SUPREME COURT OF
CANADA
Between:
Earl Lipson
Appellant
and
Her Majesty the
Queen
Respondent
And Between:
Jordan B. Lipson
Appellant
and
Her Majesty the
Queen
Respondent
Coram: Binnie, LeBel, Deschamps, Fish, Abella, Charron
and Rothstein JJ.
Reasons for Judgment:
(paras. 1 to 53)
Dissenting Reasons:
(paras. 54 to 99)
Dissenting Reasons:
(paras. 100 to 124)
|
LeBel J. (Fish, Abella and
Charron JJ. concurring)
Binnie J.
(Deschamps J. concurring)
Rothstein J.
|
______________________________
Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3
Earl Lipson Appellant
v.
Her Majesty the Queen Respondent
- and -
Jordan B. Lipson Appellant
v.
Her Majesty the Queen Respondent
Indexed as: Lipson v. Canada
Neutral citation: 2009 SCC 1.
File No.: 32041.
2008: April 23; 2009: January 8.
Present: Binnie, LeBel, Deschamps, Fish, Abella, Charron and
Rothstein JJ.
on appeal from the federal court of appeal
Taxation — Income tax — Tax avoidance — Series of
transactions — Series of transactions beginning with wife borrowing money to
purchase shares in family corporation and leading to husband deducting interest
on the couple’s home mortgage loan — Whether general anti-avoidance rule
applicable to deny tax benefits — Whether series of transactions results in
abuse and misuse of one or more provisions of Income Tax Act — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 245(4) .
The taxpayer E and his wife entered into an
agreement of purchase and sale for a family residence. The wife borrowed
$562,500 from a bank to finance the purchase of shares in a family
corporation. She paid the borrowed money directly to the taxpayer who
transferred the shares to her. The taxpayer and his wife obtained a mortgage
from a bank for $562,500. That same day, they used the mortgage loan funds to
repay the share loan in its entirety. On his 1994, 1995 and 1996 tax returns,
the taxpayer deducted the interest on the mortgage loan and reported the
taxable dividends on the shares as income when applicable. The brother of the
taxpayer, J, conducted similar transactions. The Minister of National Revenue
disallowed the deductions for those taxation years and reassessed the taxpayers
accordingly. The Tax Court of Canada dismissed the taxpayers’ appeals, holding
that the series of transactions constituted a misuse of ss. 20(1) (c),
20(3) , 73(1) and 74.1 of the Income Tax Act and the taxpayers’ appeals
were dismissed. The Federal Court of Appeal upheld that decision.
Held (Binnie, Deschamps and Rothstein JJ.
dissenting): The appeals should be dismissed.
Per LeBel, Fish,
Abella and Charron JJ.: It has long been a principle of tax law that taxpayers
may order their affairs so as to minimize the amount of tax payable. However,
this principle has never been absolute, and Parliament has enacted the general
anti-avoidance rule (“GAAR”) to limit the scope of allowable avoidance
transactions while maintaining certainty for taxpayers. The GAAR denies a tax
benefit where three criteria are met: the benefit arises from a transaction
(ss. 245(1) and 245(2)); the transaction is an avoidance transaction as defined
in s. 245(3); and the transaction results in an abuse and misuse within the
meaning of s. 245(4). The taxpayer bears the burden of proving that the first
two of these criteria are not met, while the burden is on the Minister to
prove, on the balance of probabilities, that the avoidance transaction results
in abuse and misuse within the meaning of s. 245(4). Here, all the
transactions were conceded to result in two tax benefits and to be avoidance
transactions. [21-23]
A two-part inquiry must be followed to determine
whether a transaction results in a misuse and an abuse for the purposes of s.
245(4) of the Act. First, a court must conduct a unified textual, contextual
and purposive analysis of the provisions giving rise to the tax benefit in
order to determine their essential object, spirit and purpose. It is important
to identify which provision is associated with each tax benefit. Here, the tax
benefit of interest deductibility is associated with ss. 20(1) (c) and
20(3) and the tax benefit arising out of the use of the attribution rules by
the taxpayer to reduce his income is linked with ss. 73(1) and 74.1(1) .
Second, a court must determine whether the avoidance transaction frustrates the
object, spirit or purpose of the relevant provisions. In assessing a series of
transactions, the misuse and abuse must be related to the specific transactions
forming part of the series. However, the entire series of transactions should
be considered in order to determine whether the individual transactions within
the series abuse one or more of the provisions of the Act. Individual
transactions must be viewed in the context of the series. This approach is
consistent with the wording of the GAAR provisions, in particular with ss.
245(2) and 245(3)(b), which contemplate the denial of a tax benefit resulting
from a series of transactions. Further, the use of the words “directly or
indirectly” in s. 245(4), indicates that Parliament intended the GAAR to apply
even where abuse is an indirect result of a transaction and consequently, that
regard may be had to the series of transactions when determining whether a
transaction within the series is abusive. It is preferable to refer to the
“overall result” of the transactions which more accurately reflects the wording
of s. 245(4), and the jurisprudence of this Court rather than “overall purpose”
which may incorrectly imply that the taxpayer’s motivation or the purpose of
the transaction is determinative. An avoidance purpose is needed to establish a
violation of the GAAR when s. 245(3) is in issue, but is not determinative in
the s. 245(4) analysis. [25-28] [33-34] [36-38]
The Minister has failed to establish that the
purpose of ss. 20(1) (c) and 20(3) have been misused and abused. The
series of transactions did not become problematic until the taxpayer and his
wife turned to ss. 73(1) and 74.1(1) , in order to obtain the result
contemplated in the design of the series of transactions which resulted in the
taxpayer applying his wife’s interest deduction to his own income. The
attribution by operation of s. 74.1(1) that allowed the taxpayer to deduct the
interest in order to reduce the tax payable on the dividend income from the
shares and other income, which he would not have been able to do were the wife
dealing with him at arm’s length, qualifies as abusive tax avoidance. It does
not matter that s. 74.1(1) was triggered automatically when the taxpayer did
not elect to opt out of s. 73(1) . To allow s. 74.1(1) to be used to reduce the
taxpayer’s income tax from what it would have been without the transfer to his
wife frustrates the purpose of the attribution rules. The GAAR was not at
issue in Singleton, nor was s. 74.1 of the Act, and consequently Singleton
is distinguishable. [20] [41-42]
Here, it is not open to the Court to consider the
interpretation and application of the specific anti-avoidance rule in s.
74.5(11) as it was expressly disavowed by all parties throughout the
proceedings. The GAAR’s application was the focus of the appeals and was the
proper basis for the reassessments of the transactions. These transactions are
caught by the GAAR. Courts should avoid extending the GAAR beyond its
statutory purpose. But, bearing this purpose in mind, where the language of
and principles flowing from the GAAR apply to a transaction, the court should
not refuse to apply it on the ground that a more specific provision — one that
both the Minister and the taxpayers considered to be inapplicable throughout
the proceedings — might also apply to the transaction. [43-47]
Finally, in determining the tax consequences of
the GAAR’s application under s. 245(5), courts must be satisfied that an
avoidance transaction has been found under s. 245(4), that s. 245(5) provides
for the tax consequences and that they deny the tax benefits that would flow
from the abusive transactions. Courts must then determine whether these tax
consequences are reasonable in the circumstances. In the present case, the
disallowance of the interest expense in computing the income or loss attributed
to the taxpayer and allocation of that interest deduction back to his wife is a
reasonable outcome. [51]
Per Binnie and
Deschamps JJ. (dissenting): The GAAR is a weapon that, unless contained by
the jurisprudence, could have a widespread, serious and unpredictable effect on
legitimate tax planning. At the same time, the GAAR must be given a meaningful
role. That role is circumscribed by the requirement in s. 245(4) that the
transactions not only be shown to be “avoidance transactions”, but in addition
that the Minister demonstrate that the tax benefit results from a misuse/abuse
of the provisions of the Income Tax Act relied upon to produce it. In
the present case, the Minister has failed to make such a demonstration. When
the series of transactions at issue is properly characterized, it is a tax
avoidance scheme that should not have been found to be abusive under the GAAR.
[55] [59] [64]
Singleton illustrates the proposition that
there is nothing abusive in principle for a taxpayer to rearrange his or her
capital (borrowed or non-borrowed) in a tax efficient manner. The Minister is
not asking the Court to revisit Singleton. He does not claim that GAAR
would have applied in that case. The Minister acknowledges here that it is
common ground that the interest was deductible. Thus, applying Singleton,
the only question is whether the deduction becomes “abusive” when income or
losses are attributed back to the transferor by the spousal attribution rules
in ss. 73(1) and 74.1(1) . [57-58] [60]
If the tax plan in Singleton is not
abusive, the Minister has failed to establish that Singleton with a
spousal twist is abusive tax avoidance either. There is nothing in the Act to
discourage the transfer of property at fair market value between spouses.
Indeed, by allowing a spouse to transfer property to the other spouse at the
transferor’s adjusted cost base, Parliament intended to make such inter-spousal
transfers attractive. The Minister has failed to identify a specific policy
shown to be frustrated by the taxpayer’s plan as required by Canada Trustco
and Kaulius. The approbation by the Court of the Minister’s resort to
vague generalities or “overriding policy” will only increase the element of
uncertainty in tax planning that Canada Trustco and Kaulius
sought to avoid. [59] [67]
Canada Trustco requires the Minister to
identify the misuse and abuse of an “object, spirit or purpose” that is
“anchored in a textual, contextual and purposive interpretation of the specific
provisions that are relied upon for the tax benefit”. By ignoring the initial
sale of shares to the spouse and recharacterizing the interest payment in
relation thereto as nothing more than interest on a house mortgage, and
effectively arguing for a stand-alone prohibition on the deductibility of a
house mortgage interest (despite Singleton), the Minister engages in the
sort of vague appeal to “overriding policy” that Canada Trustco sought
to eliminate from the GAAR analysis. [65]
In this case, as in Singleton, there was a
change in the taxpayer’s position with real economic substance. The share sale
must be accepted as an essential part of the “series of transactions”.
Parliament must have contemplated that by giving taxpayers a choice under s.
73(1) in the context of an inter-spousal transfer of property, they would
exercise it in a tax-minimizing manner. Far from offending the “object, spirit
or purpose” of the spousal attribution rules, the taxpayer’s tax plan fulfilled
them, or at a minimum did not abuse them. It cannot be right that whenever a
lower income spouse borrows money to purchase shares from a higher income
spouse there is an abuse of the spousal attribution rules unless the
transferring spouse opts out of ss. 73(1) and 74.1(1) , and thereby forfeits a
tax benefit clearly available under the Act. While many spouses regard
themselves as forming an economic unit, the rate at which spousal units implode
serves as a reminder that the economic union of marriage is neither
indissoluble nor free of risk. [87] [91-93] [96]
The “overall purpose” approach which the Tax Court
judge adopted, and the Federal Court of Appeal accepted, was an error of law.
The principal focus in s. 245(4) is on results not purpose. While the legal
relationships actually created by the taxpayer do not control the application
of the GAAR, they cannot be ignored. Here, the application of the GAAR would
mean paying lip service to the principle that taxpayers are entitled to arrange
their affairs to minimize the amount of tax payable, without taking seriously
its role in promoting consistency, predictability and fairness in the tax
system. [86] [90] [98]
Per Rothstein J.
(dissenting): There was no abuse of ss. 20(1)(c) and 20(3) of the Act.
There is no reason why a taxpayer may not arrange his or her affairs so as to
finance personal assets out of equity and income earning assets out of debt.
With respect to the taxpayer’s use of s. 74.1(1), ss. 245(2) and 245(4) require
that all other relevant provisions of the Act be read before the Minister may
have recourse to the GAAR. This Court held in Canada Trustco that the
GAAR is a provision of last resort. If there is a specific anti-avoidance rule
that precludes the use of an enabling rule to avoid or reduce tax, then the
GAAR will not apply. The Minister did have other recourse in this case. Section
74.5(11) is a specific anti-avoidance rule that precludes the use of the
attribution rules where one of the main reasons for the transfer of property
was to reduce the amount of tax that would be payable on the income derived
from the property. Here, one of the main reasons for the transfer of shares to
the wife was to reduce or eliminate the dividend income on the shares.
Therefore because s. 74.5(11) applied, s. 245 did not apply, and could not be
relied upon by the Minister. The Minister should have resorted to s. 74.5(11)
in order to reassess the taxpayer in respect of his use of s. 74.1(1). The
Minister’s failure to invoke s. 74.5(11) is fatal to his reassessment in
respect of s. 74.1(1). The Minister cannot preemptively rely on the GAAR to address
the alleged abusive use of s. 74.1(1) as if s. 74.5(11) did not exist. The
fact that the parties did not rely on s. 74.5(11) — either as the basis for
reassessment or as the reason why the Minister’s claim should fail — does not
change the fact that the section applies in law. If the Minister had
reassessed the taxpayer by use of the relevant specific anti-avoidance
provision, s. 74.5(11), then the tax benefit that resulted from the taxpayer’s
use of the attribution rules would have been precluded. The Minister could not
invoke the GAAR to reassess in respect of the taxpayer’s use of s. 74.1 . [100]
[102] [104-105] [108-110] [114-115] [118] [122] [124]
Cases Cited
Cited by LeBel J.
