Tax Avoidance

Table of Contents


Chappell v Revenue and Customs Commissioners, [2016] BTC 36, [2016] EWCA Civ 809

provision intended to provide relief for “real world…commercial transactions” was not available in a purely tax-driven structure

A tax avoidance scheme failed to achieve the targeted income tax shelter. In particular, relief under SI 1993/2004, Reg. 2B(3), which allowed a deduction from total income for a manufactured overseas dividend paid, was not available. Patten LJ stated (at para. 44) in finding that the principles originating in Ramsay applied:

[T]he significant aspect of regulation 2B(3) is the relief which it gives to the borrower in being able to avoid a tax charge on the dividends or interest from the securities and this is clearly intended to benefit the parties to real-world, commercial transactions involving the lending of marketable securities and not to transactions which lack those characteristics and whose only purpose is to obtain tax relief. The position seems to me to be exactly analogous to that is UBS and, for the same reasons, I would dismiss Mr. Chappell's appeal… .

UBS AG v Commissioners for HMRC; DB Group Services (UK) Ltd v. Commissioners for HMRC, [2016] UKSC 13

unexpressed intention of Parliament to give relief for restrictive conditions attached to shares only where those conditions had a commercial purpose

In order to avoid income tax employees of the respondent banks were not paid bonuses in cash, but instead were awarded redeemable shares in offshore companies. These awards were intended to qualify for an exemption for “restricted securities” (defined as shares which were subject to provision for their forfeiture if a contingency occurred) contained in s. 425(3) in Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003. In the case of the DB employees, the contingency was being dismissed for misconduct or voluntarily resigning within the next six weeks. In the case of the UBS employees, the contingency was a rise in the FTSE 100 within the next three weeks of greater than 6.5%, thereby triggering a requirement for the shares of the offshore company to be sold for 90% of their market value to a UBS employee benefit trust (but with such an increase being hedged against through the purchase by the offshore company of call options so as to increase its NAV by 10% in such event so that the employee would suffer less than a 1% loss).

In the course of discussing the Ramsay doctrine, Lord Reed stated (at para. 66):

The position was summarised by Ribeiro PJ in Arrowtown Assets, para 35, in a passage cited in Barclays Mercantile:

“The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”

In finding that these arrangements were contrary to the purpose of Chapter 2, and before finding that the employees were taxable on the value of the shares when received by them (with a small reduction in the shares’ value to reflect the restrictive conditions), Lord Reed stated (at paras. 73, 77-78):

[B]earing in mind that Part 7 generally, and Chapter 2 in particular, are extensive and highly detailed, counsel argued that it was impossible to attribute to Parliament an unexpressed intention to exclude schemes of the present kind from the ambit of Chapter 2. It cannot be denied that these are forceful arguments, and the Court of Appeal found them persuasive.

… [T]he fact that Chapter 2 was introduced partly for the purpose of forestalling tax avoidance schemes self-evidently makes it difficult to attribute to Parliament an intention that it should apply to schemes which were carefully crafted to fall within its scope, purely for the purpose of tax avoidance. Furthermore, it is difficult to accept that Parliament can have intended to encourage by exemption from taxation the award of shares to employees, where the award of the shares has no purpose whatsoever other than the obtaining of the exemption itself… .

More specifically, it appears from the background to the legislation that the exemption…was designed to address the practical problem which had arisen of valuing a benefit which was, for business or commercial reasons, subject to a restrictive condition involving a contingency. The context was one of real-world transactions having a business or commercial purpose. There is nothing in the background to suggest that Parliament intended that section 423(2) [respecting “restricted securities”] should also apply to transactions having no connection to the real world of business, where a restrictive condition was deliberately contrived with no business or commercial purpose but solely in order to take advantage of the exemption… .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares shares’ value reduced by contingent obligation to sell at discount to NAV 307

Schofield v. R & C Commrs., [2012] EWCA Civ 927 (CA)

In order to shelter a capital gain which he had realized, the UK taxpayer purchased two options on the FTSE 100 index to be settled in cash: a put option (Option 1"); and a call option ("Option 2") with essentially the same strike price. Several months later (while still in the same tax year) he closed out Option 1 at a loss - and closed out Option 2 at a gain several days later in the next tax year in which he was a non-resident who was not subject to UK tax.

