Date:
20080319
Dockets: A-151-07, A-149-07
A-150-07, A-152-07
A-153-07, A-154-07
A-155-07, A-156-07
A-157-07, A-158-07
A-159-07, A-160-07
Citation: 2008 FCA 105
CORAM: DÉCARY
J.A.
SHARLOW
J.A.
TRUDEL
J.A.
A-151-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JOHN MACKAY
Respondent
A-149-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
DEREK ROSS LEE
Respondent
A-150-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
ROBERT MACDONALD
Respondent
A-152-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
BEACH AVENUE HOLDINGS COMPANY LTD.
Respondent
A-153-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
TIMOTHY WALLACE
Respondent
A-154-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JOHN CASSILS
Respondent
A-155-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
MARIA WONG
Respondent
A-156-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
ROBERT GLASS
Respondent
A-157-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JOHN ZAYTSOFF
Respondent
A-158-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
BRIAN MCGAVIN
Respondent
A-159-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
AEBAG HOLDINGS LTD.
Respondent
A-160-07
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
ROBERT LEE LTD.
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
[1]
This
appeal is a consolidation of twelve appeals from a judgment of Justice Campbell
of the Tax Court of Canada (2007 TCC 94) involving transactions similar to
those considered
in Mathew v. Canada, [2005] 2 S.C.R. 643, 2005 SCC 55 and OSFC
Holdings Ltd. v. Canada (C.A.), [2002] 2 F.C. 288, [2001] 4 C.T.C. 82, 2001
D.T.C. 5471. In those cases, the Minister of National Revenue was held to have
been correct to use the general anti-avoidance rule (the “GAAR”) in section 245 of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) to disallow the transfer
of losses from a corporation to taxpayers unrelated to that corporation. The transactions in issue in
these twelve cases resulted in a similar transfer of losses, but Justice
Campbell held
that the GAAR did not apply. The issue is whether Justice Campbell erred in law
in reaching that conclusion.
The general anti-avoidance rule
[2]
Section
245 of the Income Tax Act reads in relevant part as follows:
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245.
(1) In this section,
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245. (1) Les
définitions qui suivent s’appliquent au présent article.
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"tax benefit" («avantage fiscal ») means
a reduction, avoidance or deferral of tax or other amount payable under this
Act or an increase in a refund of tax or other amount under this Act, and
includes a reduction, avoidance or deferral of tax or other amount that would
be payable under this Act but for a tax treaty or an increase in a refund of
tax or other amount under this Act as a result of a tax treaty;
"tax consequences" («attribut fiscal »)
to a person means the amount of income, taxable income, or taxable income
earned in Canada of, tax or other amount payable by or refundable to the
person under this Act, or any other amount that is relevant for the purposes
of computing that amount;
"transaction" («opération »)
"transaction" includes an arrangement or event.
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«attribut fiscal » ("tax consequences")
S’agissant des attributs fiscaux d’une personne, revenu, revenu imposable ou
revenu imposable gagné au Canada de cette personne, impôt ou autre montant
payable par cette personne, ou montant qui lui est remboursable, en
application de la présente loi, ainsi que tout montant à prendre en compte pour
calculer, en application de la présente loi, le revenu, le revenu imposable,
le revenu imposable gagné au Canada de cette personne ou l’impôt ou l’autre
montant payable par cette personne ou le montant qui lui est remboursable.
«avantage fiscal » ("tax benefit")
Réduction, évitement ou report d’impôt ou d’un autre montant exigible en
application de la présente loi ou augmentation d’un remboursement d’impôt ou
d’un autre montant visé par la présente loi. Y sont assimilés la réduction,
l’évitement ou le report d’impôt ou d’un autre montant qui serait exigible en
application de la présente loi en l’absence d’un traité fiscal ainsi que
l’augmentation d’un remboursement d’impôt ou d’un autre montant visé par la
présente loi qui découle d’un traité fiscal.
«opération » ("transaction") Sont
assimilés à une opération une convention, un mécanisme ou un événement.
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(2) Where a
transaction is an avoidance transaction, the tax consequences to a person
shall be determined as is reasonable in the circumstances in order to deny a
tax benefit that, but for this section, would result, directly or indirectly,
from that transaction or from a series of transactions that includes that
transaction.
