News of Note

Comments of Finance in its discussion paper on GAAR include:

• It may be appropriate to provide that a “bona fide purpose” does not include foreign (or provincial) tax savings (contrary to what was suggested obiter by the TCC in Loblaw).
• The avoidance transaction definition could be expanded (from a "primarily" test) so that it applies where one of the main purposes (or one of the purposes) for undertaking the transaction (or series) is to obtain the tax benefit.
• Given the findings in Canadian Pacific and Spruce Credit, it may be appropriate to extend the meaning of “transaction” to include “the choice to effect a transaction in a particular way.”

Potential changes to the application of the abuse or misuse test in s. 245(4) could include:

• the inclusion of preambles and purpose statements in income tax legislation or greater emphasis on purpose statements in extrinsic aids such as Explanatory Notes
• amending s. 245(4) "to ensure that general schemes that can reasonably be established upon reviewing the Act as a whole [e.g., a presumption against surplus stripping?] are taken into consideration (and given appropriate weight) in the GAAR analysis, notwithstanding that a misuse of specific provisions of the Act cannot be identified”
• including an interpretative rule which, in contrast to Alta Energy, would shift the balance more to fairness to the tax system as a whole and de-emphasize certainty and predictability, and also address application issues, e.g., providing (again contrary to Alta Energy) that GAAR applies to foreseen as well as unforeseen tax planning
• reversing the Canada Trustco burden on the Crown, e.g., presuming “that abusive tax avoidance has occurred unless the taxpayer can establish to an appropriate standard that the provision or provisions being used to provide the tax benefit were used in the manner that Parliament intended them to be used” – although perhaps this burden shift would only occur where the transactions lacked economic substance

Finance repeatedly laments that Canada Trustco had not adopted the Finance statement accompanying GAAR’s introduction that it “would apply together with the … other provisions [of the Act] to require economic substance in addition to literal compliance with the words of the Act.”

The government intends to add an explicit economic substance rule to the GAAR, so that it applies more appropriately. In this regard [:] … First, it is necessary to define economic substance so that it is possible to determine when it is lacking. Second, an economic substance rule would need to be integrated into the GAAR analysis. Third, the appropriate consequences associated with a lack of economic substance would need to be determined.

Alternatives for testing for economic substance include:

• introducing a sole or dominant purpose test (under which, for example, “[w]here a taxpayer has no bona fide commercial or other non-tax purpose (or almost no such purpose), the relevant transactions could be considered to be sufficiently lacking in economic substance”
• determining whether a transaction has the potential for pre-tax profit after taking into account the costs of the transaction, which might then be compared to the tax savings
• determining whether the transfers of rights and assumptions of obligations under the transaction affected the economic positions of the participants in the transaction (so that "[i]f the economic exposure of the participants to a transaction is not materially affected by the transfers of rights and obligations under the transaction, then the transaction can be said to be lacking in economic substance”
• assessing whether the legal form of the transactions differs significantly from the accounting treatment of the transactions

Alternatives for utilizing the concept of economic substance include:

• Reworking the avoidance transaction test, so that “where a transaction resulting in a tax benefit is primarily tax motivated but not entirely (or almost entirely) tax motivated, the current scheme would continue to apply (i.e., the transaction will be subject to the GAAR unless the current misuse or abuse exception is met)” – but “where such a transaction or series is entirely (or almost entirely) tax motivated” under an economic substance test, different tax consequences would apply, “for example, the misuse or abuse exception could be made unavailable or the misuse or abuse burden could be reversed”
• An interpretive rule could provide in the GAAR context that “tax benefits are intended to be conferred only in the context of transactions with economic substance” – although it would be necessary to "ensure that transactions which appear to lack economic substance but are not objectionable from a policy perspective” are excepted
• More simply, the misuse or abuse test could be amended by adding an explicit requirement to take into account the economic substance of the relevant transactions
• Transactions could be deemed to be abusive where they lack economic substance or the misuse or abuse exception could become unavailable where the economic substance test is failed, although, again, there would need to be an exception for transactions that were not objectionable on policy grounds
• Alternatively, where transactions lacked economic substance, “the misuse or abuse exception would apply only where the taxpayer clearly demonstrates that the use made by the taxpayer of the provisions relied upon to obtain the tax benefit was specifically contemplated and intended by Parliament.”

In order to increase the deterrent effect, penalties or increased interest charges could be added where GAAR was applied, and the period for reassessing under GAAR could be extended.

Neal Armstrong. Summaries of “Modernizing and Strengthening the General Anti-Avoidance Rule,” Department of Finance Consultation Paper, 11 August 2022 under s. 245(3), s. 245(4) and s. 245(1) – transaction.

Libfeld claimed the $24,000 Ontario new housing rebate on his purchase in 2018 of an unoccupied and sparsely-furnished home. He provided indirect evidence that the individual vendor was a builder of the home, including a Toronto Life promotional article (admitted to be hearsay) titled “House of the Week: $7 million for a newly built mini-mansion in Forest Hill” and explaining that the vendor had torn down a pre-existing house and built this one in its place.

In finding that Libfeld had not established that the vendor was a builder, as required by s. 254(2)(a), so that the rebate was unavailable, Smith J noted that “the Court does not have the benefit of any direct evidence from the Vendor or other independent witness as to the frequency of similar transactions, what her intention was when she acquired the Property or what her motive was for selling” and that, on the closing of the purchase, Libfeld had accepted the sworn declaration of the vendor that the sale was not a taxable supply. There also was not much evidence to establish, as required by ss. 254(2)(f) and (g), that the vendor had not, at some point, occupied the “new” home prior to its sale.

Neal Armstrong. Summary of Libfeld v. The Queen, 2022 TCC 91 under ETA s. 254(2)(a).

A couple (A and B) along with others purchased a property in trust for development as a condominium complex. On completion of construction, A and B took title to two of the units jointly, with a view to using them (as the first occupants) functionally as a single place of residence (with sleeping quarters in one unit and living quarters in the other).

After noting uncertainties as to whether the two units constituted two, or a single, residential complex and place of residence, CRA noted that even if each was a residential complex (and each of A and B, a builder) then the personal use exception in s. 191(5) to the self-supply rule in s. 191(1) would apply to each unit if either A or B, or both A and B, used the unit primarily as a place of residence.

CRA did not discuss the income tax jurisprudence (e.g., Salama and Boulet) as to whether duplex units or basement apartments are separate residences.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.12 under ETA s. 191(5).

This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.