Distinguished: Singleton v. Canada,
2001 SCC 61, [2001] 2 S.C.R. 1046, aff’g [1999] 4 F.C. 484; referred to:
Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601;
Mathew v. Canada, 2005 SCC 55, [2005] 2 S.C.R. 643; Commissioners of
Inland Revenue v. Duke of Westminster, [1936] A.C. 1; Placer Dome Canada
Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715; Ludco
Enterprises Ltd. v. Canada, 2001 SCC 62, [2001] 2 S.C.R. 1082; Shell
Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Thibaudeau v. Canada,
[1995] 2 S.C.R. 627.
Cited by Binnie J. (dissenting)
Canada Trustco Mortgage Co. v. Canada,
2005 SCC 54, [2005] 2 S.C.R. 601; Commissioners of Inland Revenue v. Duke of
Westminster, [1936] A.C. 1; Singleton v. Canada, 2001 SCC 61, [2001]
2 S.C.R. 1046; Jabs Construction Ltd. v. The Queen, 99 D.T.C. 729; Mathew
v. Canada, 2005 SCC 55, [2005] 2 S.C.R. 643.
Cited by Rothstein J. (dissenting)
Canada Trustco Mortgage Co. v. Canada,
2005 SCC 54, [2005] 2 S.C.R. 601.
Statutes and Regulations Cited
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 18(1) (a), (h),
20 , 73(1) , 74.1 to 74.5 , 245 .
Authors Cited
Ahmed, Firoz, and Cassandra Priede. “Case Comment — Lipson
v. Canada” (2007), 17 Can. Curr. Tax 77.
Krishna, Vern. The Fundamentals of Canadian
Income Tax, 9th ed. Toronto: Thomson/Carswell, 2006.
McDonnell, Thomas E. “The Relevance of ‘Overall
Purpose’ in a GAAR Analysis” (2007), 55 Can. Tax J. 720.
Thivierge, Manon. “GAAR Redux: After Canada
Trustco”, in Report of Proceedings of the Fifty-Eighth Tax Conference.
Toronto: Canadian Tax Foundation, 2007, 4:1.
APPEALS from a judgment of the Federal Court of
Appeal (Décary, Noël and Sexton JJ.A.), 2007 FCA 113, [2007] 4 F.C.R. 641, 280
D.L.R. (4th) 714, 361 N.R. 191, [2007] 3 C.T.C. 110, 2007 D.T.C. 5172, [2007]
F.C.J. No. 402 (QL), 2007 CarswellNat 640, affirming a decision of Bowman
C.J.T.C., 2006 TCC 148, [2006] 3 C.T.C. 2494, 2006 D.T.C. 2687, [2006] T.C.J.
No. 174 (QL), 2006 CarswellNat 982. Appeals dismissed, Binnie, Deschamps and
Rothstein JJ. dissenting.
Edwin G. Kroft and Rosemarie
Wertschek, Q.C., for the appellants.
Wendy Burnham and Daniel
Bourgeois, for the respondent.
The judgment of LeBel, Fish, Abella and Charron
JJ. was delivered by
LeBel J. —
I. Introduction
[1] These
consolidated appeals raise the issue of what constitutes abusive tax avoidance
for the purposes of the general anti-avoidance rule (“GAAR”) provided for in
the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ” or
“Act ”). More specifically at issue is whether a series of transactions
beginning with a wife borrowing money to purchase shares in a family
corporation and leading to the husband deducting the interest on the couple’s
home mortgage loan results in an abuse and misuse of one or more provisions of
the Act , as contemplated in s.
245(4) of the ITA .
[2] The
framework for identifying abusive tax avoidance was set out in the cases of Canada
Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, and Mathew
v. Canada, 2005 SCC 55, [2005] 2 S.C.R. 643 (“Kaulius”). In those
companion cases, the Court held that, for the purposes of s. 245(4) , abusive
tax avoidance occurs where the impugned transaction frustrates the
object, spirit or purpose of one or more of the provisions relied on by the
taxpayer.
[3] For
the reasons that follow, I agree with the courts below that the respondent has
established abusive tax avoidance. The GAAR applies to one of the transactions
within the series and can accordingly be used to deny one of the tax benefits
sought by the appellants. As a result, the appeals should be dismissed.
II. Facts
[4] These
appeals were heard on the basis of a statement of agreed facts and conclusion,
on which I will rely in reviewing the relevant facts. The appellant Earl Lipson
(“Mr. Lipson”) conducted a series of transactions whose purpose, he concedes,
was to minimize his income tax. He also concedes that his transactions were
avoidance transactions within the meaning of s. 245(3) of the ITA .
First, in April 1994, Mr. Lipson and his wife, Jordanna Lipson (“Mrs. Lipson”),
entered into an agreement of purchase and sale for a family residence in
Toronto. The purchase price was $750,000. On August 31, 1994, Mrs. Lipson
borrowed $562,500 from the Bank of Montreal to finance the purchase at fair
market value of 20 and 5/6 shares in Lipson Family Investments Limited, a
family corporation. Mrs. Lipson did not earn enough income to pay the interest
on this loan (the “share loan”) and the bank would not have lent it to her on
an unsecured basis but for the fact that Mr. Lipson had agreed to repay the
loan in its entirety the following day. Mrs. Lipson paid the borrowed money
directly to her husband, who transferred the shares to her. It should be noted
that the brother of Earl Lipson, the appellant Jordan B. Lipson, conducted
similar transactions. It was agreed in the courts below that the outcome in
Earl Lipson’s appeal would be dispositive of his brother’s appeal. In this
Court, the two appeals were consolidated and continued as one appeal in file
No. 32041.
[5] Mr.
and Mrs. Lipson obtained a mortgage from the Bank of Montreal for $562,500 (the
“mortgage loan”), which was advanced on the closing date of September 1, 1994.
They were joint chargers under the mortgage. That same day, they used the
mortgage loan funds to repay the share loan in its entirety.
[6] Mr.
Lipson relied on four provisions of the ITA to claim a deduction of the
mortgage loan interest on his 1994, 1995 and 1996 tax returns. The first was
s. 73(1) , pursuant to which a taxpayer may defer tax on interspousal transfers
of property. Mr. Lipson did not elect out of this provision, as he was
entitled to do. As a result, the transfer of shares from him to his wife was
deemed to have occurred at his adjusted cost base rather than at fair market
value, such that he neither sustained a loss nor realized a gain on the sale.
[7] Second,
s. 74.1 attributes any income or loss from property transferred from one spouse
to another back to the transferring spouse for tax purposes. Thus, although
Mrs. Lipson owned the shares acquired from her husband, the dividend income and
losses were attributed to Mr. Lipson.
[8] The
third provision, although the shares were paid for with the proceeds of the
share loan rather than the mortgage loan, was s. 20(3) , which allows a
deduction for interest on money borrowed to repay previously borrowed money if
the interest on the original loan is deductible. As the Tax Court judge noted,
the purpose of this provision is to facilitate refinancing (2006 TCC 148,
[2006] 3 C.T.C. 2494, at para. 20). The mortgage loan was therefore treated as
having funded the share purchase.
[9] Finally,
Mr. Lipson deducted the interest on the mortgage loan pursuant to s. 20(1) (c),
which permits the deduction of interest on money borrowed “for the purpose of
earning income from a business or property”. It is not in dispute that the
shares in Lipson Family Investments Limited were income-producing assets for
Mrs. Lipson and that, were it not for the attribution rule of s. 74.1, she
would be entitled, under s. 20(1) (c), to deduct the interest on the
money borrowed to purchase the shares. As a result of that attribution rule,
however, the dividend income and the interest expense were attributed to Mr.
Lipson.
[10] On
his 1994, 1995 and 1996 tax returns, Mr. Lipson deducted the interest on the
mortgage loan and reported the taxable dividends on the shares as income where
applicable. The Minister of National Revenue (“Minister”) disallowed the
interest expenses of $12,948.19, $47,370.55 and $44,572.95, respectively, for
those years and reassessed Mr. Lipson accordingly. The Minister originally
disallowed the deductions on the basis that the true economic purpose for which
the borrowed money was used was not to earn income and that the interest was therefore
not deductible under s. 20(1) (c) of the ITA . However, by the
time the case reached the Tax Court of Canada, this Court had rejected the
“true economic purpose” approach in Singleton v. Canada, 2001 SCC 61,
[2001] 2 S.C.R. 1046, aff’g [1999] 4 F.C. 484. The Minister therefore argued
the case on the basis of the GAAR set out in s. 245 of the ITA and
submitted that the series of transactions amounted to abusive tax avoidance.
III. Judicial History
[11] The
appellants appealed the Minister’s reassessments to the Tax Court of Canada.
The only issue at trial was whether the transactions, which the parties agreed
were avoidance transactions resulting in a tax benefit, constituted abusive tax
avoidance and were prohibited by the GAAR. Bowman C.J.T.C. relied on the
approach to the GAAR set out by this Court in Canada Trustco and Kaulius.
He held that “[t]he overall purpose as well as the use to which each individual
provision was put was to make interest on money used to buy a personal
residence deductible” (para. 23). He emphasized this overall purpose in
relation to the purposes of each of the provisions in question and found that
the series of transactions resulted in a misuse of ss. 20(1) (c), 20(3) ,
73(1) and 74.1 of the ITA (para. 23). He therefore dismissed the
appeals.
[12] On
appeal to the Federal Court of Appeal, the appellants claimed that Bowman
C.J.T.C. had erred by relying on the overall purpose of the series of
transactions in concluding that the transactions resulted in a misuse of
specific ITA provisions. They added that Bowman C.J.T.C. had relied on
the economic purpose and substance of the transactions, which is not the test
for interest deductibility under s. 20(1) (c). The proper approach,
according to the appellants, would have been to assess each transaction, and
the resulting legal relationships, separately, in which case the court could
find no abuse and misuse of the provisions. They argued that this approach was
consistent with the Supreme Court’s rulings in Canada Trustco and Kaulius.
[13] Noël
J.A. agreed that, viewed separately and without regard to the overall purpose
of the scheme, no single one of the transactions appeared abusive (2007 FCA
113, [2007] 4 F.C.R. 641, at para. 33). However, he concluded that Bowman
C.J.T.C. was entitled to consider the transactions as a series. Indeed, both
ss. 245(2) and 245(3) (b) contemplate the denial of a tax benefit
resulting from a “series of transactions”. Further, Noël J.A. quoted para. 46
of Kaulius, in which this Court spoke of assessing the “object, spirit
or purpose” of the provision “in light of the series of transactions”. He
concluded that “the series cannot be ignored in conducting the abuse analysis”
for the purposes of the GAAR (para. 45). He held that it had been open to
Bowman C.J.T.C. to find, as he did, that the transactions resulted in a misuse
of several provisions of the ITA . He dismissed the appeals.
IV. Analysis
A. Issues and Positions of
the Parties
[14] The
appellants submit that the Minister has not established that abusive tax
avoidance had occurred. They point out that it is not disputed that the share
purchase transaction was a bona fide, legal transaction in which Mrs.
Lipson acquired shares in Lipson Family Investments Limited. She earned income
on those shares and, were it not for s. 74.1 of the ITA , would have been
required to report that income for tax purposes but would, pursuant to s.
20(1) (c), have been entitled to deduct the interest paid on the money
borrowed to purchase those shares. The purpose of s. 20(1) (c) is to
encourage the accumulation of income-producing assets. The fact that the
applicability of this provision depends on tracing (i.e., of the actual
use of the borrowed funds) rather than on apportionment or ordering (based on
assumptions about use) means that the provision is concerned with legal
relationships rather than with the true economic purpose of the transaction or
series of transactions (Appellants’ Factum, at paras. 72-76). This principle
was confirmed in Singleton, where a taxpayer was effectively permitted
to deduct his home mortgage interest under s. 20(1) (c) because the
direct use of the funds in issue was to acquire an income-producing asset, not
to purchase a house. Therefore, the transactions in that case did not
frustrate the purpose of s. 20(1) (c).
[15] Similarly,
according to the appellants, the purposes of the other three provisions on
which they rely are not frustrated. Section 20(3) contemplates the refinancing
of a loan, and that was what the Lipsons did in using the mortgage loan to pay
off the share loan. Section 73(1) applies automatically unless the taxpayer
opts out, and s. 74.1 also applies automatically if the taxpayer does not elect
out of s. 73(1) . The provisions operated as intended. It would have been a
misuse had they not applied.
[16] The
appellants argue that the courts below erred in their analysis of the GAAR by
relying on the “overall purpose” of the transactions, since an “overall
purpose” test is not part of the inquiry under s. 245(4) . Further, to the
extent that “overall purpose” is synonymous with “true economic purpose”, this
Court rejected the application of such a test under s. 20(1) (c) in Singleton
and stated in Canada Trustco that “economic substance” is not
determinative in the inquiry under s. 245(4) (Canada Trustco, at paras.
57 and 59). The effect of adopting an “overall purpose” test under s. 245(4)
would be to cause uncertainty and inconsistency for taxpayers.
[17] The
respondent, on the other hand, submits that the appellants’ approach
effectively reads the GAAR out of the ITA . The very purpose of the GAAR
is to negate arrangements that would result in a tax benefit “but for this
section” (s. 245(2) ). In other words, even if the provision being relied on
allows a tax benefit, this does not preclude the transaction from being abusive
under s. 245(4) of the Act .