By itself, this arrangement would have resulted in the taxpayer being unhedged between the times of closing out Options 1 and 2. Accordingly, at the same time that he acquired Options 1 and 2, the taxpayer wrote physical-settlement options on British gilts (which, as such, were exempt from UK tax), but with the strike prices based on the FTSE 100 index rather than the value of gilts - so that they effectively were a put option ("Option 3") or a call option ("Option 4") on that index in favour of the (same) counterparty. The taxpayer closed out Options 3 and 4, respectively, at the same time as he closed out Options 1 and 2, respectively.

After quoting from Ramsay (including the statement therein that "the transactions regarded together, and as intended, were from the outset designed to produce neither gain nor loss:...they were self-cancelling"), Chancellor Morritt found that the Ramsay principle applied to the option transactions before him (so that the loss on Option 1 should not be recognized for UK capital gains tax purposes) on the basis of the finding below that "the four options in this case were parts of an overall preordained scheme designed to produce neither a gain nor a loss" (para. 36).

2529-1915 Québec Inc. v. Canada, 2009 DTC 5023 [at 5585], 2008 FCA 398

capital dividend elections for distributions of what should have been known to be income-account gains were shams

Overview of facts. The two individual taxpayers devised a scheme to: generate artificial capital gains of $110 million in some home-grown companies; pay the supposedly resulting capital dividend accounts (CDAs) of $55 million to another company (1915); generate artificial capital losses in the home-grown companies to offset their capital gains; effectively sell negotiated portions of the CDA to 3rd-party purchasers by having them subscribe for preferred shares at a 21% premium to their redemption amount with the shares' redemption amounts effectively being flowed out to the 3rd parties as purported capital dividends; and then pocketing such subscription "premiums" as capital dividends paid out to them. A more detailed summary of the facts is under s. 83(2).

Gains generated on income account. After finding that the daylight loan used in the transactions and the promissory notes issued in the transactions issued in the transactions generating capital gains were not shams, and finding that the share premiums generated by 1915 were business income, Noël JA found that the "gainmaking" shares which were acquired for the purpose of their immediate resale so as to give rise to such gains were acquired on income account, given that "property acquired for resale is held on account of revenue" (para. 73).

Elections were shams. Given that these shares were acquired on income account, the subsidiaries in making capital capital dividend elections to flow out their CDAs to 1915 were making a misrepresentation which rendered such elections shams, and similarly the subsequent capital dividend elections by 1915 also were shams.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham capital dividend elections for distributions of what should have been known to be income-account gains were shams 266
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business shares premiums received for marketing tax scheme were business income 213
Tax Topics - Income Tax Act - Section 83 - Subsection 83(2) capital dividend elections for distributions of what should have been known to be income-account gains were shams 718
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares shares acquired for immediate resale as part of capital dividend account generation scheme were on income account 177
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business shares premiums received for marketing tax scheme were business income 223

Canada v. Nunn, 2007 DTC 5111, 2006 FCA 403

misrepresentation element of sham

In finding that the trial Judge has erred in finding that the investment of the taxpayer's RRSP in worthless shares as a result of fraudulent misrepresentation represented a sham, Malone J.A. stated, after citing the Snook v. London & West Riding Investments Ltd. case stated (at p. 5114):

"In other words, the elements of a sham require that the parties to a transaction together have deliberately set out to misrepresent the actual state of affairs to a third party ... ."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham misrepresentation element of sham 87
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) sham finding not argued 51

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

Before going on to find that the taxpayers had not become partners of a putative partnership by virtue of their arrangements because they lacked the requisite intention to carry on business in common, the Court stated (at p. 5154) that "this Court has repeatedly held that a tax motivation does not derogate from the validity of transactions for tax purposes ... . The question at this stage is whether the taxpayer can establish an intention to make a profit, whether or not he was motivated by tax considerations".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Purpose/Intention motivation v. purpose 65
Tax Topics - Income Tax Act - Section 96 essential Canadian elements of partnership not present as only momentarily "partners" in common 298
Tax Topics - Statutory Interpretation - Provincial Law foreign "partnership" must have the attributes of a Cdn partnership 153

Singleton v. Canada, 2001 DTC 5533, 2001 SCC 61, [2001] 2 S.C.R. 1046

Major J. stated (at p. o) that:

"The Court in Shell emphasized that taxpayers are entitled to structure their transactions in a manner that reduces taxes ... . The fact that the structures may be complex arrangements does not remove the right to do so."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) qualifying direct use where borrowed funds used to refinance partnership capital account, with personal withdrawal 131

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

right to structure for tax avoidance

Before going on to find that the taxpayer had effectively generated net deductions by investing in a tax-deferred offshore investment, Iacobucci J. stated (at p. o) that:

"Given that the Income Tax Act has many specific anti-avoidance provisions and rules, it follows that courts should not be quick to embellish the provisions of the Act in response to concerns about tax avoidance when it is open to Parliament to be precise and specific with respect to any mischief to be prevented ... . To do otherwise would be to fail to give appropriate weight to the well-established principle that, absent a provision to the contrary, taxpayers are entitled to arrange their affairs for the sole purpose of achieving a favourable position regarding taxation ... ."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Purpose/Intention objective and subjective manifestations of purpose 104
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) ancillary purpose of earning (1%-yield) dividend income/allocation of reinvested proceeds 100% to income-producing source 414
Tax Topics - Statutory Interpretation - Certainty 103

Ledoux c. La Reine, 2000 DTC 6465, 2001 FCA 130 (FCA)

documents did not reflect actual transactions

The Court affirmed (at p. 6466) the findings of the trial judge that a series of complex transactions comprising 43 stages that were completed within a few days, whose apparent purpose was to transmute an income-account gain into a capital gain, "did not reflect the actual transactions completed and did not correspond to the actual relationships formed between the parties: in short, it constituted a deception, a subterfuge, a sham".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham documents did not reflect actual transactions 70

McEwen Bros. Ltd. v. The Queen, 99 DTC 5326, [1999] 3 CTC 373 (FCA)

deception of Minister

In finding that a purported partnership agreement was not a sham, Robertson J.A. stated (at p. 5330):

"In short, to qualify as a sham, the taxpayer must say one thing to the Minister, and do another in an attempt to avoid its tax obligations."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham deception of Minister 50
Tax Topics - Income Tax Act - Section 96 purported partners did not jointly manage or provide capital 87

Shell Canada Ltd. v. Canada, 99 DTC 5669, [1999] 3 S.C.R. 622, [1999] 4 CTC 313

taxpayers entitled to rely on structure of their transactions

After referring to arguments, based on decisions in Bronfman Trust and Stubart, that courts should look through transactions that impose tax according to their true economic and commercial effects, McLachlin J. stated (at p. 5677):

"However, this Court has made it clear in more recent decisions that, absent a specific provision to the contrary, it is not the Courts' role to prevent taxpayers from relying on the sophisticated structure of their transactions, arranged in such a way that the particular provisions of the Act are met, on the basis that it would be inequitable to those taxpayers who have not chosen to structure their transactions that way ... ."

She also indicated (at p. 5677) that inquiring into the "economic realities" of a particular situation:

"wrongly invites a rule that where there are two ways to structure a transaction with the same economic effect, the Court must have regard only to the one without tax advantages."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance legal relationships prevail over economic realities 201
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) borrowing in legal substance was in weak currency 174
Tax Topics - Income Tax Act - Section 67 s. 67 does not apply where provisions, having their own internal limiting clauses, apply 96
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange FX hedging gain was capital gain as hedged borrowing was on capital account 225
Tax Topics - Statutory Interpretation - Specific v. General Provisions 96

Canada v. Ferrel, 99 D.TC 5111, [1999] 2 CTC 101 (FCA)

After referring to the statement in Neuman (98 D.TC 6297) that "taxpayers can arrange their affairs in a particular way for the sole purpose of deliberately availing themselves of the tax reduction levies" and noting that this included the use of corporate structures for the sole purpose of avoiding tax, Linden J.A. stated (at p. 5111) that "it follows that other structures, including trusts, may also be used to save tax, as long as proper legal documentation is prepared to accomplish the purpose desired".

Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, 98 DTC 6334, [1998] 3 CTC 303

no business purpose test

In finding that the transactions under consideration had successfully avoided the change-of-control provisions of the Act, Iacobucci C.J. stated (at p. 6350) that "it is well established in the jurisprudence of this Court that no 'business purpose' is required for a transaction to be considered valid under the Income Tax Act, and that a taxpayer is entitled to take advantage of the Act even where a transaction is motivated solely by the minimization of tax".

Continental Bank of Canada v. R., [1997] 1 CTC 13, 96 DTC 6355, [1996] 3 CTC 14

no sham if docs reflect legal reality
rev'd on other grounds 98 DTC 6501 (SCC)

Before finding that the taxpayer had failed to accomplish a tax-motivated plan because it had failed, in law, to establish a partnership with two other parties, Linden J.A. quoted a statement of the Tax Court Judge that "if the legal reality that underlies the ostensible legal relationship is the same as that which appears on the surface, there is no sham", and then stated (at p. 6359):

"Absent the essential component of deceit, the present transaction cannot be considered a sham according to current Canadian law."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham no sham if docs reflect legal reality 92
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) no rollover because partnership not established 228

The Queen v. Fording Coal. Ltd., 95 DTC 5672 (FCA)

Before finding that former s. 245(1) applied to deny the deduction of resource pools that otherwise would have been available to the taxpayer because of a "seeding transaction" (i.e., a transfer, prior to its acquisition of resource interests, of a minute interest in the property by it to the vendor), Strayer J.A. noted (at p. 5673) that "these were legal transactions which had the effect of transferring and retransferring interests so as to make possible the claim by the respondent for the deductions".

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Resolving Ambiguity 143

Attorney General of Canada v. Hoefele, 95 DTC 5602, [1996] 1 CTC 131 (FCA)

form matters

Before finding that a mortgage interest rate subsidy was not a taxable benefit, notwithstanding that other methods of compensating the employee-taxpayer would have been taxable, Linden J.A. stated (at p. 5606):

"Form may not rule, but it does matter. And because form matters, one may structure one's affairs so as to minimize the tax payable on certain transactions. There is nothing wrong with this. Subject to provisions such as section 245, it is neither illegal nor immoral."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) interest rate subsidy did not increase net worth 102
Tax Topics - Income Tax Act - Section 80.4 - Subsection 80.4(1) new mortgage debt of relocated employees 125

The Queen v. Friedberg, 92 DTC 6031, [1992] 1 CTC 1 (FCA)

subjective intention does not alter transactions

Before going on to find that the value of textiles donated to the Royal Ontario Museum did not give rise to a charitable deduction to the taxpayer because the documentation failed to establish that the taxpayer had ever acquired title to the textiles, Linden J.A. stated (at p. 6032):

"In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges its affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax ... . If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions."

C&E Commissioners v. Music and Video Exchange Ltd., [1992] BTC 5028 (Q.B.)

tax minimization acceptable

Before finding that an arrangement which had been described in the relevant documents as an agency relationship should be respected as such, McCullough J. stated (p. 5030):

"The citizen is entitled to order his affairs in such a way that the tax properly attaching to his dispositions is less than it might otherwise be, however unappreciative the Commissioners of Inland Revenue or the Commissioners of Customs and Excise may be of the result."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency 53

Alberta Gas Ethylene Co. Ltd. v. The Queen, 89 DTC 5058, [1989] 1 CTC 135 (FCTD), aff'd 90 DT 6419 (FCA)

An argument that a U.S. subsidiary of the taxpayer - which had no business premises, no employees and no function other than to on-lend a loan to the taxpayer - had no independent existence, was rejected.

A.G. Securities v. Vaughan, [1988] 3 WLR 1205 (HL)

The landlord, by separate but identical agreements entered into contemporaneously, granted a young man and his girlfriend the purportedly non-exclusive right to occupy a flat. A joint tenancy was created and the power of the "licensor" to use the rooms or to permit others to use the rooms was a pretence only intended to deprive the applicants of the protection of the Rent Acts.

Craven v. White, [1988] BTC 268 (HL)

Lord Oliver stated:

"As the law currently stands, the essentials emerging from Furniss v. Dawson appear to me to be four in number:

  1. that the series of transactions was, at the time when the intermediate transaction was entered into it, preordained in order to produce a given result;
  2. that the transaction had no other purpose than tax mitigation;
  3. that there was at that time no practical likelihood that the pre-planned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life, and
  4. that the pre-ordained events did in fact take place."

