Robertson
J.A.
(McDonald,
Strayer
J
J.
A.,
concurring):—
This
is
an
appeal
from
a
decision
of
Judge
Bell
of
the
Tax
Court
of
Canada
involving
the
interpretation
and
application
of
subsection
55(2)
of
the
Income
Tax
Act
(the
“Act”).
As
an
anti-avoidance
provision,
subsection
55(2)
seeks
to
prevent
the
conversion
of
taxable
capital
gains
into
tax-free
intercorporate
dividends,
or
what
is
colloquially
referred
to
as
“capital
gains
stripping”.
The
essential
facts
are
that
Placer
Dome
(“Placer”)
decided
to
dispose
of
its
non-controlling
interest
in
Falconbridge
Ltd.
(“Falconbridge”)
and
solicited
bids
for
the
shares
it
held.
Falconbridge
was
the
successful
bidder,
having
agreed
to
pay
dividends
of
nearly
$83
million
while
acquiring
Placer’s
shares
for
approximately
$450
million.
Normally,
inter-corporate
dividends
are
rendered
tax-free
pursuant
to
subsection
112(1)
of
the
Act.
In
this
case,
however,
the
Minister
of
National
Revenue
(the
“Minister”)
reassessed
Placer
on
the
basis
of
subsection
55(2)
which,
in
defined
circumstances,
deems
dividends
to
be
proceeds
of
disposition
for
the
shares
on
which
the
dividends
were
received.
It
is
the
deeming
effect
of
subsection
55(2)
which
converts
tax-free
dividends
into
taxable
capital
gains.
Before
subsection
55(2)
is
applicable
it
must
be
established,
inter
alia,
that
one
of
the
purposes
of
the
transaction(s)
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
on
a
sale
of
the
shares
at
fair
market
value.
The
Tax
Court
Judge
concluded
that
neither
Placer
nor
Falconbridge
possessed
the
required
purpose
and,
therefore,
subsection
55(2)
is
not
applicable.
In
reaching
that
conclusion
the
Minister
insists
that
the
Tax
Court
Judge
incorrectly
applied
a
subjective
rather
than
an
objective
test
in
determining
the
purpose
of
the
transaction
which
led
to
the
sale
of
the
Falconbridge
shares
and
payment
of
dividends.
In
my
respectful
opinion,
the
learned
Tax
Court
Judge
did
not
err.
My
analysis
begins
with
the
legislative
framework
relevant
to
the
issue
at
hand.
I.
Legislative
Framework
Subsections
55(2)
to
(5)
form
a
set
of
anti-avoidance
provisions
which
prevent
a
Canadian-resident
shareholder
from
converting
a
taxable
capital
gain
on
the
disposition
of
shares
held
in
another
corporation
into
a
dividend
that
would
not
be
taxable
under
Part
I
of
the
Act.
When
subsection
55(2)
applies
it
deems
tax-free
intercorporate
dividends
not
to
be
dividends
but
rather
proceeds
of
disposition
of
a
capital
property
or,
where
the
shares
have
not
been
disposed
of,
a
gain
on
the
disposition
of
capital
property.
Subsection
55(2)
reads
as
follows:
55(2)
Deemed
proceeds
or
capital
gain.
—
Where
a
corporation
resident
in
Canada
has
after
April
21,
1980
received
a
taxable
dividend
in
respect
of
which
it
is
entitled
to
a
deduction
under
subsection
112(1)
or
138(6)
as
part
of
a
transaction
or
event
or
a
series
of
transactions
or
events
(other
than
as
part
of
a
series
of
transactions
or
events
that
commenced
before
April
22,
1980),
one
of
the
purposes
of
which
(or,
in
the
case
of
a
dividend
under
subsection
84(3),
one
of
the
results
of
which)
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
on
a
disposition
at
fair
market
value
of
any
share
of
capital
stock
immediately
before
the
dividend
and
that
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
income
earned
or
realized
by
any
corporation
after
1971
and
before
the
transaction
or
event
or
the
commencement
of
the
series
of
transactions
or
events
referred
to
in
paragraph
(3)(a),
notwithstanding
any
other
section
of
this
Act,
the
amount
of
the
dividend
(other
than
the
portion
thereof,
if
any,
subject
to
tax
under
Part
IV
that
is
not
refunded
as
a
consequence
of
the
payment
of
a
dividend
to
a
corporation
where
the
payment
is
part
of
the
series
of
transactions
or
events)
(a)
shall
be
deemed
not
to
be
a
dividend
received
by
the
corporation;
(b)
where
a
corporation
has
disposed
of
the
share,
shall
be
deemed
to
be
proceeds
of
disposition
of
the
share
except
to
the
extent
that
it
is
otherwise
included
in
computing
such
proceeds;
and
(c)
where
a
corporation
has
not
disposed
of
the
share,
shall
be
deemed
to
be
a
gain
of
the
corporation
for
the
year
in
which
the
dividend
was
received
from
the
disposition
of
a
capital
property.
