Date: 20010323
Docket: 98-1946-IT-G
BETWEEN:
THÉRÈSE ROUSSEAU-HOULE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Archambault, J.T.C.C.
[1]
Thérèse Rousseau-Houle is appealing from
the assessments made by the Minister of National Revenue (the
Minister) in respect of the 1990 to 1993, 1995 and 1996
taxation years (the relevant period). The main question at
issue is whether the formation, existence and financing of the
Société en commandite TRH Enr. (SEC) and
the acquisition by that limited partnership of an immovable (the
Laroche immovable) constitute a series of transactions the
primary purpose of which was to obtain a tax benefit which, as a
result, is subject to the general anti-avoidance rule
(GAAR) in section 245 of the Income Tax Act
(the Act). The Minister argues that the fact that
Ms. Rousseau-Houle personally took out a loan to
finance her contribution to SEC made it possible for that
partnership to show artificially inflated earnings and benefit
from a higher capital cost allowance (CCA) than it could
have done had SEC itself borrowed to purchase the Laroche
immovable. Ms. Rousseau-Houle thereby, according to the
Minister, contravened both the letter and the spirit of
subsection 1100(11) of the Income Tax Regulations
(the Regulations). This subsection reads as follows:
(11) Rental
Properties — Notwithstanding subsection (1), in no case
shall the aggregate of deductions, each of which is a deduction
in respect of property of a prescribed class owned by a taxpayer
that includes rental property owned by him, otherwise allowed to
the taxpayer by virtue of subsection (1) in computing his income
for a taxation year, exceed the amount, if any, by which
(a)
the aggregate of amounts each of which is
(i)
his income for the year from renting or leasing a rental property
owned by him, computed without regard to paragraph
20(1)(a) of the Act, or
(ii)
the income of a partnership for the year from renting or leasing
a rental property of the partnership, to the extent of the
taxpayer's share of such income,
exceeds
(b)
the aggregate of amounts each of which is
(i)
his loss for the year from renting or leasing a rental property
owned by him, computed without regard to paragraph
20(1)(a) of the Act, or
(ii)
the loss of a partnership for the year from renting or leasing a
rental property of the partnership, to the extent of the
taxpayer's share of such loss.
[2]
The Minister accordingly disallowed in whole or in part the CCA
claimed by SEC in computing its income in respect of the relevant
period.
[3]
The other question at issue, which is a subsidiary one, is
whether money borrowed in 1991 and 1993 was used for the purpose
of gaining or producing income from a business or property. The
Minister disallowed deductions for interest of $7,652 for 1991,
$22,834 for 1992, and $34,947 for 1993, because there was
insufficient evidence to show that the interest had been paid for
the purpose of gaining or producing income from a business or
property.
Facts
[4]
During the relevant period, Ms. Rousseau-Houle was
married to Fernand Houle, who owned a large
construction company in the Quebec City area and an investment
company, "Placements FH Inc." (PFH).
Mr. Houle also owned industrial and residential rental
properties, including a 50-unit apartment building.
[5]
Between 1978 and 1988, when she was appointed to the Bench,
Ms. Rousseau-Houle acquired four rental properties
(the personal immovables). The first one (the
Saint-Louis immovable), acquired in 1978, is located on
Saint-Louis Road and has 26 apartments. She managed it herself
during the first year but, because of her professional
activities, she decided to have it managed by property managers.
Of the other three properties that were subsequently acquired,
two were located on Delage Street (the Delage immovables)
and the third on Chanoine-Scott Avenue. During the relevant
period, Gestion Houle enr. (Gestion), a company
belonging to her husband, managed the personal immovables.
[6]
At a time when his spouse was in Florida, Mr. Houle made an
offer on December 23, 1989, to purchase the Laroche
immovable for $1,550,000. The offer was accepted, but the sale
had to be closed quickly, before December 31, 1989. Prior to the
offer being submitted, Ms. Rousseau-Houle had
consulted a cousin, a well-known tax lawyer, regarding the
various methods of purchasing and holding rental property and the
tax rules that applied to each. In particular, they had discussed
holding immovables through a business corporation or through a
partnership. Ms. Rousseau-Houle acknowledged that she
was familiar with the tax rules applicable to rental properties
and more specifically with the rules relative to CCA. She knew
that a rental loss could not be created or increased through the
deduction of CCA, except in the case of losses from Class 31 or
32 immovables, usually called MURBs (multiple unit residential
buildings). She knew that the personal immovables and the Laroche
Immovable were not MURBs. Lastly, Ms. Rousseau-Houle
acknowledged that, if a rental property were purchased through a
partnership, it would be more advantageous from a tax standpoint
for Ms. Rousseau-Houle herself to borrow to finance her
interest in the partnership rather than to have the partnership
to borrow to finance the purchase of that property.
[7]
Even before the offer was made on December 23, 1989,
consideration had been given to purchasing the Laroche immovable
through a limited partnership whose partners would be Ms.
Rousseau-Houle and her husband. However, the respective
interest of each had not been decided on. Thus, when
Mr. Houle made his purchase offer, he did so on behalf of a
limited partnership yet to be formed.
