REASONS FOR JUDGMENT
Associate Chief
Justice Lamarre
[1]
Fiducie financière Satoma (the Appellant or
Fiducie Satoma) is appealing from assessments issued by the Canada
Revenue Agency (CRA) for the 2005, 2006, and 2007 taxation years.
[2]
The assessments under appeal are based on the
CRA’s application of the General Anti-Avoidance Rule (GAAR) set out in
section 245 of the Income Tax Act (ITA), in response to the tax
planning orchestrated by the appellant’s advisors, whereby the application of
subsection 75(2) of the ITA (a specific anti-avoidance rule) was
voluntarily triggered.
[3]
More specifically, at issue is the payment to
the appellant of dividends totalling $6,250,100 by 9163-9682 Québec Inc. (9163)
during the years at issue.
[4]
The appellant did not redistribute those
dividends to its beneficiaries. Consequently, the appellant should normally
have been taxed on the funds received from 9163 during the years at issue.
[5]
However, under subsection 75(2) of the ITA,
those dividends were attributed to one of the appellant’s beneficiaries, 91341024
Québec Inc. (9134), on a tax-free basis for Fiducie Satoma and, as
will be seen further on, for its other beneficiaries as well.
[6]
In a partial agreed statement of facts filed as
Exhibit A-1, the parties related all the transactions that were conducted to
transfer the total amount of $6,250,100 to the appellant, which is the amount
at issue here. This partial agreement of facts is attached to these reasons in
Appendix 1. A simplified diagram of the structure set up (Appendix II) is also
included after the partial agreement to help explain the issue.
[7]
Applying subsection 75(2) of the ITA, 9134,
which had included the dividends in its income, was able to claim the deduction
under subsection 112(1) of the ITA for intercorporate dividends (applying
subsections 104(13) and 104(19) of the ITA), thereby bringing the taxable
income from those dividends to zero.
[8]
Through that strategy, the appellant was able to
retain the full amount of the dividends received tax-free and that amount could
not be taxed if it were eventually distributed to the beneficiaries.
[9]
The evidence showed that those funds initially
came from Gennium produits pharmaceutiques Inc. (Gennium), whose shares
were held by Louis Pilon and Fiducie familiale Louis Pilon. Gennium is a
corporation that specialized in generic drug distribution.
[10]
Louis Pilon wanted to use Gennium’s profits to
expand his activities to include drug manufacturing.
[11]
From the start, the intention was to completely
separate Gennium’s distribution activities from the manufacturing activities,
given the high risk of litigation in that field.
[12]
Fiducie Satoma, the appellant, was created with
the intent that, as a trust, it would invest the funds from Gennium in new
corporations to be created for drug manufacturing activities. By investing
through Fiducie Satoma, the goal was to shield the assets from any potential
lawsuits from creditors.
[13]
Mr. Pilon explained that he gave his tax
advisor, François Proulx, a mandate to set up an organizational structure to be
able to transfer funds from Gennium to the new entities to be created, while
minimizing the tax payable and ensuring the protection of assets.
[14]
Thus, although Fiducie familiale Louis Pilon
already existed, Mr. Proulx initiated the tax planning to transfer the
profits from Gennium to another trust, Fiducie Satoma, on a tax-free basis.
Fiducie Satoma then invested the majority of those funds in corporations
created for drug manufacturing.
[15]
It is worth noting here that all the plan was
based on the creation of a reversionary trust (Fiducie Satoma) (which Fiducie
familiale Louis Pilon was not) with the intention of voluntarily triggering the
application of subsection 75(2) of the ITA. Under this provision of the
ITA the trust income must be attributed to the person who transferred the
property to the trust if the property can revert to that person or if it can be
transferred to a person of his or her choice. This is an attribution rule that
stipulates that any income resulting from the transferred property and from any
property substituted therefor is deemed to belong to the person who transferred
the property to the trust.
[16]
If we carefully analyze the tax plan, Gennium
distributed dividends to Fiducie familiale Louis Pilon (which, I repeat, is
not, itself, a reversionary trust to which subsection 75(2) of the ITA
would apply).
[17]
Fiducie familiale Louis Pilon distributed those
dividends, in the year they were received, to 9134, one of its beneficiaries,
which had not engaged in any commercial activity since 2005. Fiducie familiale
Louis Pilon then used the deduction under subsection 104(6) of the ITA,
such that it did not have to pay tax on those dividends.
[18]
In turn, 9134 included those dividends in its
income, in accordance with subsection 104(13) of the ITA, but claimed the
deduction for intercorporate dividends in subsection 112(1) of the ITA, by
applying subsection 104(19) of the ITA, which allows the beneficiary to
process the income, based on the nature of the income, on behalf of the trust
(dividend income).
[19]
The appellant created 9134, which is also its
beneficiary. Louis Pilon is 9134’s only shareholder.
[20]
Corporation 9134 then gave the appellant a gift
of $100, which the appellant used to acquire Class F shares from 9163 (another
corporation with no commercial activities)—the shares from 9163 becoming the
substituted property. This gift triggered the application of
subsection 75(2) of the ITA, such that all income from the substituted
property (dividends on shares held by the appellant in 9163) had to be
attributed, for tax purposes, to 9134 (the person who transferred the property
without consideration while retaining the right of reversion, as a
beneficiary.)
[21]
The corporation 9134 then contributed to 9163’s
capital by paying, as a contributed surplus, the funds from the dividends it
received from Fiducie familiale Louis Pilon.
[22]
The corporation 9163 then paid those funds to
the appellant as dividends.
[23]
The appellant did not have to include those
dividends in its income because, under subsection 75(2) of the ITA, 9134
had to include them in its income. That corporation claimed the deduction for
dividends in subsection 112(1) of the ITA and therefore did not pay any
tax on those amounts.
[24]
The result of the transactions described above
(paragraphs 17 to 21) was that 9134 was stripped of its assets in favour of the
appellant, without paying any tax.
[25]
The appellant subsequently invested $4,575,000
in shares of various companies to engage in drug manufacturing activities
(4273702 Canada Inc. (427)—which in turn, invested in Jamp Pharma Corporation (JAMP)
and Nutralife—and Technologie & Services RX Inc. (RX)).
