REASONS
FOR JUDGMENT
V.A. Miller J.
INTRODUCTION
[1]
This case involves the anti-avoidance rule in
section 212.1 and the definition of paid-up capital (“PUC”) in section 89 of
the Income Tax Act (the “Act”).
[2]
In 2007, CVC Capital Properties (“CVC”), a
United Kingdom private equity firm, acquired Univar NV, a Netherlands public
corporation. With the acquisition, CVC indirectly acquired a Canadian operating
subsidiary with surplus in excess of $889,000,000. CVC carried out a series of transactions
so that it could indirectly strip the surplus out of the Canadian subsidiary
without paying withholding tax. The Appellant was the holding company used to
accomplish the outcome in that series of transactions.
[3]
The transactions were arranged to circumvent the
application of the anti-avoidance rule in section 212.1 and to take advantage
of the relieving exemption found in subsection 212.1(4) of the Act.
[4]
The Minister of National Revenue (the
“Minister”) relied on the general anti-avoidance rule (the “GAAR”) in section
245 of the Act to assess the Appellant for its 2007 taxation year.
Counsel for the Appellant acknowledged that the transactions in issue resulted
in a “tax benefit” for the purposes of
subsection 245(1) and there was an “avoidance transaction”
as that term is defined in subsection 245(3) of the Act. The sole issue
before the Court was whether the transactions resulted in “abusive tax avoidance” within the meaning of
subsection 245(4) of the Act.
[5]
I have concluded that the transactions undertaken
in this case circumvented the application of the anti-avoidance rule in section
212.1 in a manner that “frustrated or defeated the
object, spirit or purpose” of section 212.1 in general and subsection
212.1(4) in particular: Canada Trustco Mortgage Company v Canada, 2005
SCC 54 at paragraph 45.
FACTS
[6]
The evidence at the hearing consisted of a
Statement of Partially Agreed Facts; the testimony of Mr. Alexander Fotakidis,
a senior managing director in the financing team of CVC Capital Partners (“CVC”);
two volumes of Joint Documents; the memorandum to the GAAR Committee of the
Canada Revenue Agency (“CRA”) with respect to the issue in this appeal; and,
read-ins from the examinations for discovery of both parties.
[7]
The Statement of Partially Agreed Facts is
attached as an Appendix to these Reasons. A summary of that statement together
with the evidence presented at the hearing is included below.
[8]
CVC, a United Kingdom private equity and
investment firm, is based in London, England. In early 2007, it identified
Univar NV as a corporation it wanted to acquire.
[9]
Univar NV, a Netherlands public corporation,
distributes commodity and speciality chemicals to the global market. Its main
business is to purchase commodities in bulk, then process, blend and repack them
to meet the requirements of the industries it serves. Univar NV operates a
network of distribution centres located throughout the world including the
United States, Canada, Europe and China.
[10]
Univar Holdco Canada ULC (the “Appellant” or at
times referred to as “UHC”) was one of a group of entities which were
controlled, directly or indirectly, by Univar NV. It was incorporated on
September 21, 2007 under the laws of Alberta in anticipation of the
reorganization that was undertaken. Counsel for the Appellant, in his
submissions, stated that UHC was incorporated to act as a de facto
acquisition corporation.
[11]
In either March or April 2007, as part of its
due diligence for its proposed acquisition of Univar NV, CVC and its
acquisition vehicle for the purchase, Ulysses Luxembourg Sarl (“Ulysses”),
sought advice from Deloitte Touche Tohmatsu Limited (“Deloitte”) with respect
to certain taxation services. According to Mr. Fotakidis, there were two
elements to the tax due diligence. One element was the tax itself including the
tax liabilities of Univar NV and its subsidiaries and the second was the tax
structuring.
[12]
Deloitte gave detailed advice concerning the
post-acquisition restructuring of Univar NV. This advice included the
transactions at issue in this appeal. Mr. Fotakidis testified that
Deloitte’s advice was used by CVC in July 2007 to obtain the desired debt
package for the acquisition. This allowed CVC to propose a binding cash bid to
Univar NV on July 9, 2007. CVC proposed cash of €1.5
billion (equivalent to approximately US$2.1 billion or $72.76 per share) for
the acquisition of the shares of Univar NV and its subsidiaries. This bid was
conditional upon tender of at least 95% of the outstanding shares of Univar NV
and all necessary regulatory approvals.
[13]
On August 20, 2007, a formal bid for all of the
shares of Univar NV was announced.
[14]
By letter dated September 6, 2007, Deloitte set
out the terms on which it offered to perform certain taxation services to CVC
and Ulysses. The letter contained the contractual terms between the parties in
respect of matters concerning the proposed acquisition of Univar NV and its
subsidiaries. The advice was to be presented through a “Final Report” which was
completed by Deloitte on October 11, 2007.
[15]
On September 18, 2007, the European Commission
approved the proposed acquisition by CVC.
[16]
On October 4, 2007, 97.2% of Univar NV’s
outstanding shares had been acquired by Ulysses with the result that CVC and
the Univar group of companies no longer dealt at arm’s length with each other.
[17]
By the end of October, 2007, 99.4% of Univar
NV’s outstanding shares had been acquired by Ulysses with the result that CVC
effectively acquired Univar NV in 2007. Mr. Fotakidis explained that Univar NV
was the only company in the group whose shares were listed publicly and by
acquiring Univar NV, CVC also acquired the Univar group. Mr. Fotakidis further
stated that no real consideration had been given to acquiring the various
operating companies of the group because there were no listed shares available
at the individual operating levels. In addition, if they had to acquire the
various operating companies separately, it would have negatively impacted the
value, speed and certainty of delivering the offer.
[18]
Mr. Fotakidis explained that, in order to obtain
the desired debt package, CVC had agreed with the banks in July 2007 that the
reorganization giving rise to the present appeal would take place. The banks
which underwrote the financing did so based on the consolidated assets and earnings
of Univar. As part of the commitment package signed with the banks, it was
necessary to have all the assets of the Univar group “lined up” under the U.S.
borrower.
[19]
On cross-examination, counsel for the Respondent
asked Mr. Fotakidis if one of the global goals of the financing was to enable
access to the surpluses of the Canadian subsidiary to help pay the debt. Mr.
Fotakidis replied that one of the objectives was to set up the “most efficient tax structure” and “extraction structure” in terms of cash distribution
and ultimately to service the debt. Mr. Fotakidis explained what he meant
by the expression the “most efficient tax structure”.
He said the meaning was twofold. It meant the ability to regularly distribute
reserves or cash to service the debt on a quarterly basis rather than
semi-annually and it also meant, in terms of the cost involved, the ability to
minimize withholding taxes and other expenses when extracting cash out of
Canada.