[8]
As time was too short to form SEC, it was
Ms. Rousseau-Houle who purchased the immovable on
December 29, 1989. In the conveyance,
Ms. Rousseau-Houle declared, and the vendor
acknowledged, that she was not acting in her individual capacity
but solely [TRANSLATION] "for and on behalf of a company
and/or partnership to be created." The purchase price was
$1,550,000, and the vendor acknowledged receiving the sum of
$388,000 as a down payment. According to the testimony of
Renée Garnier, an employee of Gestion who had been
responsible for PFH's accounts since February 1989, and
according to the statement of changes in financial position
(statements of changes) for the period from 1989 to 1993
prepared for each of the personal immovables and the Laroche
immovable, the $388,000 came from withdrawals of $260,000 from
the Saint-Louis immovable and a $128,000 withdrawal from one of
the Delage immovables.[1] As for the $1,162,000 balance, the purchaser undertook
to pay it no later than February 1, 1990, with interest
calculated annually at 11.375%.
[9]
On February 2, 1990, Ms. Rousseau-Houle, as general
partner, and Fernand Houle, as limited partner, signed a
limited partnership declaration. In the declaration, it is
indicated that the object of SEC was the acquisition, operation,
administration and leasing of movable and immovable properties.
Ms. Rousseau-Houle undertook to contribute $1,534,500,
and Mr. Houle, $15,500. On February 5, 1990, Fernand Houle
subscribed for one unit of SEC for $15,500, and
Ms. Rousseau-Houle subscribed for 99 units for
$1,544,500.[2] As
she had already paid $388,000 on purchasing the Laroche immovable
on behalf of SEC, Ms. Rousseau-Houle had to remit only
$1,156,500 to SEC. To pay this amount, she secured, on February
5, 1990, a bridging loan of $1,146,500 from PFH and no doubt used
$10,000 of her own money. On the same day, SEC paid
$1,170,728.63, an amount that presumably included interest, to
the vendor of the Laroche immovable.
[10]
Ms. Rousseau-Houle offered the following explanation
as to why her husband's share in SEC was limited to 1%.
Mr. Houle had to provide security so that his construction
company could obtain major construction contracts. Because of
these financial commitments, his financial situation did not
allow him to acquire a larger share in SEC. She added that the
purchase of the Laroche immovable through SEC was the
couple's first joint investment and that she and her husband
planned to acquire other rental properties through that
partnership. To date, there have been no further acquisitions,
however.
[11] On
February 6, 1990, SEC entrusted the management of the
Laroche immovable to Gestion. That firm handled the negotiation
of leases, dealt with the Régie du logement and took care
of the repayment and renewal of
Ms. Rousseau-Houle's loan.
[12] On behalf
of SEC, Ms. Rousseau-Houle, on April 12, 1990,
ratified the contract of purchase signed by her for the benefit
of that partnership, and the partnership thus became the owner of
the Laroche immovable as of the date of its formation. On the
same day, Montreal Trust made a $1,125,000 loan to
Ms. Rousseau-Houle. A condition of the loan was that
Ms. Rousseau-Houle had to use the funds to purchase an
equivalent share in SEC. Obviously, the loan was used to repay,
at least in part, the bridging loan granted by PFH. On the same
day as well, SEC signed a mortgage document granting Montreal
Trust a first mortgage on the Laroche immovable. As an additional
guarantee, SEC assigned to the mortgagee the rents due and to
become due from the Laroche immovable.
[13] The April
12, 1990, loan was replaced on August 7, 1991, by a new loan of
$1,325,000, which was $200,000[3] more than the earlier loan. The loan agreement
provided for a fixed annual interest rate of 11¼%; it also
provided that repayment would be spread out over a 25-year
period. The new loan was guaranteed by SEC, just as the earlier
loan was.
[14] According
to Ms. Rousseau-Houle, the additional amount of
$200,000 was to be used to finance the acquisition of other
immovables. SEC's balance sheet to December 31, 1991,
shows a capital investment of $209,594.50 during that year.
According to SEC's bank statement, a cheque in the amount of
$209,594.50 was deposited on August 15, 1991. The next day,
SEC paid to Gestion the sum of $209,000. According to
Ms. Garnier's testimony, that $209,000 amount was used
to operate the Laroche immovable and was not repaid to
Ms. Rousseau-Houle. However, Ms. Garnier did not
know why Ms. Rousseau-Houle had obtained the
additional $200,000 in the July 1991 refinancing.
[15]
Ms. Rousseau-Houle obtained from SEC the funds
required to repay the principal of the loans taken out to finance
her share in SEC and the interest on those loans. The transfers
of funds are shown as withdrawals in the partnership's
financial statements. Thus, part of the $209,000 could have
allowed Ms. Rousseau-Houle to make her mortgage
payments, which totalled $145,378 in 1991 (according to Exhibit
I-2).
[16] On
January 8, 1993, Laurentian Life Inc. lent $750,000 to
Ms. Rousseau-Houle to refinance an existing loan. The
new loan bore interest at 8.875% from February 5, 1993, and was
secured by a $750,000 mortgage on the Saint-Louis immovable
granted to that insurance company. This loan provided
Ms. Rousseau-Houle with an additional $170,771. This
amount is shown on the statements of changes as
"refinancing". According to Ms. Garnier, it was
deposited in Gestion's account. According to
Ms. Rousseau-Houle, the additional funds were to be
used to purchase an immovable at a cost of between $2 million and
$3 million. Unfortunately, the planned purchase did not
materialize because of the difficult situation in the real estate
market.