[Emphasis
added.]
The
foregoing
provision
embraces
a
number
of
conditions
precedent
before
it
can
be
deemed
applicable.
First,
the
dividend
must
be
received
after
April
21,
1980.
Second,
the
dividend
must
have
been
received
by
a
corporation
resident
in
Canada.
Third,
the
dividend
must
be
one
which
would
be
otherwise
deductible
under
either
subsection
112(1)
or
138(6)
of
the
Act.
Fourth,
subject
to
the
fifth
requirement,
the
dividend
must
be
received
as
part
of
a
transaction
or
series
of
transactions,
one
of
the
purposes
of
which
was
to
effect
a
reduction
of
what
otherwise
would
have
been
a
capital
gain.
Fifth,
if
the
dividend
is
deemed
to
arise
under
subsection
84(3),
then
it
need
only
be
established
that
one
of
the
results
of
the
transaction(s)
was
to
effect
such
a
reduction.
Sixth,
the
reduction
effected
must
be
a
significant
one.
Seventh,
the
potential
capital
gain
that
is
being
reduced
must
be
attributable
to
anything
other
than
income
earned
by
the
dividend-paying
corporation
after
1971
and
prior
to
the
time
of
the
receipt
of
the
dividend.
While
the
distinction
to
be
drawn
between
the
use
of
the
term
“purposes”
and
“results”
is
pivotal
to
this
appeal,
the
seventh
condition
precedent
requires
a
brief
explanation.
It
is
common
ground
that
subsection
55(2)
does
not
apply
to
dividends
wholly
attributable
to
income
earned
by
Falconbridge
after
1971
or
what
is
referred
to
in
tax
circles
as
“safe
income”.
The
amount
that
can
be
paid
as
a
dividend
without
offending
section
55(2)
is
colloquially
referred
to
as
a
“safe
dividend”
and
can
be
paid
to
the
extent
that
there
is
safe
income
on
hand
immediately
before
the
dividend
is
paid.
In
the
event
a
dividend
is
not
wholly
attributable
to
safe
income,
subparagraph
55(5)(f)
effectively
permits
a
taxpayer
to
separate
that
portion
of
the
dividend
which
represents
safe
income
from
that
which
does
not,
such
that
the
former
is
unaffected
by
subsection
55(2).
The
tax
literature
reveals
that
the
more
problematic
aspect
of
this
exception
to
subsection
55(2)
lies
in
the
method
of
calculating
the
amount
of
“safe
income”:
see
generally
454538
Ontario
Ltd.
v.
Minister
of
National
Revenue,
[1993]
1
C.T.C.
2746,
93
D.T.C.
427,
at
page
2754
and
B.J.
Arnold,
T.
Edgar
&
J.
Li,
Materials
on
Canadian
Income
Tax,
10th
ed.
(Toronto:
Carswell,
1993)
at
page
726-27.
II.
Facts
Placer
owned
shares
of
Falconbridge,
as
well
as
52.9
per
cent
of
the
issued
shares
in
McIntyre
Mines
Ltd.
(“McIntyre”).
In
turn,
McIntyre
held
shares
in
Falconbridge.
In
effect,
Placer
held
24.7
per
cent
of
the
outstanding
share
capital
in
Falconbridge
on
a
fully
diluted
basis.
On
May
10,
1988,
Placer’s
board
of
directors
passed
a
resolution
authorizing
the
solicitation
of
bids
for
the
Falconbridge
shares
held
by
itself
and
McIntyre.
Placer
retained
RBC
Dominion
Securities
Inc.
(“RBC”)
to
solicit
interest
in
and
to
invite
bids
for
the
purchase
of
the
shares
in
question.
On
June
16,
1988,
RBC
issued
an
invitation
to
bid
for
the
Falconbridge
shares
to
four
companies,
including
Falconbridge
and
Noranda
Inc.,
the
latter
being
a
competitor
of
the
former.
Falconbridge
wanted
to
participate
in
the
bidding
process
because
it
was
concerned
that
the
shares
would
be
acquired
by
Noranda
or
another
bidder,
allowing
them
to
effect
a
creeping
takeover
of
Falconbridge
without
paying
a
control
premium
to
all
shareholders.
Falconbridge
was
prohibited
by
provisions
of
the
Ontario
Securities
Act
from
offering
to
purchase
the
Falconbridge
interest
without
making
an
offer
to
purchase
the
shares
of
all
other
Falconbridge
shareholders
(“the
issuer
bid
requirements”).
Because
Placer’s
interest
in
Falconbridge
represented
more
than
20
per
cent
of
its
issued
shares
on
a
fully
diluted
basis,
any
purchaser
of
the
Falconbridge
shares,
other
than
Falconbridge
itself,
was
prohibited
by
the
Securities
Act
from
offering
to
pay
a
price
in
excess
of
115
per
cent
of
the
average
trading
price
on
the
Toronto
Stock
Exchange
over
a
prescribed
period
of
time,
unless
that
purchaser
was
prepared
to
offer
to
purchase
at
the
same
price
all
other
shares
of
Falconbridge
from
all
other
shareholders
(the
“takeover
bid
requirements”).