[18] A
contextual and purposive approach to the GAAR, as is mandated by Canada
Trustco and Kaulius, requires a court to consider the purpose
of each provision relied on and whether that purpose was defeated by the
transaction or series of transactions. According to the respondent, such an
analysis leads inevitably to the conclusion that to allow the interest to be
deducted in the case at bar would frustrate the purpose of the provisions being
relied on. Specifically, the deduction of mortgage interest frustrates the
purpose of s. 20(1) (c) because personal expenses such as home mortgage
interest are not deductible under s. 20(1) (c), as is clear from ss.
18(1) (a) and 18(1) (h) of the ITA . Such a deduction also
frustrates s. 74.1 , because that provision is aimed at preventing income
splitting. Section 74.1 is an anti-avoidance provision, but it was used here
precisely to avoid tax. It cannot be consistent with the object, spirit or
purpose of s. 20(1) (c), s. 73(1) or s. 74.1 to permit one spouse to
deduct interest on money borrowed to fund a personal expense for the benefit of
both spouses. The respondent therefore submits that the courts below were
correct in finding that the transactions were prohibited by the GAAR.
B. Applicability of the
Singleton Case to the Present Situation
[19] As
I mentioned above, the appellants consider this Court’s decision in
Singleton to weigh in their favour because of its focus on legal
relationships. The Minister concedes that, were it not for the GAAR, Mr. Lipson
could properly deduct the interest expense under s. 20(1) (c) (Statement
of Agreed Facts and Conclusion, at para. 15). If, as in Singleton, the
issue in the instant case were whether the deduction was properly available
under s. 20(1) (c), the Minister’s concession would be fatal.
[20] However,
neither the GAAR nor s. 74.1 of the ITA was at issue in Singleton,
so the present case is distinguishable. By treating Singleton as
dispositive of the present appeals, the appellants in effect read the GAAR out
of the ITA .
C. Interpretation of Tax
Statutes and the Principle of Minimizing Tax Liability
[21] It
has long been a principle of tax law that taxpayers may order their affairs so
as to minimize the amount of tax payable (Commissioners of Inland Revenue v.
Duke of Westminster, [1936] A.C. 1 (H.L.)). This remains the case.
However, the Duke of Westminster principle has never been absolute, and
Parliament enacted s. 245 of the ITA , known as the GAAR, to limit the
scope of allowable avoidance transactions while maintaining certainty for
taxpayers (Canada Trustco, at para. 15). In brief, the GAAR denies a
tax benefit where three criteria are met: the benefit arises from a transaction
(ss. 245(1) and 245(2) ); the transaction is an avoidance transaction as defined
in s. 245(3) ; and the transaction results in an abuse and misuse within the
meaning of s. 245(4) . The taxpayer bears the burden of proving that the first
two of these criteria are not met, while the burden is on the Minister to
prove, on the balance of probabilities, that the avoidance transaction results
in abuse and misuse within the meaning of s. 245(4) .
[22] The
appellants argue that the courts below erred by disregarding the existence of
two tax benefits stemming from the series of transactions. They contend and
concede that the series of transactions involves two tax benefits: Mrs.
Lipson’s entitlement to the interest deduction and the actual deduction of that
interest from Mr. Lipson’s income by application of the attribution rules (see
Transcript, at pp. 9, 10 and 17). I would add that, as specified in Canada
Trustco, at para. 19, the existence of a tax benefit is a factual
determination best left to the Tax Court judge. However, in the case at bar,
the Tax Court judge did not clearly decide whether the series of transactions
created more than one tax benefit. This Court must therefore make that
determination. I agree that the GAAR analysis should be conducted in respect of
each of those tax benefits. The appellants sought an overall result, that is,
the deduction of the interest payments on the mortgage from their income.
Nevertheless, the legal analysis required by the GAAR cannot stop at this
level. Its focus must be on the individual benefits — which may in combination
have led to the overall result — in the context of the series of transactions.
[23] Mr.
Lipson concedes that all the transactions were avoidance transactions (see
Statement of Agreed Facts and Conclusion, at para. 16). Therefore, the issue
before us is whether any of the transactions result in a misuse and an abuse
having regard to the provisions the taxpayers have relied on.
[24] The
GAAR is set out in s. 245 of the ITA . The provision at issue in the
present case, s. 245(4) , reads as follows:
Subsection (2) [i.e. the denial of a tax benefit] applies to
a transaction only if it may reasonably be considered that the transaction
(a) would, if this Act were read without reference to
this section, result directly or indirectly in a misuse of the provisions of
any one or more of
(i)
this Act ,
(ii) the Income Tax Regulations,
(iii) the Income Tax Application Rules ,
(iv) a tax treaty, or
(v) any other enactment that is relevant in computing tax or any
other amount payable by or refundable to a person under this Act or in
determining any amount that is relevant for the purposes of that computation;
or
(b) would result directly or indirectly in
an abuse having regard to those provisions, other than this section, read as a
whole.
[25] In
other words, a taxpayer will not be denied a tax benefit resulting from an
avoidance transaction unless that transaction directly or indirectly results in
the abuse and misuse of provisions of the Act (or regulations, etc.). The
approach to determining whether a transaction results in a misuse and an abuse
for the purposes of s. 245(4) was set out in Canada Trustco, at
paras. 44-62, the key portion of which reads as follows:
The heart of the analysis under s. 245(4) lies in a
contextual and purposive interpretation of the provisions of the Act that are
relied on by the taxpayer, and the application of the properly interpreted
provisions to the facts of a given case. 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 transaction falls within or
frustrates that purpose. The overall inquiry thus involves a mixed question of
fact and law. The textual, contextual and purposive interpretation of specific
provisions of the Income Tax Act is essentially a question of law but
the application of these provisions to the facts of a case is necessarily
fact-intensive.
This analysis will lead to a finding of abusive tax avoidance
when a taxpayer relies on specific provisions of the Income Tax Act in
order to achieve an outcome that those provisions seek to prevent. As well,
abusive tax avoidance will occur when a transaction defeats the underlying
rationale of the provisions that are relied upon. An abuse may also result
from an arrangement that circumvents the application of certain provisions,
such as specific anti-avoidance rules, in a manner that frustrates or defeats
the object, spirit or purpose of those provisions. By contrast, abuse is not
established where it is reasonable to conclude that an avoidance transaction
under s. 245(3) was within the object, spirit or purpose of the provisions that
confer the tax benefit. [paras. 44-45]
[26] In
determining the purpose of the relevant provision(s) of the Act , a court must
take a unified textual, contextual and purposive approach to statutory
interpretation (Canada Trustco, at para. 47). This approach is, of
course, not unique to the GAAR. As this Court confirmed in Kaulius, the
approach to statutory interpretation is the same for provisions of the ITA
as for those of any other statute: it is necessary “to determine the intention
of the legislator by considering the text, context and purpose of the
provisions at issue” (para. 42; see also Placer Dome Canada Ltd. v. Ontario
(Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715, at paras. 21-23).
[27] Thus,
the first analytical step is to interpret the four provisions at issue in the
present case to determine their essential object, spirit and purpose. The
parties do not generally dispute Bowman C.J.T.C.’s analysis in this regard,
although they emphasize different aspects of the provisions’ object, spirit and
purpose. For example, the Minister highlights the link between certain
provisions and Parliament’s goal of regulating taxation within the spousal unit
(Respondent’s Factum, at para. 47). The appellants, on the other hand, submit
that the Tax Court judge erred in his analysis of the purpose of s. 20(1) (c)
by failing to appreciate the importance of “tracing” (Appellants’ Factum, at
para. 33(c)).
[28] At
this step, it is important to identify which provisions are associated with
each tax benefit. Here, it is clear that the tax benefit of deductibility of
interest relates to ss. 20(1) (c) and 20(3) . On the other hand, the tax
benefit arising out of Mr. Lipson’s use of the attribution rules, namely the
possibility of deducting the interest to reduce his income, is linked with ss.
73(1) and 74.1(1) . By virtue of these provisions, Mr. Lipson retains, for tax
purposes, the stream of income from the shares sold to his wife but is able to
deduct the interest payments on the mortgage from his income.
[29] Section
20(1) (c) allows taxpayers to deduct interest on borrowed money used for
a commercial purpose. The purpose of this provision is to “create an incentive
to accumulate capital with the potential to produce income” (Ludco
Enterprises Ltd. v. Canada, 2001 SCC 62, [2001] 2 S.C.R. 1082, at para.
63), or to “encourage the accumulation of capital which would produce taxable
income” (Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 57).
[30] Section
20(3) was enacted “[f]or greater certainty” in order to make it clear that
interest that is deductible under s. 20(1) (c) does not cease to be
deductible because the original loan was refinanced. It serves “a practical
function in the commercial world of facilitating refinancing” (Tax Court
judgment, at para. 20).
[31] The
effect of s. 73(1) is to facilitate interspousal transfers of property without
triggering immediate tax consequences (Tax Court judgment, at para. 21). This
is an exception to the general rule that capital gains and losses are
recognized when property is disposed of. According to Professor Vern Krishna:
The rationale for permitting a taxpayer to rollover assets is that
it is undesirable, and perhaps unfair, to impose a tax on transactions that do
not involve a fundamental economic change in ownership, even though there may
be a change in form or legal structure.
(The Fundamentals of Canadian Income Tax (9th ed. 2006) at p.
1112)
[32] Finally,
the attribution rules in ss. 74.1 to 74.5 are anti-avoidance provisions whose
purpose is to prevent spouses (and other related persons) from reducing tax by
taking advantage of their non-arm’s length status when transferring property
between themselves. The most common example of such a benefit is one derived
from income splitting, but it is not the only example. In Canada, the unit of
taxation is the individual: “Each individual is a taxpayer in his or her own
right” (Krishna, at p. 16; see also Thibaudeau v. Canada, [1995] 2
S.C.R. 627, at para. 93). Thus, s. 74.1(1) is designed to prevent spouses from
benefiting from their non-arm’s length relationship by attributing, for tax
purposes, any income or loss from property transferred to a spouse back to the
transferring spouse.
[33] The
second step in the s. 245(4) analysis is to determine whether the avoidance
transaction frustrates the object, spirit or purpose of the relevant
provisions. The appellants submit that the courts below erred at this step of
the analysis by relying on the “overall purpose” of the transactions in
question, that is, by collapsing the series of legally effective transactions
into a single transaction and recharacterizing them by attributing an overall
purpose to them (Appellants’ Factum, at paras. 134-43). As I interpret the
appellants’ submissions, the objection to an “overall purpose” approach is
twofold: First, transactions under s. 20(1) (c) should be assessed
individually rather than as a series (Appellants’ Factum, at paras. 90-91).
This is an objection to the “overall” aspect of the “overall purpose” test.
Second, this approach is legally incorrect because the purpose of the
transactions — whether in the sense of the taxpayer’s motivation, of the
primary purpose or perhaps even of economic substance — is not determinative in
the s. 245(4) inquiry. This is an objection to the “purpose” aspect of the
“overall purpose” test.
[34] It
is true, as the appellants argue, that in assessing a series of transactions,
the misuse and abuse must be related to the specific transactions forming part
of the series. However, the entire series of transactions should be considered
in order to determine whether the individual transactions within the series
abuse one or more provisions of the Act . Individual transactions must be viewed
in the context of the series. Consideration of this context will enable a
reviewing court to assess and understand the nature of the individual parts of
the series when analysing whether abusive tax avoidance has occurred. At the
same time, care should be taken not to shift the focus of the analysis to the
“overall purpose” of the transactions. Such an approach might incorrectly imply
that the taxpayer’s motivation or the purpose of the transaction is determinative.
In such a context, it may be preferable to refer to the “overall result”, which
more accurately reflects the wording of s. 245(4) and this Court’s judgment in Canada
Trustco. I will now review the arguments of the parties from this
perspective.
[35] First,
with regard to viewing transactions individually versus as a series (i.e., the
“overall” aspect of the “overall purpose” test), the appellants argue that the
results of a series of transactions are not relevant in an analysis under s.
20(1) (c). This submission is based both on the wording of s. 20(1) (c)
itself, which does not refer to a series of transactions, and on the decisions
of this Court and of the Federal Court of Appeal in Singleton.
[36] It
is true that this Court has held that no recourse may be had to a series of
transactions in determining whether s. 20(1) (c) applies (Singleton,
at para. 34). However, at issue is not whether the series is relevant in a s.
20(1) (c) analysis, but rather whether it is relevant to an analysis
under s. 245(4) of the GAAR. There is no question that a court may consider a
series of transactions of which the transaction is a part in order to determine
whether the transaction results in abuse and misuse of one or more provisions
of the Act . As Noël J.A. noted, this is clear from the wording of the GAAR
provisions, and in particular from ss. 245(2) and 245(3) (b), which
contemplate the denial of a tax benefit resulting from a series of
transactions.