[17] According
to the statements of changes for the Saint-Louis immovable,
$105,000 was withdrawn in 1993 for the benefit of
Ms. Rousseau-Houle. According to Ms. Garnier,
$5,000 was used for personal purposes; she does not know how the
$100,000 balance was used. The only evidence provided in this
regard was a guaranteed investment certificate purchased by
Ms. Rousseau-Houle the following year, on May 3, 1994,
bearing interest at 7.95%, with a maturity date of May 3, 1997.
According to Ms. Rousseau-Houle, this guaranteed
investment certificate could be redeemed at any time.
[18] On June
8, 1995, Ms. Rousseau-Houle received a draft assessment in
which the Minister disallowed in part or in whole, on the basis
of the GAAR, the CCA claimed by SEC in the 1990 to 1993 taxation
years. Ms. Rousseau-Houle thereupon decided to file
her returns for 1995 and 1996 using the approach taken by the
Minister in the draft assessments, that is, deducting interest in
computing SEC's income, thereby reducing the amount of CCA.
However, she was careful to indicate that these returns were
filed with the Minister without prejudice to any of her rights,
in particular, her right to claim herself a deduction for the
interest on the loans taken out by her to invest in SEC, and to
deduct a higher CCA amount in computing SEC's income.
[19]
Ms. Andrée Simard, Co-ordinator of the Quebec
Tax Avoidance Section testified at the respondent's request.
Her audit report was produced as Exhibit I-1. She
provided therein the following reasons as to why the Minister
applied subsection 245(2) in disallowing the CCA taken by
SEC.
[TRANSLATION]
Overview
Through a scheme using a partnership to lease immovables, the
client had the partnership claim the depreciation because it had
sufficient net income, as it did not have the significant expense
that the interest costs on the mortgages represented, since those
costs remained at the level of the individual.
The scheme may be summarized as follows:
The client acquired an immovable, which was paid for in part
through a loan from Les Placements Fernand Houle Inc.
Subsequently, the client formed a partnership with her spouse;
she made a minimal contribution to that partnership.
On the same date, or shortly thereafter, she subscribed for an
interest in the partnership, contributing the immovable to the
partnership. As consideration, she received shares in the
partnership equivalent to the value of the transferred immovable.
The client continued to be responsible for the mortgage.
The partnership leased the building to a third party unrelated to
the client and claimed as expenses the taxes, insurance, in fact,
all the current expenses for a rental property.
[20] The tax
benefit that the Minister wants to counteract by application of
subsection 245(2) of the Act in respect of each of the years at
issue is well described in the respondent's Reply to the
Notice of Appeal. By way of illustration, I will quote the
description for the 1990 taxation year:
[TRANSLATION]
TAX BENEFIT FOR THE 1990 TAXATION YEAR
FIGURES FOR THE PERSONAL IMMOVABLES
(x)
The appellant's tax return for the 1990 taxation year
provides the following information concerning her personal
immovables:
1990 INCOME STATEMENT - PERSONAL IMMOVABLES
|
|
Saint-Louis
|
878 Delage
|
Chanoine
Scott
|
858 Delage
|
TOTAL
|
|
Gross income
|
$147,273
|
$86,565
|
$32,678
|
$63,158
|
$329,674
|
|
Expenses before
depreciation
|
$123,186
|
$123,482
|
$43,242
|
$71,455
|
$361,365
|
|
Profits or (losses)
efore before depreciation
|
$22,518
|
($37,331)
|
($10,596)
|
($8,297)
|
($31,691)
|
|
Depreciation on
movables (other than
Cl. 3 and 6)
|
$1,570
|
$415
|
$32
|
|
$2,017
|
|
Capital cost
allowance-immovables,
Cl. 3 or 6)
|
$16,460
|
$13,270
|
$ 7,315
|
$18,775
|
$55,820
|
|
Total depreciation
|
|
|
|
|
$57,837
|
|
Net profits or losses
claimed
|
$6,057
|
($50,602)
|
($17,911)
|
($27,072)
|
($89,528)
|
(y)
Based on the 1990 INCOME STATEMENT (PERSONAL IMMOVABLES) from her
tax return for the 1990 taxation year, the appellant had a loss
of ($31,691) before depreciation;
(z)
To the extent that the appellant owned only her personal
immovables and held no interest in the Partnership, she could not
create a loss through capital cost allowance since she would not
have been entitled to claim the depreciation expense of
$57,837 ($2,017 + $55,820) with respect to those
immovables because of subsection 1100(11) of the Income Tax
Regulations, which provides that a taxpayer may claim capital
cost allowance or a depreciation expense only up to the amount of
all the profits from his rental properties and the amount from
such properties that was allocated to him by a partnership, the
profit for these purposes being computed without regard to the
depreciation expense relating to the immovables.
