Citation: 2008TCC344
Date: 20080819
Docket: 2007-1132(IT)G
BETWEEN:
ELLEN REMAI,
AS EXECUTRIX OF THE ESTATE OF FRANK REMAI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter, A.C.J.
Introduction
[1] The appeal is from a
reassessment of the Estate of Frank Remai dated July 8, 2005, made under
the Income Tax Act (“Act”).
[2] The reassessment
dealt with the disallowance by the Canada Revenue Agency (“CRA”) of charitable
donation credits in the amount of $10,500,000 claimed by the deceased, Frank
Remai, in 2001.
[3] Frank Remai (“Frank”)
owned 100% of the shares of a management company, F.R. Management (FRM). FRM
paid Frank management fees by way of interest bearing Promissory Notes and Frank
gifted these Notes to the Frank and Ellen Remai Foundation (“Foundation”) of
which Frank was the controlling mind. The Foundation sold the Notes to a third
party on the same terms as the donated Notes. CRA was of the view the sale was
non-arm’s length.
Facts
[4] The Appellant and the Respondent submitted
a Partial Agreed Statement of Facts and the Appellant presented other evidence
through witnesses.
[5] Frank and Ellen Remai established the Foundation
in 1992 as a private foundation and a registered charity for purposes of establishing
a long term mechanism to carry out their philanthropic activities. The trustees
of the Foundation were Frank and Ellen Remai and Frank Remai’s brother, Henry Remai.
Ellen and
Frank were the hands-on directors of the Foundation; ultimately Frank was the
Foundation’s controlling mind, making all the decisions. Donations by the
Foundation to other charities from 1992 to 2004 totalled over $4,000,000 and
the capital of the Foundation had never been encroached upon. A certain
percentage or disbursement quota based on the capital of the Foundation was
disbursed annually. In addition to owning 100% of the shares of FRM, Frank also
owned 100% of the shares of Remai
Ventures Inc. (“Ventures”) and was a shareholder of a number of other entities
some of whose income flowed into FRM. Darrell Remai (“Darrell”), a nephew of
Frank, was the principal shareholder and director of Sweet Developments Ltd.
(“Sweet”).
[6] Sweet and FRM,
through other corporate interests of Frank, formed partnerships and carried on
the business of developing and operating seniors’ residences as well as other
business interests including project management, renovation, and property
development.
[7] On October 1, 1999,
Sweet and Ventures entered into a partnership to develop and operate a seniors’
centre in Regina, Saskatchewan. Post
October 1, 1999, Sweet and Ventures also developed three other seniors’ centres,
one in each of Swift Current, Yorkton and Moose Jaw, Saskatchewan.
[8] Besides being the
general contractor for these seniors’ centres and holding a 25% equity interest
with Ventures, Sweet also built numerous projects, including condominiums and
renovations on both a non-equity and equity basis, with and for Frank. It is
apparent that there existed a high level of trust between Darrell and Frank which
accrued over time as they did more business together.
[9] On December 31, 1998,
FRM issued a $4,000,000 interest bearing Promissory Note (“1998 Note”) to Frank for
management fees. Frank gifted the 1998 Note to the Foundation and the
Foundation issued a donation receipt to Frank for $4,000,000. The receipt was
included in Frank Remai’s 1998 T1 tax return as a claim for a charitable
donation tax credit.
[10] On December 31, 1999, a
similar transaction took place, this time in the amount of $6,500,000 (“1999
Note”). The 1999 Note was gifted to the Foundation and Frank sought a
$6,500,000 charitable donation tax credit in his 1999 T1 tax return.
[11] CRA denied the
charitable donation tax credits claimed on the basis that pursuant to the 1997 Federal
Budget, the 1998 and 1999 Notes were non‑qualifying security as they were
an obligation to a person with whom Frank did not deal with at arm’s length. Similar
transactions by Frank pre-1998 were satisfactory to CRA but amendments to the Act
made the transactions in 1998 and 1999 offside. Frank objected to the
assessments, a Notice of Confirmation was issued but there was no further
appeal.