[37] Section
245(3) (b) indicates that an avoidance transaction is not necessarily a
transaction that results in a tax benefit on its own, but may instead be one
that is part of a series of transactions that result in a tax benefit. It
would be odd if a court could not then consider the rest of that series in
determining whether an avoidance transaction resulted in abuse and misuse of
provisions of the Act . Further, s. 245(4) states that a tax benefit may be
denied if a transaction would result “directly or indirectly” in a misuse of
the provisions of the Act or in an abuse having regard to those provisions read
as a whole. The use of the words “directly or indirectly” indicates that
Parliament intended the GAAR to apply even where abuse is an indirect result of
a transaction. It follows logically that regard may be had to the series of
transactions when determining whether a transaction within the series is
abusive; otherwise, the GAAR would apply only to transactions that directly
result in abuse and misuse. Finally, this Court agreed in Kaulius that
the s. 245(4) analysis may be conducted “in light of the series of
transactions” (para. 46; see also para. 56).
[38] The
appellants raise another objection to an “overall purpose” approach. In their
view, the Tax Court judge may have been relying on the taxpayers’ motivation,
the true economic purpose of the transactions, or their economic substance when
he adopted this approach. They submit that none of these is determinative at
this stage of the analysis (Appellants’ Factum, at para. 140). The appellants
are correct on this point: it is clear from Canada Trustco that the
proper approach under s. 245(4) is to determine whether the transaction
frustrates the object, spirit or purpose of the provisions giving rise to the
tax benefit. An avoidance purpose is needed to establish a violation of the
GAAR when s. 245(3) is in issue, but is not determinative in the s. 245(4)
analysis. Motivation, purpose and economic substance are relevant under s.
245(4) only to the extent that they establish whether the transaction
frustrates the purpose of the relevant provisions (Canada Trustco, at
paras. 57-60).
[39] Turning
to the Tax Court judge’s reasons, it is not entirely clear what Bowman C.J.T.C.
meant by “overall purpose”. He cited and applied the Canada Trustco analysis
(paras. 17-30), but also appeared, at times, to rely on the taxpayers’
motivation and on the economic substance of the transactions. For example, in
para. 31, he mentioned that the primary objective of the transactions was to
make the interest on the purchase of the house tax deductible. However, as I
mentioned above, Bowman C.J.T.C. seems to have focussed on the result of the
series of transactions. I will now turn to a review of the specific
transactions within the series at issue.
D. Abuse and Misuse
[40] According
to the framework set out in Canada Trustco, a transaction can result in
an abuse and misuse of the Act in one of three ways: where the result of the
avoidance transaction (a) is an outcome that the provisions relied on seek to
prevent; (b) defeats the underlying rationale of the provisions relied on; or
(c) circumvents certain provisions in a manner that frustrates the object,
spirit or purpose of those provisions (Canada Trustco, at para. 45). One
or more of these possibilities may apply in a given case. I should reiterate
that in a case like the one at bar, the individual tax benefits must be
analysed separately, but always in the context of the entire series of
transactions and bearing in mind that each step may have an impact on the
others, in order to determine whether any of the provisions relied upon for
each tax benefit was misused and abused.
[41] First
of all, in accordance with the analytical approach described above, we must
consider the tax benefit conferred on Mrs. Lipson by ss. 20(1) (c) and
20(3) , namely the entitlement to deduct the interest. In my opinion, the
respondent has not established that in view of their purpose, these provisions
have been misused and abused. Mr. Lipson sold his shares to his wife and bought
the residence with the proceeds of that sale (Statement of Agreed Facts and
Conclusion, at para. 12). In the result, Mrs. Lipson financed the purchase of
income-producing property with debt, whereas Mr. Lipson financed the purchase
of the residence with equity. To this point, the transactions were
unimpeachable. They became problematic when the parties took further steps in
their series of transactions. The problem arose when Mr. Lipson and his wife
turned to ss. 73(1) and 74.1(1) in order to obtain the result contemplated in
the design of the series of transactions, namely to have Mr. Lipson apply his
wife’s interest deduction to his own income. This was contrary to the purpose
of s. 74.1(1).
[42] As
I mentioned above in para. 32, the purpose of s. 74.1(1) is to prevent spouses
from reducing tax by taking advantage of their non-arm’s length relationship
when transferring property between themselves. In this case, the attribution to
Mr. Lipson of the net income or loss derived from the shares would enable him to
reduce the dividend income attributed to him by the amount of the interest on
the loan that financed his wife’s purchase of those shares. However, before the
transfer, when the dividend income was in Mr. Lipson’s hands, no interest
expense could have been deducted from it. It seems strange that the operation
of s. 74.1(1) can result in the reduction of the total amount of tax payable by
Mr. Lipson on the income from the transferred property. The only way the
Lipsons could have produced the result in this case was by taking advantage of
their non-arm’s length relationship. Therefore, the attribution by operation of
s. 74.1(1) that allowed Mr. Lipson to deduct the interest in order to reduce
the tax payable on the dividend income from the shares and other income, which
he would not have been able to do were Mrs. Lipson dealing with him at arm’s
length, qualifies as abusive tax avoidance. It does not matter that s. 74.1(1)
was triggered automatically when Mr. Lipson did not elect to opt out of s.
73(1) . His motivation or purpose is irrelevant. But to allow s. 74.1(1) to be
used to reduce Mr. Lipson’s income tax from what it would have been without the
transfer to his spouse would frustrate the purpose of the attribution rules.
Indeed, a specific anti-avoidance rule is being used to facilitate abusive tax
avoidance.
[43] My
colleague Rothstein J. agrees that the impugned transactions fall afoul of the Income
Tax Act but would nevertheless refer the reassessment back to the Minister
on the ground that the Minister ought to have relied on the specific
anti-avoidance rule in s. 74.5(11) ITA instead of the GAAR. In my
respectful view, this approach is not open to the Court in this case. Both
parties have contended from the outset and reasserted in this Court that s.
74.5(11) ITA , on which Rothstein J. rests his conclusion, does not apply
on the facts of this case.
[44] Although
I agree with Rothstein J. that this Court is not bound to adopt, on a question
of law, an interpretation on which the parties agree, it is quite another
matter to settle their dispute on a basis of a construction and an application
of the statute expressly disavowed by all parties throughout the proceedings.
Our decision must turn on the issues as framed in the proceedings and litigated
in the courts below and on appeal to this Court. The issue in these appeals was
whether the GAAR applies to the impugned transactions.
[45] In
my view, for the reasons set out above, the GAAR applies to these transactions.
It is true that courts should avoid extending the GAAR beyond its statutory
purpose. But, bearing this purpose in mind, where the language of and
principles flowing from the GAAR apply to a transaction, the court should not
refuse to apply it on the ground that a more specific provision — one that both
the Minister and the taxpayers considered to be inapplicable throughout the
proceedings — might also apply to the transaction.
[46] In
this context, I need not decide whether the taxpayers could have succeeded
under s. 74.5(11) ITA . I seriously doubt that that provision would have
properly addressed the complex series of transactions before this Court in the
present appeals. It may have been mentioned in factums and in questions at the
hearing, but its interpretation and application were not the issues litigated
by the parties in this case. The GAAR was and remains the focus of the present
appeals. I would leave the issue of the interpretation of s. 74.5(11) ITA for
another day.
[47] In
the end, the parties focussed on the application of the GAAR, which was the
proper basis for the reassessment. The GAAR is a residual provision, but it is
designed to address the complexity of transactions which fall outside the scope
of specific anti-avoidance provisions. As I mentioned above, it relates
specifically to the impact of complex series of transactions which often depend
on the interplay of discrete provisions of the ITA . The Minister could
properly use the GAAR in respect of a series of transactions that had an impact
on more than just one stream of income.
[48] In
summary, the tax benefit of the interest deduction resulting from the
refinancing of the shares of the family corporation by Mrs. Lipson is not
abusive viewed in isolation, but the ensuing tax benefit of the attribution of
Mrs. Lipson’s interest deduction to Mr. Lipson is. It follows that this latter
tax benefit can be denied under s. 245(2), which is triggered because the
transactions in the series include the attribution of the interest deduction
under s. 74.1(1) and this attribution frustrates the object, spirit and purpose
of that provision. I must now briefly consider the tax consequences of the
denial of the tax benefit and the application of the GAAR.
E. Determination of the Tax
Consequences of the Application of Section 245(2)
[49] The
Minister seeks to deny the deductibility of the interest expense in the hands
of Mr. Lipson, while still attributing the dividend income back to him (see
Transcript, at p. 40). The appellants respond that such an outcome is
impossible, since s. 74.1(1) only attributes the income or loss back to the
transferor (see Transcript, at p. 22). Thus, the tax consequences of the
application of s. 245(2) are in issue here.
[50] Section
245(5), without restricting the generality of s. 245(2), sets forth a scheme
for determining the tax consequences of the application of that provision.
Section 245(5) reads as follows:
245. . . .
(5) Without restricting the generality of subsection
(2), and notwithstanding any other enactment,
(a) any deduction, exemption or exclusion in computing
income, taxable income, taxable income earned in Canada or tax payable or any
part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, exemption or exclusion, any
income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be
recharacterized, and
(d) the tax effects that would otherwise result from
the application of other provisions of this Act may be ignored,
in determining the tax consequences to a person as is reasonable in
the circumstances in order to deny a tax benefit that would, but for this
section, result, directly or indirectly, from an avoidance transaction.
[51] When
considering the application of s. 245(5), a court must be satisfied that there
is an avoidance transaction that satisfies the requirements of s. 245(4), that
s. 245(5) provides for the tax consequences and that the tax benefits that
would flow from the abusive transactions should accordingly be denied. The
court must then determine whether these tax consequences are reasonable in the
circumstances. In the present case, disallowing the interest deduction in
computing the income or loss attributed to Mr. Lipson and attributing that
deduction back to Mrs. Lipson is a reasonable outcome.
F. Uncertainty and the
GAAR
[52] The
appellants and several commentators have warned of the potential for
uncertainty should this Court find that the GAAR applies in the instant case.
The appellants argue that to maintain certainty for taxpayers, the direct use
of the borrowed funds — as determined by tracing — should be determinative of
whether the GAAR applies to deductions claimed under s. 20(1) (c)
(Appellants’ Factum, at para. 82). As I mentioned above, such an approach
would effectively read the GAAR out of the ITA , since the “direct use”
test applies only to determine whether interest is deductible under s. 20(1) (c)
and involves an inquiry that is distinct from the one under s. 245 , in which it
must be asked whether otherwise valid transactions, such as those in Singleton
and in the present case, frustrate the object, spirit and purpose of the
provisions relied on. Indeed, contrary to the judgments in Canada Trustco
and Kaulius, my colleague Binnie J. essentially guts the GAAR and reads
it out of the ITA under the guise of an exercise in legal
interpretation. To the extent that it may not always be obvious whether the
purpose of a provision is frustrated by an avoidance transaction, the GAAR may
introduce a degree of uncertainty into tax planning, but such uncertainty is
inherent in all situations in which the law must be applied to unique facts.
The GAAR is neither a penal provision nor a hammer to pound taxpayers into
submission. It is designed, in the complex context of the ITA , to
restrain abusive tax avoidance and to make sure that the fairness of the tax
system is preserved. A desire to avoid uncertainty cannot justify ignoring a
provision of the ITA that is clearly intended to apply to transactions
that would otherwise be valid on their face.
[53] I
would therefore dismiss the appeal of Earl Lipson with costs in this Court.
Given the agreement between the parties, I would also dismiss the appeal of
Jordan B. Lipson with costs in this Court.
The reasons of Binnie and Deschamps JJ. were
delivered by
[54] Binnie J. (dissenting) — How healthy is
the Duke of Westminster? There is cause for concern. Although this
Court in Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2
S.C.R. 601, affirmed, at para. 11, the continuing viability of the principle
that taxpayers are entitled to arrange their affairs to minimize the amount of
tax payable (a principle enshrined in Commissioners of Inland Revenue v. Duke
of Westminster, [1936] A.C. 1 (H.L.)), the traditional approach is now
tempered by the application of the general anti-avoidance rule (“GAAR”). The
question in these appeals, as it was in Canada Trustco, is where the
appropriate balance is to be struck.
[55] The
GAAR is a weapon that, unless contained by the jurisprudence, could have a
widespread, serious and unpredictable effect on legitimate tax planning. At
the same time, of course, the GAAR must be given a meaningful role. That role
is circumscribed by the requirement in s. 245(4) of the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp .), that the transactions not only be shown to be
“avoidance transaction[s]”, i.e. transactions structured primarily to obtain a
tax benefit, but in addition that the Minister demonstrate that the tax
benefit results from a misuse/abuse of the provisions of the Act relied upon to
produce it.
[56] The
tax plan at issue in this case is “Singleton with a spousal dimension” —
or Singleton with a twist — see Singleton v. Canada, 2001 SCC 61,
[2001] 2 S.C.R. 1046. In that case, the taxpayer used $300,000 of existing
equity in his law firm to purchase a house. He refinanced his law firm equity
with borrowed money. He deducted the interest on the loan claiming that the
borrowed money now represented his investment in the law firm. Despite the
Minister’s objection, our Court held that he was entitled to do so.
[57] Singleton
was not a GAAR case, and it did not involve the spousal attribution rules. Its
outcome turned on the Court’s view of s. 20(1) (c) interest
deductibility. Nevertheless, it is important to emphasize at the outset that
the Minister is not asking the Court to revisit Singleton. He does not
claim that the GAAR would have applied on the facts of that case.