[26]
To date, the appellant has not made any payments
to the beneficiaries.
[27]
It is not disputed that the appellant is a
reversionary trust and that the conditions have been met for the application of
subsection 75(2) of the ITA.
[28]
It is also important to note that when a trust’s
income did not become payable to a beneficiary during the year (as is the case
here where no funds were actually paid to any of the appellant’s
beneficiaries), it accumulates in the trust for the beneficiaries. Normally, this
income is taxable in the trust and any subsequent distribution of this
accumulated income will be deemed a non-taxable distribution of the trust’s
capital (Marc Cuerrier, “L’impôt des fiducies”, Revue de planification fiscale
et successorale, 1996, vol. 18, no 4, 802-872). (Tab 23 of the Respondent’s
book of authorities).
[29]
If this income is taxable in the hands of the
person who transferred the property to the trust with a right of reversion, by
applying subsection 75(2) of the ITA, the CRA does not consider this
amount taxable in the hands of the trust’s beneficiary if the trust
subsequently redistributes this revenue. This is explained by the fact that the
income was already included in the income of the person who, under
subsection 75(2) of the ITA, is deemed to have earned the income and that
income is therefore considered part of the trust’s capital (CRA Views, Taxnet
Pro, document 9411115 - Attribution). (Tab 7 of the Appellant’s book of
authorities).
[30]
However, it should be noted that
subsection 75(2) does not expressly provide that the income attributed in
this way to the person who transferred the property is deemed not to be income
for the trust, as is the case for other provisions of the ITA that deal with
attribution rules (see, for example, section 74.1 of the ITA, that pertains
to attribution rules in the case of a transfer between spouses or common-law
partners). However, the CRA confirmed in its Tax Interpretation Bulletin,
IT-369R, that any income to which subsection 75(2) of the ITA applies is
not deemed to be the beneficiary’s revenue (Brenda L. Crockett, “Subsection
75(2): The Spoiler” in “Personal Tax Planning” (2005) 53:3 Canadian Tax Journal
831. “Subsection 75(2): The Spoiler” in “Personal Tax Planning” (2005) 53:3
Canadian Tax Journal 806. (Tab 25, page 11 of 21) of the Respondent’s book of
authorities).
[31]
Paragraph 10 of Interpretation Bulletin 369R
states that an amount which has been attributed to a person under
subsection 75(2) is normally to be excluded from the income of a beneficiary
of the trust to whom it was paid or payable in the year, and from the income of
the trust where it was not paid or payable to the beneficiary of the trust.
[32]
Moreover, the Federal Court of Appeal ruled in Sommerer
v. Canada, 2012 FCA 207, [2014] 1 FCR 379, at paragraph 55, that
nothing in subsection 75(2) contemplates an outcome involving the attribution
of the same gain to more than one person. The Court of Appeal added: “This
double application of subsection 75(2) cannot be avoided by a discretionary use
of subsection 75(2), because it is not a discretionary provision. It applies
automatically to every situation it describes.”
[33]
In this context, the CRA did not tax Fiducie
Satoma (the appellant) on the dividend income in accordance with the tax rules
applicable to trusts, but, instead, decided to invoke the GAAR to include the
dividend income attributed to 9134 in the appellant’s income, in spite of the
fact that, in its Interpretation Bulletin, it took the position of avoiding
double taxation.
[34]
According to the CRA, the intentional use of
subsection 75(2) to attribute dividend income to a corporation which
claims a dividend deduction under subsection 112(1) of the ITA, resulting in
neither the trust nor its beneficiaries being taxed on the dividend income,
constitutes tax avoidance within the meaning of subsection 245(2) of the ITA
(Maria Elena Hoffstein and Michelle Lee, “Revisiting the Attribution Rules”
2012 Ontario Tax Conference, Toronto, Canadian Tax Foundation, 2012) 9 : 1-40).
(Tab 28, page 27 of 44 of the Respondent’s book of authorities).
[35]
According to the respondent, the appellant
obtained a clear tax benefit by completely avoiding all forms of taxation. The
respondent claims that this benefit is the result of a series of transactions
leading to a clear abuse of subsections 75(2) and 112(1) of the ITA and
therefore the GAAR should be applied.
[36]
According to the appellant, this case does not
involve a tax benefit at this stage. The appellant submits that the tax benefit
will only be obtained if it distributes the untaxed funds to its beneficiaries,
more specifically, if the funds are distributed to a beneficiary who is an
individual.
[37]
The appellant is not disputing that, if there
were a tax benefit, it would be the result of a series of transactions leading
to avoidance.
[38]
However, the appellant submits that it is not
reasonable to consider that this series of transactions entailed an abuse of
subsections 75(2) and 112(1) of the ITA.
Analysis
[39]
At issue is whether or not the GAAR should be
applied.
[40]
In the words of the Supreme Court of Canada in Canada Trustco Mortgage Co.
v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54, at paragraph 16, “The GAAR draws
a line between legitimate tax minimization and abusive tax avoidance. The line
is far from bright. The GAAR’s purpose is to deny the tax benefits of certain
arrangements that comply with a literal interpretation of the provisions of the
Act, but amount to an abuse of the provisions of the Act.”
[41]
Thus, in response to the appellant’s argument
that it simply applied the provisions of subsections 75(2) and 112(1) of the
ITA and therefore complied with the law, i.e. the provisions of the ITA,
the respondent argues that the tax plan carried out crossed the line into tax
avoidance.
[42]
The appellant submits that by invoking the GAAR,
the respondent is indirectly doing what it cannot do directly, as it is taxing
two taxpayers on the same amount, which is contrary to the doctrine propounded
by the Federal Court of Appeal in Sommerer, above. Given that 9134
already included the dividend amount distributed to the appellant in its
income, it submits that the respondent cannot include that income in the
appellant’s income a second time.
[43]
The Supreme Court of Canada has responded to
that argument, for instance, in Copthorne Holdings Ltd. v. Canada,
[2011] 3 S.C.R. 721, 2011 SCC 63 at paragraph 66: “The GAAR is a legal mechanism
whereby Parliament has conferred on the court the unusual duty of going behind
the words of the legislation to determine the object, spirit or purpose of the
provision or provisions relied upon by the taxpayer. While the taxpayer’s
transactions will be in strict compliance with the text of the relevant
provisions relied upon, they may not necessarily be in accord with their
object, spirit or purpose.”