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(2) En cas
d’opération d’évitement, les attributs fiscaux d’une personne doivent être
déterminés de façon raisonnable dans les circonstances de façon à supprimer
un avantage fiscal qui, sans le présent article, découlerait, directement ou
indirectement, de cette opération ou d’une série d’opérations dont cette
opération fait partie.
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(3) An
avoidance transaction means any transaction
(a)
that, but for this section, would result, directly or indirectly, in a tax
benefit, unless the transaction may reasonably be considered to have been
undertaken or arranged primarily for bona
fide purposes other than to obtain
the tax benefit; or
(b) that is part of a series of
transactions, which series, but for this section, would result, directly or
indirectly, in a tax benefit, unless the transaction may reasonably be
considered to have been undertaken or arranged primarily for bona fide purposes
other than to obtain the tax benefit.
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(3)
L’opération d’évitement s’entend :
a) soit de
l’opération dont, sans le présent article, découlerait, directement ou
indirectement, un avantage fiscal, sauf s’il est raisonnable de considérer
que l’opération est principalement effectuée pour des objets véritables —
l’obtention de l’avantage fiscal n’étant pas considérée comme un objet
véritable;
b) soit de l’opération
qui fait partie d’une série d’opérations dont, sans le présent article,
découlerait, directement ou indirectement, un avantage fiscal, sauf s’il est
raisonnable de considérer que l’opération est principalement effectuée pour
des objets véritables — l’obtention de l’avantage fiscal n’étant pas
considérée comme un objet véritable.
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(4) Subsection
(2) applies to a transaction only if it may reasonably be considered that the
transaction
(a)
would, if this Act were read without reference to this section, result
directly or indirectly in a misuse of the provisions of any one or more of
(i) this Act,
(ii) the Income
Tax Regulations,
(iii) the Income
Tax Application Rules,
(iv) a tax treaty,
or
(v) any other
enactment that is relevant in computing tax or any other amount payable by or
refundable to a person under this Act or in determining any amount that is
relevant for the purposes of that computation; or
(b) would result directly or
indirectly in an abuse having regard to those provisions, other than this
section, read as a whole.
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(4) Le
paragraphe (2) ne s’applique qu’à l’opération dont il est raisonnable de
considérer, selon le cas :
a) qu’elle
entraînerait, directement ou indirectement, s’il n’était pas tenu compte du
présent article, un abus dans l’application des dispositions d’un ou de
plusieurs des textes suivants :
(i) la
présente loi,
(ii) le Règlement
de l’impôt sur le revenu,
(iii) les
Règles concernant l’application de l’impôt sur le revenu,
(iv) un
traité fiscal,
(v) tout
autre texte législatif qui est utile soit pour le calcul d’un impôt ou de toute
autre somme exigible ou remboursable sous le régime de la présente loi, soit
pour la détermination de toute somme à prendre en compte dans ce calcul;
b) qu’elle
entraînerait, directement ou indirectement, un abus dans l’application de ces
dispositions compte non tenu du présent article lues dans leur ensemble.
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(5) Without
restricting the generality of subsection (2), and notwithstanding any other
enactment,
(a)
any deduction, exemption or exclusion in computing income, taxable income,
taxable income earned in Canada or tax payable or any part thereof may be
allowed or disallowed in whole or in part,
(b)
any such deduction, exemption or exclusion, any income, loss or other amount
or part thereof may be allocated to any person,
(c)
the nature of any payment or other amount may be recharacterized, and
(d)
the tax effects that would otherwise result from the application of other
provisions of this Act may be ignored,
in
determining the tax consequences to a person as is reasonable in the
circumstances in order to deny a tax benefit that would, but for this
section, result, directly or indirectly, from an avoidance transaction.
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(5) Sans
préjudice de la portée générale du paragraphe (2) et malgré tout autre texte
législatif, dans le cadre de la détermination des attributs fiscaux d’une
personne de façon raisonnable dans les circonstances de façon à supprimer
l’avantage fiscal qui, sans le présent article, découlerait, directement ou
indirectement, d’une opération d’évitement :
a) toute
déduction, exemption ou exclusion dans le calcul de tout ou partie du revenu,
du revenu imposable, du revenu imposable gagné au Canada ou de l’impôt
payable peut être en totalité ou en partie admise ou refusée;
b) tout ou
partie de cette déduction, exemption ou exclusion ainsi que tout ou partie
d’un revenu, d’une perte ou d’un autre montant peuvent être attribués à une
personne;
c) la nature
d’un paiement ou d’un autre montant peut être qualifiée autrement;
d) les effets fiscaux qui découleraient
par ailleurs de l’application des autres dispositions de la présente loi
peuvent ne pas être pris en compte.