FIGURES FOR THE LAROCHE IMMOVABLE
(aa) The
appellant holds a 99% interest in the Partnership, which, in the
1990 taxation year, allocated to her a profit of $89,527 that was
owed to her solely because the Partnership did not bear any
interest expenses arising from the purchase of the Laroche
immovable, as appears from the appellant's tax return;
(bb) The
PARTNERSHIP INCOME STATEMENT for the 1990 financial year is as
follows:
PARTNERSHIP INCOME STATEMENT (1990)
|
1990
|
|
GROSS RENTAL INCOME
|
$218,574
|
|
EXPENSES BEFORE DEPRECIATION
|
$100,696
|
|
PROFIT BEFORE DEPRECIATION
|
$117,878
|
|
INTEREST INCOME
|
$355
|
|
PROFIT
|
$118,233
|
|
CAPITAL COST ALLOWANCE, CLASS 8
|
$1,839
|
|
CAPITAL COST ALLOWANCE-IMMOVABLES
|
$25,962
|
|
TOTAL CAPITAL COST ALLOWANCE
|
$27,801
|
|
PARTNERSHIP'S PROFIT
|
$90,432
|
|
PROFIT ALLOCATED TO THE APPELLANT
99% x $90,432
|
$89,528
|
(cc) The
Partnership made an unrealistic profit of $90,432 because of the
fact that it was the appellant, and not the Partnership, who
absorbed the interest charges relating to the acquisition of the
Laroche immovable;
(dd) Since
under subsection 96(1) of the Income Tax Act the Partnership is a
separate person from its partners, the Partnership does not take
into account, for the purposes of the restriction regarding
capital cost allowance computation as provided for in subsection
1100(11) of the Income Tax Regulations, the $141,106 in interest
paid by the appellant in the 1990 taxation year;
(ee) If it
were not for these transactions, the Partnership would have
itself borrowed to purchase the immovable and would not have had
net rental income, but would have had instead a rental loss
before depreciation of ($23,228), that is, its profit before
depreciation less the interest expense assumed by the appellant
($117,878 - $141,106 = ($23,228);
(ff)
Therefore, the Partnership could not claim capital cost allowance
of $27,801 on the Laroche immovable, nor could the appellant
claim capital cost allowance of $57,837 on the immovables held by
her personally as she had incurred a loss before depreciation of
($31,691) in respect of these other immovables;
COMBINED FIGURES FOR THE PERSONAL IMMOVABLES AND THE
LAROCHE IMMOVABLE
(gg) If there
were no partnership and if the appellant had personally held the
immovable in respect of which she indirectly claims interest
expenses, the results would have been as follows:
INCOME STATEMENT FOR 1990 (ALL IMMOVABLES)
|
|
Figures (Personal
immovables)
|
Figures (Partnership
immovables)
|
Combined figures
without Partnership
|
|
Gross income
|
$329,674
|
$218,574 x 99%
|
$546,062
|
|
Expenses before depreciation
|
$361,365
|
$100,696 x 99%
|
$461,054
+
|
|
Interest assumed by and charged to the appellant
|
|
$141,106
|
$141,106
|
|
Total expenses
|
|
|
$602,160
|
|
Profits or (losses) before depreciation of
immovables
(Classes 3 and 6)
|
($31,691)
|
($23,228)
|
($56,098)
|
|
Depreciation claimed for movables (other than Class 3
and 6 assets)
|
$2,017
|
$1,839
|
|
|
Capital cost allowance
claimed on immovables,
Class 3 or 6
|
$55,819
|
$25,962
|
|
|
Total depreciation claimed
|
$57,837
|
$27,801 x 99%
|
$ 85,360
|
|
Excess depreciation
|
|
|
$85,360
|
(hh) From the
table in the preceding paragraph, it can be seen that the only
amount the appellant could have deducted from her other income
for the 1990 taxation year would have been the combined loss
before depreciation of $56,098 (established by taking into
account all interest paid) whereas, by taking the course she did,
the appellant deducted in addition depreciation totalling $85,360
($57,837 + 99% of $27,801);
The tax benefit that the appellant improperly obtained from
that arrangement was an additional deduction of $85,360, that is,
the excess depreciation claimed by the appellant, and she thereby
contravened the spirit of subsection 1100(11) of the Income Tax
Regulations (as well as section 245 of the Income Tax Act), which
provides that a taxpayer can claim a depreciation expense only up
to the amount of all the profits from his rental properties and
the amount from such properties that was allocated to him by a
partnership, the profit for these purposes being computed without
regard to the depreciation expense relating to the
immovables.
[21] As can be
seen, the fact that she held the Laroche immovable through SEC,
that she personally borrowed to finance her contribution to SEC
(planned transactions) and that this contribution was
enough to enable SEC to hold that immovable without having to
bear any interest expenses made it possible for
Ms. Rousseau-Houle not just to maximize the CCA in
respect of the Laroche immovable but to do so as well with regard
to the personal immovables (SEC tax benefit).
Ms. Simard confirmed that, in applying
subsection 245(2) of the Act, the Minister computed
SEC's net income as if Ms. Rousseau-Houle's loan
had been taken out by SEC. She also admitted that the same result
would have been achieved if the existence of SEC had not been
taken into account. She stated clearly that, as shown in the
above-cited passage from the Reply to the Notice of Appeal, the
tax benefit improperly obtained by Ms. Rousseau-Houle
contravened subsection 1100(11) of the Regulations.
[22]
Ms. Simard also stated that the Minister had disallowed the
deduction for the interest expenses on the $209,000 loan and on
the $170,771 loan made in 1991 and 1993 respectively. According
to her, the Minister did not have sufficient evidence to be able
to find that the money was used to gain or produce income from a
business or property. In addition, Ms. Simard had prepared a
statement of changes in financial position with respect to the
personal immovables and the Laroche immovable in order to
quantify Ms. Rousseau-Houle's cash flow
requirements. For 1991 to 1993, this statement provides the
following figures: ($4,999) in 1991, ($3,003) in 1992 and
($62,887) in 1993. According to Ms. Simard, these figures do
not justify all the additional loans. On the other hand, she
acknowledged that there was no evidence of personal use of the
funds held in Gestion's bank accounts.