[12] On July 4, 2001, the Foundation,
under an Asset Sale Agreement, sold the 1998 and 1999 Notes (as well as other
Notes) to Sweet for a Promissory Note representing the total of the Notes plus
accrued interest, bearing the same rate of interest.
[13] The interest rates on
the 1998 and 1999 Notes were the CRA posted rates but they were higher than the
required disbursement rate for the Foundation, therefore ensuring that there
would always be sufficient funds to meet the annual disbursements quota for the
Foundation, without infringing upon the capital of the Foundation. The
Foundation recorded no administrative costs as these were either carried by FRM
or personally by Frank.
[14] There were subsequent
transactions which basically mirrored the foregoing transaction but which are of
no consequence to the matters before the Court.
[15] Ron Grozell, a
Chartered Accountant (“Grozell”), was the CFO for Frank’s group of companies
from 1985 to December 31, 2004. He had intimate knowledge with respect to the
financial affairs of the Remai group of companies, being responsible for all
financial reporting and information, banking, financing and filing of income
tax returns. He also did the personal tax returns for Frank and Ellen Remai
throughout this period of time. External accounting was used when required by
banking institutions.
[16] According to Grozell,
the reason for the gifting of the 1998 and 1999 Notes, as well as other Notes,
was two-fold: (1) to build the capital of the Foundation and (2) to allow Frank
to receive a charitable receipt.
[17] When Grozell filed the
1998 and 1999 T1’s for Frank, claiming the charitable tax credits on the 1998 and
1999 Notes, he believed the donations were validly claimed because he was adhering
to the process in existence throughout the earlier years. However, the 1997
Federal Budget changed the availability of the donations credits. He proceeded to research remedies
to the tax issue of the 1998 and 1999 Notes donation and determined that it
could be rectified if the Foundation disposed of the donations to an arm’s length
entity.
[18] Two different avenues
were pursued by Grozell to this end. One proposal was for FRM to borrow monies
from a bank (HSBC) to pay off the Notes held by the Foundation; the bank agreed
to this, but the Foundation would be required to put the same monies into a GIC
at the same bank. FRM would pay a higher interest rate on the loan to the bank than
it paid on the Notes. The Foundation would still receive its 4 ½% on the GIC to
meet the disbursement quota for the Foundation without encroaching on the
capital of the Foundation – the spread on interest rates would cost about
$40,000 per annum to FRM, a cost which would be passed onto the Foundation. A
second and more favourable alternative was for the Foundation to sell the 1998 and
1999 Notes to an arm’s length entity such as Grozell’s personal company, Big
Sky Drilling Ltd. (“Big Sky”). Big Sky did not have the financial wherewithal
to do a non-recourse loan with FRM and so Sweet was approached to do the
transaction.
[19] It was Grozell’s view
that Sweet, the Foundation, and Frank were at arm’s length. He knew that Sweet
had the financial wherewithal to carry out the deal even if it was a
non-recourse loan and he felt there was no risk to Sweet in doing the
transaction. Grozell had acquired a 10% interest in Sweet from Darrell in March
2001.
[20] An informal meeting was
held between Frank, Grozell and Darrell. Part of the discussion dealt with Frank’s
tax deductibility problems with regards to the 1998 and 1999 Notes. Sweet sought
independent advice from its own legal and accounting advisors. There was at
least one additional meeting where Grozell advised Sweet that the transaction
was risk-free given FRM’s strong financial situation. If the Foundation did not
agree to the transaction with Sweet then, according to Grozell, the first option,
financing the payment of the Notes held by the Foundation through a bank, would
have been pursued.
[21] The transaction thus required
that the 1998 and 1999 Notes so gifted to the Foundation be sold to Sweet, with
the Foundation receiving as payment a Promissory Note, on the same terms, from Sweet.