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[3]
In
Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, at paragraph
66, Chief Justice McLachlin and Justice Major, writing for the Court, set out
the following analytical framework for determining when to apply the GAAR
(emphasis in original):
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1. Three
requirements must be established to permit application of the GAAR:
(1) A
tax benefit resulting from a transaction or part of a series of
transactions (s. 245(1) and (2));
(2) that
the transaction is an avoidance transaction in the sense that it
cannot be said to have been reasonably undertaken or arranged primarily for a
bona fide purpose other than to obtain a tax benefit; and
(3) that
there was abusive tax avoidance in the sense that it cannot be reasonably
concluded that a tax benefit would be consistent with the object, spirit or
purpose of the provisions relied upon by the taxpayer.
2. The
burden is on the taxpayer to refute (1) and (2), and on the Minister to establish
(3).
3. If
the existence of abusive tax avoidance is unclear, the benefit of the doubt
goes to the taxpayer.
4. The
courts proceed by conducting a unified textual, contextual and purposive
analysis of the provisions giving rise to the tax benefit in order to
determine why they were put in place and why the benefit was conferred. The
goal is to arrive at a purposive interpretation that is harmonious with the
provisions of the Act that confer the tax benefit, read in the context of the
whole Act.
5. Whether
the transactions were motivated by any economic, commercial, family or other
non-tax purpose may form part of the factual context that the courts may
consider in the analysis of abusive tax avoidance allegations under s.
245(4). However, any finding in this respect would form only one part of the
underlying facts of a case, and would be insufficient by itself to establish
abusive tax avoidance. The central issue is the proper interpretation of the
relevant provisions in light of their context and purpose.
6. Abusive
tax avoidance may be found where the relationships and transactions as
expressed in the relevant documentation lack a proper basis relative to the
object, spirit or purpose of the provisions that are purported to confer the
tax benefit, or where they are wholly dissimilar to the relationships or
transactions that are contemplated by the provisions.
7. Where
the Tax Court judge has proceeded on a proper construction of the provisions
of the Income Tax Act and on findings supported by the evidence,
appellate tribunals should not interfere, absent a palpable and overriding
error.
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[4]
In
Mathew and OSFC, it was conceded that there was a tax benefit and
an avoidance transaction. The dispute related to the third requirement of the
GAAR, namely whether the tax avoidance was abusive. In this case, it was conceded
in the Tax Court that there was a tax benefit, but not that there was an
avoidance transaction. Justice Campbell concluded that there was no avoidance
transaction, making it unnecessary for her to go further in the analysis.
[5]
In
this Court, the principal issue is whether Justice Campbell erred in law in
concluding that there was no avoidance transaction. The question of whether the
tax avoidance is abusive arises only if Justice Campbell erred in finding no
avoidance transaction.
The facts
[6]
The
facts are not in dispute and are fully stated in the reasons of Justice
Campbell. For the purposes of this appeal, only a summary is necessary.
[7]
In
this summary I use the term “respondents” to refer to the respondents
collectively. The reasons of Justice Campbell set out in detail which respondents
were involved in various aspects of the transactions that are the subject of these
appeals. As all of the respondents finally agreed to all of the transactions, I
have not considered it necessary for the purposes of this appeal to identify
the role of particular individuals.
[8]
At
some point before 1992, National Bank of Canada (the “Bank”) made a loan to the
then owners of the Northills Shopping Centre in Kamloops, British
Columbia,
secured by a mortgage on the shopping centre. By 1992 the amount receivable on
the loan was approximately $16 million, and the loan was in default. The Bank
commenced foreclosure proceedings in 1992. A receiver manager was appointed and
the Bank was given the right to conduct the sale of the Northills Shopping Centre.
It was listed for sale for $12.5 million.