[20]
Deloitte submitted the Final Report of its “Tax Structure Memorandum” on October 11, 2007. Deloitte
called it “Project Monaco” and the key tax
objectives were listed in that report as:
•
Maximize interest deductions on indebtedness
related to the acquisition of the relevant entities/assets;
•
Optimize lenders’ security over assets and cash
flow;
•
Minimize withholding tax on returns to the
Sponsors; and
•
Allow for a flexible tax-free exit on disposal.
[21]
The subsidiaries which were used in the
reorganization transactions at issue were:
a)
Univar Inc. is a corporation governed by the
laws of the State of Delaware and incorporated on November 21, 1974. Prior to
the reorganization, all 468 common shares of Univar Inc. were owned directly or
indirectly by Univar NV.
b) Univar North American Corporation (“UNAC”) was a corporation
resident in the United States and governed by the laws of the state of
Washington. At all relevant times the shares of UNAC were owned directly or
indirectly by Univar Inc.
c)
Univar Canada Ltd. (“Univar Canada” or sometimes
referred to as the target corporation) is a Canadian resident corporation
incorporated pursuant to the laws of the Province of British Columbia in 1950.
Univar Canada was Canada’s largest and most successful distributor of
industrial chemicals and crop protection products. Prior to the reorganization
described herein, all shares of Univar Canada were owned by UNAC and had an
adjusted cost base (“ACB”) of $10,000[1],
PUC of approximately $911,729 and a fair market value (“FMV”) of approximately
$889,000,000.
[22]
Prior to the reorganization transactions, the
corporate structure of Univar NV and its subsidiaries was:
|
UNIVAR
NV
|
|
↓ 468 CS
|
|
Univar
Inc (US)
|
|
↓
|
|
UNAC
(US)
|
|
↓
|
|
Univar
Canada  
|
|
FMV=$889,000,000
ACB=$10,000
PUC=$911,729
|
[23]
It was admitted by the Appellant that the
reorganization of Univar NV and its subsidiaries was arranged to take advantage
of subsection 212.1(4) of the Act. Subsections 212.1(1) and (4) provide:
Non-arm’s length
sales of shares by non-residents
212.1 (1) If a
non-resident person, a designated partnership or a non-resident-owned
investment corporation (in this section referred to as the “non-resident
person”) disposes of shares (in this section referred to as the “subject
shares”) of any class of the capital stock of a corporation resident in Canada
(in this section referred to as the “subject corporation”) to another corporation
resident in Canada (in this section referred to as the “purchaser corporation”)
with which the non-resident person does not (otherwise than because of a right
referred to in paragraph 251(5)(b)) deal at arm’s length and, immediately after
the disposition, the subject corporation is connected (within the meaning that
would be assigned by subsection 186(4) if the references in that subsection to
“payer corporation” and “particular corporation” were read as “subject
corporation” and “purchaser corporation”, respectively) with the purchaser
corporation,
(a) the amount, if any, by which the fair market value of any
consideration (other than any share of the capital stock of the purchaser
corporation) received by the non-resident person from the purchaser corporation
for the subject shares exceeds the paid-up capital in respect of the subject
shares immediately before the disposition shall, for the purposes of this Act,
be deemed to be a dividend paid at the time of the disposition by the purchaser
corporation to the non-resident person and received at that time by the
non-resident person from the purchaser corporation; and
(b) in computing the paid-up capital at any particular time after
March 31, 1977 of any particular class of shares of the capital stock of the
purchaser corporation, there shall be deducted that proportion of the amount,
if any, by which the increase, if any, by virtue of the disposition, in the
paid-up capital, computed without reference to this section as it applies to
the disposition, in respect of all of the shares of the capital stock of the
purchaser corporation exceeds the amount, if any, by which
(i) the paid-up capital in respect of the subject shares immediately
before the disposition
exceeds
(ii) the fair market value of the consideration described in
paragraph 212.1(1)(a),
that the increase, if any, by virtue of the disposition, in the
paid-up capital, computed without reference to this section as it applies to
the disposition, in respect of the particular class of shares is of the increase,
if any, by virtue of the disposition, in the paid-up capital, computed without
reference to this section as it applies to the disposition, in respect of all
of the issued shares of the capital stock of the purchaser corporation.
…
Where section does
not apply
(4)
Notwithstanding subsection 212.1(1), this section does not apply in respect of
a disposition by a non-resident corporation of shares of a subject corporation
to a purchaser corporation that immediately before the disposition controlled
the non-resident corporation.
[24]
Subsection 212.1 applies when a non-resident
person sells shares of a Canadian resident corporation (the “target
corporation”) to another corporation resident in Canada (the “purchaser
corporation”) with which it does not deal at arm’s length at the time of the
disposition. When this section applies, the paid-up capital (“PUC”) of the
purchaser’s shares is limited to the historic PUC of the target corporation. If
non-share consideration is received that exceeds the PUC of the target
corporation, the excess is deemed to be a dividend paid to the non-resident
vendor and the dividend is subject to withholding taxes.
[25]
Subsection 212.1(4) is a relieving provision. It
provides that subsection 212.1(1) does not apply where the non-resident corporation
is controlled by the purchaser corporation (a Canadian resident corporation)
immediately before the sale of the shares of the subject corporation.
[26]
In this case the series of transactions was
undertaken to circumvent subsection 212.1(1) and to take advantage of the
exemption in subsection 212.1(4). As can be seen by the series of transactions
which follow, when CVC purchased Univar NV, Univar NV and its relevant
subsidiaries were in a “sandwich” so that Univar Canada was controlled by the
non-resident Univar Inc. After a series of artificial contortions, the relevant
subsidiaries were still in a “sandwich” relation; Univar Inc. still controlled
Univar Canada but the surplus funds had been stripped out of Univar Canada.
A. The Series of Transactions
[27]
The parties agreed that the corporations
participating in the series of transactions were not dealing at arm’s
length.
[28]
In September 2007, Univar Holdco Inc. (“UHI”)
was incorporated in anticipation of the reorganization that was going to be
undertaken. It was incorporated as a US resident and was a wholly owned
subsidiary of Univar NV with nominal share capital.
[29]
In September 2007, UHI incorporated the
Appellant UHC as its Canadian resident subsidiary, taking back shares which had
nominal ACB. As stated earlier, it also was incorporated in anticipation of the
reorganization that would be undertaken. At no time did the Appellant have any
employees.