[44]
I would add that the GAAR was not at issue in Sommerer,
above.
[45]
However, the application of the GAAR is a remedy
of last resort (Copthorne, paragraph 66), which is why a rigorous
analysis, as provided for in section 245 of the ITA, is necessary.
[46]
As stated in Trustco, at paragraph 17,
the application of the GAAR involves three steps. The first step is to
determine whether there is a “tax benefit” arising from a “transaction” under
s. 245(1) and (2) of the ITA. The second step is to determine whether the
transaction is an avoidance transaction under s. 245(3), in the sense of not
being “arranged primarily for bona fide purposes other than to obtain the tax
benefit”. The third step is to determine whether the avoidance transaction is
abusive under s. 245(4). The burden is on the taxpayer to rebut the first two
conditions and on the respondent to show that the third condition is not (Trustco,
paragraph 66).
Tax benefit
[47]
The phrase “tax benefit” is defined in
subsection 245(1) of the ITA as follows:
“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. It
includes a reduction, avoidance or deferral of tax or other amount that would
be payable under this Act but for a tax treaty or an increase in a refund of
tax or other amount under this Act as a result of a tax treaty;
[48]
The issue of whether there is a tax benefit is a
question of fact (Trustco, paragraph 19). If the tax benefit is not
clearly established, it will be established by comparison with an alternative
arrangement. In all cases, it must be determined whether the taxpayer reduced,
avoided or deferred tax payable under the under the ITA (Trustco,
paragraph 20).
[49]
In comparing the taxpayer’s situation with the
situation that would have resulted from an alternative arrangement, the latter
must be one that might reasonably have been carried out but for the existence
of the tax benefit (Copthorne, paragraph 35).
[50]
In this case, the respondent submits that the
tax benefit is obvious because the appellant received $6,250,100 in tax-free
dividends through the voluntary application of the specific anti-avoidance rule
in subsection 75(2) of the ITA.
[51]
As for the appellant, it submits that there is
no tax benefit, as long as the appellant does not distribute the funds to its
beneficiaries. On the basis of the comments of Justice Rothstein, of the
Federal Court of Appeal at the time, in OSFC Holdings Ltd. v.
Canada, [2002] 2 FCR 288, 2001 FCA 260, at paragraph 42, the appellant
argues that even if all the transactions that were carried out were part of a
plan through which a person could potentially obtain a tax benefit, those
transactions entail no tax benefit for that person if the person was not
involved in the series of transactions.
[52]
According to the appellant, there is, at most, a
potential tax benefit, in that the appellant could choose to distribute the
funds to its beneficiaries, who are individuals that would receive those funds
on a tax-free basis. However, this type of benefit would not exist if the trust
chose to distribute those funds to its beneficiaries that are corporations
because shareholders of those corporations would pay the tax when they received
dividends from those corporations.
[53]
Thus, as the appellant argues, there might never
be any distribution to individual shareholders and that no one would obtain an
actual tax benefit. Moreover, the appellant points out that no funds have been
distributed to the beneficiaries to date. Rather, the appellant invested in the
underlying corporations that were created to engage in commercial activities
not engaged in by Gennium.
[54]
The appellant also submits that it could have
achieved the same result by returning the dividends received to 9134, which
could have either invested the funds in the trust or invested them directly in
427 and RX. In that case, the CRA would not have invoked the GAAR because the
appellant would have distributed the funds to one of its beneficiaries.
[55]
Another possibility presented by the appellant
was that 9134 could just as well have made a much larger donation instead of
going through 9163, or simply made a donation to Fiducie familiale Louis Pilon,
so that the latter would itself invest in the new corporations that were
created, 427 and RX. It submits that such cases would involve a contribution to
the appellant’s capital or Fiducie familiale Louis Pilon’s capital, and that
the CRA would not have deemed those amounts to be taxable for that trust.
[56]
In my opinion, none of those examples hold
water.
[57]
The evidence shows that Mr. Pilon wanted to
add a trust to the organizational chart to protect his assets.
[58]
However, Fiducie familiale Louis Pilon already
existed for that purpose. In spite of everything, the decision was made to
create a new trust (Fiducie Satoma, the appellant) in order to take advantage of
a reversionary trust to make use of the anti-avoidance rule provided for in
subsection 75(2).
[59]
It is clear that this new trust was created to
reduce to zero the tax impact of transferring funds from Gennium to the assets
of this new trust. The new trust could then dispose of them as it chose. It
could invest in the new corporations to be created to manufacture drugs, but it
could also distribute the funds to its beneficiaries on a tax-free basis for
the beneficiaries.
[60]
Were it not for the need to go through a trust,
it is true that Gennium could have transferred the money into other
corporations without any tax consequences, which would not have been a problem.
Indeed, under the integration theory, the ITA allows intercorporate dividends
to be paid on a tax-free basis until they leave the hands of the corporation
and are paid to shareholders who are not corporations and who will pay the tax
at that time (Paul Bleiwas and John Hutson, Taxation of Private Corporations
and Their Shareholders, 4th ed., Toronto, Canadian Tax Foundation, 2010, «
Theory of integration », p. 2:4).
[61]
From the moment the decision is made to withdraw
the money from the companies’ regime, the income belonging to an
individual—including a trust, which is deemed to be an individual with respect
to the trust’s property under subsection 104(2) of the ITA—that comes from a
corporation must be taxed in the hands of that individual.
[62]
If it is the trust that receives the income from
the corporation, it can claim a special deduction under subsection 104(6)
for any income it attributes and that will be payable in the year to its
beneficiaries, who will there be taxed on that income. If that income has not
become payable to the beneficiaries in the year, it will accumulate in the
trust and will be taxable in the trust. Any subsequent distribution to the
beneficiaries of that accumulated income will be deemed a non-taxable
distribution of the trust’s capital.