Analysis
Application of GAAR
[23] It is
useful to begin with a review of the relevant legislative
provisions. First, there are subsections 245(1), (2) and
(3), which provide:
(1)
Definitions. In this section
"tax benefit" 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;
"tax consequences" 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" includes an arrangement or event.
(2)
General anti-avoidance provision. 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.
(3)
Avoidance transaction. 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.
[Emphasis added.]
[24] As one
can see, for the GAAR to apply, there must be no other provision
in the Act prohibiting the tax benefit claimed by the taxpayer
and disallowed by the Minister. I have underlined the relevant
passages in the Act that support this interpretation. There must
also be an avoidance transaction. If a transaction was undertaken
or arranged primarily for bona fide purposes (other than
to obtain a tax benefit), it does not constitute an avoidance
transaction. Lastly, even if the transaction constitutes an
avoidance transaction, it must be determined whether it results
directly or indirectly in a misuse of the provisions of the Act
or an abuse having regard to the provisions of the Act read as a
whole; this is what emerges from subsection 245(4), which
provides as follows:
(4)
Where s. (2) does not apply. For greater certainty,
subsection (2) does not apply to a transaction where it may
reasonably be considered that the transaction would not result
directly or indirectly in a misuse of the provisions of this
Act or an abuse having regard to the provisions of this Act,
other than this section, read as a whole.
[Emphasis added.]
[25] If the
avoidance transaction results in a misuse of the provisions of
the Act or an abuse having regard to the provisions of the Act,
the tax consequences must be determined as is reasonable in the
circumstances in order to deny the improper tax benefit. In my
opinion, in order for the tax consequences to be reasonable, in
determining them one must attempt as much as possible to avoid
modifying the transactions entered into by the taxpayer.
[26] Let us
now take each of the conditions for the application of the GAAR
and apply them to the facts of these appeals. As we saw above,
subsection 245(2) of the Act is a provision of last resort.
It supposes that the taxpayer has undertaken valid transactions
that, in addition, comply with every provision of the Act, with
the exception of section 245.
[27] In the
case at bar, there is no dispute as to the validity of the
planned transactions and as to the fact of compliance with the
provisions of the Act and Regulations, with the exception of
section 245. It must therefore first be determined whether the
planned transactions are avoidance transactions.[4]
[28] In
general, the acquisition of a rental property is a transaction
undertaken for bona fide purposes (other than to obtain a
tax benefit). The fact that such an immovable was purchased
through a partnership or a business corporation should normally
not change the situation. However, in analysing the specific
circumstances of this appeal, on cannot fail to see that Ms.
Rousseau-Houle undertook the planned transactions primarily
to obtain tax benefits. Through SEC, she held a 99% share in the
Laroche immovable. She could have purchased that immovable
herself, as she had done in the case of each of the four personal
immovables. By making a $1.5 million contribution to SEC to
finance the purchase of the Laroche immovable, she made it
possible for that partnership to realize a significant profit by
freeing it from the substantial interest expenses, thus
permitting it to avail itself of a higher CCA. That planning even
allowed Ms. Rousseau-Houle to claim CCA that she could
not have benefited from in computing the rental income from her
personal immovables. She had received the advice of a tax lawyer
and, evidently, the planned transactions had been undertaken in
order to maximize the tax benefits. In these circumstances, it
must be concluded that the planned transactions were primarily
for the purpose of obtaining a tax benefit and constituted
avoidance transactions.
[29] It
remains to be determined whether the transactions resulted in a
misuse of the provisions of the Act or an abuse having regard to
the provisions of the Act read as a whole. I do not believe that
subsection 245(2) of the Act applies in this case essentially for
two reasons. First, subsection 245(2) does not apply to a
tax benefit that contravenes a provision of the Regulations.
Second, even if the provisions of the Regulations have to be
taken into account, the planned transactions do not result in a
misuse of the provisions of the Act or an abuse having regard to
the provisions of the Act read as a whole. I shall now explain
each of these reasons.
The Act read as a whole, without taking the Regulations
into account
[30] In the
first place, the only provision of the Act referred to by counsel
for the respondent with respect to which there could be a misuse
or abuse is paragraph 20(1)(a), which enables a taxpayer
to claim CCA., the amount of which is that allowed by the
Regulations. More specifically, SEC's tax benefit would
contravene subsection 1100(11) of the Regulations and not
paragraph 20(1)(a)of the Act. Subsection 245(4)
of the Act provides that subsection 254(2) does not apply to a
transaction that does not result in a misuse of, or an abuse
having regard to, the provisions of "this Act . . . read as
a whole".
[31] During
oral argument at the hearing, counsel for both parties assumed
that, for the purposes of subsection 245(4) of the Act, the word
"Act" included the Regulations. I expressed doubt
regarding the correctness of this approach, and the parties
agreed to provide written submissions at a later date. In his
submissions of June 22, 2000, counsel for
Ms. Rousseau-Houle concluded that "Act" did
not include the word "Regulation". This is what he said
regarding this issue at page 7 of those submissions:
[TRANSLATION]
14.
It is submitted that the term "Act" in subsection
245(4) of the Act does not include the word
"Regulations" in the context of the general
anti-avoidance rule in section 245. Indeed, only Parliament may
adopt fiscal policies which show the spirit and purpose of the
Act. We reiterate the position of René Dussault and Louis
Borgeat referred to in paragraph 7 of these submissions, namely,
that statutes are "the expression of the political will of
the elected representatives of the population, articulated in the
most lasting form available. They transcend political programs,
'papers' of all colours, and inaugural speeches. They
alone manifest in concrete form the will of the elected
leaders."