Given
these
requirements
Falconbridge
wanted
to
be
able
to
compete
with
outside
bidders,
such
as
Noranda,
who
would
be
able
to
bid
up
to
115
per
cent,
without
making
a
similar
offer
to
all
other
shareholders.
To
avoid
the
issuer
bid
requirement
that
Falconbridge
extend
any
offer
to
all
its
shareholders,
it
required
an
exemption
from
the
Ontario
Securities
Commission
(“OSC”).
With
this
objective
in
mind,
Falconbridge’s
Vice
President
and
Chief
Financial
Officer
conceived
the
idea
of
paying
a
dividend
to
all
shareholders,
including
Placer.
By
paying
one
or
more
dividends
on
all
its
shares
it
was
felt
that
all
shareholders
could
partake
equally
in
the
control
premium
with
the
result
that,
after
the
transaction,
the
amount
of
dividends
paid
to
and
the
value
of
shares
of
Falconbridge
or
McIntyre
owned
by
shareholders
other
than
Placer
would
be
approximately
equal
to
the
amount
of
dividends
paid
to
Placer
and
the
purchase
price
of
its
Falconbridge
shares.
The
idea
of
applying
to
the
OSC
for
an
exemption
order
presented
Falconbridge’s
management
with
what
it
concluded
was
the
only
method
of
proceeding.
In
a
majority
decision
the
OSC
granted
the
exemption.
Both
Falconbridge
and
Noranda
submitted
offers.
On
June
30,
1988,
Placer
accepted
Falconbridge’s
offer.
That
offer
required
Falconbridge
to
declare
a
dividend
of
$4.75
per
common
share
and
McIntyre
to
declare
a
dividend
of
$11.96
per
share
payable
to
shareholders
of
McIntyre
as
of
August
15,
1988.
On
August
22,
1988,
dividends
of
$4.75
and
$11.96
were
paid
to
Placer
and
all
others
who
had
been
shareholders
of
record
of
Falconbridge
and
McIntyre,
respectively.
The
amount
of
the
cash
dividends
was
part
of
the
total
consideration
Placer
received
on
selling
its
shares.
Including
those
dividends,
Falconbridge’s
offer
equalled
approximately
118
per
cent
of
the
market
price
of
its
shares.
In
filing
its
tax
return
for
the
1988
taxation
year,
Placer
reported
the
amount
of
$25.75
per
Falconbridge
share
and
$64
per
McIntyre
share
as
proceeds
of
disposition
of
capital
property
totalling
approximately
$450
million.
Placer
also
reported
the
amounts
of
$59,523,409
and
$23,232,706
as
dividends
to
be
included
in
income
pursuant
to
paragraph
12(1
)(j)
of
the
Act
and
deducted
these
same
amounts
as
required
by
subsection
112(1).
As
well,
Placer
designated
the
amounts
of
$4,114,435
and
$1,123,945
as
separate
taxable
dividends
(relating
to
safe
income)
received
from
Falconbridge
and
McIntyre
respectively,
pursuant
to
subparagraph
55(5)(f)(ii)
of
the
Act.
The
Minister
reassessed
the
taxpayer
so
as
to
include
the
total
dividend
amount
of
$82,756,115
as
proceeds
of
disposition,
pursuant
to
subsection
55(2).
III.
Decision
Below
At
the
outset
the
Tax
Court
Judge
reviewed
the
testimony
of
the
representatives
and
advisers
of
both
Placer
and
Falconbridge.
Against
this
evidentiary
background
the
Tax
Court
Judge
framed
the
issue
in
the
following
terms:
The
next
question
is
whether
one
of
the
purposes
of
the
transactions
(assuming
a
transaction
can
have
a
purpose)
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
by
the
Appellant
on
the
sale
at
fair
market
value
of
the
shares
of
Falconbridge
and
MclIntyre....
The
Tax
Court
Judge
went
on
to
conclude
that
“neither
the
taxpayer
nor
Falconbridge
had
such
purpose”.
In
so
concluding
he
rejected
the
argument
that
a
person
is
presumed
to
intend
the
material
consequences
of
his
actions
and
that
in
the
present
case
one
of
the
effects
of
the
transaction
was
to
reduce
significantly
the
amount
of
the
capital
gain.
In
the
view
of
the
Tax
Court
Judge,
the
fact
that
a
transaction
has
a
certain
effect
does
not
lead
to
the
conclusion
that
one
of
the
purposes
of
the
transaction
was
the
payment
or
receipt
of
a
tax
free
dividend.
The
Minister
also
submitted
that
in
determining
whether
one
of
the
purposes
of
the
transaction
was
to
effect
a
significant
reduction
in
capital
gain
both
the
vendor’s
and
purchaser’s
perspectives
in
light
of
the
entire
circumstances
of
the
transaction
must
be
analyzed.