[63]
In this case, subsection 75(2) of the ITA
was used so that neither the appellant nor its beneficiaries would pay tax on
those dividends if the funds were eventually distributed because those amounts
were, in a sense, capitalized in Fiducie Satoma by the attribution of income to
9134 without that corporation receiving or being entitled to those dividends.
[64]
As soon as subsection 75(2) was applied,
regardless of how the trust used the funds (whether it invested them in the
corporations being operated, retained them or distributed them to its
beneficiaries), tax was no longer payable by either the trust or its
beneficiaries at that stage of operations.
[65]
The fact that the trust could eventually decide
to attribute those funds to the beneficiary corporations instead of to an
individual, and that the shareholders of those corporations would then have to
pay tax on the dividends they received, in no way changes the tax benefit
received by the appellant.
[66]
On the one hand, whether the appellant does or
does not pay tax on the dividends received from 9163, in all cases, an
individual who is a shareholder of a beneficiary corporation within the meaning
of the ITA must pay tax on dividends received from that corporation, unless
those dividends are non-taxable under specific provisions of the ITA.
[67]
On the other hand, the appellant’s argument is
based on the fact that there can be no question of stripping a corporation’s
funds from their source, as long as those funds have not actually been
distributed to the corporation’s own beneficiaries who are individuals. The
problem with this reasoning is that it is unrealistic to think that once the
dividends were capitalized in the trust, the trust would redistribute them to
the beneficiary corporations controlled by individuals who are also
beneficiaries of the trust. Why take that course of action if those dividends
could be distributed directly to individual beneficiaries without paying tax?
It is clear to me that those funds will never be paid to the beneficiary
corporations. It is also clear that although no funds have been distributed to
date, the trust can pay the capitalized amounts to the individuals who are its
beneficiaries at any time.
[68]
That is why the appellant’s argument that the
tax benefit cannot be invoked until the trust pays the funds to its
beneficiaries does not hold water. The tax benefit was triggered as soon as
subsection 75(2) was applied, by the decision of 9134’s sole shareholder
to strip the corporation’s assets by going through 9163, which he indirectly
controls, to capitalize them in Fiducie Satoma.
[69]
This situation differs from that in OSFC,
to which the appellant refers. In that case, OFSC had to intervene in the
series of transactions (by acquiring an interest in a partnership to be able to
benefit from its losses) to obtain a tax benefit.
[70]
The beneficiaries did not have to do anything
else. All transactions were conducted according to the tax plan, such that
neither the trust nor its beneficiaries would be taxed once taxation for those
amounts was attributed to another person (in this case, 9134) which itself claimed
the deduction under subsection 112(1) to avoid paying tax.
[71]
As for the appellant’s arguments that a
different course of action could have achieved the same result, as shown by the
examples provided, they do not change my conclusion.
[72]
On the one hand, as the Federal Court of Appeal
pointed out in Perrault v. The Queen, [1979] 1 F.C. 155,
page 163, cited by the appellant, the tax obligation must be determined in the
context of what was actually done and not on the basis of various other methods
that could have allowed the appellant to avoid being taxed.
[73]
On the other hand, the examples given of cases
where funds were invested directly in a corporation, instead of going through a
trust, are not valid comparisons. The tax system differs depending on whether
the transactions are between corporations or with individuals (including
trusts). Once the evidence shows that the trust was an essential part of the
plan, it cannot be shown that the result would have been the same without the use
of a trust. A valid comparison could have been an investment made directly by
Fiducie familiale Louis Pilon, without paying the dividends received from
Gennium to 9134. In that case, the results would not have been the same since
that family trust would have been taxed on the dividends it did not distribute
to its beneficiaries, as it was not a reversionary trust.
[74]
Finally, in the examples that involved 9134
simply donating the amounts in question either to Fiducie familiale Louis Pilon
or to Fiducie Satoma, without going through 9163, or reinvesting the funds in
Fiducie Satoma after the trust returned the funds, subsection 75(2) would
not have applied. In such cases, it is 9134’s sole shareholder, Louis Pilon,
who would most likely have been taxed on the shareholder benefits, under
section 15 of the ITA, if a transfer were made to either of the trusts of which
he was a beneficiary. Therefore, no comparison can be made with another
arrangement that could have reasonably been used were it not for the tax
benefit, as the Supreme Court of Canada did in Copthorne, above, at
paragraph 35. It is not reasonable to think that this other arrangement
proposed by the appellant could have been seriously considered, given the
taxation in the hands of Louis Pilon that such a transfer of funds in the
trusts of which he was a beneficiary would entail under section 15 of the ITA.
[75]
In my opinion, it is therefore clear that the
primary goal of the proposed plan, from the moment subsection 75(2) was engaged,
was to avoid the payment of any tax by the trust and any beneficiary of the
trust. In all cases, I consider that a tax benefit within the meaning of
subsection 245(1) of the ITA.
Series of transactions resulting in a tax benefit: avoidance
transaction
[76]
The appellant is not disputing that a series of
transactions was conducted for the purpose of obtaining a tax benefit (to the
extent that I find that a tax benefit exists), and that this is therefore an
avoidance transaction within the meaning of subsection 245(3) of the ITA.
Abusive tax avoidance
[77]
Under subsection 245(4) of the ITA, a
taxpayer will be denied a tax benefit resulting from an avoidance transaction
when the transaction directly or indirectly involves an abusive application of
the provisions of the ITA. It is the respondent’s burden to prove that on the
balance of probabilities.
[78]
The Supreme Court of Canada propounded the appropriate
procedure in Trustco, at paragraphs 44 to 62.
[79]
The first task is to interpret the provisions
giving rise to the tax benefit to determine their object, spirit and purpose.
The next task is to determine whether the avoidance transaction promotes or
frustrates that purpose. There will be an abuse if the taxpayer relies on
specific provisions of the ITA in order to achieve an outcome that those
provisions seek to prevent.
[80]
Moreover, an abuse may also result from an
arrangement that circumvents the application of anti-avoidance rules, in a
manner that is contrary to the object, spirit or purpose of those provisions. (Trustco,
paragraph 44-45).
[81]
In that case, the tax benefit is a result of the
application of subsection 75(2) and 112(1) of the ITA. The first provision
is an attribution rule and the second is a so-called integration rule.
