Purpose/Intention

Cases

MacDonald v. Canada, 2020 SCC 6

intention re forward contract determined on basis of objective linkage to hedged asset rather than testimony as to subjective purpose

An individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. Starting about seven years later, he started closing out the forward at a loss. The Tax Court had accepted the taxpayer’s testimony that he had intended to profit from the anticipated decline in the value of the BNS shares under the forward contract but nevertheless retained ownership of the shares based on his belief that they would perform well in the long term.

In affirming the Federal Court of Appeal’s decision to reverse this decision on the basis of objective indications that the forward sales hedged the taxpayer’s BNS holding, Abella J stated (at para. 22):

A long line of jurisprudence supports the conclusion that the characterization of a derivative contract as a hedge turns on the contract’s purpose. Purpose is ascertained objectively (Ludco …). While subjective manifestations of purpose may sometimes be relevant, the taxpayer’s stated intention … is not determinative. The taxpayer’s conduct is generally more revealing than “ex post facto declarations” of the taxpayer … . As the cases demonstrate, the primary source of ascertaining a derivative contract’s purpose is the linkage between the derivative contract and any underlying asset, liability or transaction purportedly hedged. The more closely the derivative contract is linked to the item it is said to hedge, the stronger the inference that the purpose of the derivative contract was hedging. The income tax treatment of gains and losses arising from derivative contracts depends on whether the derivative contract is characterized as a hedge or speculation. Gains and losses arising from hedging derivative contracts take on the character of the underlying asset, liability or transaction being hedged … . In contrast, speculative derivative contracts are characterized on their own terms, independent of an underlying asset or transaction.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges cash-settled forward sales were a hedge of a shareholding notwithstanding their settlement without a corresponding share sale and a stated intention to speculate 620
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss - Hedges cash-settled forward “objectively” was a capital share hedge notwithstanding no matching share sale 518

Ranjbar v. Canada, 2016 FCA 116

regard to objective manifestations of purpose

The trial Judge found that a purchase of a townhome satisfied ETA s. 254(2)(b) because at the time of the agreement of purchase and sale, the appellant intended to use the property as her primary place of residence. Dawson JA accepted (at para. 7) the Crown's submission that the trial judge was “required at law to have regard to objective manifestations of purpose (Symes v. Canada, [1993] 4 S.C.R. 695, at page 736,” but went on to find (at paras. 10-12) that it was inappropriate to infer that the trial judge had failed to do so having regard to the presumption:

that “[t]rial judges are presumed to know the law with which they work day in and day out” (F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41, at paragraph 54… .)

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 254 - Subsection 254(2) - Paragraph 254(2)(g) s. 254(2)(g)(ii) satisfied as alternative to (i) 160

Swirsky v. Canada, 2014 DTC 5037 [at 6723], 2014 FCA 36, aff'g 2013 TCC 73, 2013 DTC 1078 [at 431]

no objectively reasonable income-producing purpose

Before affirming a finding of Paris J that the taxpayer's wife had not established an income-producing purpose for money borrowed by her to acquire shares of a family company, Dawson JA stated (at para. 8) that "where the purpose or intention behind an action is to be ascertained, a court should objectively determine the purpose, guided by both objective and subjective manifestations of purpose." Paris J (contrary to the taxpayer's submission) had, in fact given weight to a number of objective manifestations of purpose.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) no objectively reasonable expectation of taxable dividends 433
Tax Topics - General Concepts - Onus applying GAAR at confirmation stage doesn't shift onus 63

Petro-Canada v. Canada, 2004 DTC 6329, 2004 FCA 158

purpose test satisfied even if multiple purposes

The Tax Court had allowed a deduction for only a portion of the purchase price for seismic data purchased by two joint exploration corporations and renounced to the taxpayer on the basis that only a portion of the seismic data had been acquired for the required purpose. Sharlow JA stated (at para. 34):

[T]he statutory purpose test…may be met by an expenditure which is made for more than one purpose…

Rich v. Canada, 2003 DTC 5115, 2003 FCA 38

subordinate purpose sufficient

Rothstein JA stated (respecting a situation where the predominant purpose of making a loan was to assist the taxpayer’s son) that a “subordinate purpose” of generating interest or dividend income is sufficient to satisfy the income-producing purpose test in s. 40(2)(g)(ii).