There was no suggestion by Sweet that: (1) the interest rate on its Note be different
than on the 1998 and 1999 Notes; (2) its Note should be monetarily different than
the 1998 and 1999 Notes; (3) there would be a spread in the interest rates
between this Promissory Note and the 1998 and 1999 Notes; nor that (4) there
would be a fee or compensation to Sweet for participating in the transaction. Grozell
felt the Foundation had a moral obligation to make an otherwise non-qualifying
security a qualifying security so that it would result in the resolution of
Frank’s tax problem. The transaction was of no monetary benefit to Sweet, but
it did present an opportunity to further solidify Sweet’s business relationship
with the Remai group of companies.
Issues
[22] There are two issues
for the Court to consider:
1.
Did, pursuant to paragraph
251(1)(c) of the Act, the Appellant and Sweet deal at arm’s length
with respect to the purchase of the 1998 and 1999 Notes by Sweet from the Foundation
and in particular did they deal at arm’s length before, during and immediately
after the transaction that occurred on July 4, 2001?
2.
If there was an arm’s length
relationship between the Appellant and Sweet, does section 245 of the Act (GAAR)
apply to the transaction in issue?
Law and Analysis
(1) Section 251(1) of the Act
[23] The Appellant brought to
the attention of the Court, what it described as a technical issue. Section
251(1) of the Act states as follows:
SECTION 251: Arm’s length.
(1) For the purposes of this Act,
(a)
related persons shall be deemed not to deal with
each other at arm’s length;
(b)
a taxpayer and a personal trust (other than a
trust described in any of paragraphs (a) to (e.1) of the
definition “trust” in subsection 108(1)) are deemed not to deal with each other
at arm’s length if the taxpayer, or any person not dealing at arm’s length with
the taxpayer, would be beneficially interested in the trust if subsection
248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II)
to (IV); and
(c)
where paragraph (b) does not apply, it is
a question of fact whether persons not related to each other are at a
particular time dealing with each other at arm’s length.
[24] Paragraph 251(1)(a)
deals with “related persons”. The Appellant and the Respondent agreed that the
parties to the transaction are not related persons therefore paragraph 251(1)(a)
does not apply.
[25] Paragraph 251(1)(b)
is obviously not applicable on the facts before the Court. We are therefore
left with paragraph 251(1)(c) which simply refers to a situation where
paragraph (b) does not apply. As stated, paragraph (b)
does not apply due to the facts in the case before the Court. If paragraph
251(1)(c) does not apply, because it is only applicable if paragraph (b)
does not apply, there is no question for the Court, because by exclusion, the
parties must be dealing with each other at arm’s length.
[26] There was obviously a
recognized problem with this particular section because presently before
Parliament is Bill C-10, which is proposing to amend paragraph 251(1)(c),
applicable after December 23, 1998, to “clarify that it applies to any case
where paragraph (a) and (b) do not apply”. Bill C-10 has not
received Royal Assent thus the proposed amendment is not law. The proposed
amendment itself and the explanatory note gives credence to the argument of the
Appellant that paragraph 251(1)(c) of the Act is inapplicable in
the present case. The section is free of ambiguity as is and I certainly will
not prematurely afford it the meaning which Parliament seeks to implement. The
parties agree that the parties are not related persons therefore paragraph
251(1)(a) does not apply. The facts do not support an application of
paragraph 251(1)(b) and therefore it does not apply. Paragraph 251(1)(c)
does not apply since paragraph 251(1)(b) is not applicable, therefore
the parties must be dealing at arm’s length.
(2) Non-Arm’s
Length
[27] Assuming I am wrong in
my interpretation of the applicability of paragraph 251(1)(c), I
will proceed with an analysis of the arm’s length nature of this transaction.
In doing so, the following questions must be answered:
1.
Was
there a common mind which directed the bargaining for both parties to the
transaction?
2.
Were
the parties to the transaction acting in concert without separate interests?
3.
Did
one party of the transaction exercise “de facto” control over the other?