Accordingly,
the
Minister
argued
that
Falconbridge
recognized
and
acted
on
the
dividend
tax
advantage,
while
Placer
was
aware
of
the
“safe
income”
potential.
Judge
Bell
concluded
that
Falconbridge’s
purpose
in
paying
a
dividend
was
to
obtain
an
exemption
from
the
OSC
with
respect
to
the
need
to
bid
for
all
its
issued
shares.
In
his
opinion,
the
evidence
was
compelling
that
Falconbridge
had
not
sought
to
effect
a
significant
reduction
in
the
capital
gain,
either
alone
or
in
conjunction
with
Placer.
As
to
Placer’s
purpose,
Judge
Bell
concluded
that
it
had
not
participated
in
the
creation
and
submission
of
the
Falconbridge
bid
and
that
finding
alone
rendered
it
impossible
to
conclude
that
one
of
Placer’s
purposes
was
to
effect
a
significant
reduction
in
the
capital
gain
to
be
realized
on
the
disposition
of
the
Falconbridge
and
McIntyre
shares.
As
to
the
purposes
underlying
the
transaction
he
stated
(at
page
14):
There
is
no
suggestion
in
the
evidence
of
any
of
the
ten
witnesses
who
appeared
for
[Placer]
that
the
dividend
paying
idea
was
conceived
for
the
purpose
of
reducing
capital
gain.
Those
witnesses
occupied
responsible
and
professional
positions
and
were,
in
my
estimation,
credible.
I
find
that
the
purpose
of
Falconbridge
was
simply
and
solely
to
achieve
the
goal
of
acquiring
its
shares
and
the
shares
of
McIntyre.
I
find
also
that
[Placer’s]
purpose
in
accepting
the
“M”
bid
was
to
dispose
of
its
shares
of
those
two
companies
on
what
it
determined
to
be
an
acceptable
basis.
Finally,
the
Tax
Court
Judge
held
that
the
discussion
of
safe
income
by
Placer
and
Falconbridge,
and
Placer’s
decision
to
make
a
separate
dividend
designation
under
subparagraph
55(5)(f)(ii)
of
the
Act,
had
no
bearing
on
the
outcome
of
the
case.
These
actions
were
regarded
as
matters
that
prudent
sophisticated
taxpayers
would
consider
in
the
course
of
a
transaction
of
this
nature.
IV.
Argument
The
principal
argument
of
counsel
for
the
Minister
is
premised
on
the
understanding
that
the
meaning
of
the
term
“purposes”,
as
used
in
subsection
55(2),
does
not
embrace
the
motivation
of
each
of
the
participants
involved
in
a
series
of
transactions.
In
other
words,
that
term
is
to
be
understood
in
an
objective,
not
subjective,
sense.
For
this
proposition,
the
Minister
relies
principally
on
an
Australian
decision,
although
there
are
two
decisions
of
the
Judicial
Committee
of
the
Privy
Council
which
also
lend
support
to
the
Minister’s
argument.
It
is
further
argued
that
a
purpose
of
a
dividend
is
to
effect
a
significant
reduction
in
the
capital
gain
when
the
dividend
is
inextricably
linked
to
the
disposition
of
a
share.
Thus,
it
is
irrelevant
whether
one
or
both
parties
are
motivated
by
tax
avoidance
considerations.
The
question
is
whether
the
dividend
and
disposition
of
the
share
are
inextricably
linked
where
the
transaction
has
the
effect
of
reducing
substantially
the
amount
of
the
capital
gain
that
otherwise
would
have
been
realized.
Here
the
Minister
seeks
to
rely
on
and
distinguish
an
earlier
decision
rendered
in
the
Trial
Division
of
this
Court,
namely,
C.P.L.
Holdings
Ltd.
v.
R.
(sub
nom.
C.P.L.
Holdings
Ltd.
v.
Canada),
[1995]
1
C.T.C.
447,
95
D.T.C.
5253
(F.C.T.D.).
The
final
submission
of
the
Minister
is
that
the
fact
that
the
matter
of
safe
income
was
recognized
as
a
tax
advantage
by
both
parties
constitutes
evidence
that
one
of
the
purposes
of
the
transaction
was
to
reduce
significantly
the
taxable
capital
gain.
Counsel
for
Placer
responds
by
seizing
on
the
fact
that
subsection
55(2)
provides
that
in
certain
circumstances
the
“purpose”
of
a
transaction
will
determine
whether
that
subsection
applies,
while
in
another
[namely,
in
the
case
of
deemed
dividends
under
subsection
84(3)],
the
“result”
of
a
transaction
will
determine
whether
the
provision
applies.
The
use
of
the
word
“purpose”
in
one
context
and
result
in
another
requires
that
a
different
meaning
be
attributed
to
each
word
that
is
consistent
with
it’s
use
and
context
within
the
provision.