Ludco Enterprises Ltd. v. Canada, 2001 DTC 5505, [2001] 2 S.C.R. 1082, 2001 SCC 62

objective and subjective manifestations of purpose

Before going on to consider whether the taxpayer had borrowed money for an income-producing purpose, Iacobucci J. stated (at p. 5514):

"In the interpretation of the Act, as in other areas of law, where purpose or intention behind actions is to be ascertained, courts should objectively determine the nature of the purpose, guided by both subjective and objective manifestations of purpose ... . In the result, the requisite test to determine the purpose for interest deductibility under s. 20(1)(c)(i) is whether, considering all the circumstances, the taxpayer had a reasonable expectation of income at the time the investment is made."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance right to structure for tax avoidance 121
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) ancillary purpose of earning (1%-yield) dividend income/allocation of reinvested proceeds 100% to income-producing source 396
Tax Topics - Statutory Interpretation - Certainty 97

Backman v. Canada, 2001 DTC 5149, 2001 SCC 10, [2001] 1 S.C.R. 367

motivation v. purpose

Before finding that the taxpayers had not entered into an arrangement with the requisite intention to be partners, the Court stated (at p. 5154) that "motivation is that which stimulates a person to act, and intention is a person's objective or purpose in acting. This Court has repeatedly held that a tax motivation does not derogate from the validity of transactions for tax purposes ...".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance 85
Tax Topics - Income Tax Act - Section 96 essential Canadian elements of partnership not present as only momentarily "partners" in common 292
Tax Topics - Statutory Interpretation - Provincial Law foreign "partnership" must have the attributes of a Cdn partnership 143

Roseland Farms Ltd. v. Canada, 99 DTC 5704 (FCTD), aff'd 2001 DTC 5392 (FCA), 2001 FCA 167

Before going on to find that the decision to purchase farm land by the corporation originated with its shareholders, Sharlow J. stated (at p. 5707):

"that the intention of a corporation is that of the natural persons by whom it is managed and controlled ... . In the case of a widely held public corporation, the requisite intention may be that of a corporate officer or a group of officers or directors who made the purchasing decision. The intention of a closely held corporation, however, is normally that of the shareholders."

Canada v. Wu, 98 DTC 6004 (FCA)

In light of the additional word in s. 15(1.1) referring to "it may reasonably be considered", the Tax Court Judge had erred in finding that the relevant purpose must be the conscious intent of the taxpayer. Rather than a subjective test, the quoted words clearly indicated that the evidence of necessary intent could be established if in the circumstances it was reasonable to consider that this was one of the purposes of the payment.

74712 Alberta Ltd. (formerly Cal-Gas & Equipment Ltd.) v. The Queen, 97 DTC 5126 (FCA)

Robertson J.A. stated (at p. 5135) after discussing jurisprudence on paragraph 20(1)(c):

"... I see nothing in the jurisprudence ... which requires a subjective appreciation of the motives or intent underlying the taxpayer's decision to borrow funds ... . The words 'use' and 'purpose' are used in paragraph 20(1)(c) in an objective not subjective sense."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) guarantee of parent borrowing was not made re taxpayer's income-earning capacity 191

Maritime Forwarding Ltd v. The Queen, 88 DTC 6114, [1988] 1 CTC 186 (FCTD)

"It has often been repeated in tax matters that assertions by a taxpayer as to his intentions are only persuasive to the extent that they may be directly or indirectly confirmed by or be consistent with overt and objective fact."

[C.R.: "Evidence"]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(2.1) 69

Mohawk Horning Ltd. v. The Queen, 86 DTC 6296, [1986] 2 CTC 89 (FCA)

It was found that any change of intention by a non-controlling member of a syndicate ("Schneider") to hold his interest in the real property of the syndicate as capital property rather than inventory, did not entail a change of intention by the syndicate. Urie, J. stated that where the participants in a transaction "all are to greater or lesser degrees active, (as here) the most active participant's intention (in this case Schneider's) must be enveloped by that of the consortium as a whole, even if, alone, his purpose would have been different."

Don Fell Ltd. v. The Queen, 81 DTC 5282, [1981] CTC 363 (FCTD)

The intention of a company of which one person is the sole shareholder, director and officer, is the intention of that person.

Bomag (Canada) Ltd. v. The Queen, 81 DTC 5085, [1981] CTC 156 (FCTD), aff'd 84 DTC 6363, [1984] CTC 378 (FCA)

The intention of the German parent of the taxpayer in negotiating a contract for the cancellation of a franchise prior to the incorporation of the taxpayer, was attributed to the taxpayer for the purpose of determining the tax treatment of payments made by the taxpayer pursuant to the contract.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A cost of obtaining surrender of previous contact was part of cost of new contract 34
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 14 70

Kit-Win Holdings (1973) Ltd. v. The Queen, 81 DTC 5030, [1981] CTC 43 (FCTD)

The intentions of the dominant member of a land-development syndicate were attributed to the taxpayer, which was a more passive member, for the purpose of determining whether it had acquired its interest in the syndicate lands on capital account.