[82]
Thus, according to paragraph 57 of the
respondent’s written argument, by triggering subsection 75(2) of the ITA,
and attributing the taxable dividends to a corporation that could benefit from
subsection 112(1) of the ITA, the appellant received Gennium’s surpluses
in the form of dividends totalling $6,250,100 without paying any tax on that
amount.
[83]
I will therefore first analyze the object,
spirit and purpose of the provisions in question. Second, I will examine the
question of whether there was an abusive application of those provisions.
1) The object, spirit and purpose of subsections 75(2) and 112(1)
of the ITA
[84]
For this, it is necessary to determine the
intention of the legislator by considering the language, context and purpose of
those provisions (Lipson v. Canada, [2009] 1 S.C.R. 3, 2009 SCC 1,
paragraph 26, which references Trustco, paragraph 42, and Placer
Dome Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715, 2006
SCC 20, paras. 21-23).
The language
[85]
As to the wording of subsection 75(2), it
attributes a trust’s income, losses, taxable capital gains and allowable
capital losses from property it received (or property substituted therefor), to
the originator of that donation. This is an attribution rule that automatically
applies when the conditions set out in that provision are met.
[86]
In this case, there is no dispute that all the
conditions required under subsection 75 (2) were met. They are as follows:
1) Fiducie Satoma
resides in Canada.
2) It was created
on December 22, 2005 (after 1934).
3). It
holds “property,” $100 that it received from 9134 under the terms of a donation
agreement.
4) The property
comes from a person, i.e. corporation 9134.
5) The
appellant used this $100 to subscribe to 100 Class F shares of the
capital stock of the corporation 9163. Those shares represent the “property
substituted” for the initial donation of $100.
6) Because
Fiducie Satoma’s trust document stipulates that 9134 is its beneficiary, there
is a possibility that the substituted property could revert to 9134, the
originator of the donation.
[87]
Those conditions being satisfied, they resulted
in the attribution to 9134 of dividend income generated by the Class F shares
of 9163’s capital stock paid to Fiducie Satoma, without the dividends actually
being paid to 9134.
[88]
Specifically, each time 9163 declared and paid
its shareholder (the appellant) dividends, which totalled $6,250,100 over the
years at issue, they were also attributed to 9134 for tax purposes.
[89]
Moreover, it is trite law that the person to
whom income must be attributed under subsection 75(2) can be either an
individual or a corporation such as 9134, according to the definition of “person”
found in subsection 248(1) of the ITA.
[90]
Also, even if subsection 75(2)
automatically applies, the language of this provision must be consulted with
respect to the GAAR analysis. The Supreme Court of Canada made the following
comments in Copthorne, in paragraph 88:
88 In any GAAR case the text of
the provisions at issue will not literally preclude a tax benefit the taxpayer
seeks by entering into the transaction or series. This is not surprising. If
the tax benefit of the transaction or series was prohibited by the text, on
reassessing the taxpayer, the Minister would only have to rely on the text and
not resort to the GAAR. However, this does not mean that the text is
irrelevant. In a GAAR assessment the text is considered to see if it sheds
light on what the provision was intended to do.
[91]
As to subsection 112(1) of the ITA, it
provides that, where a corporation in a taxation year has received a taxable
dividend from “a taxable Canadian corporation [. . .] or a corporation resident
in Canada [. . .] and controlled by it,” an amount equal to the dividend may be
deducted from the income of the receiving corporation for the year for the
purpose of computing its taxable income.
[92]
The result of the application of these two provisions
is that 9134 included all the dividend income, totalling $6,250,100, but did
not pay tax on that income in the light of the deduction under 112(1). Fiducie
Satoma was not taxed on those dividends in the light of the application of
subsection 75(2), though it retained at its disposal the entire amount
generated by those dividends.
Context
[93]
That part of the analysis examines other
provisions of the ITA that are related to the one in issue. The Supreme Court made
the following comments in Copthorne, in paragraph 91:
91 The consideration of context involves an examination of
other sections of the Act, as well as permissible extrinsic aids (Trustco, in
paragraph 55). However, not every other section of the Act will be relevant in
understanding the context of the provision at issue. Rather, relevant
provisions are related “because they are grouped together” or because they “work
together to give effect to a plausible and coherent plan” (R. Sullivan,
Sullivan on the Construction of Statutes (5th ed. 2008), at pp. 361 and 364).
[94]
I agree with the respondent that the relevant
context in this case includes the ITA regime with respect to the taxation of
trusts and corporations.
[95]
I have already explained hereinabove how the
trust taxation regime works. To summarize, in general, the trust is taxable
under the rules applicable to individuals because it is deemed to be an
individual under subsection 104(2) of the ITA. That being said, if the
trust’s income becomes payable to its beneficiaries during the year, the trust
can remove it from its income for tax purposes and that income will then be
taxable in the hands of its beneficiaries, under subsections 104(6) and 104(13)
of the ITA. If that is not the case, the trust is taxed on that income, and any
subsequent distribution to its beneficiaries will be considered a non-taxable
distribution of the trust’s capital.
[96]
As to of the corporate tax regime, the
corporation will first be taxed on its income and the shareholder who receives
a dividend from that corporation will also be taxed on that dividend.
[97]
If the dividend is paid to an individual, the
ITA provides for an integration arrangement. The dividend will first be grossed
up and the grossed-up dividend will be included in the shareholder’s income.
The shareholder will then be entitled to a dividend tax credit as compensation
for the tax already paid by the corporation. This system was established to
ensure that the combined tax paid by the corporation and the shareholder on the
corporation’s income is equal to what would have been paid if the income had
been earned by the shareholder directly (Paul Bleiwas and John Hutson, Taxation
of Private Corporations and Their Shareholders, above, “Theory of
Integration”, at p. 2:4). (Tab 24 of the Respondent’s book of authorities).
[98]
To avoid double taxation of the same income,
intercorporate dividends are subject to the deduction provided for in
subsection 112(1) of the ITA (Report of the Technical Committee on
Business Taxation (Mintz Committee Report on Business Taxation), December 1997,
section 7.8: “The Inter-corporate Dividend Deduction” (Tab 27 of the Respondent’s
book of authorities).