[30]
On October 12, 2007, UNAC amalgamated with
Univar Inc. to become Univar Inc. thereby acquiring all of the shares of
Univar Canada, the target corporation. UNAC filed an election regarding the
disposition of the shares of Univar Canada to Univar Inc. on amalgamation (Form
T2062 – Request by a Non-Resident of Canada for a Certificate of Compliance
Related to the Disposition of Taxable Canadian Property). Its net capital gain
was reported as nil:
|
Proceeds of Disposition
|
$889,413,400
|
|
Less
|
|
|
ACB
|
$10,000
|
|
Capital Gain
|
$889,403,400
|
|
Article XIII of Canada –US Convention
|
|
|
Exemption
|
$889,403,400
|
|
Net Capital Gain
|
nil
|
[31]
The resulting Univar structure was as follows:
|
>
|
|
UNIVAR NV
|
|
UHI (US)
|
|
468 CS
|
|
$
|
|
$
|
|
$
|
|
Univar Inc. (US)
(Amalco)
|
|
$
ACB/PUC/FMV nominal
|
|
$
|
|
UHC
(Appellant)
|
|
ACB= $889,413,400
$ FMV=$889,413,400
PUC=$911,729
|
|
|
|
Univar Canada
|
[32]
On October 18, 2007, the following transactions
were undertaken:
i.
Univar NV sold 244.6 of its common shares of
Univar Inc. to UHI in consideration for a promissory note having a principal
amount of US$415,000,000 and common shares (“CS”) with a FMV of US$406,000,000
for a total consideration of US$821,000,000 ($800,967,600).
ii.
The Appellant, UHC, then purchased the 244.6
shares of Univar Inc. that UHI had acquired from Univar NV plus the remaining
223.4 shares of Univar Inc. held by Univar NV in exchange for promissory notes
and UHC shares as follows:
|
Number of shares of Univar Inc.
|
223.4
|
244.6
|
|
From:
|
Univar NV
|
UHI
|
|
In Exchange for:
|
|
|
|
Notes Payable
|
$731,700,000
|
$589,262,400
|
|
UHC shares
|
|
$211,705,200
|
|
|
$731,700,000
|
$800,967,600
|
[33]
The structure was then as follows:
|
|
UNIVAR
NV
|
|
|
$
|
(1)
NOTE=US $415,000,000
SHARES =US $406,000,000
|
|
|
|
UHI (US)
|
|
|
$
|
(2)
NOTE=$589,262,400
SHARES/PUC=$211,705,200
|
(3) NOTE: $731,700,000
|
|
|
UHC
(Appellant)
|
|
|
$
|
244.6 CS ACB = $800,967,600
223.4 CS ACB = $731,700,000
468 CS ACB = $1,532,667,600
|
|
|
|
Univar Inc. (US)
|
|
|
$
|
ACB/FMV = $889,413,400
PUC=$911,729
|
|
|
|
Univar Canada
|
|
[34]
UHI then assumed the $731,700,000 promissory
note which had been issued by the Appellant UHC, to Univar NV by subscribing
for additional common shares of the Appellant valued at $731,700,000. As a
result, the Appellant UHC had outstanding common shares held by UHI with PUC of
$943,405,200 and a debt of $589,262,400 as follows:
|
|
UNIVAR
NV
|
|
|
$
|
(1)
NOTE=US $415,000,000
CS
=US$406,000,000
(3) NOTE: $731,700,000
|
|
|
|
UHI (US)
|
|
|
$
|
(2)
NOTE=$589,262,400
SHARES=$211,705,200
SHARES=$731,700,000
PUC=$943,405,200
|
|
|
|
UHC
(Appellant)
|
|
|
$
|
244.6 CS ACB = $801,000,000
223.4 CS ACB = $731,700,000
468 CS ACB = $1,532,700,000
|
|
|
|
Univar Inc. (US)
|
|
|
$
|
ACB/FMV = $889,413,400
PUC=$911,729
|
|
|
|
Univar Canada
|
|
[35]
Univar Inc. then redeemed 273 of its 468 total
common shares held by the Appellant UHC and paid the redemption proceeds
($891,698,400) by delivering all 627 common shares of Univar Canada to the
Appellant UHC at FMV. This transaction was reported on Form T2062 as follows:
|
Proceeds of Disposition
|
$891,698,400
|
|
Adjusted Cost Base
|
$889,413,400
|
|
Capital Gain
|
$2,285,000[2]
|
|
Article XIII of Canada –US Convention
|
|
|
Exemption
|
$2,285,000
|
|
Net Capital Gain
|
nil
|
[36]
It was the Appellant’s position that subsection
212.1(1) did not apply to this disposition because Univar Inc., the non-resident
corporation, was controlled by the purchaser (the Appellant) immediately before
the disposition. That is, the parties fit within the exception in subsection
212.1(4).
[37]
The new structure became:
|
|
|
UNIVAR NV
|
|
|
|
(1)
NOTE=US$415,000,000
$
CS US$406,000,000
(3) NOTE= $731,700,000
|
|
|
|
UHI (US)
|
|
|
|
(2)
NOTE=$589,262,400
$ SHARES = $211,705,200
SHARES = $731,700,000
PUC=
$943,405,200
|
|
|
|
UHC
(Appellant)
|
|
>
195 CS = $640,969,200$
|
|
$
ACB/FMV = $891,698,400
PUC=$911,729
|
|
Univar
Inc.
(US)
|
|
Univar Canada
|
[38]
The Appellant UHC then authorized the
distribution of 195 common shares of Univar Inc. to UHI as a return of capital
in the amount of $640,969,200 and effected the reduction by delivering those
shares. As a result, the PUC of the common shares of the Appellant UHC held by
UHI was reduced to $302,436,000. Univar Canada was isolated beneath the
Appellant so that the structure became:
|
|
|
UNIVAR
NV
|
|
|
|
(1) NOTE= US$415,000,000
$ (3) NOTE= US$731,700,000
CS=US$406,000,000
|
|
>
|
|
UHI (US)
|
|
195 shares $640,969,200$
|
|
$
|
|
Univar
Inc.
(US)
|
|
$
|
|
|
|
(2) NOTE= $589,262,400
SHARES/PUC = $302,436,000
|
|
|
|
UHC
(Appellant)
|
|
|
|
$ACB/FMV = $891,698,400
PUC=
$911,729
|
|
|
|
Univar Canada
|
[39]
On October 19, 2007, Univar Inc. and UHI
amalgamated to form Univar Inc. The result was as follows:
|
UNIVAR
NV
|
|
(1)
NOTE=US$415,000,000
$ (3)
NOTE=$731,700,000
CS=US
$406,000,000
|
|
UHI (US)
Amalgamate
Univar
Inc (US)
|
|
(2)
NOTE= $589,262,400
$ SHARES/PUC=$302,436,000
|
|
UHC
(Appellant)
|
|
ACB=$891,698,400
$ PUC=$911,729
FMV=$891,698,400
|
|
Univar
Canada
|
[40]
After the reorganization, Univar Inc. held
shares in the Appellant with PUC of $302,436,000 and a note payable by the
Appellant of $589,262,400. The aggregate of the PUC and the note payable
equalled the FMV of the Appellant’s sole asset, Univar Canada.