[58] In
the Statement of Agreed Facts and Conclusion, the Minister acknowledged that it
is common ground that the interest was deductible (para. 15). Applying Singleton,
the only question is whether the deduction becomes “abusive” when income or
losses are attributed back to the transferor (appellant) by the spousal
attribution rules in ss. 73(1) and 74.1(1) .
[59] In
my opinion, the spousal “twist” added to Singleton should not cause the
entire series of transactions to be characterized as abusive. After all, there
is nothing in the Act to discourage the transfer of property at fair market
value between spouses. Indeed, by allowing a spouse to transfer property to the
other spouse at the transferor’s adjusted cost base, Parliament intended to
make such transfers attractive. If the tax plan in Singleton is not
abusive, I do not believe the Minister has established that Singleton
with a spousal twist is abusive tax avoidance either. I would therefore allow
the appeals.
Overview
[60] My
colleague LeBel J. concludes that the series of transactions in the two appeals
at issue here not only amounted to tax avoidance (which it was conceded to be)
but abusive tax avoidance in the GAAR sense that the series of
transactions initiated by the husband’s sale of dividend-producing shares to
his wife, and ending with his deduction of the interest on the loan used to
fund the share acquisition, frustrated “the object, spirit or purpose of one or
more of the provisions relied on by the taxpayer” (para. 2). It is true that by
means of a series of transactions, the appellant turned the equity in his
shares into the part purchase (with his wife) of a house, but as stated, Singleton
illustrates the proposition that there is nothing abusive in principle for a
taxpayer to rearrange his or her capital (borrowed or non-borrowed) in a tax
efficient manner.
[61] My
colleague Rothstein J. finds in s. 74.5(11) a sort of deus ex machina to
dispose of the appeals on a basis not advanced by any of the parties. When
asked at the hearing of the appeal by Rothstein J. about the possible
application of s. 74.5(11) , counsel for the Minister stated that in the
Minister’s view s. 74.5(11) “did not address the particular problem[s] of this
case” because “the transfer of the shares by the appellant to the wife was not
merely to reduce the tax payable on any future dividends. It was really to get
the interest expense up to the appellant” (Transcript, at p. 41). The Minister
was not prepared even to argue as a matter of fact “that one of the main
reasons for the transfer or loan was to reduce the amount of tax that would,
but for this subsection, be payable” within the meaning of s. 74.5(11) . The
appellant taxpayer was not called on to meet a case under s. 74.5(11) and I do
not believe we should assume a factual basis for the application of s. 74.5(11)
(“one of the main reasons”) which none of the parties was prepared to
support. The Minister defends the disputed reassessment squarely on the basis
of the GAAR. The appellant responds that the GAAR, in its own terms, has no
application. The proper limits of the GAAR raise questions of considerable
interest to both taxpayers and tax collectors. I believe we should respond to
these questions and leave the more narrowly circumscribed role of s. 74.5(11)
to another day when one or other of the parties sees fit to allege a factual
basis for its application.
[62] The
Minister takes the selective view that while it was perfectly appropriate for
s. 74.1(1) to attribute the net dividend income to increase the tax payable by
the appellant, it was abusive for s. 74.1(1) to attribute the losses to him,
even though, as I see it, (i) the losses and income were both associated with
the same transferred shares, (ii) whether the transfer resulted in net income
or loss depended on the fluctuating dividends generated by the shares from year
to year and (iii) s. 74.1(1) itself draws no distinction between the
attribution of “income or loss[es]”. Counsel for the Minister maintains that
“[i]t is perfectly logical that the attribution rule works to attribute back
the net income and that application of the GAAR then denies the interest
deduction, under 245(2)” (Transcript, at p. 40). With respect, once it is
accepted (as it was here by the Federal Court of Appeal) that the wife borrowed
money from the bank to purchase the shares, which qualified the interest as
deductible under s. 20(1) (c), and that the subsequent bank borrowing
secured by a mortgage on the house constituted a refinancing of the original
share purchase loan under s. 20(3) , which is the result anticipated by Singleton,
I do not believe that the Minister has shown that the application of the
spousal attribution rules to the appellant by operation of law was abusive even
though, in the end result, it produced the intended tax benefit. To hold
otherwise is to say that whereas it is legitimate for a taxpayer to rearrange
his or her capital (borrowed or non-borrowed) in a tax efficient manner, it
becomes abusive when the rearrangement involves a sale of property at fair
market value between spouses. Introduction of the spousal element, according
to the Minister, forfeits the s. 20(1) (c) interest deduction otherwise
available under Singleton. Neither spouse in this case is to be allowed
the benefit even though, under our system of tax assessment, each spouse is
taxed individually. As observed in Jabs Construction Ltd. v. The Queen,
99 D.T.C. 729 (T.C.C.): “Section 245 is an extreme sanction. It should not be
used routinely every time the Minister gets upset just because a taxpayer
structures a transaction in a tax effective way, or does not structure it in a
manner that maximizes the tax” (para. 48).
Identification of the Alleged Abuse
[63] The
GAAR declares that a transaction or series of transactions which comply with
the letter of the Income Tax Act may nevertheless be disallowed if the
result is directly or indirectly “a misuse of the provisions [of the
Act ] or . . . an abuse having regard to [the] provisions [of this Act ],
other than this section, read as a whole” (s. 245(4) ). The principles
governing the application of the GAAR were considered by the Court in the
companion cases of Canada Trustco, where the GAAR was held not to be
applicable, and Mathew v. Canada, 2005 SCC 55, [2005] 2 S.C.R. 643 (“Kaulius”),
where the GAAR was applied to disallow deductions claimed by the taxpayers. Canada
Trustco recognized that the line between legitimate tax minimization and
abusive tax avoidance is “far from bright” (para. 16). This has proven to be
an understatement, and must be read together with the rule in Canada Trustco
that
[i]f the existence of abusive tax avoidance is unclear, the benefit
of the doubt goes to the taxpayer. [para. 66, point 3]
[64] In
my view, when the series of transactions at issue in this case is properly
characterized, it is a tax avoidance scheme that falls on the Canada Trustco
side of the line, and should not have been found to be abusive under the GAAR.
[65] Here,
as in Canada Trustco and Kaulius, it is clear that the series of
transactions in question produced a tax benefit in some years for the
appellant, and that the “shuffle of cheques” (as these schemes are sometimes
characterized) was designed to obtain a tax benefit. Nevertheless the following
cautionary observations in Canada Trustco are pertinent:
The courts cannot search for an overriding policy of the Act
that is not based on a unified, textual, contextual and purposive
interpretation of the specific provisions in issue. . . . To send the
courts on the search for some overarching policy and then to use such a policy
to override the wording of the provisions of the Income Tax Act would
inappropriately place the formulation of taxation policy in the hands of the
judiciary . . . .
Second, to search for an overriding policy of the Income
Tax Act that is not anchored in a textual, contextual and purposive
interpretation of the specific provisions that are relied upon for the
tax benefit would run counter to the overall policy of Parliament that tax law
be certain, predictable and fair, so that taxpayers can intelligently order
their affairs. [Emphasis added; paras. 41-42.]
Counsel for the Minister argues that the appellant “wanted to take
advantage of the tax-free rollover. He wanted to sell the shares to his wife
in order to trigger the income-earning use, but he didn’t want the consequences
that a sale of shares would normally carry with it” (Transcript, at p. 47).
But this is precisely the outcome contemplated by Parliament when it enacted
the spousal attribution rules. The outcome was not so much an abuse “of the
specific provisions” as it was a fulfilment of them. The Minister’s argument
paints with too broad a brush. Canada Trustco requires him to identify
the misuse and abuse of an “object, spirit or purpose” that is “anchored in a
textual, contextual and purposive interpretation of the specific
provisions that are relied upon for the tax benefit” (para. 42 (emphasis
added)). By ignoring the initial sale of shares and recharacterizing the
interest payment in relation thereto as nothing more than interest on a house
mortgage, and effectively arguing for a stand-alone prohibition on the
deductibility of a house mortgage interest (despite Singleton), the
Minister, with respect, engages in the sort of vague appeal to “overriding
policy” or “overarching policy” that Canada Trustco sought to eliminate
from the GAAR analysis (para. 41).
[66] The
Minister argues that Mr. Lipson’s use of the attribution rules was abusive
because he used them to reduce his tax. At the same time, his counsel readily
acknowledged at the hearing that s. 74.1(1) can operate to transfer a
loss from the lower income spouse up to the higher income spouse (Transcript,
at p. 46), thereby opening the door to the higher income spouse (in this case
Mr. Lipson) to reduce his tax (see further para. 75 below). Of course Mr.
Lipson obtained a tax benefit in some years but the Minister’s proposition
would, in this respect, further blur the distinction under the GAAR between tax
avoidance and abusive tax avoidance. As Canada Trustco states:
Even if an avoidance transaction is established under the s.
245(3) inquiry, the GAAR will not apply to deny the tax benefit if it may be
reasonable to consider that it did not result from abusive tax avoidance under
s. 245(4) , as discussed more fully below. [para. 35]
[67] In
my opinion the Minister has failed to identify a specific policy shown to be
frustrated by the appellant’s plan. The approbation by the Court of the
Minister’s resort to vague generalities or “overriding policy” would only
increase the element of uncertainty in tax planning that Canada Trustco
sought to avoid.
The Series of Transactions
[68] In
order to gain a proper appreciation of the context in which abuse is alleged to
have resulted, it is useful to identify each distinct legal step in the series
of transactions, and relate that step to the relevant provision of the Income
Tax Act . Of course, in the GAAR analysis, the entire series of
transactions must ultimately be taken into consideration to determine whether
the tax benefit results from an abuse of the provisions relied upon.
[69] Counsel
for the Minister concedes that the GAAR does not permit the re-characterization
of these individual transactions. “[E]ach transaction has to be respected for
what it is” (Transcript, at p. 35).
[70] At
the outset, the appellant owned a substantial block of stock in Lipson Family
Investments Ltd. (which I will refer to as “Holdco”). At the conclusion of the
series of transactions, he was no longer the owner of $562,500 of the stock.
It had been sold to his wife, Jordanna, at what the Minister does not dispute
was fair market value.
[71] The
wife did not have the cash on hand to buy the shares, so she took out a
$562,500 bank loan. I agree with the Federal Court of Appeal that, viewed in
isolation, the interest on this loan was clearly deductible under s. 20(1) (c)
of the Act as money borrowed to acquire an income-producing asset, i.e. the
shares in Holdco. Noël J.A. wrote:
Jordanna having acquired an income producing asset and having
financed the cost of acquisition, there is an obvious link between the borrowed
money and a current eligible use. As such, paragraph 20(1) (c) cannot be
said to have been misused.
(2007 FCA 113, [2007] 4 F.C.R. 641, at para. 40)
In other words, deductibility of the interest on the share purchase
loan satisfied both the letter and the spirit of s. 20(1) (c).
[72] Prior
to the share purchase, but plainly as part of the same series of transactions,
the appellant and his wife agreed to purchase a house for $750,000. On
closing, the Lipsons took out a $562,500 mortgage whose proceeds were used to
pay off the wife’s bank loan. The advantage to the bank of this refinancing
was that the $562,500 loan was now secured by a $750,000 house. The Minister
concedes that the $562,500 mortgage loan is properly considered to be a
refinancing of the $562,500 stock purchase loan. (It is true that the husband
was co-charger on the mortgage, but this was necessarily so, given his joint
ownership interest in the $750,000 house.) Interest payments were made from a
joint account. There is no evidence about the source of funds going into that
account. The Minister concedes that viewed in isolation s. 20(3) properly
applied to preserve the deductibility of the interest payments. If the
Minister’s position were otherwise, the parties would be arguing about
deductibility under s. 20(3) , not the GAAR.
[73] Deductibility
is based on the use of the borrowed funds prior to the refinancing (in this
case the purchase of income-producing shares), not on the nature of the
security eventually provided to secure the refinanced borrowings. Again, I
agree with the Federal Court of Appeal that, viewed in isolation, the
refinancing of the share purchase loan preserved the deductibility of the
interest payments. Noël J.A. wrote:
In this case, the mortgage loan was used to repay the money
which had been previously borrowed to purchase the shares. As such, the text,
context and purpose of subsection 20(3) , is to attribute to the mortgage loan
the same purpose as the demand loan. Again, ignoring the overall purpose
identified by Bowman C.J., I see no basis for holding that there has been an
abuse or a misuse of that provision. [para. 42]
[74] At
this point, in the sequence of events, the choice offered by Parliament in s.
73(1) presents itself, as explained by Bowman C.J.T.C.:
Subsection 73(1) has as its purpose the facilitation of
inter-spousal transfers of property without immediate tax consequences. Such
transfers, in the case of non-depreciable property, are deemed to take place at
the transferor’s [adjusted cost base] unless the transferor elects to have
subsection 73(1) not apply.