Therefore,
since
Parliament
has
differentiated
between
the
two
terms
and
because
the
term
result
is
necessarily
objective,
the
term
“purpose”
must
be
applied
in
its
subjective
sense.
V.
Analysis
Parliament’s
attempt
to
stifle
or
restrain
the
legal
imagination
of
tax
planners
is
nowhere
more
evident
than
in
the
sheer
number
of
antiavoidance
rules
strategically
scattered
throughout
the
Act.
Yet,
there
is
no
uniformity
with
respect
to
the
criteria
used
for
characterizing
tax
avoidance:
some
provisions
embrace
a
“purposes”
test,
while
others
require
a
“reason”
or
“results”
analysis.
Where
the
terms
“purposes”
or
“reason”
are
found,
they
are
conditioned
by
such
modifiers
as
“one
of
the”,
“one
of
the
main”,
“the
principle”,
or
simply
“the”.
Given
this
diversity
of
terminology,
the
question
was
bound
to
arise
as
to
whether
the
term
“purpose”
is
to
be
understood
in
a
subjective
as
opposed
to
objective
sense:
see
generally
T.E.
McDonnell,
“Legislative
Anti-Avoidance:
The
Interaction
of
the
New
Rule
and
Representative
Specific
Rules”
in
1988
Conference
Report
(Toronto:
Canadian
Tax
Foundation,
1989)
6:1.
The
principal
difference
between
a
subjective
and
objective
appreciation
of
the
term
“purposes”
is
that
the
former
extends
a
personal
invitation
to
the
taxpayer
to
testify
as
to
his
or
her
state
of
mind
at
the
time
the
transaction
or
transactions
were
carried
into
effect.
In
theory,
a
subjective
appreciation
could
mean
that
identical
transactions
carried
out
by
different
taxpayers
may
incur
different
tax
results.
However,
it
must
be
recognized
that
in
law
few
things
are
measured
wholly
in
subjective
terms.
Let
me
explain.
Accepting
for
the
moment
that
subsection
55(2)
employs
the
term
“purposes”
in
its
subjective
sense,
there
are
three
basic
propositions
relevant
to
the
analysis.
First,
the
onus
or
burden
rests
on
the
taxpayer
to
establish
the
inapplicability
of
subsection
55(2)
of
the
Act.
Second,
mere
denial
(without
explanation
or
elaboration)
by
a
taxpayer
that
his
or
her
purpose
was
to
effect
a
significant
reduction
in
capital
gain
is
not
by
itself
a
sufficient
basis
on
which
to
discharge
that
burden.
Third,
it
is
not
necessary
that
the
taxpayer
adduce
corroborative
or
additional
evidence
which
shows
or
tends
to
show
that
his
or
her
testimony
is
true.
On
these
three
points
see,
respectively,
C.P.L.
Holdings
Ltd.,
supra,
R.
v.
Covertite
Ltd.,
(sub
nom.
The
Queen
v.
Covertite
Ltd.)
(sub
nom.
Covertite
Ltd.
v.
Minister
of
National
Revenue)
[1981]
C.T.C.
464,
81
D.T.C.
5353
(F.C.T.D.);
and
McAllister
Drilling
Ltd.
v.
R.,
(sub
nom.
McAllister
Drilling
Ltd.
v.
Canada)
[1994]
2
C.T.C.
211
(F.C.T.D.).
Practically
speaking,
it
is
evident
that
once
it
is
established
that
a
transaction
has
the
effect
of
reducing
significantly
a
capital
gain
it
is
proper
for
the
Minister
to
infer
that
the
taxpayer
had
such
a
purpose.
To
rebut
that
inference
the
taxpayer
(or
his
advisors)
must
offer
an
explanation
which
reveals
the
purposes
underlying
the
transaction.
That
explanation
must
be
neither
improbable
nor
unreasonable.
All
the
while
it
must
be
remembered
that
subsection
55(2)
of
the
Act
speaks
of
“one
of
the
purposes”
of
the
transaction.
Consequently,
the
taxpayer
must
offer
a
persuasive
explanation
that
establishes
that
none
of
the
purposes
was
to
effect
a
significant
reduction
in
capital
gain.
It
is
in
this
sense
that
uncorroborated
but
credible
testimony
can
be
sufficient
proof
of
taxpayer
intention:
see
V.
Krishna,
The
Fundamentals
of
Canadian
Income
Tax,
5th
ed.,
(Toronto:
Carswell
1995)
at
page
1391.
More
likely
than
not
a
taxpayer
will
seek
to
bolster
his
or
her
explana-
tion
by
adducing
corroborative
evidence,
as
did
Placer.
While
the
Tax
Court
Judge
went
on
to
conclude
that
since
Placer
had
not
participated
in
the
creation
and
structure
of
the
Falconbridge
bid
and
that
that
finding
alone
rendered
it
impossible
to
conclude
one
of
the
purposes
of
Placer
was
to
effect
a
significant
reduction
in
capital
gain,
it
remains
for
future
determination
whether
this
reasoning
should
itself
be
determinative
of
the
issue.