[41]
As evidenced by the transactions and confirmed
by Mr. Fotakidis, no shares of Univar Canada were sold and no money came into
Canada to increase the PUC of its shares. No money was invested in Canada as a
result of the purchase of Univar NV by CVC or as a result of the
reorganization. The reorganization was structured to avoid a deemed dividend
pursuant to subsection 212.1(1) and to take advantage of the exemption in
subsection 212.1(4) of the Act.
THE REASSESSMENT
[42]
On February 18, 2013, the Minister relied on the
GAAR to reassess the Appellant’s 2007 taxation year. The Appellant UHC was
assessed Part XIII tax and interest on the issuance of its $589,262,400
promissory note payable to UHI. The PUC of the Appellant’s shares was reduced
from $302,436,000 to $911,729. The tax assessed was $29,417,533.55.
[43]
The Minister relied on the GAAR on the basis
that:
i.
a series of transactions was undertaken that
included transactions not undertaken for bona fide purposes other than
to obtain the tax benefit of a tax free return of amounts in excess of the
capital contributed to Univar Canada, a Canadian corporation, through its
indirect non-arm’s length transfer to another Canadian corporation; and that
ii.
such transactions resulted in a circumvention of
section 212.1 of the Act and resulted in a misuse of the provision and
resulted directly or indirectly in an abuse having regard to the provisions of
the Act as a whole.
LAW
[44]
The GAAR is contained in section 245 of the Act
and it provides:
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; (avantage fiscal)
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; (attribut
fiscal)
transaction includes an arrangement
or event. (opération)
General
anti-avoidance provision
(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.
Avoidance
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.
Application
of subsection (2)
(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 Applications 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.
[45]
In Canada Trustco, the Supreme Court
discussed the approach to be taken and the principles to be applied by the
courts when there has been an assessment under section 245 of the Act.
It summarized its discussion at paragraph 66 of the decision as follows:
66 The approach
to s. 245 of the Income Tax Act may be summarized as follows.
1. Three
requirements must be established to permit application of the GAAR:
(1)A tax
benefit resulting from a transaction or part of a series of transactions
(s. 245(1) and (2));
(2)that the
transaction is an avoidance transaction in the sense that it cannot be
said to have been reasonably undertaken or arranged primarily for a bona fide
purpose other than to obtain a tax benefit; and
(3)that there was
abusive tax avoidance in the sense that it cannot be reasonably
concluded that a tax benefit would be consistent with the object, spirit or
purpose of the provisions relied upon by the taxpayer.
2. The burden is
on the taxpayer to refute (1) and (2), and on the Minister to establish (3).
3. If the
existence of abusive tax avoidance is unclear, the benefit of the doubt goes to
the taxpayer.
4. The courts
proceed by conducting a unified textual, contextual and purposive analysis of
the provisions giving rise to the tax benefit in order to determine why they
were put in place and why the benefit was conferred. The goal is to arrive at a
purposive interpretation that is harmonious with the provisions of the Act that
confer the tax benefit, read in the context of the whole Act.
5. Whether the
transactions were motivated by any economic, commercial, family or other
non-tax purpose may form part of the factual context that the courts may consider
in the analysis of abusive tax avoidance allegations under s. 245(4). However,
any finding in this respect would form only one part of the underlying facts of
a case, and would be insufficient by itself to establish abusive tax avoidance.
The central issue is the proper interpretation of the relevant provisions in
light of their context and purpose.
6. Abusive tax
avoidance may be found where the relationships and transactions as expressed in
the relevant documentation lack a proper basis relative to the object, spirit
or purpose of the provisions that are purported to confer the tax benefit, or
where they are wholly dissimilar to the relationships or transactions that are
contemplated by the provisions.
7. Where the Tax
Court judge has proceeded on a proper construction of the provisions of the Income
Tax Act and on findings supported by the evidence, appellate tribunals
should not interfere, absent a palpable and overriding error.
[46]
In this case, the Appellant admitted that there
was a “tax benefit” both through the avoidance
of Part XIII tax which would have applied to the distribution of $589,262,400
and from the increase in the PUC; and that there was an “avoidance transaction” as that term is defined in
subsection 245(3) of the Act.
[47]
Therefore the only issue is whether the
avoidance transactions which gave rise to the tax benefit resulted directly or
indirectly in a misuse or abuse of section 212.1 and the related provisions of
the Act read as a whole. The burden to establish misuse or abuse under
subsection 245(4) is on the Respondent.
APPELLANT’S POSITION
[48]
It was the Appellant’s position that the GAAR
does not apply in the circumstances of this appeal because the object, spirit
and purpose of section 212.1 were not frustrated by the transactions at issue.
The transactions were arranged to take advantage of the relieving provision
contained in subsection 212.1(4) of the Act.
[49]
Section 212.1 applies only to dispositions where
the vendor and purchaser do not deal at arm’s length. The concern with a
shareholder accessing the undistributed income of a corporation is limited to
circumstances in which the shareholder continues, directly or indirectly, to
control the corporation in which the surplus was earned. Arm’s length
purchasers are not within the scope of section 212.1 of the Act.
[50]
In his Trial Brief, counsel for the Appellant
wrote that the legislative purpose underlying section 212.1 is to prevent “incestuous” reorganizations which extract surplus
without a change in constructive ownership. The section is not concerned with
the manner in which a true purchaser structures an arm’s length acquisition.
[51]
According to the Appellant, the reorganization
of the Univar group occurred in the context of an arm’s length acquisition.
This was not a situation where a corporate group decided to reorganize itself
to access its accumulated surplus in Canada. The purpose of the reorganization
was to allow CVC, the arm’s length purchaser, access to the acquired Canadian
surplus.
[52]
Counsel for the Appellant stated that the ideal
acquisition structure would have been to have CVC acquire Univar Canada the
target corporation through a Canadian holding company that was
fully-capitalized to effect the purchase. This would have allowed a tax-free
intercorporate dividend to be paid by Univar Canada to the holding company,
which, in turn, could return capital, tax free, to CVC, the non-resident
purchaser.
[53]
According to the Appellant, in the circumstances
of this case, it was not practical to use a Canadian acquisition company and a
different route was needed to obtain the same result.
[54]
It was in the context of the arm’s-length sale
of Univar NV to CVC that the relieving rule in subsection 212.1(4) was relied
on. This subsection was considered at the planning stage of the acquisition of
Univar NV as a relief against the application of subsection 212.1(1).
[55]
Subsection 212.1(4) required that the purchaser
corporation (the Appellant) be a Canadian resident and it had to control the
non-resident vendor immediately before the disposition. This occurred in this
case. It was the Appellant’s position that the rule contemplates that non-arm’s
length transactions which meet the criteria in subsection 212.1(4) are excluded
from the application of subsection 212.1(1).