15.
It is however true that a regulation has the force of law. Yet,
as Patrice Garant wrote, a regulation is not a formal Act, that
is to say, a statute, even if a provision of the Act attempts to
equate the regulation with the Act.
[32] I cite
some of the relevant passages from René Dussault and
Louis Borgeat, Administrative Law: A Treatise,
2nd ed., Vol. 1, 1985, Carswell, at page 15, referred to by
counsel:
(b) Statutes
The statutes are the expression of the political will of the
elected representatives of the population, articulated in the
most lasting form available. They transcend political
programs, "papers" of all colours, and inaugural
speeches. They alone manifest in concrete form the will of the
elected leaders. Parliament's authority in legal matters is
sovereign; when it acts within the framework of the Constitution,
its power to make or amend laws in principle has no limit.
Since it is supreme, the legislation which Parliament passes
must be considered as the primary source of law. It is the source
of those ever-expanding powers — regulatory and
otherwise — conferred upon the Executive or other
governmental bodies.
(c) Regulations
Just as statutes are the voice of parliamentarians,
regulations are the principal voice of the Executive.
Essentially they constitute a norm of general conduct authorized
by statute and applying to citizens or to certain categories of
citizens. Contrary to statutes, which come from Parliament,
regulations originate in several bodies, the major source being
the government. . . . The importance of regulations as a
source of law is fundamental, for they have become an
indispensable tool in the application of statutes.
[Emphasis added.]
[33] Counsel
also cited Patrice Garant, Droit administratif,
4th ed., Vol. 1, 1996, Les Éditions Yvon Blais, pages
408, 414 and 418, which enunciates several basic rules that
govern the regulatory activities of government:
[TRANSLATION]
2nd rule: every regulation requires an enabling
Act.
7th rule: a regulation is not a formal Act, that is
to say, a statute, even if a provision of the Act attempts to
equate the regulation with the Act; however, the term
"Act" or "loi" very often includes the word
"regulation", depending on the context.
10th rule: the regulation must be consistent with the
enabling clause. A regulation, in its object or its content,
must not go beyond the enabling clause. This rule is the logical
expression of the relationship of subordination between an Act
and a regulation. Regulatory power may not and must not be
exercised otherwise than in accordance with the enabling
Act.
[Emphasis added.]
[34] To the
academic writings referred to by counsel for
Ms. Rousseau-Houle must be added the case of The
King v. Singer, [1941] S.C.R. 111, in which the Supreme Court
of Canada held that a regulation or an order was not an Act. In
that case, a druggist who had contravened a provision of an order
made under the War Measures Act was prosecuted under
section 164 of the Criminal Code (section 126 of the
present Code). The War Measures Act explicitly provided
that orders and regulations had the force of law. The dissenting
judges of the Court of King's Bench had found that the
[TRANSLATION] "regulation in question must be considered
part of the War Measures Act, and therefore section 164
Cr. C. applies." (p. 113). This section of the Criminal
Code applied to any person who contravened an Act of
Parliament. The Supreme Court upheld the decision of the trial
judge dismissing the proceedings against the druggist and that of
the Court of Appeal affirming the trial decision.
[35] In his
submissions of June 22, 2000, counsel for the respondent
naturally expressed an opposing point of view. In paragraph 14 of
those submissions, he wrote:
[TRANSLATION]
14.
In our humble opinion, the provisions of the Income Tax Act and
the whole of the Income Tax Regulations (in particular those
regulations concerning capital cost allowance, as they form in
themselves a complete mini-code) are all so interrelated that
they cannot and should not be read or interpreted independently
of one another and, consequently, by reason of this context
peculiar to the Income Tax Act, we conclude that the word
"Act" in section 245 of the Income Tax Act necessarily
includes by reference the word "regulation".
[36] In
support of this conclusion, he cites, inter alia,
Driedger on the Construction of Statutes, Ruth Sullivan,
3rd ed., Butterworths, Toronto and Vancouver, at page 246:
In appropriate circumstances, however, where the Act and the
regulations are closely meshed so as to form an integrated
scheme, provisions from both are interpreted in the light of that
overall scheme.
[37] In my
opinion, the wording of subsection 245(4) of the Act is clear and
unambiguous. In speaking of a misuse of, or an abuse having
regard to, the provisions "of this Act . . . read as a
whole", the legislator is referring to the Act enacted by
the Parliament of Canada. There is no reference at all to the
Regulations made by the government. It is important at this point
to remember the principles of construction adopted by the Supreme
Court of Canada for cases where the wording is clear and
unambiguous. For example, in Friesen v. Canada,
[1995] 3 S.C.R. 103, at page 113 (95 DTC 5551, at page
5553), Major J., Sopinka and L'Heureux-Dubé JJ.
concurring, describes these principles as follows:
In interpreting sections of the Income Tax Act, the
correct approach, as set out by Estey J. in Stubart
Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, is to
apply the plain meaning rule. Estey J. at p. 578 relied on the
following passage from E. A. Driedger, Construction
of Statutes (2nd ed. 1983), at p. 87:
Today there is only one principle or approach, namely, the
words of an Act are to be read in their entire context and in
their grammatical and ordinary sense harmoniously with the scheme
of the Act, the object of the Act, and the intention of
Parliament.