With respect to the transfer of shares to a Manx company in exchange for treasury shares of the Manx company, followed by the sale of the shares by the Manx company to the ultimate purchaser, it was uncertain at the time of the transfer of the shares to the Manx company that the subsequent disposal would occur, and it was only later that negotiations with the ultimate purchaser were resumed. The Ramsay principle accordingly was not applied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) a series if no real likelihood that the successive transactions will not occur 155

Doncaster v. Smith, [1987] 5 WWR 444 (BCCA)

The receiver-manager of three companies was negligent for realizing recapture and a capital gain on the sale of one of the company's depreciable assets. Since the other two companies had losses, he would have been advised to first amalgamate the three companies.

Consolidated-Bathurst Ltd. v. The Queen, 85 DTC 5120, [1985] 1 CTC 142 (FCTD), aff'd on different grounds, 87 DTC 5001, [1987] 1 CTC 55 (FCA)

A captive Bermudan insurance company was found to be a legal entity distinct from its ultimate Canadian parent, and accordingly interest income and foreign exchange gains of the Bermudan company were found not to be income of the Canadian parent.

The Queen v. Parsons, 84 DTC 6447, [1984] C.T.C 354, 84 DTC 6452 (FCA)

no sham as purported legal rights were created

It was found by the trial judge that management companies, which two professional engineers ("Parsons" and "Vivian") had incorporated and interposed between themselves and an engineering firm ("Design") of which they had been employees until that time, "(1) had no bona fide business purpose, (2) had, primarily, the purpose of directly reducing their income tax liabilities [and] (3) had, secondarily, an estate planning purpose which ... must be taken to have also been solely motivated by tax and personal, not business, considerations." Nonetheless, it was held that the arrangements were not a sham and were effective for tax purposes because the legal rights and obligations which the parties purported to create, they had succeeded in actually creating.

R. v. Redpath Industries Ltd., 84 DTC 6349, [1984] CTC 483 (Que. S.C.)

Although the operations of a Bermudan company were directed and conducted by its parent companies, the Bermudan company nonetheless was treated as having a separate existence for Canadian tax purposes.

Stubart Investments Ltd. v. The Queen, 84 DTC 6305, [1984] CTC 294, [1984] 1 S.C.R. 536

A transaction should not "be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose." However, the formal validity of a transaction may be insufficient where giving full effect to the transaction would defeat the object and spirit of an allowance or benefit provision, or go contrary to a legislative intent to restrict the benefit of such provision to rights that had accrued prior to the transaction, or where the relevant provisions of the Act relate to an identified business function.

A transfer by the taxpayer of its flavouring business to an affiliated company with a history of losses (coupled with the agreement of the taxpayer to act as the affiliated company's agent respecting that business) was a legally effective transaction and also was effective for tax purposes.

Furniss v. Dawson, [1984] 2 WLR 226, [1984] AC 474 (HL)

Where a pre-ordained (or pre-contracted) series of transactions contains steps that were inserted without any commercial purpose apart from obtaining a tax advantage, then the inserted steps will be disregarded in determining the end result of the transactions (the end result being what is relevant for fiscal purposes). It is irrelevant whether the series of transactions is "self-cancelling", i.e., designed to return the taxpayer to his original position.

Here, the taxpayers, rather than selling their shares in operating companies directly to a purchaser, instead exchanged those shares on a roll-over basis for shares of a newly-incorporated Isle of Man company ("Greenjacket"). Greenjacket then sold the shares of the operating companies to the purchaser. "If the sale had taken place in 1964 before capital gains tax was introduced, there would have been no Greenjacket." The taxpayers accordingly were to be taxed as if they had disposed of their shares directly to the ultimate purchaser.

The Queen v. Houle, 83 DTC 5430, [1983] CTC 406 (FCTD)

There is no need for a purchase by a private company to be recorded in minutes or other written memoranda in order for such purchase to be effective.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 60

The Queen v. Special Risks Holdings Inc., 83 DTC 5046, [1983] CTC 36 (FCA)

Where there was no allegation of facts in the Queen's Statement of Defence which would establish a sham, lack of valid business purpose, artificial transactions under section 245, tax avoidance under section 246 or dividend stripping under section 247, and where essentially the only matter at issue was who controlled a corporation for an 11-day period, then the Motions Judge was right in striking out the Queen's pleading that "the Plaintiff entered into a scheme described in said paragraphs with the hope and expectation of avoiding tax on the distribution of dividends".