[99]
According to the integration theory, the
dividend will only be taxable at the very end of the process, when the
individual receives this amount. It can therefore be said that subsection
112(1) is necessary to allow a Canadian corporation to distribute its income to
its shareholders without double taxation in the case of intermediary
corporations, assuming, of course, that all the conditions in section 112 are
met.
Object
[100]
This step “seeks to ascertain what outcome
Parliament intended a provision or provisions to achieve, amidst the myriad of
purposes promoted by the Act.” (Copthorne, paragraph 113)
[101]
Subsection 75(2) finds its origin in
subsection 32(3) of the Income War Tax Act) (IWTA), which
was introduced in 1936. This new subsection read as follows:
[translation] When a person transfers
property to a trust and stipulates that the trust corpus must revert either to
the donor or to individuals that he or she can designate at a later date, or
when a trust stipulates that, during the life of the donor, the property in the
trust cannot be disposed of or otherwise processed without written or other
consent from the donor, that person may still be subject to tax on the income
generated by the property transferred to the trust or the property substituted
therefor, as if the transfer had not been made. (S.C. 1936, ch. 38, section 13)
(See the respondent’s written
arguments, page 22, paragraph 84.
[102] In paragraph 85 of its written arguments, the respondent explains
the development of this section as follows:
85. [translation] In 1948, subsection 32(3)
of the IWTA was amended and became subsection 22(2) of the Act, which, in turn,
became the current subsection 75(2) in 1970. Since 1948, subsection 22(2),
which became 75(2), has undergone certain amendments, specifically to include
capital gains and losses and to clarify certain terms. Overall, aside from
those amendments, the structure and wording of the subsection have remained the
same since 1948.32
32 Brenda L. Crockett, “Subsection 75(2): The Spoiler” in “Personal
Tax Planning”) (2009) vol. 53 No. 3, Canadian Tax Journal, 806-820, p. 2).
[103] In Sommerer, above, the Federal Court of Appeal made the
following comments regarding subsection 75(2): “subsection 75(2) generally
is intended to ensure that a taxpayer cannot avoid the income tax consequences
of the use or disposition of property by transferring it to another person in
trust while retaining a right of reversion or a right of disposition with
respect to the property or property for which it may be substituted. A common
example of the application of subsection 75(2) is the settlement of a trust
where the settlor is also a beneficiary with an immediate or contingent right
to a distribution of the trust property. In that situation, and in many other
situations contemplated by paragraphs 75(2)(a) and (b), subsection 75(2)
achieves its intended purpose.” (paragraph 48).
[104]
Subsection 75(2) is a specific anti-avoidance
section of the ITA, which provides that the transfer of property to a trust by a
potential beneficiary will attribute income, loss and capital gains, or capital
losses back to that beneficiary (Brent Kern Family Trust c. Canada, 2013
TCC 327, TCJ no. 286 (QL), paragraph 10, aff’d 2014 CAF 230).
[105]
The British Columbia Court of Appeal also
addressed the object of subsection 75(2) in Re Pallen Trust, 2015
BCCA 222 (British Columbia Court of Appeal), in paragraph 5:
5 […]
Obviously, s. 75(2) is intended to ensure that a taxpayer may not use the
vehicle of a trust to shield the transferor of income-producing property from
tax on such income, if that person may under the terms of the trust direct that
the property revert to him or her, or any other person named by him or her. The
provision itself, then, is an ‘anti-avoidance’ measure.
[106] Thus, subsection 75(2) of the ITA is an attribution rule that was
introduced to prevent income splitting. If the property transferred to the
trust can revert to the settlor on a tax-free basis, the income from the
property so transferred will be attributed to the settlor (Elie S. Roth and Tim
Youdan, “Subsection 75(2): Is the CRA’s Interpretation Appropriate?”
Report on Proceedings of the Sixty-Second Tax Conference, 2010 Conference
Report, Toronto, (Canadian Tax Foundation), 34:1). (Tab 26 of the Respondent’s
book of authorities.)
[107]
Regarding the object of subsection 112(1),
as was previously seen, the ITA’s intent is to ensure a certain neutrality and
to avoid double taxation when intercorporate dividends are paid.
2) Can there be an abusive application of subsections 75(2)
and 112(1) within the meaning of subsection 245(4) of the ITA?
[108]
The issue now is to determine whether the
avoidance transactions 1) produced an outcome that the legislative provisions
invoked (those mentioned above) seek to prevent, 2) frustrated the rationale of
those provisions, or 3) circumvented the application of those provisions in a
manner that was contrary to the object, spirit or purpose of those provisions (Copthorne,
paragraph 72; Trustco, paragraph 45; Lipson, paragraph 40). One
or more of these conditions may be met in a given case, which will lead to a
finding of abuse.
[109]
Moreover, the GAAR can only be applied to deny a
tax benefit when the abusive nature of the transaction is clear (Trustco,
paragraph 50).
[110]
In this case, the whole plan was intended to
create a tax benefit through the interaction of subsection 75(2) and
subsection 112(1).
[111]
The creation of a second trust, Fiducie Satoma,
by one of its beneficiaries, who are essentially the same as Fiducie familiale
Louis Pilon’s beneficiaries, is central to the tax planning undertaken to
transfer funds from Gennium with no tax impact.
[112]
Louis Pilon emphasized the importance of
sheltering those funds from creditors by going through a trust. In the light of
that priority, it was no longer possible to simply transfer funds from one
corporation to another (for example, directly from 9134 to 427) while claiming
the intercorporate dividend deduction.
[113]
As soon as funds are transferred from a
corporation to a trust, the ITA requires either the trust or its beneficiaries
to pay tax on the transferred funds.
[114]
However, by moving the funds through a
reversionary trust (whose beneficiary corporation had the income attributed to
it) the system applicable to corporations was being used while money was being
taken out of the system applicable to corporations and placed in a trust,
without either the trust or its beneficiaries paying their fair share of taxes.
[115]
Only by taking advantage of the introduction of
the reversionary trust created by a beneficiary corporation could Fiducie
Satoma obtain Genniums’s profits with no tax impact, through the combined application
of the attribution rules in subsection 75(2) and the dividend deduction
for corporations in subsection 112(1) of the ITA.
