Veracity - B.C. Supreme Court finds that a “Quebec year-end shuffle” used to largely avoid provincial income tax on a capital gain was contrary to the B.C. GAAR

In order to avoid most of the B.C. capital gains tax otherwise applicable to a share sale which closed in July 2002, the B.C. shareholders rolled their shares into a Newco (“Veracity”), which had a taxation year ending on August 31, 2002 for Quebec taxation purposes, and a taxation year ending on June 30, 2003 for federal and B.C. purposes. In order that 100% of the taxable capital gain would be allocated to B.C. for Quebec purposes, small directors’ fees were paid to B.C. directors in July 2002 (i.e., before the August 31, 2002 Quebec year end). In order that 90% of the taxable capital gain would be allocated to Quebec for B.C. purposes, Veracity purchased units of a listed limited partnership with a September 30 year end, so that as at September 30, 2002 (i.e., after the Quebec year end) a pro rata portion of the gross revenues and salary expense of the LP would be allocated to Veracity qua unitholder.

In affirming CRA’s assessment to apply the B.C. GAAR to allocate 100% of the taxable capital gain to B.C., Macintosh J found that although the LP units purchased were “a reasonable, stand-alone investment,” the targeted tax savings were five-times the investment return on the LP units, and the units were purchased primarily for the purposes of these “Quebec Year-end shuffle” transactions. The transactions also were “abusive of the inter-provincial income allocation provisions,” whose allocation formula is “designed to prevent both the over-taxation and the under-taxation of income earned by a corporation which is active in more than one province.”

Quite interestingly, he also found that the choice of differing year ends represented additional avoidance “transactions,” and that the transfer of the shares under s. 85(1) into Veracity was an abuse of s. 85(1) as this “allowed for the absolute avoidance of B.C. tax, not simply a deferral under s. 85.”

Neal Armstrong. Summaries of Veracity Capital Corporation v. M.N.R., 2015 BCSC 2278 under s. 245(3), s. 245(4).