I.R.C. v. Burmah Oil Co. Ltd., [1982] BTC 56 (HL)

A preordained series of transactions that had the apparent result of the taxpayer suffering a loss of almost the whole price that it had paid for shares, did not result in a real loss for tax purposes because it got back virtually all of the money that it had paid.

The Queen v. Malone, 82 DTC 6130, [1982] CTC 145 (FCTD)

It was accepted (before finding against the taxpayer on another ground) that he was in the stockbrokering business on his own account notwithstanding that all his trading activities were effected through a company of which he was an employee.

W.T. Ramsay Ltd. v. l.R.C., [1982] A.C. 300, [1981] UKHL 1 (HL)

In order to realize a capital loss that could be deducted from a chargeable gain that had been realized by him, the taxpayer bought shares in a newly-formed investment company and, at the same time, made two loans to the company for 20 and 31 years respectively at an 11% interest rate. The following year, the interest rates on the two loans were changed to 22% and 0% respectively, and the low-interest-rate loan was sold to a finance company at its reduced market value. The company was then wound-up, with a loss being realized by the taxpayer on his shares.

Before finding that the taxpayer had not realized a loss on the shares for UK capital gains purposes, Lord Wilberforce stated (at p. 326):

"The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd. v. Inland Revenue Commissioners [1978] A.C. 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function."

Quemet Corp. v. The Queen, 81 DTC 5359, [1981] CTC 472 (FCTD)

The taxpayer knowingly assisted its suppliers to defraud the Department of National Revenue or dispose of stolen property, by paying them in cash. (The payments and sales were purportedly made through an intermediary company, in an attempt to avoid being involved in illegality, but in fact the taxpayer dealt directly with its suppliers.) The cash expenditures for the purchased goods nonetheless were held to be deductible, because they were made for business purposes.

The Queen v. Daly, 81 DTC 5197, [1981] CTC 270 (FCA)

The purported interposition between the taxpayer and his employer of a management corporation was legally ineffective, and thus, also ineffective for tax purposes, because (1) he failed to have his existing employment contract cancelled (or effectively assigned to the management corporation) and, in fact, he later entered into a similar employment contract with the same employer, which contract made no reference to the management corporation, and (2) the dealings between the taxpayer and his employer were consistent only with their being in an employer/employee relationship. [C.R.: 18(1)(a) - "Related Companies"]

Spur Oil Ltd. v. The Queen, 81 DTC 5168, [1981] CTC 336 (FCA)

It was stated that the question of whether a "quotation letter", which the Crown submitted set an artificially high purchase price for oil, was a legally binding contract should be determined without reference to extrinsic evidence as to whether the parties treated themselves as bound by the letter. [See also S.245(1).]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Old 115

Fraser Companies, Ltd. v. The Queen, 81 DTC 5051, [1981] CTC 61 (FCTD)

"There is no relationship of principal and agent between the shareholders of a company and the company. The fact that the sole shareholder of a company is another company, as is the case here, does not alter that."

Agar v. The Queen, 80 DTC 6311, [1980] CTC 397 (FCTD)

As there was no evidence to support the taxpayer's contention that fees for performing construction work were earned by a company controlled by him rather than in his personal capacity, other than the payments of those fees being deposited in the company's bank account, such fees were treated as income.

R. v. Campbell, 80 DTC 6239, [1980] CTC 319, [1980] 2 S.C.R. 256

The fact that the taxpayer surgeon responded to regulations, requiring that OHIP be billed in the name of an individual doctor, by billing for surgical services he had performed as employee of a private hospital owned by him, then assigning those fees to the hospital, did not mean that the hospital was engaged in the illegal practice of medicine. The employment contract between the surgeon and the hospital was not illegal, and the assigned fees had been earned by the hospital, not by him. [C.R.: 18(1)(a) - "Related Companies"]

Feinstein v. The Queen, 79 DTC 5236, [1979] CTC 329 (FCTD)

It was found "that to look at the true situation realistically", the individual taxpayer was acting on behalf of his company when he signed a contract in his own name. Income generated under the contract accordingly was his company's income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(b) 39

Atinco Paper Products Ltd. v. The Queen, 78 DTC 6387, [1978] CTC 566 (FCA)

After finding that an income-splitting "scheme" was ineffective because two supposed trusts had not been properly established, Urie, J. stated: "it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law."

