Iberville Developments – Quebec Court of Appeal finds that it is abusive to use rollover provisions to avoid rather than defer tax
Three affiliated Quebec corporations avoided (or so they thought) most of the Quebec tax on the sale of Quebec real estate at a gain of around $800M (including some recapture) by using a “Quebec year-end shuffle.” In particular, they transferred the properties on a rollover basis to subsidiary LPs, and then transferred their units of those LPs to two numbered companies, also on a rollover basis. The two numbered companies selected February 28, 2006 as their taxation year-end for federal (and Ontario) tax purposes, but March 19, 2006 for Quebec taxation purposes. On March 1, the two numbered companies then acquired units in two Ontario LPs with business income, which had the effect of most of their income being allocated to Ontario for Quebec purposes in accordance with the inter-provincial income allocation formula, so that virtually no Quebec tax was payable on the above gains, which were realized in March between the two year ends.
Schrager JA agreed with the findings in the Court of Quebec that the Quebec GAAR applied on the basis that:
- establishing different year ends for provincial and federal purposes was contrary to the purpose of the Quebec definition of “fiscal period” which, in copying the federal definition, did not show any intention to allow different year ends for federal and Quebec purposes as well as contrary to the interprovincial allocation rule, whose purpose was to ensure that 100% of a corporation’s income is taxed collectively by the provinces (with Schrager JA disagreeing with a Veracity comment that how the provinces tax the income allocated to them “is beyond the purpose, object and spirit of the Allocation Rules”)
- the rollover transactions abused the legislative intent of the rollover provisions, which was to defer and not to eliminate tax.
In the latter regard, he stated:
[T]he Appellants transferred their business to Ontario knowing that because of the creation of two fiscal periods, tax would not be paid there …[and] knew that no tax would be payable in Quebec because (theoretically) it was payable in Ontario upon application of the allocation formula, but because of the different fiscal periods, no tax would ultimately be paid in Ontario.
Thus, the rollover provisions have been used, as in OGT Holdings, to avoid the payment of tax and not simply defer its payment. ln this manner, the Appellants have acted contrary to the object and spirit of [the rollover provisions].
One of the companies had wanted to acquire 10 million square feet to build a shopping centre, but the vendor had insisted that the sale be of the whole 30 million square foot tract, with the zoning of the balance of 20 million square feet expected to be residential. Schrager JA confirmed the trial judge’s finding that the two portions of the property were acquired on capital and income account, respectively. Bifurcating an acquisition in this manner is quite unusual.
Neal Armstrong. Summaries of Les Développements Iberville Ltée v. Agence du Revenu du Québec, Quebec Court of Appeal No. 500-09-026184-168 (November 12, 2018) under s. 245(4), s. 9 – capital gain v. profit – real estate and s. 18(1)(b) – capital expenditure v. expense – improvements v. running expenses.