(2006 TCC 148, [2006] 3 C.T.C. 2494, at para. 21)
The appellant could have elected not to enjoy the s. 73(1)
rollover. In that event, the disposition of the shares would have been subject
to the capital gains tax provisions. However, he did not make that election,
and as the Federal Court of Appeal held, per Noël J.A.:
Subsection 73(1) also operated as intended. The shares were
transferred from the appellant to Jordanna on a rollover basis (i.e., at the
appellant’s [adjusted cost base]) and any future gain or loss resulting from
the disposition of the shares by Jordanna will be attributed back to the
appellant. [para. 37]
[75] Since
the appellant did not opt out of s. 73(1) , any income or loss from the shares in
the hands of Jordanna are deemed to be that of the appellant pursuant to s.
74.1(1) of the Income Tax Act . This is understandable. If for tax
purposes there is no realization of the property, then for tax purposes
Parliament has decided that the income or losses should stay with the
transferor.
[76] My
colleague LeBel J. states that “the purpose of s. 74.1(1) is to prevent spouses
from reducing tax by taking advantage of their non-arm’s length relationship
when transferring property between themselves” (para. 42). This concept of an
abuse of s. 74.1(1) is so broad that it would include interspousal transfers of
assets at fair market value for bona fide economic reasons. It offers,
I think, too large a field of operation for the GAAR. The reality is that such
a reduction in the total amount of tax is the likely result of any interspousal
rollover from a higher income spouse to a lower income spouse, a result that s.
74.1 plainly contemplates. Nowhere in the provisions at issue does Parliament
indicate that attribution of a loss could only be made from lower income
spouses to higher income spouses. On the contrary, even counsel for the Minister
acknowledged at the hearing that
there could be a situation where it is the lower-income spouse
transferring a loss up to the higher-income spouse. It can work both ways and
that is why you have “income or loss.” [Transcript, at p. 46]
Further, it seems that my colleague’s definition of s. 74.1(1) abuse
is framed broadly enough to include any debt-financed transfer of assets
between spouses where the tax consequences are attributed back to the
transferor spouse, whether such attribution happens because the transferor
fails to make the election out of s. 73(1) or because the election is not
available in the circumstances. This too gives the GAAR too wide a field of
potential operation, in my view.
[77] The
focus of my colleague’s analysis is the appellant’s ability to deduct the
interest expense against dividend income, and thus to reduce his taxable income
from what it would have been if the series of transactions had never taken
place. Yet the Minister seems to concede that the Singleton deduction per
se is not abusive. And as well, the Minister seems to accept that the
deduction would not be abusive if the “income or loss” had been left in the
wife’s hands. Before the transactions in Singleton occurred, it will be
recalled, Singleton was responsible for the tax consequences of his partnership
stake and there was no interest deduction. Then he withdrew his stake, spent
the proceeds on a house, and borrowed money to deposit back into the
partnership. The end result was that the partnership stake remained with
Singleton — along with a new interest deduction. If the interest deduction is
not per se abusive, I do not believe the Minister has shown why it
becomes abusive with the addition of a spousal rollover that operates precisely
as it was intended by Parliament to operate.
[78] When
Parliament used the words “income or loss” in s. 74.1(1) , it expressly
contemplated that regardless of the relative income of the spouses, interest
expenses incurred by the transferee (here the wife) will in the circumstances
dictated by Parliament be attributed to the transferor (here the appellant).
Section 74.1(1) does not change the ownership of the property. It simply
attributes the net income or loss arising from the transferred property to the
transferor in circumstances where the transferor has decided not to opt for a
deemed disposition and thereby risk capital gains tax.
[79] Parliament
recognized that an attribution back to the transferor spouse might be
inappropriate in some circumstances. The attribution rules include an
anti-avoidance provision. Section 74.5(11) provides that the spousal
attribution rules
do not apply to a transfer or loan of property where it may
reasonably be concluded that one of the main reasons for the transfer or loan
was to reduce the amount of tax that would, but for this subsection, be payable
under this Part on the income and gains derived from the property or from
property substituted therefor.
The Minister made no attempt to bring this case within s. 74.5(11)
(Respondent’s Factum, at para. 45).
[80] In
an effort to identify the “object, spirit or purpose” of s. 74.1(1) abused by
the appellant’s plan, my colleague LeBel J. states, as mentioned, that “the
attribution rules in ss. 74.1 to 74.5 are anti-avoidance provisions whose
purpose is to prevent spouses (and other related persons) from reducing tax by
taking advantage of their non-arm’s length status when transferring property
between themselves” (para. 32). In my respectful view, what LeBel J. believes
s. 74.1(1) is designed to prevent is actually a reasonable statement of
what s. 74.1(1) seeks to permit. This case, as my colleague appears to
acknowledge at para. 32, is not about income splitting. The taxpayer’s evident
purpose was to postpone capital gains tax on the transfer of property to the
wife while in the meantime allowing any “income or loss[es]” to be attributed
to himself.
[81] My
colleague further says at para. 42 that “[t]he only way the Lipsons could have
produced the result in this case was by taking advantage of their non-arm’s
length relationship.” I agree, but, far from constituting an indicia of
abuse, the spousal relationship is precisely the reason Parliament permits the
attribution of income or loss back to the transferor. In other words, in my
respectful view, the tax consequence my colleague condemns is precisely the
consequence called for by s. 74.1(1) unless the taxpayer opts out. Thus, in
the view of Noël J.A. writing for the Federal Court of Appeal:
Considering the transactions as they unfolded, the
purposes of subsections 74.1(1) and 73(1) were fulfilled. The appellant
(presumably in a higher tax bracket his counsel suggests) transferred the
shares to his spouse with the result that (pursuant to subsection 74.1(1) ) any
income or loss incurred by Jordanna with respect to the shares was attributed
back to the appellant. [Emphasis added; para. 36.]
I agree with the Federal Court of Appeal to the extent that it
recognized that the specific purposes of ss. 74.1(1) and 73(1) were fulfilled,
not abused. In my view, moreover, the additional fact that the attribution
occurred as part of a Singleton “shuffle” does not render the “series of
transactions” abusive unless the Singleton shuffle itself is abusive,
which is a position the Minister declined to advance.
[82] In
one of the three years at issue, the appellant’s failure to opt out resulted in
an increase in the appellant’s income. In 1995, the taxable dividend
paid on the transferred shares and attributed to him under s. 74.1(1) exceeded
the interest expense paid on the loan. In the other two years (1994 and 1996),
the interest expense exceeded the Holdco dividends. Whether or not the
appellant suffers a loss or gains additional income in any particular taxation
year depends on the fluctuating amount of the dividends. There was no evidence
about the dividend practice or policy of Holdco.
[83] In
the Minister’s view, apparently, the spousal attribution rules provided in this
case a narrow bridge over which income may pass, but not losses.
Identification of the “Overall Purpose”
[84] Having
accepted that none of the transactions in the series, taken in isolation,
offended the letter or intent of the tax provisions relied upon by the
appellant, the Federal Court of Appeal nevertheless upheld the Tax Court on the
basis of the view of the trial judge that “[t]he overall purpose of the scheme
obviously was to make the interest on the mortgage on the home deductible by
Earl” (Bowman C.J.T.C., at para. 8). Again, at para. 23, the Tax Court judge
stated:
The overall purpose as well as the use to which each individual
provision was put was to make interest on money used to buy a personal
residence deductible.
This, of course, is the issue subsequently decided in the taxpayer’s
favour by Singleton.
[85] The
Federal Court of Appeal saw nothing wrong with the “overall purpose” approach
taken by the Tax Court judge:
Bowman C.J. was entitled to consider the transactions as a whole and
their overall purpose in the conduct of his misuse and abuse analysis and to
give this factor the weight that he did. [para. 43]
[86] While
Canada Trustco requires deference to Tax Court judges who have
“proceeded on a proper construction of the provisions of the Income Tax Act ”
(para. 66), in my view the “overall purpose” approach that he adopted, and the
Federal Court of Appeal accepted, was an error of law that invites our
intervention. Identification of “purpose” is relevant to a determination under
s. 245(3) about whether the impugned transaction is or is not an “avoidance
transaction”. The appellant conceded before the Federal Court that it was
a tax-avoidance scheme. The focus therefore shifts to s. 245(4) which
disallows a tax benefit that would, but for the GAAR, “result directly
or indirectly in a misuse [or] abuse”. At that stage, the principal focus is
on results, not purpose.
[87] Moreover,
it is not sufficient, in my view, for the Minister to offer a general “overall”
conclusory snapshot of the series of transactions without regard to the legal
relationships thereby created. Here, as in Singleton, there was a
change in the taxpayer’s position with real economic substance. The wife
became owner of the shares. Apart from the spousal attribution rules, which
applied automatically as a result of the appellant’s failure to opt out of s.
73(1) , she would have been taxed on the dividends, and she would have been
taxed on the capital gain or loss on the shares when she sold them. While many
spouses regard themselves as forming an economic unit, the rate at which
spousal units implode serves as a reminder that the economic union of marriage
is neither indissoluble nor free of risk. As the Federal Court of Appeal
wrote:
In this case, Jordanna borrowed money to acquire shares which
had the potential to produce and did produce non-exempt income. The change in
the respective ownership positions of the appellant and his spouse is real from
both a legal and an economic perspective, and this is unaltered by the distinct
treatment which the attribution rules provide for the purposes of the Act . The
shares no longer belong to the appellant; they belong to Jordanna. [para. 39]
See also M. Thivierge, “GAAR Redux: After Canada Trustco”, in Report
of Proceedings of the Fifty-Eighth Tax Conference (2007), 4:1; F. Ahmed and
C. Priede, “Case Comment — Lipson v. Canada” (2007), 17 Can. Curr.
Tax 77; and T. E. McDonnell, “The Relevance of ‘Overall Purpose’ in a GAAR
Analysis” (2007), 55 Can. Tax J. 720.
The Spousal Attribution Rules
[88] Section
74.5(1) provides that the spousal attribution rules do not apply where an
individual transfers property to his or her spouse at fair market value and
elects out of the s. 73(1) spousal rollover. The spousal attribution rules do
apply if the transferor does not elect out of the spousal rollover (as
was the case here). Thus, by operation of the spousal attribution rules in ss.
73(1) and 74.1(1) , the losses associated with the shares in Holdco were
attributed to the appellant.
[89] My
colleague LeBel J. concludes that the only provision of the Income Tax Act
for which the Minister had established abuse contrary to the GAAR is s. 74.1(1)
because “the attribution by operation of s. 74.1(1) that allowed Mr. Lipson to
deduct the interest in order to reduce the tax payable on the dividend income
from the shares and other income, which he would not have been able to do were
Mrs. Lipson dealing with him at arm’s length, qualifies as abusive tax
avoidance” (para. 42). This conclusion it seems to me, with respect, gives the
GAAR a sweeping effect not contemplated in Canada Trustco or Kaulius.
[90] Counsel
for the Minister says that in this case, unlike Singleton, there was no
rearrangement of capital:
Unlike Mr. Singleton, who had cash sitting in his partnership and
was then able to take a mortgage out on his house, Mr. Lipson doesn’t have
those options because he has only one pot of money, and that is borrowed money.
At the end of the day he uses that borrowed money to buy the house.
[Transcript, at p. 53]
The Minister’s argument simply ignores the initial step in the
“series of transactions”, whereby the appellant did in fact and in law sell his
dividend-generating shares to his wife at fair market value. I do not believe
that Singleton can be distinguished on the basis suggested by the
Minister. While the legal relationships actually created by the taxpayer do
not control the application of the GAAR, they cannot be ignored.
[91] Kaulius
states that “the entire factual context of the series of transactions” must be
considered and applied to the provisions, properly interpreted (para. 59). If
the Minister wished to contend that the share sale was a sham, it was open to
him to make the argument, but he didn’t, and it must therefore be accepted as
an essential part of the “series of transactions”.
Was There an Abuse of Section 74.1(1) ?
[92] In
my view, Parliament must have contemplated that by giving taxpayers a choice
under s. 73(1) , they would exercise it in a tax-minimizing manner. Once it is
accepted that interest is deductible under Singleton, the Minister’s
argument is simply that the appellant’s tax plan offended the “object, spirit
or purpose” of the spousal attribution rules when the interest deduction was
attributed to him by the operation of s. 73(1) and the application of s.
74.1(1) . The appellant’s counsel suggests that “[t]he attribution rules will
always offend the Crown when there is a reduction of tax by virtue of their
application” (Transcript, at p. 23). This seems a plausible summary of the
Minister’s position in this case.
[93] I
have already stated the reasons for my conclusion that far from offending the
“object, spirit or purpose” of the spousal attribution rules, the appellant’s
tax plan fulfilled them, or at a minimum did not abuse them.
The Onus Is on the Minister to Establish Abuse
[94] Canada
Trustco is emphatic that the GAAR “was enacted as a provision of last
resort” (para. 21), and Parliament “intends taxpayers to take full advantage of
the provisions of the Income Tax Act that confer tax benefits” (para.
31). The onus of establishing abuse is on the Minister to identify with some
precision the “object, spirit or purpose” frustrated by the impugned series of
transactions.
[95] As
mentioned earlier, the Minister in the Statement of Agreed Facts and
Conclusion acknowledged that the interest was deductible. It is also clear
that by virtue of s. 20(3) , what is being deducted (despite the refinancing) is
correctly characterized for tax purposes as the interest on the original share
purchase loan. The only question was whether the deductions available to the
wife became abusive when attributed by s. 74.1(1) to the appellant.