RESPONDENT’S POSITION
[56]
It was the Respondent’s position that the
transactions undertaken by Univar NV were designed to avoid the application of
subsection 212.1(1) of the Act and to take advantage of the relieving
provision in subsection 212.1(4).In so doing, the transactions resulted in
abusive tax avoidance because they misused section 212.1 in a manner which
frustrated its object, spirit and intended purpose: Canada Trustco (supra)
at paragraph 45.
[57]
Counsel for the Respondent stated that section
212.1 is an anti-avoidance provision aimed at “dividend
stripping”. Although there is no general anti-surplus stripping rule in
the Act, the Supreme Court in Copthorne Holdings Ltd v Canada,
2011 SCC 63 (hereinafter referred to as Copthorne (SCC)) clearly
established that there is a PUC scheme in the Act and section 212.1
plays an integral part in that scheme and cannot be disassociated with it.
[58]
The definition of PUC is provided in section 89
of the Act.
[59]
The Respondent provided a textual, contextual
and purposive analysis of sections 212.1 and 89. She concluded that the object,
spirit and purpose of section 212.1 is to prevent the tax free distribution of
a corporation’s retained earnings to a non-resident corporation through
transactions designed to distribute funds in excess of the initial investment.
[60]
The Respondent concluded her written submissions
with the following:
94. At the
commencement of the series, the amount that could be repatriated tax-free from
Canada was nominal. At the end of the series, corporate surpluses of
approximately $899,000,000 were available for distribution to a non-resident
with no Canadian tax consequences.
95. The
non-resident taxpayer was able to access corporate surpluses with no Canadian
tax consequences through a non-arm’s length transfer of a Canadian corporation
to, as the corporate structure suggests at the end of the series of
transactions, another Canadian corporation. Clearly, the reorganization was put
in place to circumvent the application of section 212.1 and defeated its
purpose and the PUC scheme of the Act as established by the Supreme Court in Copthorne.
As such, the series of transactions results in an abuse of the relevant
provisions of the Act having regard to those provisions read as a whole.
ANALYSIS
[61]
In Lipson v Canada, 2009 SCC 1, the
Supreme Court summarized the principles from Canada Trustco with respect
to “abuse and misuse” under subsection 245(4).
It stated:
40According 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.
[62]
Subsection 245(4) requires a two-step analysis.
The first step is to determine the object, spirit or purpose of the provisions
of the Act relied on for the tax benefit. In this step, I must consider
the overall scheme of the Act, the relevant provisions and permissible
extrinsic aids. The second step is to examine the factual context of this
appeal in order to determine whether the avoidance transaction defeated or
frustrated the object, spirit or purpose of the provisions in issue: Canada
Trustco (supra) at paragraph 55. The proper approach is a unified textual,
contextual and purposive analysis of the sections of the Act which gave
rise to the tax benefit: Canada Trustco (supra) at paragraph 66.
[63]
The provisions of the Act which are
relevant in this appeal are section 212.1 and subsection 89(1). Subsection
89(1) provides the definition of PUC, a term referenced in section 212.1.
[64]
Section 84.1 is the domestic counterpart of
section 212.1. These sections have been described as “anti-avoidance”
sections aimed at preventing “dividend-stripping”:
Collins & Aikman Products Co v R, 2009 TCC 299 at paras.55 and 105,
aff’d 2010 FCA 251.
[65]
In his article, “The
1977 Amendments to the Corporate Distribution Rules”(1978) 16:1 Osgoode
Hall LJ 155 at 181, Blake Murray described a dividend strip as follows:
In theory, any
transaction by a taxpayer that involves the shares of a Canadian corporation
and that, directly or indirectly, effects a distribution to the taxpayer of all
or part of that corporation’s surplus at a tax cost that is less than the tax
otherwise payable on a dividend of that surplus to the taxpayer would be
regarded as a dividend strip.
[66]
I am mindful that there is no ‘general policy’
in the Act that prohibits dividend stripping and the courts have held
that surplus stripping does not inherently constitute abusive tax avoidance: Gwartz
v R, 2013 TCC 86 at paragraphs 63 to 65. In Copthorne v The Queen,
2007 TCC 481, Campbell J. wrote at paragraph 73:
…While the Act
contains many provisions which seek to prevent surplus stripping, the analysis
under subsection 245(4) must be firmly rooted in a unified textual, contextual
and purposive interpretation of the relevant provisions. As such, reliance on a
general policy against surplus stripping is inappropriate to establish abusive
tax avoidance….
However, in this
appeal, the issue does not involve a ‘general policy’ but a specific
anti-avoidance section aimed at preventing non-residents from withdrawing
dividends out of Canada on a tax-free basis. Any tax planning done for that
purpose must comply with the provisions found in section 212.1 of the Act:
Descarries v R, 2014 TCC 75 at paragraph 43. The question is whether the
Appellant’s reliance on the exemption in subsection 212.1(4) is within the
object, spirit and purpose of that subsection and section 212.1.
A The Text
[67]
The text of the provisions at issue is a
consideration because it may shed light on the rationale for the sections: Copthorne
(SCC) (supra) at paragraph 88.
(1) PUC
[68]
The definition of PUC in subsection 89(1) of the
Act provides:
“paid-up capital”
at any particular
time means,
(a) in
respect of a share of any class of the capital stock of a corporation, an
amount equal to the paid-up capital at that time, in respect of the class of
shares of the capital stock of the corporation to which that share belongs, divided
by the number of issued shares of that class outstanding at that time,
(b) in respect of
a class of shares of the capital stock of a corporation,
…
(iii) where the
particular time is after March 31, 1977, an amount equal to the paid-up capital
in respect of that class of shares at the particular time, computed without
reference to the provisions of this Act except subsections 51(3) and
66.3(2) and (4), sections 84.1 and 84.2, subsections 85(2.1), 85.1(2.1) and
(8), 86(2.1), 87(3) and (9), paragraph 128.1(1)(c.3), subsections 128.1(2) and
(3), 138(11.7), 139.1(6) and (7), 192(4.1) and 194(4.1) and sections 212.1
and 212.3, (emphasis added)
[69]
The Act does not expressly define PUC.
Instead, it relies on the corporate law concept of stated capital. Professor
Krishna refers to PUC as the amount of capital that a corporation can return to
shareholders on a tax-free basis: “The Fundamentals of
Canadian Income Tax”, (9th ed. 2006) p. 719. In Copthorne (SCC),
Rothstein J. discussed the definition of PUC and its reliance on the concept of
stated capital. At paragraphs 76 and 78, he made the following observations:
76 Stated capital
is “the full amount that [a corporation] receives in respect of any shares it
issues” (K. P. McGuinness, Canadian Business Corporations Law (2nd ed. 2007),
at §7.231). Where an investment is made in a corporation in consideration for
shares, the stated capital of the corporation increases. Professor Krishna
refers to stated capital as “the amount of money a shareholder ‘commits’ to the
corporation” (p. 610). The calculation of stated capital is set out at s. 26 of
the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”)
and at s. 28 of the Alberta Business Corporations Act, R.S.A. 2000, c.