[9]
The
respondents were all involved in some manner in the business of investing in,
developing and selling real estate. In August of 1993, the respondents learned
of the opportunity to purchase the Northills Shopping Centre. After some
negotiations, the Bank agreed in principle to transfer the Northills Shopping Centre
to the respondents for $10 million. The respondents were satisfied that, with that
purchase price, they would be able to sell the Northills Shopping Centre at a
profit after investing in some improvements.
[10]
There
was evidence, which Justice Campbell accepted, that the respondents wished to
hold the Northills Shopping Centre in partnership, that they wished to have the
partnership acquire the property through mortgage foreclosure proceedings, and
that both of those business arrangements were common in commercial property
acquisitions. For the purposes of this appeal, I will assume that the
respondents made those choices for valid business reasons, other than for tax
reasons, although it is not clear from the record what those business reasons were.
[11]
At
some point after the respondents had identified the acquisition of the
Northills Shopping Centre as a feasible business opportunity, it occurred to
them that the acquisition could be structured in a way that would permit the
respondents to obtain the benefit of the $6 million loss that had accrued on
the mortgage receivable while it was held by the Bank. For the purposes of this
appeal, I will assume that the respondents would have agreed to acquire the
Northills Shopping Centre for $10 million even without the opportunity to
acquire the $6 million accrued loss on the mortgage receivable. That assumption
seems reasonable because it appears from the record that respondents’ business
plan for the Northills Shopping Centre, based on a $10 million acquisition
cost, was developed before any thought was given to income tax issues. In
addition, the parties had agreed to the $10 million price some days before
engaging in discussions as to how the acquisition would be structured to
accomplish the transfer of the $6 million loss.
[12]
The
transactions that are the subject of these appeals were devised by the
respondents and proposed to the Bank, which accepted them. The Bank and the
respondents agreed in advance to the sequence and timing of the transactions. They
were all aware that the transactions were intended to accomplish the
acquisition of the Northills Shopping Centre by the respondents through a
structure that met the respondents’ business objectives, and also to permit the
transfer to the respondents of the accrued $6 million loss on the mortgage
receivable.
[13]
I
summarize as follows the transactions in issue in this case and their intended
income tax consequences (assuming the GAAR does not apply):
(a)
On
November 5, 1993, the Bank and its newly incorporated subsidiary, Northills
Shopping Centre Ltd., formed a limited partnership (the “Partnership”) named
Northills Shopping Centre Limited Partnership. The new subsidiary was the
general partner. The Bank was a limited partner. The Partnership’s first fiscal
year would end on December 31, 1993. For the purposes of issues raised in this
appeal, it is not significant that the Bank was a limited partner rather than a
general partner. For income tax purposes, a limited partner and a general
partner are treated alike, with certain exceptions that do not apply in this
case.
(b)
On
November 23, 1993, the Bank assigned to the Partnership the mortgage receivable
and its interest in the foreclosure proceedings, taking as consideration 10,000
limited partnership units of the Partnership at $1,000 each, for a total of $10
million. The Bank agreed to remain a partner of the Partnership for at least 30
days.
(c)
For
income tax purposes, the Bank’s cost of the mortgage receivable was $16
million. But for subsection 18(13) of the Income Tax Act, the Bank would
have been entitled to claim a deduction for the $6 million loss from the
disposition of the mortgage receivable for $10 million. However, because the
Bank and the Partnership did not deal with each other at arm’s length at the
time of the transfer and for a further 30 days, subsection 18(13) applied to
deny the Bank the right to deduct the loss. At the same time, subsection 18(13)
permitted the Partnership to add the loss to its cost of the mortgage
receivable, as determined for tax purposes, increasing the cost from $10
million to $16 million. In effect, subsection 18(13) resulted in the transfer
of the accrued $6 million loss on the mortgage receivable from the Bank to the
Partnership.
(d)
On
December 29, 1993, the following transactions occurred:
(i)
The
respondents (and two others who are not parties to this appeal) became general
partners of the Partnership. They acquired a total of 2,000 general partnership
units for which they paid a total of $2 million.
(ii)
The
Bank made loans to the Partnership totalling approximately $9.7 million. Of
that amount, $8.6 million was to be used to finance part of the redemption of
the Bank’s limited partnership units. The remainder was to be used to finance
improvements to the Northills Shopping Centre.