[96] My
colleague LeBel J. says that the foregoing analysis would essentially “gu[t]”
the GAAR provision and “reads it out of the ITA ” (para. 52), but, with
respect, this seems a somewhat apocalyptic verdict on a disagreement about
whether or not the Minister has met his onus of demonstrating abuse of a
specific “object, spirit or purpose” arising out of the “specific provisions”
relied upon by the taxpayers to claim the tax benefit. It cannot be right that
whenever a lower income spouse borrows money to purchase shares from a higher
income spouse there is an abuse of the spousal attribution rules unless the
transferring spouse opts out of ss. 73(1) and 74.1(1) , and thereby forfeits a
tax benefit clearly available under the Act . As stated in Canada Trustco:
Where Parliament has specified precisely what conditions must be
satisfied to achieve a particular result, it is reasonable to assume that
Parliament intended that taxpayers would rely on such provisions to achieve the
result they prescribe. [para. 11]
[97] In
Kaulius, at para. 58, the Court was satisfied that “[i]nterpreted
textually, contextually and purposefully”, the partnership provisions of the Income
Tax Act were abused by a series of transactions under which a trust company
purported to “sell” unrealized losses to unrelated parties who were entirely at
arm’s length. The Court stated that the “abusive nature of the transactions
[in issue was] confirmed by the vacuity and artificiality” of the transactions
which, in the result, “frustrated Parliament’s purpose of confining the
transfer of losses such as these to a non-arm’s length partnership” (para.
62). In this case, the sale of the shares in Holdco was neither vacuous nor
artificial. No specific policy was frustrated or defeated by the series of
transactions, for the reasons already discussed, in my opinion.
[98] The
question here is not whether the series of transactions constituted a tax
avoidance scheme. Clearly it did. The appellant readily admits it. However, Canada
Trustco says that
a finding of abuse is only warranted where the opposite conclusion —
that the avoidance transaction was consistent with the object, spirit or
purpose of the provisions of the Act that are relied on by the taxpayer —
cannot be reasonably entertained. In other words, the abusive nature of the
transaction must be clear. [para. 62]
I do not believe the Minister has shown that the abusive nature of
this transaction is “clear”. The application of the GAAR in these
circumstances, in my respectful view, means paying lip service to the Duke
of Westminster principle without taking seriously its role in promoting
consistency, predictability and fairness in the tax system.
Disposition
[99] I
would therefore allow the appeals, with one set of costs throughout.
The following are the reasons delivered by
Rothstein
J. (dissenting) —
Introduction
[100] I
have had the benefit of reading the reasons of my colleagues Binnie J. and
LeBel J. I am in agreement with their analyses insofar as ss. 20(1) (c)
and 20(3) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“Act ”),
are concerned. There is no reason why taxpayers may not arrange their affairs
so as to finance personal assets out of equity and income earning assets out of
debt.
[101] However,
I am unable to agree with either of my colleagues’ approaches to the
attribution rules.
[102] With
respect to the views of my colleague, LeBel J., I do not believe it was
appropriate for the Minister to rely on the general anti-avoidance rule
(“GAAR”) in this case. In my opinion, the GAAR does not apply here because
there is a specific anti-avoidance rule that pre-empted its application. Had
the Minister reassessed Mr. Earl Lipson using the relevant specific
anti-avoidance provision, s. 74.5(11) , the tax benefit that resulted from Mr.
Lipson’s use of the attribution rules would have been precluded.
[103] I
agree with Binnie J. that the GAAR does not apply in this case. However, I am
unable to agree with his reasons because in my view they do not take account of
s. 74.5(11) of the Act . He says, at para. 66:
. . . s. 74.1(1) can operate to transfer a loss from the lower
income spouse up to the higher income spouse (Transcript, at p. 46), thereby
opening the door to the higher income spouse (in this case Mr. Lipson) to
reduce his tax. [Emphasis deleted.]
While s. 74.1(1) permits a net loss to be transferred between
spouses, this section must be read harmoniously with s. 74.5(11) . I agree with
Binnie J. that the attribution of a net loss from a lower income spouse to a
higher income spouse can occur, in some cases. However, this is not the case
where, as here, s. 74.5(11) precludes the attribution of the net loss because
one of the main reasons for the transfer of the shares was to reduce the amount
of tax that would be payable on the dividend income derived from the shares. By
not addressing s. 74.5(11) , Binnie J.’s reasons leave the inaccurate impression
that because the GAAR did not apply in this case, nothing in the Act prevented
the attribution of the net loss to Mr. Lipson.
Analysis
The Relationship Between the GAAR and Section 74.5(11)
[104] In
my opinion, the Minister could not reassess Mr. Lipson’s use of the attribution
rules on the basis of the GAAR. The Minister can only resort to the GAAR when
he has no other recourse. In Canada Trustco Mortgage Co. v. Canada, 2005
SCC 54, [2005] 2 S.C.R. 601, McLachlin C.J. and Major J. stated at para. 21:
The GAAR was enacted as a provision of last resort in order to
address abusive tax avoidance, it was not intended to introduce uncertainty in
tax planning.
In my respectful view, the Minister did have other recourse in this
case.
[105] Section
74.5(11) provides:
Notwithstanding any other provision of this Act, sections
74.1 to 74.4 do not apply to a transfer or loan of property where it may
reasonably be concluded that one of the main reasons for the transfer or loan
was to reduce the amount of tax that would, but for this subsection, be payable
under this Part on the income and gains derived from the property or from
property substituted therefor.
Section 74.5(11) is a specific anti-avoidance rule that precludes
the use of the attribution rules where one of the main reasons for the transfer
of property was to reduce the amount of tax that would be payable on the income
derived from the property. As I will explain, that is what occurred here.
[106] The
fact that the GAAR is a provision of last resort is indicated by the words of
s. 245 itself. Section 245(2) provides:
Where a transaction is an avoidance transaction, the tax
consequences to a person shall be determined as is reasonable in the
circumstances in order to deny a tax benefit that, but for this section,
would result, directly or indirectly, from that transaction or from a
series of transactions that includes that transaction.
For the Minister to invoke the GAAR, a tax benefit must result
unless the GAAR were applied to prevent it.
[107] The
wording of s. 245(4) is to the same effect:
Subsection (2) applies to a transaction only if it may
reasonably be considered that the transaction
(a) would, if this Act were read without reference
to this section, result directly or indirectly in a misuse of the
provisions of any one or more of
(i) this Act ,
. .
.
(b) would result directly or indirectly in an
abuse having regard to those provisions, other than this section, read as a whole.
[108] Again,
it is apparent that in order for there to be a finding of misuse and abuse in
respect of a transaction, the Act must be read without reference to the GAAR.
In other words, s. 245(4) requires that all other relevant provisions of the
Act be read before the Minister may have recourse to the GAAR. This would
include not only the enabling provision that is alleged to be misused and
abused, but also provisions that themselves would prevent the use of the
enabling provision for the purpose objected to by the Minister. If there is a
specific anti-avoidance rule that precludes the use of an enabling rule to
avoid or reduce tax, then the GAAR will not apply.
The Application of Section 74.5(11)
[109] The
issue here is whether s. 74.5(11) applies to preclude the attribution back to
Mr. Lipson of the net income or loss with respect to the shares transferred to
Mrs. Lipson. As I read s. 74.5(11) , it provides that there can be no
attribution under s. 74.1(1) when one of the main reasons for the transfer of
property (the transfer of the shares from Mr. Lipson to Mrs. Lipson) was to
reduce the amount of tax that would, but for s. 74.5(11) , be payable on the
income (dividends less interest) derived from the property (the shares).
[110] It
is uncontroversial that one of the main reasons for the transfer of shares to
Mrs. Lipson was to use mortgage interest on a loan to reduce or eliminate the
income from the dividends on the shares. There were other reasons, but
certainly it is reasonable to conclude that this was one of the main reasons.
[111] In
1995, the dividend income exceeded the interest expense and so there was net
income. But that net income was less than what it would have been had the
transfer not taken place. Without the transfer, the dividends in Mr. Lipson’s
hands would not have been reduced by any interest expense. In 1994 and 1996,
the interest expense exceeded the gross dividend income and no tax was payable
on the dividends. There was a net loss. Again, there would have been tax
payable by Mr. Lipson on the dividends had the transfer not taken place,
whereas with the transfer, no tax was payable on the dividend income.
[112] By
using s. 74.1(1), Mr. Lipson was presumably able to apply the net loss on the
dividends in 1994 and 1996 to offset his other income in those years. While
reducing tax on income earned from sources other than the transferred property
would not be caught directly by s. 74.5(11) , offsetting other income cannot
take place without the income on the dividends first having been reduced to
zero. That is because under s. 74.1(1) the amount attributed back to the
transferor, Mr. Lipson, would be the net income or loss from the property
transferred. Therefore, the transfer had to have as one of its main purposes
the reduction of tax on the income from the transferred property, namely the
dividends on the shares transferred to Mrs. Lipson.
[113] In
the circumstances, s. 74.5(11) precluded the application of s. 74.1(1). As a
result, if it had been invoked by the Minister as the basis for reassessing in
respect of the use of s. 74.1(1) by Mr. Lipson, the tax benefit in his hands
would have been precluded. By the same reasoning, there could be no misuse and
abuse of s. 74.1(1) for purposes of the GAAR because its use would have been
pre-empted by s. 74.5(11) .
[114] The
Minister was obliged to resort to s. 74.5(11) in order to reassess Mr. Lipson
in respect of his use of s. 74.1(1). Section 245 did not apply and could not
be relied upon by the Minister. The Minister’s failure to invoke s. 74.5(11)
is fatal to his reassessment in respect of s. 74.1(1).
Responses to LeBel J. and Binnie J.
[115] LeBel
J. (at para. 47 of his reasons) says that the GAAR was the appropriate remedy
in this case because, in his view, the GAAR “relates specifically to the
impact of complex series of transactions”. I cannot agree. In my respectful
view, my colleague can only reach this conclusion by ignoring the relevant
specific anti-avoidance rule contained in the Act, s. 74.5(11) , which precluded
Mr. Lipson’s use of s. 74.1(1) . The fact that a transfer of property between
spouses, to which s. 74.1(1) applied, was part of a “complex series of
transactions” does not preclude a determination that one of the main reasons
for the transfer of property between the spouses was to reduce or eliminate tax
on the income derived from the property. The fact that the transfer occurred
as part of a series does not permit the Minister to ignore the specific
anti-avoidance rule that would preclude the attribution of net income or loss
under s. 74.1(1) to the transferor. Nothing in s. 74.5(11) says that it does
not apply where the transfer of property between spouses is part of a series of
transactions. On the contrary, by its express terms, it does apply. The
Minister cannot preemptively rely on the GAAR to address the alleged abusive
use of s. 74.1(1) as if s. 74.5(11) did not exist.
[116] LeBel
J. writes (at para. 45) that “the court should not refuse to apply it [the
GAAR] on the ground that a more specific provision . . . might also apply to
the transaction”. This passage indicates that both the GAAR and s. 74.5(11) may
be concurrently applicable. That cannot be correct. This Court was clear in Canada
Trustco that the GAAR is a provision of last resort. It can only be
relied upon by the Minister to address abusive tax avoidance when a relevant
specific anti-avoidance rule in the Act does not apply (see also V. Krishna, The
Fundamentals of Canadian Income Tax (9th ed. 2006), at p. 1018). The GAAR
is a supplementary rule. It is not a catch-all provision that the Minister can
choose to deploy any or every time that he suspects a taxpayer of abusive tax
avoidance.
[117] At
para. 47 of his reasons, LeBel J. says that “[t]he Minister could properly use
the GAAR in respect of a series of transactions that had an impact on more than
just one stream of income”. This passage implies that the tax benefit from the
series of transactions included the possibility that Mr. Lipson might set the
net losses attributed to him against his other sources of income (other than
the dividend income from the shares) to reduce tax and that, because s.
74.5(11) does not preclude this tax benefit, it is not the appropriate
provision for the Minister to have relied on. However, in the context of this
case, the tax benefit of setting the attributed net losses against Mr. Lipson’s
other sources of income was precluded by s. 74.5(11) . Section 74.5(11)
precludes the operation of s. 74.1(1) where, as here, one of the main reasons
that Mr. Lipson transferred the shares to Mrs. Lipson was to reduce the amount
of tax payable on the dividends from those same shares. No attributed loss
could be set off against Mr. Lipson’s other sources of income unless the
dividend income from the shares was first reduced to zero. On the facts of
this case, the Minister did not have to resort to the GAAR to preclude Mr.
Lipson from setting off the attributed net losses against his other sources of
income because s. 74.5(11) precluded this tax benefit.
[118] Finally,
LeBel J. asserts at paras. 43-46 of his reasons that s. 74.5(11) was not the
focus of this litigation. Rather, this case was litigated on the basis of the
GAAR. Binnie J. makes the same argument at para. 61 of his reasons. While
this is true, s. 74.5(11) was referred to in both parties’ factums and counsel
for both parties were questioned about s. 74.5(11) in oral argument. The fact
that the parties did not rely on s. 74.5(11) — either as the basis for
reassessment or as the reason why the Minister’s claim should fail — does not
change the fact that the section applies in law. In my view, the parties
cannot avoid the proper application of the Act by conceding or asserting that
the relevant provision does not apply. It is not open to this Court to assist
the Minister by allowing him to ignore the applicable specific anti-avoidance
rule and instead rely on the GAAR.