B-9 (“ABCA”).
…
78 Where the PUC
of a corporation diverges from the stated capital it is “because of subsequent
adjustments for tax purposes” (Krishna, at p. 621). The adjustments made to
compute PUC are those enumerated in subparagraph (b)(iii) of the
definition of PUC in s. 89(1). Thus, while stated capital and PUC may be the
same in some cases, the two may differ substantially. The adjustment relevant
in this case is found in s. 87(3).
[70]
In the present case, the adjustment to PUC for
tax purposes is found in section 212.1 of the Act.
(2) Section
212.1
[71]
The application of subsection 212.1(1) prevents
a non-resident person from avoiding Part XIII tax on dividends through a
non-arm’s length sale of shares when the following conditions are met:
a)
There is a sale of shares of a corporation
resident in Canada (called the subject corporation) by a non-resident person;
b) The purchaser corporation is also resident in Canada;
c)
The purchaser corporation and the non-resident
corporation do not deal at arm’s length at the time of the disposition;
d) Immediately after the disposition, the subject corporation is
connected to the purchaser corporation within the meaning assigned by
subsection 186(4) of the Act.
[72]
The text of subsection 212.1(1) ensures that in
a non-arm’s length disposition of a Canadian resident corporation’s shares by a
non-resident person to another Canadian resident corporation, the non-resident
is limited to withdrawing its PUC tax free. Any distributions to the
non-resident in excess of its PUC will be taxed as a deemed dividend under Part
XIII of the Act.
[73]
When subsection 212.1(1) applies, paragraph
212.1(1)(a) deems an immediate dividend to have been paid by the purchaser
corporation to the non-resident to the extent that the non-share consideration
given on the transfer exceeds the PUC of the subject shares. The deemed
dividend is then subject to withholding tax under subsection 212(2) of the Act.
[74]
Where the consideration for the transfer of
shares of the subject corporation consists of shares of the purchaser
corporation, an immediate deemed dividend is not triggered. However, paragraph
212.1(1)(b) applies to reduce the PUC of the shares of the purchaser
corporation so that the corporate group cannot make future distributions in
excess of the historical PUC of the subject shares.
[75]
As stated earlier, subsection 212.1(4) is a
relieving provision. It provides that subsection 212.1(1) does not apply where
the non-resident corporation is controlled by the purchaser corporation
immediately before the sale of the shares of the subject corporation. In such a
scenario, any surplus from the subject corporation would remain in Canada with
the purchaser corporation which is a resident of Canada.
[76]
In this appeal, the transactions complied with
the text or actual words contained in this relieving subsection. However, the
question is whether the transactions were in accord with the object, spirt or
purpose of section 212.1 generally and subsection 212.1(4) in particular. At
paragraph 66 of Copthorne, Rothstein J wrote:
The GAAR is a
legal mechanism whereby Parliament has conferred on the court the unusual duty
of going behind the words of the legislation to determine the object, spirit or
purpose of the provision or provisions relied upon by the taxpayer. While
the taxpayer's transactions will be in strict compliance with the text of the
relevant provisions relied upon, they may not necessarily be in accord with
their object, spirit or purpose. In such cases, the GAAR may be invoked by
the Minister. The GAAR does create some uncertainty for taxpayers. Courts,
however, must remember that s. 245 was enacted “as a provision of last resort”
(Trustco, at para. 21). (emphasis added)
B. The Context
[77]
A consideration of the context of the sections
at issue involves an examination of other relevant sections of the Act.
In Copthorne, Rothstein J. described “relevant
sections” as follows:
…However, not
every other section of the Act will be relevant in understanding the context of
the provision at issue. Rather, relevant provisions are related “because they
are grouped together” or because they “work together to give effect to a
plausible and coherent plan” (R. Sullivan, Sullivan on the Construction of
Statutes (5th ed. 2008), at pp. 361 and 364).
[78]
The context for section 212.1 must be considered
in conjunction with how the Act treats the distributions from
corporations resident in Canada, generally.
[79]
The Act attempts to integrate corporate
income tax with personal income tax. To this end, when corporate dividends are
paid to individual shareholders, the gross-up and credit system in subsection
82(1) and section 121 generally allow for a full credit for individuals in
respect of any corporate income tax paid. Likewise, when a corporation’s income
has been subject to Canadian income tax, the after-tax profit will not be
subject to tax again when it is distributed as a dividend to corporations
resident in Canada (section 112). However, dividends paid to non-resident
corporations by corporations resident in Canada are subject to Part XIII tax
pursuant to subsection 212(2) of the Act. The context of section 212.1
is therefore within the system that is used to impose withholding taxes on a
non-resident corporation when it receives dividends from a Canadian resident
corporation.
[80]
Section 212.1, as part of the “PUC Scheme” within the Act, ensures that in
non-arm’s length transactions, tax-free distributions from a corporation
resident in Canada to a non-resident shareholder are limited to its PUC. Any
payments to the non-resident shareholder in excess of its investment are
taxable.
[81]
Section 212.1 is contained in Part XIII of the Act
which is entitled “Tax on Income from Canada of
Non-Resident Persons”. Part XIII applies 25% withholding tax - subject
to treaty exemptions. In this case, the withholding tax was 5% in accordance
with Article X of the Canada–United States Tax Convention (1980). Subsection
212(2) of the Act requires that every non-resident person shall pay
income tax on every amount that a corporation resident in Canada pays or
credits, or is deemed by Part I to pay to a non-resident in satisfaction of a
taxable dividend.
[82]
In the present appeal, if the Appellant had not
used subsection 212.1(4) of the Act, it would have been required by
subsection 215(1) to withhold the amount of tax on the dividend deemed to UHI
and to remit this tax to the Receiver General on behalf of UHI. Failing to do
this, the Appellant would have been liable for the tax on the deemed dividend
pursuant to subsection 215(6) of the Act.
[83]
Subsection 212.1(4) is placed as an exception
within an anti-avoidance section and it must be viewed within that context.
With this in mind, it is reasonable to infer that subsection 212.1(4) cannot be
used so that it would defeat the very application of section 212.1. It is my
view that subsection 212.1(4) is aimed at a narrow circumstance where the purchaser
corporation, which is resident in Canada, actually controls the non-resident
corporation without manipulating the corporate structure to achieve that
control. Such narrow circumstances do not apply to this appeal.
[84]
Both sections 84.1 and 212.1 are described as “anti-avoidance” sections and they operate in a
similar fashion. However, section 84.1 is more generous in its application. As
with the application of section 212.1, when certain conditions are met,
subsection 84.1(1) may cause an immediate deemed dividend to the transferor
with respect to non-share consideration or a reduction in the PUC of the shares
of the purchaser corporation where the consideration for the shares includes
shares of that corporation or both. Unlike section 212.1, in certain circumstances,
section 84.1 allows a step-up in PUC when calculating the deemed dividend.