[116]
In my view, this is clearly a situation where
the interaction of an anti-avoidance provision (subsection 75(2)) and a
provision that only applies to corporations (subsection 112(1)) were used
to facilitate abusive tax avoidance.
[117]
The interaction of those two provisions created
a tax benefit, in that Gennium stripped itself of its surplus in favour of a
trust at zero tax cost, which is contrary to the object, spirit and purpose of
those two provisions.
[118]
Concretely, subsection 75(2) seeks to
prevent income splitting by a settlor who transfers property to a trust while
retaining the right to recover that property. Subsection 112(1) seeks to
prevent the taxation of intercorporate dividends.
[119] The object, spirit and purpose of those two provisions are not to
allow a total tax reduction by transferring funds from a corporation to a
trust. The avoidance transactions in question defeat the underlying rationale
of those provisions.
[120] In Lipson, above, at paragraph 42, the Supreme Court of
Canada decided that the use of an attribution rule (subsection 74.1(1) of
the ITA, which is an attribution rule between spouses) to reduce the tax
payable by one spouse were it not for the use of this attribution rule
frustrates the object of attribution rules. The Court found that an
anti-avoidance rule was used to facilitate abusive tax avoidance.
[121] I have reached the same conclusion, and I find that the avoidance
transactions in question were clearly abusive and that the appellant is not
entitled to the tax benefit sought.
[122] Consequently, the CRA added to the appellant’s income the dividends
received during the years at issue in accordance with paragraph 12(1)(j),
section 82 and subsection 245(5) of the ITA. The appellant submitted
that this mode of establishing its assessment involved double taxation of the
same amount because 9134, even if it had claimed the deduction in
subsection 112(1), had, nonetheless, included those dividends in its
income.
[123] I am of the view that, in the circumstances, the CRA reasonably
determined the tax consequences in order to deny the tax benefit in accordance
with subsection 245(5) of the ITA.
[124] The appeals are dismissed with expenses in favour of the respondent.
[125] The parties may, if they wish, make submissions regarding the costs,
which must be submitted within 30 days of the signing of the judgment,
otherwise, the respondent will be entitled to costs in accordance with Tariff B
of the Tax Court of Canada Rules (General Procedure).
Signed at Ottawa, Canada, this
1st day of June 2017.
“Lucie Lamarre”
Associate
Chief Justice Lamarre
Translation certified true
on this 31st day of January 2018.
François Brunet, Revisor
APPENDIX I
2014-3800(IT)G
TAX COURT OF CANADA
BETWEEN:
FIDUCIE FINANCIÈRE SATOMA
Appellant
and
HER MAJESTY THE QUEEN
Respondent
PARTIAL AGREED STATEMENT OF FACTS
The parties agree on the following facts:
1.
The corporation
9134-1024 Québec inc. was created on September 25, 2003, under
Part IA of the Quebec Companies Act.[3]
Its sole shareholder is Louis Pilon, who holds 100 Class A
shares of its capital stock.[4]
2.
The corporation
Gennium Produits Pharmaceutiques inc. (Gennium), formerly 4258843 Canada inc.,
was created on November 15, 2004 under the Canada Business Corporations
Act.[5]
Its shareholders are Louis Pilon and Fiducie Familiale Louis Pilon,
which hold, respectively, 1000 multiple voting shares and 100 Class A
shares of its capital stock.[6]
3.
Fiducie
Familiale Louis Pilon (Fiducie Louis Pilon) was constituted on
December 6, 2004, by Bruno Barette. Its trustees are Louis, François
and André Pilon. Its beneficiaries are Louis Pilon, his spouse, his
descendants, any company controlled by him, by his spouse, or by one or more of
his descendants, and any trust for the exclusive benefit of one or more from
among Louis Pilon, his spouse, or his descendants.[7]
4.
Through
Gennium, Louis Pilon operated a generic drug distribution company. On
January 5, 2005, Gennium signed a Subdistribution Agreement with Gennium
Pharma inc. for the distribution of certain Genpharm products in Quebec.[8]
Gennium ceased the distribution of the Genpharm products in May 2008.[9]
5.
On
June 9, 2005, Gennium reported a dividend of $1,000,000 on its
100 Class A shares, payable on June 10, 2005, to Fiducie
Louis Pilon, which paid or made payable this amount to 9134-1024 Québec
inc. during the same year.[10]
6.
On
July 21, 2005, Gennium reported a dividend of $1,000,000 on its
100 Class A shares, payable on July 22, 2005, to Fiducie
Louis Pilon, which paid or made payable this amount to 9134-1024 Québec
inc. during the same year.
7.
The corporation
9163-9682 Québec inc. was created on December 21, 2005.[11] Its shareholders
are: 9134-1024 Québec inc., which holds 100 Class A shares; the
appellant, which holds 100 Class F shares; and, Louis Pilon, who
holds 10,000 Class C shares.[12]
8.
On
December 22, 2005, the corporation 9134-1024 Québec inc. constituted the
appellant by issuing a one-hundred-dollar banknote to the trust estate. Its
trustees are Louis, François and André Pilon. Its beneficiaries are
Louis Pilon, his spouse, his descendants, any company controlled by him,
by his spouse, or by one or more of his descendants, and any trust for the
exclusive benefit of one or more from among Louis Pilon, his spouse, or
his descendants.[13]
9.
On
December 22, 2005, a donation agreement was entered into between 9134-1024
Québec inc. and the appellant, under which 9134-1024 Québec inc. made a $100
donation to the appellant. The appellant used this $100 to subscribe to
100 Class F shares of the capital stock of 9163-9682 Québec inc.
10.
On
December 22, 2005, 9134-1024 Québec inc. contributed to 9163-9682 Québec
inc.’s surplus for an amount of $2,000,000.
11.
On
December 22, 2005, 9163-9682 Québec inc. reported and paid a dividend in
the amount of $2,000,000 to the appellant, as a holder of its Class F
shares.[14]
12.
On
January 17, 2006, Gennium reported and paid a dividend of $2,000,000 on
its 100 Class A shares to Fiducie Louis Pilon, which paid or
made payable this amount to 9134-1024 Québec inc. during the same year.
13.