The Queen v. Esskay Farms Ltd., 76 DTC 6010, [1976] CTC 24 (FCTD)

no sham if documents describe intended legal rights

The taxpayer, wished to sell land to the City of Calgary in consideration for two annual instalments in order to defer a portion of the gain to its second taxation year, but was informed that the City was precluded by statute from purchasing land over a period of years. As a result: the taxpayer sold the land to a trust company for the same purchase price, but payable in two instalments with the second instalment bearing interest at 7.5% per annum, and with a clause in the purchase agreement that the trust company could elect within 60 days of the date of the agreement of sale to void the agreement; and the trust company sold the land to the City for the same purchase price, paid in cash. Title was transferred directly from the taxpayer to the City.

Cattanach J. found that the transactions were not a sham as the intended legal rights of the three parties were exactly those described in the documents. For example, the Trust Company had the use of the money received on its sale to the City for a protracted period, which it could and did turn to profit on its own account.

Cattanach J., after noting that, in fact, the Trust Company did not pay interest until the time it received money on the sale to the City, rather than from the earlier date provided in the agreement, stated (at p. 6016):

"The delay in payment exceeded the estimated date and there is no impediment to the parties not to strictly comply with the agreement in this respect although the benefiting party is entitled to do so and the party detrimentally affected is bound by the agreement."

After noting that the trust company did not record a liability in its book of account to the taxpayer until the time it receiving payment from the City, Cattanach J. stated (at p. 6016):

"I do not think that bookkeeping entries or the lack of an entry can be accepted as contradicting the clear provisions of a written agreement."

Dominion Bridge Co. Ltd. v. The Queen, 75 DTC 5150, [1975] CTC 263, aff'd 77 DTC 5367, [1977] CTC 554 (FCA)

The amounts paid by a wholly-owned Bermudan subsidiary ("Span") for purchases of steel were found to constitute the taxpayer's cost of that steel, rather than the higher price charged by Span to the taxpayer, because Span was a puppet of the taxpayer, and the business of the taxpayer accordingly included the activities or purported activities of Span. A vice-president of the taxpayer "controlled every step of the operations of Span from the purchase price to the selling price of off-shore steel" and in fact was permitted by the Articles of Association of Span to exercise the powers of its board.

Leon v. MNR, 76 DTC 6303, [1976] CTC 541 (FCA)

lack of business purpose established sham

Fees paid by a company ("Ablan Leon Distributors") to a second company ("Nor-Mar") which was owned by its sole employee ("Leon") in respect of management services that Nor-Mar provided were held to be the income of Leon rather than Nor-Mar. "[I]t is my view that the complete absence of a bona fide business purpose for the interposition of Nor-Mar into the provision of Norman Leon's services to Ablan Leon Distributors is sufficient to stamp that transaction a sham." [C.R.: 18(1)(a) - "Related Companies"]

Simard-Beaudry Inc. v. M.N.R., 74 DTC 6552, [1974] CTC 715 (FCTD)

motives should not be exaggerated

Before concluding (at p. 6557) that "the purchase by the Appellant by means of an option does not constitute a sham in the legal sense," and after quoting the "excellent definition of a financial sham" in Snook, Addy J stated (at p. 6556):

"[I]n order to determine if a document constitutes a sham or not and for this reason must necessarily attract financial consequences, one must not take an exaggerated view of the motives of the parties for the sole purpose of arriving at an interpretation favourable to the taxing authority."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency agent can act for two principals 51
Tax Topics - General Concepts - Sham motives should not be exaggerated 98
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A cost of option included in cost of acquired asset 28
Tax Topics - Income Tax Act - Section 245 - Old 134

See Also

The Trustees of the Morrison 2002 Maintenance Trust & Ors v Revenue and Customs, [2019] EWCA Civ 93

Three “Scottish Trusts” exercised their put to sell shares of a listed public company to trusts (the “Irish Trusts”) with similar terms for the shares’ cost base of £4.5M; and the Irish Trusts sold the same shares eight days later to Merrill Lynch for £14.3M, who then sold the shares into the market. Newey LJ confirmed the findings below that the put exercise and subsequent sale were a "pre-ordained series of transactions" (a.k.a., a "single composite transaction") under the Ramsay doctrine so that the transactions were to be treated for U.K. capital gains purposes as if the Scottish Trusts had disposed of their shares for £14.3M.