Angelo Nikolakakis and Alain Léonard explained it this way:
…What is
interesting in this regard is that section 84.1, the domestic counterpart of
section 212.1, reflects a different standard, in that it permits PUC to be
stepped up through such non-arm’s length transfer to the extent of the
transferor’s “hard basis” in the transferred shares. That is, the combined
effect of paragraphs 84.1(1)(b) and 84.1(2)(a) and (a.1) is that the transferor
is permitted to take back non-share consideration up to the amount of the
transferor’s ACB in the transferred shares, except to the extent that the ACB
arises from a prior disposition by the taxpayer or a non-arm’s length person to
which a capital gains exemption under section 110.6 was applicable or to the
extent that such ACB resulted, in whole or in part, from transactions involving
shares that had (or were substituted for shares that had) pre-1972 accrued
gains (“the soft basis”). No such latitude is permitted under section 212.1.
(emphasis added)
(Angelo
Nikolakakis and Alain Léonard, “The Acquisition of Canadian
Corporations by Non-Residents: Canadian Income Tax Considerations Affecting
Acquisition Strategies and Structure, Financial Issues, and Repatriation of
Profits” Report of Proceedings of
Fifty-Seventh Tax Conference, 2005 Conference Report (Toronto: Canadian Tax
Foundation, 2006), 21:1-45.)
C. The Purpose
[85]
This step in the analysis seeks to ascertain the
outcome Parliament intended a provision or provisions to achieve: Copthorne
(SCC) at paragraph 113. It is accepted that extrinsic aids, including budget
materials, can be used to determine the purpose of the relevant section of the Act.
[86]
Section 212.1 came into effect in 1977 as part
of the revision to the anti-dividend stripping rules. It was intended that
section 212.1 would block dividend stripping by a non-resident shareholder,
whether against the Valuation Day value of his shares or by virtue of a treaty
exemption from Canadian tax on capital gains, through the non-arm’s length sale
of such shares to a Canadian corporation: “The 1977
Amendments to the Corporate Distribution Rules” (1978) (supra) at
p. 182.
[87]
The section has been amended on numerous
occasions. The Technical Notes which accompanied the 1984 amendment to
section 212.1 included the following:
Section 212.1
ensures that non-residents cannot use non-arm’s length reorganizations of their
Canadian corporations to convert dividend distributions that would be subject
to non-resident withholding tax under Part XIII into tax-free capital gains.
[88]
Section 212.1 was again amended in 1988 to
extend its application to non-resident-owned investment corporations and the Technical
Notes released by the Department of Finance read:
Subsection
212.1(1) is intended to prevent the conversion of a corporation’s surplus –
which would be subject to Canadian tax upon distribution to its non-resident
shareholder – into proceeds from the disposition of the corporation’s shares –
which may give rise to a capital gain that is not subject to tax in Canada.
Where a non-resident disposes of his shares to a Canadian corporation with
which he does not deal at arm’s length, subsection 212.1(1) treats a dividend
as having been paid to the non-resident to the extent that any non-share
consideration, including debt, received on the disposition exceeds the paid-up
capital of the shares.
[89]
The 1988 Budget Supplementary Information
reads:
Section 212.1 of
the Income Tax Act contains special provisions applying to a non-resident who
disposes of shares of a Canadian corporation to another Canadian corporation
with which the non-resident does not deal at arm’s length. The purpose of
these provisions is to prevent the conversion of a corporation’s surplus -
which would be subject to tax upon distribution to the non-resident shareholder
- into proceeds from the disposition of the corporation’s shares, thereby
giving rise to a capital gain that may not be subject to tax in Canada. (emphasis
added)
[90]
In 1998, section 212.1 was again amended so that
its scope also extended to situations where the subject corporation and the
purchaser corporation were corporations resident in Canada whether or not they
were Canadian corporations. The purpose of section 212.1 was confirmed by the
1998 amendment.
[91]
In Copthorne, the Supreme Court agreed
that section 212.1 was an anti-avoidance section aimed at preventing “dividend stripping”. Rothstein J stated:
[95] Section
89(1) incorporates by reference provisions which reduce the PUC of the shares
of a corporation. They are colloquially referred to as “grinds”. For example,
ss. 84.1 and 212.1 both grind PUC in non-arm’s length transactions. These
sections have been described as “anti-avoidance” provisions aimed at “dividend
stripping” (Collins & Aikman Products Co. v. The Queen, 2009 TCC
299, 2009 D.T.C. 1179, at paras. 55 and 105, aff’d 2010 FCA 251, [2011] 1
C.T.C. 250) because such non-arm’s length transactions may provide an
opportunity for corporations to return funds in excess of the initial
investment made with tax-paid funds to a shareholder as a non-taxable return of
capital, rather than as a taxable dividend.
[92]
In conclusion, it is well established that the
purpose of section 212.1 is to prevent non-resident shareholders from reorganizing
their Canadian resident corporations so that they can convert dividend
distributions that would ordinarily be subject to non-resident withholding tax
under Part XIII into tax-free capital gains.
[93]
If the Appellant’s position prevailed, any
non-resident shareholder could reorganize its corporate structure to interpose
layers of Canadian resident subsidiaries within its structure to ensure that
subsection 212.1 (1) never applies. This cannot have been the intent of
Parliament when enacting subsection 212.1(4) of the Act.
[94]
Subsection 212.1(4) was added in 1978 without
any explanatory notes. However, I believe that the 1977 De Boo Budget Date
Comments regarding the proposed enactment of section 212.1 sheds light on
the rationale for enactment of the relieving provision in subsection 212.1(4).
That comment was:
This proposal
will introduce rules to prevent non-residents from engaging in surplus strips
and thereby avoiding non-resident withholding tax by the sale of shares in
non-arm’s length transactions to another corporation, for example, a Canadian
corporation. The full extent of this far-reaching proposal will not be known
until the wording of the implementing legislation is made public. However,
there is some danger that, unless the legislation is drafted with extreme care
it will inadvertently inhibit bona fide sale of shares by one member of
a multinational corporate group to another. (emphasis added)
[95]
Seen in this light, the purpose of subsection
212.1(4) was to address the concerns raised by tax lawyers as evidenced in the 1977
De Boo Budget Date Comments. That purpose is to allow for the bona fide
sale of shares by one member of a multinational corporate group to another
while still respecting the purpose of subsection 212.1(1) of the Act.
[96]
The March 22, 2016 Budget has proposed an
amendment to this provision which would ensure that it could not be used to
circumvent the application of section 212.1. In Tax Measures: Supplementary
Information, the Government wrote:
The paid-up
capital (PUC) of the shares of a Canadian corporation generally represents the
amount of capital that has been contributed to the corporation by its
shareholders. PUC is a valuable tax attribute because it can be returned to
shareholders free of tax. Retained earnings in excess of PUC that are
distributed to shareholders are normally treated as taxable dividends that are,
for non-resident shareholders, subject to a 25-per-cent withholding tax (unless
reduced under an applicable tax treaty).