[28] The Supreme Court of Canada in R. v. McLarty,
2008 D.T.C. 6354, adopted the analytical approach of Peter Cundill &
Associates Ltd. v. The Queen, 91 D.T.C. 5543 (F.C.A.) when it stated in
part as follows:
62 The Canada Revenue Agency Income Tax
Interpretation Bulletin IT‑419R2 "Meaning of Arm's Length"
(June 8, 2004) sets out an approach to determine whether the parties are
dealing at arm's length. Each case will depend on its own facts. However, there
are some useful criteria that have been developed and accepted by the courts:
see for example Peter Cundill & Associates Ltd. v. The Queen, [91
DTC 5085] [1991] 1 C.T.C. 197 (F.C.T.D.), aff'd [91 DTC 5543], [1991] 2 C.T.C.
221 (F.C.A.). The Bulletin provides:
22. ... By
providing general criteria to determine whether there is an arm's length
relationship between unrelated persons for a given transaction, it must be
recognized that all-encompassing guidelines to cover every situation cannot be
supplied. Each particular transaction or series of transactions must be
examined on its own merits. The following paragraphs set forth the CRA's
general guidelines with some specific comments about certain relationships.
23. The
following criteria have generally been used by the courts in determining whether
parties to a transaction are not dealing at "arm's length":
·
was there a common mind which directs the bargaining for both
parties to a transaction;
·
were the parties to a transaction acting in concert without
separate interests; and
·
was there "de facto" control.
“Common Mind”
[29] In analyzing whether there was a common
mind directing the bargaining for both parties of the transaction, one must not
only focus on the time immediately following the transaction but also look at evidence
of matters, before, during and after the transaction transpired.
[30] Frank was in control of FRM and was the controlling mind of
the Foundation. Notwithstanding his business relationship with Sweet, there is no
evidence that he had direct or indirect control over Sweet. There was no
evidence of an ownership interest in Sweet by FRM or Frank, or indebtedness by
Sweet to FRM or Frank and there was no evidence that Frank was an officer or
director of Sweet. However, the evidence did show that Sweet would naturally welcome
a business relationship with Frank because of the business ventures they
participated in together in the past and the possibility of future business
opportunities. Prior to the transaction taking place, there had been a falling
out of sorts between Frank and Sweet over the management of a particular
project in which Frank and Sweet had been involved.
[31] The evidence disclosed that Darrell was an independent
business person who had his own business interests, separate and apart from
Frank and his group of companies, and that he made all of the decisions for
Sweet.
[32] How the transaction developed and came to fruition is of
some significance. Grozell came up with the alternatives for the 1998 and 1999
Notes to become qualifying security, that is,
1.
financing
through a bank;
2.
a sale to his
own company Big Sky; or
3.
a sale to
Sweet.
Since a transaction through a bank involved reducing the
Foundation’s income by $40,000 per year and since Grozell’s company did not
have the financial wherewithal to do a non-recourse loan, the decision was made
to approach Sweet. Sweet considered the proposal even though there was no
financial benefit to Sweet in terms of differential spread between the interest
rates and the Notes or other monetary consideration. Sweet had done business
with the Frank group before and stood to gain more similar business in the
future. Sweet sought its own advice regarding the transaction. Sweet made the
decision to proceed; no one else. Other alternatives were available to the
Foundation, albeit somewhat more expensive. Sweet could have turned the deal
down but did not. Both parties approached the transaction from a different
point of view, with different interests, and made their separate decisions with
Sweet considering the downside of the transaction and its legality. The fact
that Frank may have benefited from the transaction does not make a common mind
as it is quite evident that Sweet made its own decision whether or not to enter
into the transaction.