On
the
facts
of
this
case
it
was
held
below
that
neither
party
to
the
transaction
had
such
a
purpose,
a
finding
which
tends
to
support
the
understanding
that
the
purposes
of
both
parties
ought
to
be
examined:
on
this
last
point
see
Bentleys,
Stokes
&
Lowlees
v.
Beeson,
[1952]
2
All
E.R.
82,
33
T.C.
491
at
page
504,
Romer
L.J.
Putting
aside
these
evidential
matters,
it
remains
to
be
decided
whether
the
term
“purposes”
as
employed
in
subsection
55(2)
of
the
Act
is
to
be
understood
in
an
objective
sense.
Standing
alone
that
term
is
neutral.
It
is
only
when
it
is
placed
in
a
particular
context
that
its
meaning
can
be
ascertained.
While
there
may
be
instances
where
the
term
“purposes”
is
modified
by
words
or
phrases
suggesting
something
other
than
a
subjective
understanding,
that
is
not
the
case
with
respect
to
subsection
55(2)
of
the
Act.
The
words
of
that
subsection
provide
that
in
certain
circumstances
the
“purpose”
of
a
transaction
will
determine
whether
the
subsection
applies
while
in
another
(i.e.,
where
the
dividend
is
deemed
to
arise
under
subsection
84(3))
the
“result”
of
a
transaction
will
be
determinative.
Parenthetically,
I
note
that
subsection
55(1),
a
general
anti-avoidance
provision
(since
repealed)
is
limited
to
circumstances
in
which
the
“result”
of
a
transaction
is
to
artificially
or
unduly
reduce
the
amount
of
gain.
No
one
can
doubt
that
the
term
“result”
invites
an
objective
appreciation
of
the
factual
circumstances.
In
this
context
I
do
not
see
how
one
can
argue
persuasively
that
both
the
words
“purpose”
and
“result”
are
to
be
interpreted
as
embracing
an
objective
criterion.
In
my
opinion,
it
is
clear
that
the
use
of
the
term
“purpose”
in
one
context
and
“result”
in
another
requires
that
a
different
meaning
be
attributed
to
each
that
is
consistent
with
their
use
and
context
within
subsection
55(2).
The
foregoing
conclusion
is
reinforced
by
the
decision
of
the
House
of
Lords
in
ZR.C.
v.
Brebner,
[1967]
1
All
E.R.
779,
43
T.C.
705.
That
case
involved
subsection
28(1)
of
the
Finance
Act
1960
which
draws
a
clear
distinction
between
the
terms
“effect”
and
“object”.
It
was
held
that
the
“object”
which
had
to
be
considered
involved
a
subjective
matter
of
intention
(at
page
715).
To
the
extent
that
the
term
“object”
is
synonymous
with
“purpose”,
the
reasoning
in
Brebner
seems
equally
applicable
to
the
case
at
hand.
The
validity
of
my
conclusion,
of
course,
must
be
measured
against
the
precise
wording
of
subsection
28(1)
which
reads
as
follows:
Cancellation
of
tax
advantages
from
certain
transactions
in
securities.
28(1)
Where
—
(a)
in
any
such
circumstances
as
are
mentioned
in
the
next
following
subsection,
and
(b)
in
consequence
of
a
transaction
in
securities
or
of
the
combined
effect
of
two
or
more
such
transactions,
a
person
is
in
a
position
to
obtain,
or
has
obtained,
a
tax
advantage,
then
unless
he
shows
that
the
transaction
or
transactions
were
carried
out
either
for
bona
fide
commercial
reasons
or
in
the
ordinary
course
of
making
or
managing
investments,
and
that
none
of
them
had
as
their
main
object,
or
one
of
their
main
objects,
to
enable
tax
advantages
to
be
obtained,
this
section
shall
apply
to
him
in
respect
of
that
transaction
or
those
transactions.
Notwithstanding
the
position
I
have
adopted,
I
am
prepared
to
address
the
Minister’s
argument
which
hinges
on
case
law
emanating
from
other
Commonwealth
jurisdictions.
It
cannot
be
denied
that
on
at
least
two
occasions
the
Privy
Council
has
held
that
the
term
“purposes”
found
in
certain
anti-avoidance
provisions
is
to
be
interpreted
in
an
objective
manner.
In
Newton
v.
Commissioner
of
Taxation,
[1958]
A.C.
450,
the
Privy
Council
construed
the
now
repealed
Australian
blanket
anti-avoidance
provision
such
that
“[t]he
word
purpose
means,
not
motive
but
the
effect
which
it
is
sought
to
achieve...”
(at
page
465).
Again
in
Ashton
v.
Inland
Revenue
Commissioner,
[1975]
1
W.L.R.