The Income Tax
Act contains an “anti-surplus-stripping” rule (section 212.1) that is
intended to prevent a non-resident shareholder from entering into a transaction
to extract free of tax (or “strip”) a Canadian corporation’s retained earnings
(or “surplus”) in excess of the PUC of its shares or to artificially increase
the PUC of the shares. When applicable, the anti-surplus-stripping rule results
in a deemed dividend to the non-resident or a suppression of the PUC of the
shares that would otherwise have been increased as a result of the transaction.
An exception to
this anti-surplus-stripping rule is found in subsection 212.1(4). It applies
where a Canadian corporation (the “Canadian purchaser corporation”) acquires
shares of a non-resident corporation that itself owns shares of a Canadian
corporation – that is, where the non-resident is “sandwiched” between the two
Canadian corporations – and the non-resident disposes of shares of the
lower-tier Canadian corporation to the Canadian purchaser corporation in order
to unwind the sandwich structure. Some non-resident corporations with Canadian
subsidiaries have misused this exception by reorganizing the group into a
sandwich structure with a view to qualifying for this exception, as part of a
series of transactions designed to artificially increase the PUC of shares of
those Canadian subsidiaries.
Budget 2016
proposes to amend the exception in subsection 212.1(4) to ensure that it
applies as intended. In particular, it will be clarified that, consistent with
the policy of the anti-surplus-stripping rule, the exception does not apply
where a non-resident both (i) owns, directly or indirectly, shares of the
Canadian purchaser corporation, and (ii) does not deal at arm’s length with the
Canadian purchaser corporation. (emphasis added)
Transactions that
misuse subsection 212.1(4) are currently being challenged by the Government
under existing provisions of the Income Tax Act, including the general
anti-avoidance rule; these challenges will continue with respect to
transactions that occurred prior to Budget Day. This measure is intended to
promote certainty and clarify the intended scope of the existing exception.
(emphasis added)
To address the
possibility of situations where it may be uncertain whether consideration has
been received by a non-resident from the Canadian purchaser corporation in
respect of the disposition by the non-resident of shares of the lower-tier
Canadian corporation, Budget 2016 also proposes to clarify the application of
the anti-surplus-stripping rule by deeming the non-resident to receive
non-share consideration from the Canadian purchaser corporation in such
situations. The amount of this deemed consideration will be determined by
reference to the fair market value of the shares of the lower-tier Canadian
corporation received by the Canadian purchaser corporation.
This measure will
apply in respect of dispositions occurring on or after Budget Day.
[97]
It is my view that this proposed amendment to
subsection 212.1(4) is a relevant consideration in ascertaining the purpose
underlying the provision at issue in this appeal. The proposed amendment does
not retroactively change the law but simply amends the subsection while
embodying its underlying rationale as it existed at the time of the
transactions in this appeal. The Supplementary Information directly
addresses the purpose and the intended scope of the exception as it applied in
2007. That purpose is to allow for a bona fide sale of shares from a
non-resident corporation to a Canadian resident corporation where it is the
Canadian resident corporation that controls the non-resident corporation. The
exception should not apply in the situation where a non-resident owns shares of
the Canadian resident purchaser corporation. The exception does not apply where
a non-resident uses non-arm’s length reorganizations of their Canadian resident
corporations to convert dividend distributions that would otherwise be subject
to non-resident withholding tax under Part XIII into tax-free capital gains:
See the 1984 Technical Notes.
[98]
As in the case of Water’s Edge Village
Estates (Phase II) Ltd v The Queen, 2002 FCA 291, I believe that “this amendment demonstrates that Parliament moved as quickly
as it could to close the loophole exploited by the appellants precisely because
the result achieved was anomalous having regard to the object and spirit of the
relevant provisions of the Act”: Water’s Edge at paragraph 47.
[99]
I agree with the Respondent’s view that
subsection 212.1(4) allows for an internal restructuring where, ultimately, a
Canadian resident parent corporation would benefit from the surplus held by one
of its subsidiaries. In such a situation, the surplus remains in Canada.
CONCLUSION
[100] CVC conducted a reorganization of some of its corporations for the
sole purpose of “artificially complying” with
the text of subsection 212.1(4). As a result, approximately $889,000,000
surplus funds from Univar Canada were available for distribution to a
non-resident without paying Part XIII tax. The transactions which were used in
the reorganization were planned prior to July 9, 2007 when CVC made its binding
bid to Univar NV. In September 2007, the corporation UHI and the Appellant were
incorporated for the sole purpose of taking part in the planned reorganization.
The transactions were carried out in 7 days. The Appellant fictionally
controlled the non-resident, Univar Inc. for less than a day and at all times
the Appellant was itself controlled by a non-resident, UHI.
[101] Consequently, the overall outcome that section 212.1 was intended to
prevent was circumvented. In doing so, the object, spirit and purpose of
section 212.1 in general and subsection 212.1(4) in particular were defeated.
It is clear that the transactions at issue in this appeal were an abuse of the Act
and section 245 applies.
[102] Before I conclude, I want to address two arguments made by
Appellant’s counsel at the hearing of the appeal. The Appellant agreed in the
Statement of Partially Agreed Facts that the corporations participating in the
series of transactions were not dealing at arm’s length. However, at the hearing
of the appeal, counsel argued that the transactions did not frustrate section
212.1 because they arose in the circumstances of an arm’s length purchase of
Univar NV by CVC.
[103] CVC and Univar NV may have been operating at arm’s length when the
planning and discussions for these transactions occurred. However, they were
not at arm’s length by October 4, 2007 and all of these transactions took place
between October 12 and October 19, 2007.
[104] The second argument made by the Appellant concerned the relevance of
a Canada Revenue Agency Memorandum (“the Memo”) which I admitted into evidence
under advisement. This Memo was from the GAAR Committee which addressed the
application of the GAAR to the facts in the present appeal. Counsel on behalf
of the Appellant submitted to the committee that the result obtained by CVC in
this appeal could have been realized by fully capitalizing a Canadian
acquisition corporation.
[105] Counsel for the Appellant wrote to the GAAR Committee that this
alternative structure “would have ensured that cross
border tax attributes (in the form of tax cost and PUC) would accurately
reflect the economic cost to the purchaser of making its investment in a
Canadian operating entity”.
[106] However, the Appellant did not implement this alternative structure
and in tax law, form matters: Friedberg v The Queen, [1992] 1 CTC 1 at
paragraph 5.
[107] The appeal is dismissed. Costs are awarded to the Respondent.
Signed
at Toronto, Ontario, this 22nd day of June 2016.
“V.A. Miller”
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