(iii)
The
Partnership was formally substituted for the Bank in the foreclosure
proceedings, and the Partnership acquired the Northills Shopping Centre by
completing the foreclosure. For income tax purposes, the foreclosure resulted
in the Partnership’s $16 million cost of the mortgage receivable becoming the
Partnership’s cost of the Northills Shopping Centre.
(e)
On
December 30, 1993, the Partnership redeemed 8,600 of the Bank’s limited partnership
units for $8.6 million, using the money the Bank had lent to the Partnership. On
December 31, 1993, the Partnership redeemed the Bank’s remaining 1,400 limited
partnership units for $1.4 million, using $1.4 million of the $2 million
provided by the respondents to acquire their general partnership units. Upon
the redemption of the Bank’s limited partnership units, the Bank ceased to be a
partner of the Partnership.
(f)
On
December 31, 1993, the Bank sold its shares of Northills Shopping Centre Ltd.
to two of the respondents. At that point the Bank’s only interest in the
Partnership was as a creditor.
[14]
The
Partnership earned an operating profit in its first fiscal year ending December
31, 1993. As of the end of that year, the Partnership was permitted by
subsection 10(1) of the Income Tax Act to write down the cost of the
shopping centre to its then fair market value ($10 million). The Partnership
took that write-down, resulting in a $6 million loss.
[15]
The
tax treatment of partnership profits and losses is governed by section 96 of
the Income Tax Act. Under that provision, the $6 million loss from the
write-down of the cost of the shopping centre, less the operating profit, was
allocated to the persons (including the respondents) who were partners of the
Partnership at the end of December 31, 1993.
[16]
The
respondents, when filing their income tax returns for the taxation year that
included December 31, 1993, claimed deductions for their allocated portions of
the net loss of the Partnership. In some cases the deduction resulted in a
non-capital loss that was carried over to another year. The Minister applied
the GAAR to reassess the respondents and to disallow the deduction of the
Partnership loss and any resulting loss carryovers.
Discussion
[17]
It
is undisputed that the respondents derived a tax benefit from the deduction of
the $6 million loss that had been transferred from the Bank to the
Partnership. The question before Justice Campbell was whether the series of
transactions that gave the respondents access to that loss was an avoidance
transaction. For that reason, the focus of Justice Campbell’s analysis was the
definition of “avoidance transaction” in subsection 245(3) of the Income Tax
Act. That definition is quoted above, but I repeat it here for ease of
reference.
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245. (3) An
avoidance transaction means any transaction
(a)
that, but for this section, would result, directly or indirectly, in a tax
benefit, unless the transaction may reasonably be considered to have been
undertaken or arranged primarily for bona
fide purposes other than to obtain
the tax benefit; or
(b) that is part of a series of
transactions, which series, but for this section, would result, directly or
indirectly, in a tax benefit, unless the transaction may reasonably be
considered to have been undertaken or arranged primarily for bona fide purposes
other than to obtain the tax benefit.
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245. (3)
L’opération d’évitement s’entend :
a) soit de
l’opération dont, sans le présent article, découlerait, directement ou
indirectement, un avantage fiscal, sauf s’il est raisonnable de considérer
que l’opération est principalement effectuée pour des objets véritables —
l’obtention de l’avantage fiscal n’étant pas considérée comme un objet véritable;
b) soit de l’opération
qui fait partie d’une série d’opérations dont, sans le présent article,
découlerait, directement ou indirectement, un avantage fiscal, sauf s’il est
raisonnable de considérer que l’opération est principalement effectuée pour des
objets véritables — l’obtention de l’avantage fiscal n’étant pas considérée
comme un objet véritable.
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[18]
Justice
Campbell, after discussing the portion of Canada Trustco that deals with
subsection 245(3) (see Canada Trustco, paragraphs 27 to 35), concluded
that there was no avoidance transaction because the respondents’ primary
purpose of the entire series of transactions was to permit the respondents to realize
a profit from the acquisition and sale of the Northills Shopping Centre, which
was a bona fide purpose other than to obtain the tax benefit.
[19]
Justice
Campbell reasoned that subsection 245(3) of the Income Tax Act requires
a determination of the purpose of each transaction within a series of
transactions, but only as part of the analysis that must be undertaken to
determine the primary purpose of the series. She concluded that each
transaction within the series of transactions in this case was undertaken
primarily for bona fide purposes other than to obtain the tax benefit.