“Separate Interests”
[33] The evidence discloses that each party was, in the end, protecting
its own interests. The Foundation was going to save $40,000 in extra interest
costs it would incur if the transaction was to be done through a financial
institution. At the same time it was going to solve a tax problem for its highly
regarded and much appreciated benefactor. If the Foundation could accommodate
its benefactor by helping the benefactor resolve a tax problem which arose from
gifts to the Foundation and render such help in a cash neutral transaction avoiding
$40,000 per annum in interest costs, why would it not proceed with the
transaction? At the same time Sweet was not benefiting from the transaction in
a monetary sense; it was satisfied with the legality of the transaction, saw no
real downside to it and could continue to build its business relationship with
Frank. Sweet considered its own interest. The fact that a large amount of money
would flow through its own bank account was attractive because it would give
the appearance that Sweet dealt in large dollar figures. Sweet sought its own
legal and accounting advice to the transaction and it was looking at the
effects of the transactions on Sweet. Given the limited risk, it decided to
proceed.
“De Facto Control”
[34] Justice Bell noted in Baxter v. The Queen, 2006
D.T.C. 2642 at paragraph 51 (T.C.C.) (affirmed by the Federal Court of Appeal
on different grounds at 2007 D.T.C. 5199):
… The fact
that the parties considered that they had entered into a mutually beneficial
relationship when, at the same time, they were pursuing their own individual
interests and were free, without either of them being controlled by the other,
to enter or not enter into that relationship means they were dealing with each
other at arm's length as a matter of fact.
[35] Sweet, FRM and Frank had a mutually beneficial
relationship for many years yet pursued their own individual interests and were
free, without either of them being controlled by the other, to enter or not
enter into this particular relationship.
[36] I believe that Frank would have had some influence over
Sweet simply because of their past and on-going business relationships and
because of his financial strength; however, the question is not that he had
some influence, rather was there controlling influence or de facto control
over Sweet? Sweet was a separate company, owned and operated by Darrell and
although it had a long standing business relationship with Frank it was
certainly not economically dependant on Frank or his group of companies. It had
independently developed its own projects and become quite successful. Additionally,
the business relationship between Sweet and FRM incorporated a certain protection
allowing them to terminate their relationship on a mutually beneficial basis
through a shotgun clause.
[37] Given the nature of the transaction, which was basically
neutral to Sweet, the fact that Sweet did not attempt to renegotiate a better
deal is not of significance given the long standing business relationship
between Sweet and Frank. Although there was not a monetary reward to Sweet,
which one might think in the normal market would influence Sweet’s decision, I
believe the decision was influenced by the long standing business relationship
between Sweet and Frank and the trust they had developed in one another over
many years. This is simply not a case where the same person is dictating the
terms of the bargain on behalf of both parties – Sweet analyzed the deal and
made a decision in its own right.
[38] The Respondent referred to the following excerpt from Petro-Canada
v. The Queen, 2004 D.T.C. 6329 (F.C.A.), where Justice Sharlow stated in
paragraph 55 as follows:
The Judge addressed these questions implicitly rather than expressly,
and concluded that the joint exploration corporations did not deal with each
other at arm's length when entering into the agreement for the purchase and
sale of the seismic data. In my view, the evidence justifies that conclusion.
The terms of the transactions did not reflect ordinary commercial dealings between
vendors and purchasers acting in their own interests. The joint exploration
corporations, for example, did not attempt to negotiate a volume discount, as
the evidence indicated would be normal for such large acquisitions of seismic
data. Neither joint exploration corporation acted independently and in its own
interest in entering into the transactions. The terms of the transaction were
in fact dictated jointly by Petro‑Canada and Phillips (in the case of the
Phillips JEC) and jointly by Petro‑Canada and CanEagle (in the case of
the CanEagle JEC). The joint exploration corporations, for all practical
purposes, were indifferent as to the purchase price of the seismic data
because, whatever it turned out to be, the shareholders would ensure that the
purchase price was funded. Any tax relief relating to the cost of the seismic
data would be transferred to Petro-Canada by means of a renunciation.
[39] Although this quote may appear to be applicable to the
case at bar, Sweet had two shareholders: Darrell and a 10% minority shareholder
Grozell. The consideration received by Sweet for entering into the transaction
was in the form of continued and cherished business relationship between itself
and Frank. Neither of these entities was publicly traded. The entities were
carrying out their obligations to their shareholders who in fact were the
persons who were engaged in the negotiations.
