Veracity - B.C. Court of Appeal finds that a “Quebec year-end shuffle” avoiding provincial capital gains tax was not GAARable in B.C. as there was no abuse of the B.C. Act itself

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 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 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 reversing the decision below that the B.C. GAAR was applicable so as to reallocate the 90% of the taxable capital gain back to B.C., MacKenzie JA found that the B.C. GAAR referred only to abuse of the B.C. Act, which did not include ITA s. 85(1), so that the rollover was not an abuse under the B.C. Act – and, in any event, the real complaint of CRA was not that the gain was (temporarily) deferred, but that when the gain was realized, the allocation rules caused that gain to mostly not be taxed, which had nothing to do with the purpose of s. 85(1).

The inter- provincial income allocation rules in Part IV of the ITA Regs. were effectively incorporated by reference into the B.C. Act, so that their abuse could come within the scope of the B.C. Act. However, essentially the same point applied:

The purpose of the Allocation Rules is to allocate the income to the provinces. How the provinces tax that income, if at all, is beyond the purpose, object and spirit of the Allocation Rules.

Tax was avoided because Veracity exploited its ability under the Quebec Act to pick a different year end.

Neal Armstrong. Summaries of Veracity Capital Corp. v. The Queen, 2017 BCCA 3 under s. 245(4) and Statutory Interpretation – Inserting words.