However, she did not reach that conclusion by determining separately the
purpose of each transaction within the series. Rather, she determined the
primary purpose of the series of transactions and attributed that purpose to each
transaction within the series. She considered that any other approach would
undermine the object of subsection 245(3).
[20]
The
Crown argues that Justice Campbell erred in law when she failed to identify,
within the entire series of transactions, the specific transactions that gave
rise to the tax benefit, and then to determine whether those
transactions were undertaken or arranged primarily for bona fide
purposes other than to obtain the tax benefit. The respondents defend Justice
Campbell’s interpretation on the basis that it is mandated by the
jurisprudence.
[21]
I
must respectfully disagree with Justice Campbell’s interpretation of subsection
245(3). In my view, her interpretation is incorrect because it is not consistent
with the language or the purpose of subsection 245(3), particularly paragraph
245(3)(b). As I read paragraph 245(3)(b), it requires a
determination of the primary purpose of any transaction (or transactions) within
a series of transactions that would result in a tax benefit if the GAAR does
not apply. It follows that a subset of transactions within a series of
transactions is an avoidance transaction unless the subset of transactions
may reasonably be considered to have been undertaken or arranged primarily for bona
fide purposes other than to obtain the tax benefit. In my view, the
conclusion that a series of transactions was undertaken primarily for bona
fide non-tax purposes does not preclude a finding that the primary purpose
of one or more steps within the series was to obtain a tax benefit. It seems to
me that this is what Chief Justice McLachlin and Justice Major had in mind when
they wrote the following in Canada Trustco (at paragraph 34):
If at least one
transaction in a series of transactions is an "avoidance
transaction", then the tax benefit that results from the series may be
denied under the GAAR. This is apparent from the wording of s. 245(3).
Conversely, if each transaction in a series was carried out primarily for bona
fide non-tax purposes, the GAAR cannot be applied to deny a tax benefit.
[22]
I
agree with the Crown that Justice Campbell should have determined the primary
purpose of the transactions by which the Bank became a partner of the
Partnership at the outset, transferred the mortgage receivable to the
Partnership before any of the respondents became partners, and remained a partner
for more than 30 days after the transfer. Nothing in the record suggests that
the non-tax business objectives of the respondents required those steps to be
taken. If Justice Campbell had considered this point, she would have been
compelled to conclude that the primary purpose of those transactions was to
obtain the tax benefit.
[23]
The
respondents cite a number of cases in support of Justice Campbell’s
interpretation of subsection 245(3). In my view, none of them support the
approach Justice Campbell took in this case. I will comment on two of the
cases.
[24]
The
first case is Canada v. Canadian Pacific Limited (F.C.A.), [2002] 3
F.C.R. 170. The issue in that case was whether the GAAR could be applied to
disallow the tax benefit derived from borrowing foreign currency rather than
Canadian currency. The Crown had argued in that case that the designation of
the foreign currency was itself a “transaction”, the purpose of which could be
assessed under paragraph 245(3) separately from the purpose of the loan itself.
This Court rejected that approach. The respondents quote the underlined portion
of the reasons of Justice Sexton, writing for the Court, at paragraph 26:
The words of the
Act require consideration of a transaction in its entirety and it is not
open to the Crown artificially to split off various aspects of it in order to
create an avoidance transaction. In the present case, the Australian dollar
borrowing was one complete transaction and cannot be separated into two
transactions by labelling the designation in Australian dollars as a separate
transaction.
I see nothing in the Canadian Pacific
case that precludes the possibility that, within a particular series of
transactions, there may be one or more transactions undertaken primarily to
obtain a tax benefit, even if the series as a whole is undertaken for a bona
fide purpose other than to obtain the tax benefit. On the contrary, that possibility
is recognized in paragraphs 16 and 17 of that case.