On
March 4, 2006, Fiducie Louis Pilon advanced $200,000 to Jamp Pharma
Corporation.
14.
The corporation
4273702 Canada inc. was created on March 16, 2006, under the Canada
Business Corporations Act.[15]
Its shareholders are the appellant and 9163-9682 Québec inc.[16]
15.
On
March 16, 2006, the appellant purchased 200,000 Class F shares in
4273702 Canada inc., payable via transfer of the $200,000 admissible claim by
Jamp Pharma Corporation.[17]
16.
On
March 29, 2006, Fiducie Financière Louis Pilon paid $1,030,600 and
$1,826,010 to its beneficiary 9134-1024 Québec inc.
17.
On
March 29, 2006, 9134-1024 Québec inc. contributed $2,000,000 to 9163-9682
Québec inc.’s surplus.
18.
On
March 29, 2006, 9163-9682 Québec inc. reported and paid a dividend in the
amount of $2,000,000 to the appellant, as a holder of its Class F shares.
19.
On
March 29, 2006, the appellant purchased 2,000,000 Class F shares of
the capital stock of 4273702 Canada inc. for an amount of $2,000,000.
20.
On
March 30, 2006, 4273702 Canada inc. purchased 3,266,650 Class B
common shares and 3,266,240 Class A preferred shares of the capital stock
of Jamp Pharma Corporation, for the respective amounts of $769,295 and $705.
21.
On
March 30, 2006, 4273702 Canada inc. purchased 1,911,240 Class B
common shares and 1,911,240 Class A preferred shares of the capital stock
of Nutralife, for the respective amounts of $477,810 and $2,190.[18]
22.
On
April 3, 2006, Fiducie Louis Pilon paid $1,000,000 to its
beneficiary, 9134-1024 Québec inc.
23.
On
May 1, 2006, the appellant purchased 400,000 Class F shares of the
capital stock of 4273702 Canada inc. for an amount of $400,000.
24.
On
May 5, 2006, 4273702 Canada inc. purchased 4,030,272 Class B common
shares and 4,030,272 Class A preferred shares of the capital stock of Jamp
Pharma Corporation, for the respective amounts of $949,130 and $870.[19]
25.
On
May 26, 2006, the appellant purchased 625,000 Class F shares of
the capital stock of 4273702 Canada inc. for an amount of $625,000.
26.
On
June 20, 2006, Gennium reported and paid a dividend of $1,000,000 on its
100 Class A shares to Fiducie Louis Pilon, which paid or made payable
this amount to 9134-1024 Québec inc. during the same year.
27.
On
July 10, 2006, the appellant purchased 300,000 Class F shares of
the capital stock of 4273702 Canada inc. for an amount of $300,000.
28.
On
August 2, 2006, the appellant purchased 300,000 Class F shares
of the capital stock of 4273702 Canada inc. for an amount of $300,000.
29.
On
December 22, 2006, 9134-1024 Québec inc. contributed $2,000,000 to
9163-9682 Québec inc.’s surplus.
30.
On
December 22, 2006, 9163-9682 Québec inc. reported and paid a dividend in
the amount of $1,000,000 to the appellant, as a holder of its Class F
shares.
31.
On
February 27, 2007, the appellant purchased 100 Class A shares of
the capital stock of Technologie & Services RX inc. for an amount of $100.
32.
On
May 22, 2007, Gennium reported and paid a dividend of $1,000,000 on its
100 Class A shares to Fiducie Louis Pilon, which paid or made
payable this amount to 9134-1024 Québec inc. during the same year.
33.
On
June 13, 2007, 9134-1024 Québec inc. contributed to 9163-9682 Québec
inc.’s surplus for an amount of $1,250,000.
34.
On
June 13, 2007, 9163-9682 Québec inc. reported and paid a dividend in the
amount of $1,250,000 to the appellant, as a holder of its Class F shares.
35.
On
September 13, 2007, the appellant purchased 500,000 Class B shares of
the capital stock of Technologie & Services RX inc. for an amount of
$500,000.
36.
On
October 18, 2007, the appellant purchased 250,000 Class B shares
of the capital stock of Technologie & Services RX inc. for an amount of
$250,000.
37.
On
December 31, 2007, the appellant’s bank account balance was $1,421,956.
38.
The
appellant included the $6,250,100 in dividends received in its income for the
years 2005, 2006 and 2007, then later excluded them, indicating that it had
attributed them to 9134-1024 Québec inc.[20]
39.
9134-1024
Québec inc. included the $6,250,100 in dividends received by the appellant (as
described in paragraphs 11, 18, 30 and 34) in its income, under
subsection 75(2) of the Income Tax Act, then later deducted them
under subsection 112(1) of the Act.
40.
As of
this date, the appellant’s trustees have not distributed any capital thus
obtained and/or income in favour of any of the beneficiaries.
41.
On
March 2, 2011, the Canada Revenue Agency issued the appellant notices of
assessment for the 2005, 2006 and 2007 taxation years.[21]
42.
The
appellant duly objected to the notices of assessment[22] and the CRA
confirmed them on July 28, 2004.[23]
|
Montréal,
October 21 , 2016
|
Montréal,
October 21 , 2016
William F. Pentney, Q.C.
Deputy Attorney General of Canada
Counsel for the Respondent
|
|
By: (signature)
Wilfrid Lefebvre
Vincent Dionne
Norton Rose Fulbright Canada LLP
1 Place Ville-Marie
Suite 2500
Montréal (Quebec) H3B 1R1
|
By: (signature)
Natalie Goulard
Sara Jahanbakhsh
DEPARTMENT OF JUSTICE
Quebec Regional Office
Guy-Favreau Complex
200 René-Lévesque Blvd. West
East Tower, 9th floor
Montréal, Quebec H2Z 1X4
|
|
Telephone: 514-847-4400
514-847-6003
Fax: 514-286-5474
wilfrid.lefebvre@nortonrosefulbright.com
vincent.dionne@ nortonrosefulbright.com
|
Telephone: 514-496-6546
514-496-1378
Fax: 514-283-3103
Email: natalie.goulard@justice.gc.ca
sara.jahanbakhsh@justice.gc.ca
File number: 3041238
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