Robbie Holdings Ltd. v. The Queen, 80 DTC 6336, [1980] CTC 422 (FCTD)

"The motivation or motivations which lead a person to make a purchase of land are always questions of fact. What the purchaser says on this point must always be considered, but it may not be decisive. Particularly is this the case when the motives or intention he ascribes for the purchase would result in a sustantial financial benefit to himself. The purchaser's actions and other circumstances may be a far better guide to his true motives than are his statements about them."

Program Properties Ltd. v. The Queen, 78 DTC 6215, [1978] CTC 320 (FCTD)

Walsh, J. stated: "The intent of this closely held company can only be determined by examing the intent of the shareholders of it and in particular the principal and controlling shareholder. The intent must be determined as of the date of purchase".

See Also

Commissioner of Taxation v Sharpcan Pty Ltd, [2019] HCA 36

purpose distinguished from motive

Before finding that the taxpayer’s expenditures for 10-year assignable gaming licences (“GMEs”), which it required in order to be permitted to continue using gaming machines on its hotel premises, were capital expenditures, the Court stated (at para. 49):

[T]he evidence … demonstrated that the Trustee was motivated to purchase the GMEs by the realisation that it could not continue to carry on its gaming business unless it did so. Motive, however, is different from purpose. [T]he motive for a person's conduct is the person's reason for engaging in it. By contrast, the purpose of a person's conduct is the end that is sought to be accomplished by it. Here, although it may be accepted that the Trustee's motive for purchasing the GMEs was that the Trustee wished to continue to carry on its gaming business as it had done up to that point, the end that the Trustee subjectively sought to accomplish in outlaying the purchase price of the 18 GMEs, and thus the subjective purpose of the expenditure, was to acquire the 18 GMEs necessary to continue to trade. That was also the objective purpose of the outlay. Looked at objectively from a practical and business point of view, the purpose of paying the purchase price of the GMEs was to acquire the GMEs as an asset of the Trustee to be used in the course of the Trustee's hotel business.

Words and Phrases
purpose motive
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Contract Purchases 10-year gaming licences required to maintain existing gaming revenues were purchased on capital account 334
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Concessions and Licences periodic payments under 30-year government concession were currently deductible 190
Tax Topics - Income Tax Act - Section 13 - Subsection 13(34) - Paragraph 13(34)(b) 10-year gaming licences required to maintain existing gaming revenues were not for goodwill 233

High-Crest Enterprises Limited v. The Queen, 2015 TCC 230, nullified on procedural grounds 2017 FCA 88

government funding only of operating costs did not detract from its purpose of increasing beds
see summary 2017 FCA 88

ETA s. 191.1(2) effectively deems the HST to be payable on the greater of most costs and the fair market value where the builder received government funding "for the purpose of making residential units in the complex available to [seniors]."

Owen J found (at para. 93) that although the form of government assistance for an addition to a Nova Scotia nursing home was its agreement to subsidize operating costs relating to the additional residents and not the construction costs:

[T]his does not alter the fact that the dominant purpose of the Department in…agreeing to make these payments was to secure additional long‑term care beds for seniors in Nova Scotia. The immediate result of the payments may have been the provision of the Services but that was not the purpose behind the payments.

He previously noted (at para. 80):

In light of the focus on the purpose of a third party - the grantor or organization - the use of the definite article "the" before the word "purpose" suggests that the definition requires a determination of the main or dominant purpose of the grantor or organization. Otherwise the builder would be faced with the near impossible task of ruling out all other possible purposes.

See summary under ETA, s. 191.1(1) - Government Funding.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 191.1 - Subsection 191.1(1) - Government Funding government funding only of operating costs did not detract from its objective of increasing beds 245
Tax Topics - Statutory Interpretation - Certainty interpretation with reasonably certain application is preferred 162

McKesson Canada Corporation v. The Queen, 2014 DTC 1040 [at 2723], 2013 TCC 404

tax purpose v. commercial result

FCA appeal settled.