[40] Applying the three part test from Peter Cundill &
Associates Ltd. v. The Queen, supra, as to whether or not there is
an arm’s length transaction, I conclude based on the evidence and find as a
fact that the parties were dealing at arm’s length. Given this conclusion the
only remaining issue then before the Court, is the issue of GAAR.
(3) General Anti-Avoidance Rule (“GAAR”)
[41] Canada Trustco Mortgage Company v. R., 2005 D.T.C.
5523 (S.C.C.), is the leading authority with respect to the GAAR. The
application of GAAR involves three steps.
1.
Determine
whether there is a “tax benefit” arising from a transaction under subsections
245(1) and 245(2) of the Act.
2.
Determine
whether the transaction is an avoidance transaction under subsection 245(3) of
the Act in the sense of not being “arranged
primarily for bona fide purposes other than to obtain the tax
benefit".
3.
Determine if
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 other than to obtain a tax benefit.
All three requirements must be fulfilled before the GAAR
can be applied to deny the tax benefit.
Tax Benefit
[42] It was conceded by the Appellant
that there was a tax benefit arising from the transaction pursuant to
subsections 245(1) and 245(2) of the Act.
Avoidance Transaction
[43] The transaction in
question took place in July 2001 when the 1998 and 1999 Notes of FRM were sold
by the Foundation to Sweet for Promissory Notes for the same quantum and the
same interest rate. The transactions were not arranged primarily for a bona
fide purpose other than to obtain a tax benefit. There is no question in my
mind but that the transaction was done to provide Frank with a tax benefit
which he thought he had when he made the donations of the 1998 and 1999 Notes
to the Foundation. The question is whether it was undertaken or arranged
primarily for a bona fide purpose other than to obtain a tax benefit. Would
the transaction have been done if Frank did not want to obtain the charitable
donation tax credits for the gifted 1998 and 1999 Notes? The answer to that
question is no. There was nothing in it for the Foundation. There was no
evidence that the Foundation’s benefactor was going to terminate his annual
gifting. Frank was the Foundation; he was its controlling mind and benefactor. The
Foundation had basically two choices as to how it might dispose of the Notes. Do
a deal with the HSBC or one with Sweet. The Foundation had never done a similar
transaction so why was it doing it now? The only reason the Foundation was doing
the deal was to alleviate Frank’s tax issues with respect to the donations and possibly
to carry out a moral obligation to ensure tax relief for its benefactor. Justice
Bowman (as he then was) in Jabs Construction Limited v. The Queen, 99
D.T.C. 729 (T.C.C.) at paragraph 23 stated the following:
The Minister
assessed in the manner set out at the beginning of these reasons, on the basis
that the transfer to Felsen was ineffective, the capital gain on the sale to
Callahan belonged to the appellant, the interest paid to Felsen was not
deductible and in any event section 245 applied. The Minister sees the whole
series of transactions as an elaborate and sinister form of tax avoidance. For
the reasons that follow, I see it as no such thing. It is in my view a
sensible and carefully conceived plan carried out within the specific
provisions of the Act designed to achieve the overall charitable objectives of
Mr. and Mrs. Jabs. [Emphasis added].
Justice
Bowman continued at paragraph 46 as follows:
Essential to
the operation of the section is that there be an avoidance transaction, i.e. a
transaction resulting in a "tax benefit", as defined. It is true, the
appellant did not, as a result of the gift to Felsen, have to pay tax on the
capital gain that it would have realized had it sold the properties itself to
Callahan. If this were the tax benefit upon which the respondent relies, every
gift at a designated amount less than fair market value to a charity under
subsection 110.1(3) would be an avoidance transaction. Such gifts are however
precisely what subsection 110.1(3) contemplates. I fail to see how the use
of a specific provision of the Act that allows the tax consequences of a
charitable gift to be mitigated can by any stretch of the imagination be a
misuse of the provisions of the Act or an abuse within the meaning of
subsection 245(4). It is simply a use of a provision of the Act - not a misuse
or abuse - for the very purpose for which it was designed. [Emphasis
added].