The principle that the plain meaning of the relevant sections
of the Income Tax Act is to prevail unless the transaction
is a sham has recently been affirmed by this Court in Canada
v. Antosko, [1994] 2 S.C.R. 312. Iacobucci J., writing for
the Court, held at pp. 326-27 that:
While it is true that the courts must view discrete
sections of the Income Tax Act in light of the other
provisions of the Act and of the purpose of the legislation,
and that they must analyze a given transaction in the context of
economic and commercial reality, such techniques cannot alter
the result where the words of the statute are clear and plain
and where the legal and practical effect of the transaction is
undisputed: Mattabi Mines Ltd. v. Ontario (Minister of
Revenue),[1988] 2 S.C.R. 175, at p. 194; see also
Symes v. Canada [1993] 4 S.C.R. 695.
I accept the following comments on the Antosko case in
P. W. Hogg and J. E. Magee, Principles of Canadian
Income Tax Law (1995), section 22.3(c) "Strict and
purposive interpretation", at pp. 453-54:
It would introduce intolerable uncertainty into the Income Tax
Act if clear language in a detailed provision of the Act were
to be qualified by unexpressed exceptions derived from a
court's view of the object and purpose of the provision.
. . . [The Antosko case] is simply a recognition that
"object and purpose" can play only a limited role in
the interpretation of a statute that is as precise and detailed
as the Income Tax Act. When a provision is couched in specific
language that admits of no doubt or ambiguity in its application
to the facts, then the provision must be applied regardless of
its object and purpose. Only when the statutory language admits
of some doubt or ambiguity in its application to the facts is it
useful to resort to the object and purpose of the provision.
[Emphasis added.]
[38] When
Parliament's intent is that both the Act and the Regulations
are to be taken into account, it says so explicitly. I have
counted at least twenty sections[5] of the Act where Parliament refers to both the
Act and the Regulations. I should add that the phrase "of
this Act or the regulations" or similar phrases may be found
in at least eight separate provisions of the Act: 147.1(7),
220(2.1), 220(5), 221(2), 225.1(6), 238(3), 239(1)(a) and
239(1.1).
[39] I shall
cite only a few highly indicative examples. First, there is
paragraph 221(2)(b), which sets out the rule stating when
a regulation correcting an enactment that is "not in
accordance with the objects of this Act or the Income Tax
Regulations" has effect. Paragraph 221(2)(b) is
worded as follows:
221(2) Effect. A regulation made under this Act
shall have effect from the date it is published in the Canada
Gazette or at such time thereafter as may be specified in the
regulation unless the regulation provides otherwise and it
. . .
(b) corrects an ambiguous or deficient enactment that
was not in accordance with the objects of this Act or the
Income Tax Regulations;
. . .
[Emphasis added.]
[40]
Subsection 220(5) concerns the power of certain officers to
administer oaths "for the purposes of . . . the
administration or enforcement of this Act or regulations made
thereunder."[6]
[41] The final
example illustrates the case where Parliament refers in the Act
to another Act of Parliament and the regulations made thereunder.
Subsection 126.1(12) of the Act, concerning prepayment of the
unemployment insurance premium tax credit, provides that an
employer shall be deemed for the purposes "of the
Unemployment Insurance Act and regulations made under
it" to have remitted the amount in question to the Receiver
General on account of the employer's unemployment insurance
premium.
[42] It is
clear, then, that, when Parliament wishes to refer to both the
Act and the Regulations, it says so explicitly. In subsection
245(4) of the Act, it did not do so. In my opinion, in
interpreting the words "this Act . . . read as a whole"
in this subsection one must limit oneself to the provisions of
the Act and not take the provisions of the Regulations into
account.
[43] I find
this result completely appropriate, especially considering that
the purpose of subsection 245(2) of the Act is to deprive
Canadian taxpayers of tax benefits that are granted by the Act
and that contravene none of its provisions, other than section
245. If the intent of Parliament is, for the purposes of this
section, to have the government's fiscal policy enunciated in
the Regulations taken into account in addition to the policy
enacted by Parliament in the Act, it must, in my opinion, clearly
express that intent in the section. Since Parliament has taken
care to refer, in other provisions of the Act, to both Act and
the Regulations, it seems to me that it is even more important
for it to do likewise in the context of section 245 of the
Act.
[44] If the
provisions of the Regulations are not taken into account, the
conclusion must be that none of the provisions of the Act read as
a whole, including paragraph 20(1)(a), restricts the
amount of CCA that may be deducted. This result is not
surprising, since the rules governing the calculation of CCA are
all to be found in the Regulations.
The Act read as a whole, taking the Regulations into
account
[45] Even if I
had had to take the provisions of the Regulations into account
for the purposes of applying subsection 245(4) of the Act, I
would still find that the planned transactions do not result in a
misuse of, or an abuse having regard to, the provisions of the
Act.
[46] In my
opinion, there is nothing in the Act or the Regulations to
prevent the use of either a business corporation or a partnership
to hold rental property, and there is no requirement that a
taxpayer finance such a property through a partnership rather
than obtaining financing directly through the partner or partners
themselves. On the contrary, the use of a partnership for this
purpose is in fact explicitly recognized in subparagraph
1100(11)(a)(ii) of the Regulations.[7] Moreover, paragraph 20(1)(c)
explicitly provides that, in computing his income, a taxpayer is
entitled to deduct interest paid for the purpose of earning
income from a business or property. This paragraph also permits
the deduction of interest on an amount payable for property
acquired for use in a business. Thus, if a taxpayer purchases
shares in a partnership or holds a rental property personally
(alone or in co-ownership) or through a partnership, he may
deduct the interest on the loans taken out to finance the
acquisition thereof.