1615
(N.Z.),
the
Privy
Council
equated
purpose
and
effect
in
relation
to
the
now
repealed,
but
similar,
New
Zealand
blanket
anti-avoidance
provision.
In
my
opinion,
both
Privy
Council
decisions
are
easily
distinguishable
once
attention
is
focused
upon
the
statutory
context
in
which
the
term
“purpose”
was
being
scrutinized.
Given
the
similarities
between
the
Australian
and
New
Zealand
provisions
it
is
sufficient
to
reproduce
only
the
relevant
portion
of
section
260
of
Australia’s
Income
Tax
Act:
Every
contract,
agreement,
or
arrangement...entered
into,
orally
or
in
writing,...shall
so
far
as
it
has
or
purports
to
have
the
purpose
or
effect
of
..(c)...avoiding
any
liability
imposed
on
any
person
by
this
Act...be
absolutely
void
as
against
the
commissionet....
[Emphasis
added.]
The
textual
differences
between
the
wording
of
subsection
55(2)
of
the
Act
and
the
Australian
provision
reproduced
above
are
clear.
Since
“purpose”
and
“effect”
are
used
interchangeably
only
in
the
Australian
and
New
Zealand
legislation,
it
would
be
unproductive
to
explore
further
the
legal
rationale
underlying
the
two
decisions
of
the
Privy
Council.
Others
have
already
attempted
to
do
so
and
nothing
is
to
be
gained
by
revisiting
taxation
regimes
which
do
not
bear
upon
the
Canadian
scheme:
see
J.F.
Avery
Jones,
“Nothing
Either
Good
or
Bad,
But
Thinking
Makes
It
So
-
The
Mental
Element
in
Anti-Avoidance
Legislation”
(1983)
British
Tax
Review
9.
The
one
case
the
Minister
does
rely
on
is
the
decision
of
the
Federal
Court
of
Australia
(General
Division)
in
Magna
Alloys
and
Research
Property
Ltd.
v.
Federal
Commissioner
of
Taxation,
33
A.L.R.
213.
Specifically
the
Minister
relies
on
the
following
passage
of
Brennan
J.
at
page
215:
Purpose
may
be
either
a
subjective
purpose
—
the
taxpayer’s
purpose
—
where
it
means
the
object
which
the
taxpayer
intends
to
achieve
by
incurring
the
expenditure;
or
it
may
be
an
objective
purpose,
meaning
the
object
which
the
incurring
of
the
expenditure
is
apt
to
achieve.
Both
motive
and
subjective
purpose
are
states
of
mind
and
they
are
to
be
distinguished
from
objective
purpose,
which
is
an
attribute
of
a
transaction.
An
objective
purpose
is
attributed
to
a
transaction
by
reference
to
all
the
known
circumstances;
whereas
subjective
purpose
and
motive,
being
states
of
mind,
are
susceptible
of
proof
not
by
inference
alone
but
also
by
direct
evidence,
for
a
state
of
mind
may
be
proved
by
the
testimony
of
him
whose
state
of
mind
is
relevant
to
a
fact
in
issue.
The
above
quotation
is
to
the
effect
that
the
purpose
of
a
transaction
(objective
purpose)
can
be
different
from
the
purpose
of
the
person
carrying
out
the
transaction
(subjective
purpose).
I
pause
here
to
note
that
at
page
12
of
his
reasons
the
Tax
Court
Judge
appears
to
question
the
view
that
a
transaction
can
have
a
purpose
which
is
independent
of
the
purpose
of
the
person
carrying
out
the
transaction:
“The
next
question
is
whether
one
of
the
purposes
of
the
transactions
(assuming
a
transaction
can
have
a
purpose)...”.
At
first
blush,
the
positions
of
the
Tax
Court
Judge
and
Brennan
J.
appear
to
be
opposed
to
one
another
and
yet
they
are
compatible
once
the
context
within
which
Brennan
J.’s
observations
were
made
is
acknowledged.
In
Magna
Alloys,
it
was
subsection
51(1)
of
Australia’s
Income
Tax
Assessment
Act
1936
that
required
interpretation.
That
subsection
reads
as
follows:
51(1)
All
losses
and
outgoings
to
the
extent
to
which
they
are
incurred
in
gaining
or
producing
the
assessable
income,
or
are
necessarily
incurred
in
carrying
on
a
business
for
the
purpose
of
gaining
or
producing
such
income,
shall
be
allowable
deductions
except
to
the
extent
to
which
they
are
losses
or
outgoings
of
capital,
or
of
a
capital,
private
or
domestic
nature,
or
are
incurred
in
relation
to
the
gaining
or
production
of
exempt
income.
[Emphasis
added.]
Having
regard
to
the
foregoing
provision
it
is
understandable
why
Brennan
J.
concluded
that
the
question
of
whether
an
expenditure
is
incurred
for
the
purpose
of
carrying
on
a
business
or
for
the
purpose
of
gaining
or
producing
income
does
not
depend
upon
the
taxpayer’s
state
of
mind
(at
page
225).