[44] On the evidence before the Court, there are both tax and
non-tax reasons behind this particular series of transactions. The tax reasons
have been explained. There were charitable credits for Frank based on the
donation and the Notes. The non-tax reasons include the fact that the sale of
the 1998 and 1999 Notes by the Foundation allowed its philanthropy objectives
to be carried out by allowing it to have more funds to disperse to the charity
than if the transaction had been done through HSBC. Also, the Foundation wanted
to ensure its benefactor was pleased, having already issued charitable receipts
for 1998 and 1999 Notes which were found to be not allowed.
[45] In Canada
Trustco Mortgage Company, supra, the Supreme Court of Canada suggested an approach when
there were tax and non-tax basis for transactions. I can only conclude on the
evidence that the transaction was undertaken to arrange primarily for tax-benefit
purposes. I have reviewed the transaction and the relationship between the
parties in my previous comments and will not review same again, save and except to say that this transaction would
not have occurred, based on the evidence, but for the desire of Frank to
receive tax relief for the gifting of the 1998 and 1999 Notes.
Abusive Tax Avoidance
[46] Having reached the conclusion
that this transaction is an avoidance transaction as not being arranged primarily
for bona fide purposes other than to obtain a tax benefit, I will now
address whether there was abusive tax avoidance, such that the tax benefit was
not consistent with the object, spirit or purpose of the provisions in which
the Appellant relied on.
[47] It was determined in Canada Trustco Mortgage Company,
supra, that the third requirement must be established by the Minister.
As to the steps to be taken in the analysis by way of summary, the Court stated
the following in paragraph 66:
The approach to s. 245 of the Income Tax Act
may be summarized as follows.
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.
[48] Canada Trustco Mortgage Company, supra, set out a
two stage test for determining whether the avoidance transaction giving rise to
the tax benefit, is a misuse or abuse:
(a) First, the
provisions giving rise to the tax benefit must be interpreted by applying a
textual, contextual, and purposive approach to determine their object, spirit
and purpose; and
(b) Second the
facts must be examined in order to determine whether the transaction falls
within or frustrates the object, spirit and purpose.
[49] The Foundation relies upon paragraph 118.1(18)(a)
and subsection 118.1(13)(a) of the Act.
[50] The relevant portions of paragraph 118.1(18)(a)
define “non-qualifying security” of an individual at any time as meaning:
(a) an obligation … of the individual or the
individual’s estate or of any person or partnership with which the individual or the estate does not deal at arm's length immediately
after that time
[51] Subsection 118.1(13) provides that if and when the
individual makes a gift of “non-qualifying security” as defined in subsection
118.1(18), that gift will be deemed to not have been made. Therefore, in
accordance with paragraph 118.1(13)(a), an individual gifting a
non-qualifying security would not be entitled to include the gift in completing
his or her “total charitable gifts” for the year. This is exactly what happened
in the case at bar. However, under subsection 118.1(13) there are
redemptive provisions, in particular paragraph 118.1(13)(b) and (c),
which specifically address the amount of the gift (a previous non-qualifying
security) that will be included in computing the individual’s “total charitable
gifts” for the subsequent year in which the donee disposes of the
“non-qualifying security”.
[52] I have already dealt with the arm’s length nature of the
transaction in question and went through the detailed analysis with respect to
same looking at the various provisions and therefore carried out an examination
of the textual interpretation of the provision in question.
[53] I must look at the sections then from a contextual point
of view and in doing so note that subsections 118.1(13) - 118.1(20) are
commonly known as the non-qualifying security rules and these really defer the recognition
of certain types of non-arm’s length gifts. Paragraph 118.1(18)(a) and
subsection 118.1(13) are part of these non-qualifying security rules. These
subsections address gifts to charities of non-qualifying securities which
include shares and debt obligations of persons who are non-arm’s length to the
donor, denying a charitable donation tax credit unless certain events occur
within the timeframe set out therein. It should be noted also that subsections
118.1(16) and 118.1(17) deal with loan back transactions. It was acknowledged
by the parties that the transactions under review are not a loan back
transaction and as such subsections 118.1(16) and 118.1(17) are not applicable.