[47] Moreover,
it is paragraph 96(1)(a)[8] that requires that the income from a partnership
that holds an immovable be computed as though the partnership
were a separate person, which means that the CCA provided for in
paragraph 20(1)(a) of the Act must be claimed by the
individual, and that the partners who borrowed to finance their
contribution to the partnership must deduct the interest. It
should be added that this rule has been in force since 1972 and
represents a major change from the situation existing prior to
1972 when CCA was claimed by the partners. Accordingly, it was
not through oversight or inadvertence that this partnership
taxation regime that existed during the relevant period was
created.
[48] It may be
seen from a combined reading of subsection 1100(11) of the
Regulations and paragraph 96(1)(a) of the Act that a
partnership may not claim CCA in excess of its net rental income.
In the case at bar, the amount claimed by SEC does not exceed the
net income (before deducting CCA) earned by that partnership.
Therefore, strictly speaking, the rule was observed.
[49]
Ms. Rousseau-Houle had the option of financing the
acquisition of the Laroche immovable either by borrowing to
finance her subscription for the units in SEC or by having SEC
itself take out the required loan. The choice of the first option
does not in itself result in a misuse of, or an abuse having
regard to, the provisions of the Act. It is quite common for a
shareholder to borrow to subscribe for his shares and so finance
the transactions of his business corporation, just as it is
common for such a corporation to itself borrow to finance its own
activities. I see no reason to treat any differently a partner
who decides to finance the activities of his partnership by
borrowing in order to make his contribution to the partnership[9] instead of asking
the partnership to obtain its own financing. Yet, in the case at
bar, the Minister argues that it is necessary, in computing
SEC's rental income, to deduct an expense that it did not
incur, that is, the interest paid by
Ms. Rousseau-Houle. To require SEC to take into
account in computing its income an expense that it did not incur
would contravene section 96 of the Act, which requires that
the partnership's income be computed as if it were a separate
person.
[50] In
enacting section 245 of the Act, Parliament was seeking to
counter the use of schemes that create an undue tax benefit for
taxpayers. The intent was not, however, to permit the Minister to
force taxpayers to structure their transactions in the most
costly way possible from a tax standpoint. In the explanatory
notes for the new section 245 that accompanied the bill to amend
the Act, the Minister of Finance recognized that a taxpayer is
entitled to arrange his affairs so as to pay the least tax
possible. Section 245 is a powerful tool to discourage and
prevent flagrant abuses in the application of the Act. It may not
be used by the Minister as a means to force taxpayers to
structure their transactions in the way most favourable to the
tax authorities. My colleague Judge Bowman took the same line in
Jabs Construction Ltd. v. The Queen, 99 DTC 729,
stating in paragraph 48 that section 245"should not be
used routinely every time the Minister gets upset just because a
taxpayer structures a transaction in a tax effective way, or does
not structure it in a manner that maximizes the tax."
Deduction of interest
[51] In making
the assessment, the Minister disallowed a portion of the interest
deducted by Ms. Rousseau-Houle in respect of amounts
borrowed in 1991 and 1993. When, in August 1991,
Ms. Rousseau-Houle refinanced her loan from Montreal
Trust, she ended up with an excess of $209,000. This amount was
deposited in SEC's account, and SEC remitted it to Gestion.
These funds were used in SEC's transactions, and there is
nothing to indicate that they were used for personal purposes. In
these circumstances, I believe it is reasonable to conclude that
the interest relating to this amount of $209,000 constitutes
expenses incurred to gain or produce income from a business or
property.
[52] As for
the $170,771 representing the excess amount obtained when
Ms. Rousseau-Houle refinanced the Saint-Louis
immovable on January 8, 1993, the evidence reveals that it was
initially deposited in Gestion's bank account and used for
the purpose of renting the immovables. In all likelihood,
however, that amount was used later, at an undetermined time
during the year, to make the $105,000 withdrawal in favour of
Ms. Rousseau-Houle. According to Ms. Garnier, an
amount of $5,000 was used for personal purposes. As for the
$100,000 balance, Ms. Rousseau-Houle did not provide,
as it was incumbent upon her to do,[10] evidence regarding the use that was
made of this amount between the time it was withdrawn in 1993 and
May 3, 1994, when Ms. Rousseau-Houle purchased a
guaranteed investment certificate. In the circumstances, I
believe it reasonable to conclude that
Ms. Rousseau-Houle can deduct only the interest on the
portion of the $170,771 that was kept by Gestion, or $65,771.
[53] For these
reasons, the appeals of Ms. Rousseau-Houle are allowed
and the assessments are referred back to the Minister for
reconsideration and reassessment on the basis that
section 245 does not apply to the planned transactions, that
Ms. Rousseau-Houle is entitled to CCA computed pursuant to
subsection 1100(11) of the Regulations in respect of the personal
immovables and the Laroche immovable held by SEC, and that she is
entitled to a deduction for
the interest on the $209,000 amount from August 7, 1991
and for the interest on the $65,771 amount from January 8, 1993,
the whole with costs.
Signed at Ottawa, Canada, this 23rd day of March 2001.
"Pierre Archambault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 14th day of May
2001.
Erich Klein, Revisor
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