The taxpayer sold receivables to its Luxembourg parent at over twice the discount which could be supported under s. 247(2)). Boyle J stated (at para. 268):

[T]he predominant purpose and intention of McKesson Canada participating in the… transactions with the other McKesson Group members was not to access capital or to lay off credit risk. Those were results of the transactions but did not motivate them. The purpose was to reduce McKesson Canada's Canadian tax liability... .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence expert reports without testimony 46
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) terms adjusted within framework of transaction chosen by taxpayer 894
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(4) advocacy 3rd-party report not read by taxpayer 149
Tax Topics - Treaties - Income Tax Conventions - Article 9 5-year limitation did not apply to secondary Part XIII assessment 190

McCoy v. The Queen, 2003 DTC 660, 2003 TCC 332

Before going on to find that a limited partnership had acquired software for the purpose of gaining or producing income, Bowman A.C.J. stated (at p. 678):

"Intention is subjective. Purpose, while it may involve a subjective element, must be largely determined on the basis of objective considerations. It is impossible if one looks at the material that was presented to the investors to conclude that the earning of income was not a purpose of the partnership."

Jacques St-Onge Inc. v. The Queen, 2003 DTC 153 (TCC)

Archambault T.C.J. referred, with approval, to the statement of Rip T.C.J. in Bailey v. The Queen, [1989] T.C.J. 602 that: "what is 'reasonable' is not the subjective view of either the respondent or appellant but the view of an objective observer with a knowledge of all the pertinent facts", and went on to find that it was reasonable to expect that a subsidiary of the taxpayer would be wound-up notwithstanding that the proprietor of the taxpayer had indicated that, in fact, he had no intention to wind-up the subsidiary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) wind-up of debtor was delayed 137

Wong v. The Queen, 99 DTC 458 (TCC)

Before going on to accept evidence that stock dividends that produced the result described in s. 15(1.1) were not declared with that purpose in mind, Rowe D.J. stated (at p. 464):

"In my view the addition of the words 'it may reasonably be considered' in subsection 15(1.1) does not detract from the validity of examining the definition of 'purpose' as it pertains to the intention, end, aim, object, plan, project or goal to be accomplished or achieved. The additional words make it clear that an objective standard is to be applied to the evidence offered up by a taxpayer and fanciful, outrageous or otherwise unreliable testimony on the issue of purpose does not have to be accepted at face value any more than any other portion of testimony or piece of evidence even though it is forcefully expressed in a manner consistent with a deeply-held belief. It is apparent the standard to be applied against the taxpayer is much more stringent than where the language of the legislation used the word 'desired' as in subsection 56(2) of the Act as considered by the Federal Court of Appeal in Jones v. The Queen, 96 DTC 6015 (also reported as Ascot Enterprises v. R, [1996] 1 CTC 384."

Vodafone Cellular Ltd. v. Shaw, [1997] BTC 247 (C.A.)

Before going on to find that a contract-cancellation payment by the taxpayer was made exclusively for the purposes of its trade, Millett L.J. noted (at p. 254) that the inquiry as to what was the taxpayer's subjective intention did "not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment".

IRC v. Fisher's Executors, [1926] A.C. 395 (HL)

"In any case desires and intentions are things of which a company is incapable. These are the mental operations of its shareholders and officers. The only intention that the company has is such as is expressed in or necessarily follows from its proceedings. It is hardly a paradox to say that the form of a company's resolutions and instruments is their substance."

Administrative Policy

14 March 2016 Internal T.I. 2015-0609671I7 - Earnout, Amalgamation, Cost of Shares and ECE

attribution of predecessor's intention to Amalco

A Canadian Acquisitionco acquired Canadian Targetco for a cash base price plus earnout obligations, and then immediately merged with Targetco under a short-form amalgamation. After first finding that these payments were an addition to the cost of the Targetco shares (notwithstanding that such shares had since disappeared), the Rulings Directorate went on to find that, in any event, the earnout payments were not made for the purpose of gaining or producing income from a business for purposes of the eligible capital expenditure definition, stating inter alia:

Amalco has to be placed in the shoes of Acquisitionco at the time of Acquisitionco entering into the Agreement. At that time, the purpose for the Earnout Payments was not to earn income from a business but to acquire a capital asset, i.e., the Shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) post-amalgamation earnout payment could be applied to increase an s. 88(1)(d) bump of capital property (but not ECP) of the amalgamated target 299
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure payments made by Amalco in satisfaction of earnout obligation for acquisition of one precedessor by the other were not ECE 204
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base earnout payments an addition to cost of shares which had since disappeared 78
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) position on interest deductibility following target amalgamation is based on policy and ITA scheme rather than technical 338