In
Magna
Alloys
the
precise
legal
question
was
whether
legal
expenses
[outgoings]
incurred
in
defending
directors
and
agents
of
the
taxpayer
against
charges
of
criminal
conspiracy
were
deductible.
At
page
225
Brennan
J.
concluded:
In
the
present
case,
the
character
and
scope
of
the
taxpayer’s
business
is
known
without
reference
to
its
state
of
mind.
Equally,
it
is
objectively
certain
that
the
relevant
expenditure
was
incurred
to
defray
the
legal
costs
of
the
directors
and
agents
in
the
criminal
proceedings
brought
against
them.
The
connection
between
the
legal
services
thus
acquired
and
the
taxpayer’s
business
neither
requires
nor
permits
reference
to
the
taxpayer’s
state
of
mind.
The
nature
of
that
connection
is
to
be
found
in
the
objective
facts
found
by
his
Honour
or
not
in
dispute
between
the
parties.
Once
Magna
Alloys
is
placed
in
context
the
comments
of
Brennan
J.
cited
earlier
can
be
of
no
assistance
to
the
Minister.
That
case
is
only
authority
for
the
proposition
that
an
objective
purpose
test
is
appropriate
in
the
context
of
the
statutory
framework
prescribed
by
subsection
51(1)
of
the
Australian
Income
Tax
Act.
Accordingly,
the
argument
that
the
term
“purposes”,
as
utilized
in
subsection
55(2)
of
our
Act,
must
be
interpreted
in
an
objective
manner
cannot
succeed.
In
the
circumstances,
it
is
unnecessary
to
deal
in
detail
with
the
remainder
of
the
Minister’s
arguments.
Nevertheless,
I
believe
they
merit
some
comment.
As
noted
earlier,
the
Minister
maintains
that
a
purpose
of
a
dividend
is
to
effect
a
significant
reduction
in
realizable
capital
gains
when
the
dividend
is
inextricably
linked
to
the
disposition
of
a
share.
In
my
view,
this
argument
is
premised
on
the
mistaken
assumption
that
the
Minister
would
have
been
successful
in
C.P.L.
Holdings
had
the
necessary
link
between
payment
of
the
dividend
and
disposition
of
the
shares
been
established.
While
it
is
true
that
the
Trial
Judge
in
that
case
held
that
the
subsequent
disposition
of
the
shares
was
not
part
of
the
same
transaction
giving
rise
to
the
payment
of
the
dividend,
he
did
not
go
on
to
conclude
that
had
he
found
otherwise
the
case
would
have
been
decided
differently.
At
most,
such
a
link
gives
rise
to
the
rebuttable
inference
that
a
purpose
of
the
transaction
was
to
effect
a
significant
reduction
in
capital
gain.
Equally
important
is
the
fact
that
the
Trial
Judge
in
C.P.L.
Holdings
acknowledged
that
subsection
55(2)
draws
a
distinction
between
the
terms
“purpose”
and
“result”.
At
page
457
he
stated:
Although
[the
Revenue
Canada
Auditor]
had
reasonable
grounds
to
act
as
he
did,
I
do
not
agree
with
his
conclusion.
The
taxpayer
has
provided
convincing
evidence
that
the
purpose
of
the
rollover
was
to
make
[the
taxpayer]
a
secured
creditor
of
the
corporation.
J
do
not
find
that
the
purpose
of
the
transaction
was
to
reduce
the
fair
market
value
of
the
shares,
although
I
agree
that
it
was
one
of
the
effects
of
the
transaction.
[Emphasis
added.]
Finally,
I
fail
to
see
how
the
discussions
between
Falconbridge
and
Placer
of
safe
income
could
somehow
bring
Placer
within
the
ambit
of
subsection
55(2)
of
the
Act.
The
discussions
of
safe
income
that
occurred
do
not
establish
that
one
of
the
purposes
of
the
transaction
was
to
effect
a
significant
reduction
in
capital
gain.
What
they
do
establish
is
that
the
parties
were
aware
that
subsection
55(2)
does
not
apply
to
dividends
attributable
to
safe
income.
Cognizance
of
the
fact
that
Placer
was
entitled
to
reduce
significantly
the
capital
gain
otherwise
realizable
on
the
transaction,
to
the
extent
that
the
dividend
payment
could
be
attributed
to
safe
income,
cannot
be
equated
with
a
tax-avoidance
purpose
on
the
part
of
Placer.
Indeed,
it
was
not
until
after
the
transaction
was
completed
that
an
outside
accounting
firm
to
Placer
stumbled
across
the
legal
argument
(and
adroitly
so)
that
the
entire
amount
of
the
dividends
might
be
held
to
be
tax-free
and
not
just
the
amount
that
related
to
safe
income.
VI.
Conclusion
For
the
above
reasons
I
would
dismiss
the
appeal
with
costs.
Appeal
dismissed.