[25]
The
second case is Lipson v. Canada (F.C.A.), [2007] 4 F.C.R. 641, cited by
the respondents as authority for the proposition that the primary purpose of a
series of transactions is relevant in determining whether an avoidance
transaction is abusive. The respondents argue that by the same reasoning, the
primary purpose of a series of transactions is relevant in determining whether
there is an avoidance transaction. I agree that it is always relevant to
determine the primary purpose of a series of transactions. If the primary
purpose of the entire series is to obtain a tax benefit, then the entire series
is an avoidance transaction. However, the converse is not necessarily true. The
existence of a bona fide non-tax purpose for a series of transactions does
not exclude the possibility that the primary purpose of one or more transactions
within the series is to obtain a tax benefit.
[26]
The
respondents argue that it was reasonable for Justice Campbell to conclude that
the entire series of transaction was undertaken primarily for bona fide
purposes other than to obtain the tax benefit represented by the transfer of
the $6 million accrued loss on the mortgage receivable from the Bank to the respondents.
I agree. Indeed, the Crown does not challenge that conclusion. However, Justice
Campbell’s erroneous interpretation of subsection 245(3) led her to stop the
analysis at that point, when she should have gone on to consider the Crown’s
allegation that within the series of transactions there were one or more
transactions that were undertaken primarily to obtain the tax benefit.
[27]
To
summarize, I conclude that the transactions by which the Bank became a partner
of the Partnership, transferred the mortgage receivable to the Partnership, and
maintained its status as a partner of the Partnership for at least 30 days
after the transfer, comprised an avoidance transaction. The primary purpose of
those transactions was to transfer the $6 million accrued loss on the mortgage
receivable from the Bank to the Partnership so that the loss could be deducted
by the respondents in computing their income.
[28]
It
remains only to consider whether the tax avoidance was abusive within the
meaning of subsection 245(4). According to Canada Trustco, the Crown has
the onus of establishing that an avoidance transaction is abusive (see item 2
of paragraph 66 of Canada Trustco). In this case, the Minister made the
necessary allegations in its Tax Court pleadings, and the respondents did not
allege the contrary. The respondents argue that they did not concede that
point, they simply did not dispute it because they chose to challenge the
reassessments on the basis that there was no avoidance transaction. The result
is the same in either case. The Crown wins that point by default.
[29]
Even
if the respondents had contested the Crown’s allegation that the avoidance
transaction was not abusive, their arguments would have failed in light of the
decision of the Supreme Court of Canada in Mathew. As mentioned above,
that case involved a loss transfer by means of a series of transactions that
was similar to the series of transactions in this case. The Supreme Court of
Canada held that the transactions that were intended to permit the loss
transfer were abusive tax avoidance. The reasons for that conclusion are
summarized as follows in paragraph 58 (my emphasis):
We are of the
view that to allow the appellants to claim the losses in the present appeal
would defeat the purposes of s. 18(13) and the partnership provisions, and that
the Minister properly denied the appellants the losses under the GAAR.
Interpreted textually, contextually and purposively, s. 18(13) and s. 96 do not
permit arm's length parties to purchase the tax losses preserved by s. 18(13)
and claim them as their own. The purpose of s. 18(13) is to transfer a loss to
a non-arm's length party in order to prevent a taxpayer who carries on a
business of lending money from realizing a superficial loss. The purpose for
the broad treatment of loss sharing between partners is to promote an
organizational structure that allows partners to carry on a business in common,
in a non-arm's length relationship. Section 18(13) preserves and transfers a
loss under the assumption that it will be realized by a taxpayer who does not
deal at arm's length with the transferor. Parliament could not have intended
that the combined effect of the partnership rules and s. 18(13) would preserve
and transfer a loss to be realized by a taxpayer who deals at arm's length with
the transferor. To use these provisions to preserve and sell an unrealized loss
to an arm's length party results in abusive tax avoidance under s. 245(4). Such
transactions do not fall within the spirit and purpose of s. 18(13) and s. 96,
properly construed.
[30]
The
same can be said in this case. I conclude that the avoidance transaction in
this case was abusive within the meaning of subsection 245(4) of the GAAR. It
follows that the Minister was correct to reassess the respondents to disallow
the deduction of the transferred losses.
Conclusion
[31]
For
these reasons, I would allow each of the twelve appeals with costs in this
Court and in the Tax Court of Canada. I would set aside the judgments of the
Tax Court of Canada in each case, and dismiss each of the appeals from the
income tax reassessments.
“K.
Sharlow”
“I
agree
Robert
Décary J.A.”
“I
agree
Johanne
Trudel J.A.”
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