Articles

Michael McGowan, "HMRC v Lloyds Bank Leasing (No 1) Ltd: the troublesome increase in the scope of the "sole or main object" test", [2015] British Tax Review, No.5 2015 (Thomson Reuters (Professional) UK Limited), p. 649

Facts in Lloyds Bank case (p. 649)

[K]awasaki Kisen Kaisha (K-Line) won a tender contract to acquire and operate two ships to transport liquefied natural gas under time charters. Lloyds TSB Equipment Leasing (No. 1) Ltd (Lloyds Leasing) agreed to a novation of the purchase contracts in its favour from K-Line and subsequently granted finance leases of the two ships to companies of which K-Line was a shareholder (the Northern LNG Companies). This meant the Northern LNG Companies bore the financial risk of owning and operating the vessels but Lloyds Leasing ^retained die legal title and the right to claim capital allowances. Bareboat charters were then granted by the Northern LNG Companies to K-Euro. a UK-resident trading subsidiary of K-Line….

“One of the main objects" tests (p. 649)

The main focus of the court hearings has been the scope of the anti-avoidance rule contained in section 123(4) of the Capital Allowances Act 2001 (CAA 2001). The key question which was appealed to the CA [[2014] EWCA Civ 1062; [2014 STC 2770] and remitted to the FTT [[2015] UKFTT 401] was…whether the obtaining of a writing-down allowance at 25 per cent was "a main object, or one of the main objects" of the relevant ship-leasing transactions.

Melluish distinguished (pp. 650-1)

[A]ccording to the CA,…in Melluish, the relevant anti-avoidance test focused on "the sole or main benefit" of a given transaction, whereas section 123(4) CAA 2001 focuses more loosely on "the main, or one of the main objects" of the relevant transaction.

[R]imer LJ, delivering the unanimous decision of the CA, stated that even if each transaction "was entered into for a genuine commercial purpose, it may still be the case that a main object of structuring them in the way they were was to obtain the capital allowances.

[T]he CA allowed HMRC's appeal, set aside the decision of the FTT and remitted the case to the FTT, to be reheard on the facts….

Focus on intention of decision-maker (p. 651)

[A]s to whose intentions are relevant, the FTT suggested that the primary focus is on "the intentions of the person or persons who took the decision to enter into a particular transaction.'" [f,n, 13...[48]] However, in this case, it did not in fact matter whether one looked directly at the intentions of relevant parties other than K-Line or examined them through K-Line's eyes: K-Line must have been aware that tax was a consideration for all parties.

Tax allowance shaped transactions' form (p. 651)

[A]lthough the FTT accepted that, even without allowances, "the transactions would have gone ahead in some form", [fn: 14: ...at [85]] it was unlikely they would have taken the form they did but for the potential availability of allowances. That sufficed to trigger section 123(4) CAA 2001.

Main v. subsidiary object (p. 653)

[A]t paragraph 50, the FTT pose the question regarding the

"identification of the dividing line between an object which, though not paramount, is a main object and an object which, even if it is rather more than the icing on the cake, is nevertheless a subsidiary rather than main object"

Departure from more favourable Brebener test re genuine commercial transaction (p. 654)

In effect, the courts have now made it difficult for taxpayers to show that tax is not "a main object/purpose" in any situation where they have taken tax advice, and elected to adopt a more rather than less tax-efficient structure for a commercial transaction. This effectively ignores Lord Upjohn's statement in IRC v Brebner that:

"... when the question of carrying out a genuine commercial transaction ... is considered, the fact that there are two ways of carrying it out—one by paying the maximum amount of tax, the other by paying no, or much less, tax—it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is ... avoidance of tax. [fn 22: IRC v Brebner (1967), 43 TC 705 (HL) at 718.]

Words and Phrases
one of main objects
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 83 - Subsection 83(2.1) structured transactions with tax reduction as one of main objects 85

David C. Nathanson, "Tax Motive Kills Partnership: Spier Freezes (cf. Continental Bank)", Tax Litigation, Vol. VII, No. 3

Includes a discussion of Norglen Ltd. v. Reeds Rain Prudential Ltd., Circuit Systems Ltd., [1998] 1 All E R 218 (HL) (respecting the irrelevance of motive).

Jones, "Nothing Either Good or Bad, But Thinking Makes It So - The Mental Element in Anti-Avoidance Legislation", 1983 British Tax Review, pp. 9, 113.