[119] Binnie
J. says that the Court should deal with “[t]he proper limits of the GAAR” and
leave s. 74.5(11) to another day (para. 61). At para. 46 of his reasons, LeBel
J. also says that the “interpretation and application” of s. 74.5(11) should be
considered in another case. The problem with this argument is that, as noted
above, the GAAR is only intended to operate as a provision of last resort.
Debating the proper application of the GAAR without taking into account the
specific anti-avoidance rule that displaces it ignores the words of the GAAR
itself. In my respectful view, it is impossible to define “[t]he proper limits
of the GAAR” while failing to recognize the limits imposed by the express terms
of the provision itself. Binnie J.’s reliance on an overly broad foundation to
base his opinion distorts the actual site of legal conflict. This leads to an
unhelpful legal analysis because it ignores the applicable limits that the
legislature has chosen to impose on the operation of the GAAR in favour of an
analysis that is based on the assumption that the GAAR would be the appropriate
anti-avoidance rule where the Minister is able to establish Mr. Lipson’s abuse
and misuse of s. 74.1(1).
[120] Binnie
J. also says that I am “assum[ing] a factual basis for the application of s.
74.5(11)” (para. 61). He asserts that s. 74.5(11) was inapplicable in this
case because counsel for the Minister was of the view that the purpose of the
transfer of shares from Mr. Lipson to Mrs. Lipson “was not merely to reduce the
tax payable on any future dividends. It was really to get the interest expense
up [from Mrs. Lipson] to the appellant [Mr. Lipson]” (Transcript, at p. 41).
With respect, s. 74.5(11) applies so long as “one of the main reasons
for the transfer” was to reduce tax payable on the dividend income from the
transferred shares. I do not disagree that one of the main reasons for the
transfer of shares from Mr. Lipson to Mrs. Lipson was “to get the interest
expense up to the appellant”. However to accomplish that objective, the
interest expense deduction first had to be applied to reduce the dividend
income. This is because the operation of s. 74.1(1) only attributes the net
income or losses from Mrs. Lipson (the transferee) to Mr. Lipson (the
transferor). Section 74.1(1) mandates that the only way to “get the interest
expense up to the appellant” was by first reducing or eliminating the dividend
income from the transferred shares contrary to s. 74.5(11). Thus, s. 74.5(11)
was engaged by operation of law, not by reason of an assumed factual
basis.
Conclusion
[121] I
accept that the tax benefit that the Minister sought to prevent was obtained by
the series of transactions involving ss. 20(1) (c) and 20(3) as well as
s. 74.1(1). If the Minister wished to reassess in respect of the transactions,
relying on the use of all three sections, then his recourse was to reassess in
respect of the alleged misuse and abuse of ss. 20(1) (c) and 20(3) by
invoking the GAAR and s. 74.1(1) by invoking s. 74.5(11).
[122] Had
the Minister reassessed on the basis of s. 74.5(11), his remedy would simply
have been to disallow Mr. Lipson’s use of the attribution rules and leave the
dividend income and interest deduction in the hands of Mrs. Lipson. The
rollover of the shares from Mr. to Mrs. Lipson at their adjusted cost base
would not have been affected.
[123] It
may seem anomalous that the rollover would be allowed to stand while the
attribution rules would not apply. However, that is the way in which s.
74.5(11) must be interpreted. It does not prevent the operation of s. 73(1)
which enables a taxpayer to elect either to rollover the shares to his or her
spouse or sell them to him or her at fair market value and pay whatever tax may
be applicable on any capital gains on the shares. Section 74.5(11) is the
Minister’s remedy when the attribution rules are being used to reduce tax on
income from transferred property and it applies “[n]otwithstanding any other
provision of this Act ”, including the GAAR. It is the remedy that Parliament provided
in the circumstances. If it does not go far enough in some cases, it is up to
the Minister to ask Parliament to change it.
[124] Because
there was no abuse of ss. 20(1) (c) and 20(3) of the Act and because the
Minister could not invoke the GAAR to reassess in respect of Mr. Lipson’s use
of s. 74.1 , I am of the opinion that the appeals should be allowed with one set
of costs in this Court and the courts below.
APPENDIX
Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp .)
18. (1) In computing the income of
a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it
was made or incurred by the taxpayer for the purpose of gaining or producing
income from the business or property;
. . .
(h) personal or living expenses of the taxpayer, other
than travel expenses incurred by the taxpayer while away from home in the
course of carrying on the taxpayer’s business;
20. (1) Notwithstanding paragraphs 18(1)(a), (b)
and (h), in computing a taxpayer’s income for a taxation year from a
business or property, there may be deducted such of the following amounts as
are wholly applicable to that source or such part of the following amounts as
may reasonably be regarded as applicable thereto:
. . .
(c) an amount paid in the year or payable in respect of
the year (depending on the method regularly followed by the taxpayer in
computing the taxpayer’s income), pursuant to a legal obligation to pay
interest on
(i) borrowed money used for the purpose of earning income from a
business or property (other than borrowed money used to acquire property the
income from which would be exempt or to acquire a life insurance policy),
(ii) an amount payable for property acquired for the purpose of
gaining or producing income from the property or for the purpose of gaining or
producing income from a business (other than property the income from which
would be exempt or property that is an interest in a life insurance policy),
(iii) an amount paid to the taxpayer under
(A) an appropriation Act and on terms and conditions approved by
the Treasury Board for the purpose of advancing or sustaining the technological
capability of Canadian manufacturing or other industry, or
(B) the Northern Mineral Exploration Assistance Regulations made
under an appropriation Act that provides for payments in respect of the
Northern Mineral Grants Program, or
(iv) borrowed money used to acquire an interest in an annuity
contract in respect of which section 12.2 applies (or would apply if the
contract had an anniversary day in the year at a time when the taxpayer held
the interest) except that, where annuity payments have begun under the contract
in a preceding taxation year, the amount of interest paid or payable in the
year shall not be deducted to the extent that it exceeds the amount included
under section 12.2 in computing the taxpayer’s income for the year in respect
of the taxpayer’s interest in the contract,
or a reasonable amount in respect thereof, whichever is the lesser;
. . .
(3) For greater certainty, it is hereby declared that where a
taxpayer has used borrowed money
(a) to repay money previously borrowed, or
(b) to pay an amount payable for property described in
subparagraph (1)(c)(ii) previously acquired,
subject to subsection 20.1(6), the borrowed money shall, for the
purposes of paragraphs (1)(c), (e) and (e.1), subsections
20.1(1) and (2), section 21 and subparagraph 95(2)(a)(ii) and for the
purpose of paragraph 20(1) (k) of the Income Tax Act , Chapter 148
of the Revised Statutes of Canada, 1952, be deemed to have been used for the
purpose for which the money previously borrowed was used or was deemed by this
subsection to have been used, or to acquire the property in respect of which
the amount was payable, as the case may be.
73. (1) For the purposes of this Part, where at any
time any particular capital property of an individual (other than a trust) has
been transferred in circumstances to which subsection (1.01) applies and both
the individual and the transferee are resident in Canada at that time, unless
the individual elects in the individual’s return of income under this Part for
the taxation year in which the property was transferred that the provisions of
this subsection not apply, the particular property is deemed
(a) to have been disposed of at that time by the
individual for proceeds equal to,
(i) where the particular property is depreciable property of a
prescribed class, that proportion of the undepreciated capital cost to the
individual immediately before that time of all property of that class that the
fair market value immediately before that time of the particular property is of
the fair market value immediately before that time of all of that property of
that class, and
(ii) in any other case, the adjusted cost base to the individual
of the particular property immediately before that time; and
(b) to have been acquired at that time by the
transferee for an amount equal to those proceeds.
74.1 (1) Where an individual has transferred or lent
property (otherwise than by an assignment of any portion of a retirement
pension pursuant to section 65.1 of the Canada Pension Plan or a
comparable provision of a provincial pension plan as defined in section 3 of
that Act or of a prescribed provincial pension plan), either directly or
indirectly, by means of a trust or by any other means whatever, to or for the
benefit of a person who is the individual’s spouse or common-law partner or who
has since become the individual’s spouse or common-law partner, any income or
loss, as the case may be, of that person for a taxation year from the property
or from property substituted therefor, that relates to the period in the year
throughout which the individual is resident in Canada and that person is the
individual’s spouse or common-law partner, shall be deemed to be income or a
loss, as the case may be, of the individual for the year and not of that
person.
. . .
(3) For the purposes of subsections (1) and (2), where,
at any time, an individual has lent or transferred property (in this subsection
referred to as the “lent or transferred property”) either directly or
indirectly, by means of a trust or by any other means whatever, to or for the
benefit of a person, and the lent or transferred property or property
substituted therefor is used
(a) to repay, in whole or in part, borrowed money with
which other property was acquired, or
(b) to reduce an amount payable for other property,
there shall be included in computing the income from the lent or
transferred property, or from property substituted therefor, that is so used,
that proportion of the income or loss, as the case may be, derived after that
time from the other property or from property substituted therefor that the
fair market value at that time of the lent or transferred property, or property
substituted therefor, that is so used is of the cost to that person of the
other property at the time of its acquisition, but for greater certainty
nothing in this subsection shall affect the application of subsections (1) and
(2) to any income or loss derived from the other property or from property
substituted therefor.
74.5 . . .
(11) Notwithstanding any other provision of this Act,
sections 74.1 to 74.4 do not apply to a transfer or loan of property where it
may reasonably be concluded that one of the main reasons for the transfer or
loan was to reduce the amount of tax that would, but for this subsection, be
payable under this Part on the income and gains derived from the property or
from property substituted therefor.
245. (1) In this section,
“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 , and 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;
“tax consequences” to a person means the amount of
income, taxable income, or taxable income earned in Canada of, tax or other
amount payable by or refundable to the person under this Act , or any other
amount that is relevant for the purposes of computing that amount;
“transaction” includes an arrangement or event.
(2) Where a transaction is an avoidance transaction,
the tax consequences to a person shall be determined as is reasonable in the
circumstances in order to deny a tax benefit that, but for this section, would
result, directly or indirectly, from that transaction or from a series of
transactions that includes that transaction.
(3) An avoidance transaction means any transaction
(a) that, but for this section, would result, directly
or indirectly, in a tax benefit, unless the transaction may reasonably be
considered to have been undertaken or arranged primarily for bona fide purposes
other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which
series, but for this section, would result, directly or indirectly, in a tax
benefit, unless the transaction may reasonably be considered to have been
undertaken or arranged primarily for bona fide purposes other than to
obtain the tax benefit.
(4) Subsection (2) applies to a transaction only if it
may reasonably be considered that the transaction
(a) would, if this Act were read without reference to
this section, result directly or indirectly in a misuse of the provisions of
any one or more of
(i) this Act ,
(ii) the Income Tax Regulations,
(iii) the Income Tax Application Rules ,
(iv) a tax treaty, or
(v) any other enactment that is relevant in computing tax or any
other amount payable by or refundable to a person under this Act or in
determining any amount that is relevant for the purposes of that computation;
or
(b) would result directly or indirectly in an abuse
having regard to those provisions, other than this section, read as a whole.
(5) Without restricting the generality of subsection
(2), and notwithstanding any other enactment,
(a) any deduction, exemption or exclusion in computing
income, taxable income, taxable income earned in Canada or tax payable or any
part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, exemption or exclusion, any
income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be
recharacterized, and
(d) the tax effects that would otherwise result from
the application of other provisions of this Act may be ignored,
in determining the tax consequences to a person as is reasonable in
the circumstances in order to deny a tax benefit that would, but for this
section, result, directly or indirectly, from an avoidance transaction.
(6) Where with respect to a transaction
(a) a notice of assessment, reassessment or additional
assessment involving the application of subsection (2) with respect to the
transaction has been sent to a person, or
(b) a notice of determination pursuant to subsection
152(1.11) has been sent to a person with respect to the transaction,
any person (other than a person referred to in paragraph (a)
or (b)) shall be entitled, within 180 days after the day of mailing of
the notice, to request in writing that the Minister make an assessment,
reassessment or additional assessment applying subsection (2) or make a
determination applying subsection 152(1.11) with respect to that transaction.
(7) Notwithstanding any other provision of this Act ,
the tax consequences to any person, following the application of this section,
shall only be determined through a notice of assessment, reassessment,
additional assessment or determination pursuant to subsection 152(1.11)
involving the application of this section.
(8) On receipt of a request by a person under
subsection (6), the Minister shall, with all due dispatch, consider the request
and, notwithstanding subsection 152(4), assess, reassess or make an additional
assessment or determination pursuant to subsection 152(1.11) with respect to
that person, except that an assessment, reassessment, additional assessment or
determination may be made under this subsection only to the extent that it may
reasonably be regarded as relating to the transaction referred to in subsection
(6).
Appeals dismissed with costs, Binnie, Deschamps and Rothstein
JJ. dissenting.
Solicitors for the appellants: McCarthy
Tétrault, Vancouver.
Solicitor for the respondent: Attorney General
of Canada, Ottawa.