9199-3899 Québec – Quebec Court of Appeal finds that using the investment allowance to generate a capital tax savings abused its purpose of merely avoiding double taxation

In order to reduce Quebec capital tax, a Quebec company lent $350M on a non-interest-bearing basis to its parent on January 27, 2005, and claimed this amount as an investment allowance in computing its capital tax liability at its January 31, 2005 year end. On February 15, 2005, the loan was repaid so that the parent did not account for this loan in its capital when it, in turn, calculated its capital tax liability. In confirming the application of the Quebec general anti-avoidance rule to deny the investment allowance, Vézina JCA stated the resulting capital reduction “did not serve to rectify a prejudice, but created a benefit, which is contrary to the object and spirit of this disposition of simply addressing double taxation and not creating a tax exemption.”

This sounds like the MLI, Art. 6 statement that Treaties are intended “to eliminate double taxation … without creating opportunities for non-taxation.”

If correct, this case would suggest that GAAR can apply to simple and obvious transactions, rather than being restricted to transactions which are complicated and too clever by half. (Cf. Univar, where Webb JA indicated that funding an inbound purchase with a Canadian Buyco with high outside capital was such an obvious surplus-stripping stripping technique that it could not be considered an abuse of s. 212.1 - so that doing something more complicated to accomplish the same thing also was not abusive.)

Neal Armstrong. Summary of 9199-3899 Québec inc. v. Agence du revenu du Québec, 2017 QCCA 1524 under s. 245(4).