[54] On reading of subsection 118.1(18) it appears that the
legislators did not intend that all debt obligations gifted to charities be non-qualifying
securities. An arm’s length debt obligation is in fact sanctioned by the
section and that section focuses on the time immediately after the gift as well
as the time period before and during the gifting. This would lead one to
believe that the purpose of the section was that the debt obligations be held
by arm’s length parties. I have already found as a fact that the disposition of
the Notes in question by the Foundation and Sweet Developments were by arm’s
length parties and therefore there is no apparent harm or abuse.
[55] Subsections 118.1(13) and 118.1(18) seem to purport that the
object, spirit and purpose of these provisions is to defer the recognition of
certain types of gifts, namely gifts of non-qualifying securities which include
debt to the non‑arm’s length person. The object, spirit and purpose do
not operate to disqualify all types of debt obligations and certainly not debt
obligations held by arm’s length parties. These redemptive provisions represent
built-in remedies whose purpose is to assist persons who make gifts that
otherwise might not generate legitimate charitable donation receipts and if the
remedial provisions are to be meaningful at all, then their existence supports
the conclusion that the purpose of the provision is not to deny charitable gift
status in respect of every debt obligation.
[56] It would appear that the stated purpose in recognizing
paragraphs 118.1(13)(b) and (c) is predicated on the factual
finding of an arm’s length relationship. These provisions specifically address
the amount of the gift for a previous non-qualifying security that will be
included in computing the individual’s total charitable gifts for a subsequent
year in which the donee disposes of the non-qualifying security. This section
contemplates the subsequent eligibility of a tax benefit.
[57] I have already found that the Appellant and Sweet
Development were dealing at arm’s length after the disposition of the 1998 and
1999 Notes – this was a legal relationship which the parties wanted; why would
the Courts intervene? In applying the approach taken in Canada Trustco
Mortgage Company, supra, the Appellant described the key question on a GAAR
consideration to be:
Was the Appellant abusing the
Act to rectify a problem when there is a manner to rectify the problem in
the Act by the similar amendment that caused the problem in the first
place?
The Respondent however asserted the provisions are to
prevent someone from claiming a credit when they have not lost use of the gifted
funds. The Respondent goes on to state that even when there is an attempt to remedy
the situation the donor still has use of the funds. I see no reference to use of
the funds in any of these provisions nor is there any suggestion that this is
the actual question which is to be asked or analyzed. Rather, I adopt the
position taken by Justice Bowman in Jabs Construction Ltd., supra, already
quoted, where he held that where a
taxpayer structures a transaction to take advantage of a specific provision (non
anti-avoidance interpretation of the Act) there is no misuse or abuse of
the Act.
[58] I believe the comments of Justice Bowman are particularly
apt in this particular case. I have conducted the textual, contextual and
purposeful analysis of subsections 118.1(13) and 118.1(18) and I believe that
this analysis is consistent with the finding that the transaction under review
does not frustrate the object, spirit and purpose of these provisions. Indeed
the Act specifically allows the very nature of the transaction that has
been conducted in this particular case. It allows for a non-qualifying security
to be otherwise qualified as a security, within a certain period of time by
sale of the non-qualifying security to an arm’s length party. In conducting the
transaction in the way it was conducted, the parties were simply carrying out
the very purpose for which the remaining sections were put in. Whether or not
the donor still has use of the funds, is really neither here nor there. The
same amount of income is being received from the funds before the transaction
since interest rates had not really been changed.
[59] All the Appellant did was exactly what the provision
allowed them to do, no more or no less.
[60] Having found the parties were dealing at arm’s length and
having found the GAAR does not apply, the appeal is allowed with costs.
Signed at Charlottetown, Prince
Edward Island, this 19th day
of August, 2008.
“E. P. Rossiter”
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