In order to minimize provincial income tax, a Canadian corporate group restructured so that various intercompany debts were owing (on a back-to-back basis through an intermediate company) to the taxpayer which, although it was resident in Canada and had a permanent establishment in Ontario for other tax reasons, was exempt from tax on the interest income by virtue of an exemption in the Corporations Tax Act (Ontario) for income from property earned by a corporation which had been incorporated outside Canada (here, the British Virgin Islands.) For more detail see under s. 115(1)(b) – and respecting the BVI situs issue, see summary under TA, s. 54(2)(b).
In finding found that Ontario's GAAR did not apply, as there was no abuse of the relevant provision, Pardu JA stated (at para. 55) that "in 1959, Ontario adopted the place of incorporation test [for residence], unlike the federal government and all other provinces," referred (at para. 60) to "the deliberate decision not to tax corporations incorporated outside Canada on income from property" and (at para. 61) noted that Copthorne stated that "in some cases the underlying rationale of a provision would be no broader than the text itself." She then stated (at paras. 62, 66):
Here, the purpose of s. 2(2) of the OCTA was to tax corporations incorporated outside Canada with a permanent establishment in Ontario on income from business but not on from income from property. Where such a corporation structures its affairs to earn income from property rather than income from business, it has not…defeated the underlying rationale of the provision… .
The approach taken by the appeal judge - to define the purpose of the provision as to raise revenue and to define the tax base as broadly as possible - renders "abusive" any transaction that has the effect of reducing tax. I do not accept that approach.
In rejecting an argument that situating the specialty debt instruments in the British Virgin Islands was an abusive transaction, Pardu JA noted (at paras. 95-7) that "the rule governing the situs of specialty debts instruments is a long-standing and well-established rule," "the situs for the instruments was not arbitrary, but was a place to which the corporation had some link, namely, its place of incorporation," and "the level of [the taxpayer's] activity in Ontario to generate the income from property was minimal."