The Scottish Trusts submitted inter alia that it was significant that at the time of exercise of the put, it was contemplated that the Irish Trusts would on-sell their shares into the market (through the agency of Merrill Lynch), whereas in fact the shares were sold to Merrill Lynch as principal for what effectively was a partially underwritten price. Newey LJ stated (at paras. 56-57) that he agreed with the First-tier Tribunal:

that the sale to Merrill Lynch "sufficiently corresponded to the scheme as planned" and … it "would be extraordinary if the application of the Ramsay approach could be defeated by the sale being to brokers rather than to the market by brokers on behalf of the Irish Trustees" … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) identifying the form of ultimate sale was not essential to finding a pre-ordained series 516

Alberta v ENMAX Energy Corporation, 2018 ABCA 147

right to structure affairs to reduce taxes (or, here, payments in lieu) inapplicable where consumer assistance purpose defeated

A parent of a municipal entity is not entitled to gain an advantage over its private competitors by arranging its subsidiaries’ affairs in a way that causes a hypothetical arm’s length loan to appear riskier than it would have been had any reasonable municipal entity actually gone into the market to borrow the funds. Hence the need under the Balancing Pool Payments regime to ensure that the structure of the loan transaction is also objectively reasonable to the extent it would affect a market interest rate.

In also accepting the Minister’s submission that the hypothetical arm’s length loan (in addition to not reflecting the “junk bond” way in which the actual loan had been structured) should reflect implicit credit support by ENMAX (to whom these subs were key assets), the Court stated (para. 116):

[A]ny third party lender would look at the entire corporate structure and see that ENMAX’s viability could not be separated from that of its subsidiaries. An external lender would therefore assume implicit parental support.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) interest on a loan from a tax-exempt parent should be at an arm’s length rate reflecting implicit parental credit support 494
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) arm’s length interest rate to sub could not be manipulated by structuring the loan as a junk bond without implicit parental credit support 293
Tax Topics - Statutory Interpretation - Hansard, explanatory notes, etc. purpose inferred in part from Legislative Assembly statement of Minister 83
Tax Topics - Income Tax Act - Section 67 test of whether the amount was objectively reasonable 293

McLarty v. The Queen, 2014 DTC 1162 [at 3556], 2014 TCC 30

sham cannot apply to just part of transaction

The taxpayer, as a member of a joint venture, bought an undivided interest in seismic data for $20,000 cash and an $85,000 limited-recourse promissory note. The Minister limited the taxpayer's deductions in connection with the note portion to the amount of licensing revenues ultimately received. After finding that the expenses connected with the note were reasonable (see summary under s. 67), Favreau J stated (at para. 78):

In my opinion, the Crown cannot apply the doctrine of sham to only a part of a particular transaction while considering another part of the same transaction as being legally valid and effective. For example, I have difficulty with the Crown being permitted to apply the doctrine of sham to only that part of the acquisition by the appellant of an undivided interest in the Seismic Data that was paid for by the appellant's Promissory Note.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency participations contrary to agreement were disregarded 111
Tax Topics - General Concepts - Illegality participations contrary to agreement were disregarded 113
Tax Topics - General Concepts - Sham sham cannot apply to just part of transaction 145
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) revenues 10% of interest 186
Tax Topics - Income Tax Act - Section 67 leveraged purchase of seismic data at arm's length was presumptively reasonable 296

Foresbec Inc. v. The Queen, 2002 DTC 1786 (TCC), aff'd 2003 DTC 5455, 2002 FCA 186

documents did not reflect legal reality

A consulting contract did not reflect the legal reality of the parties' rights and obligations (it was never contemplated that consulting services would be provided and the payments were to be made irrespective of the level of services to be provided) and, accordingly, the contract was found to be a sham for purposes of the Act.

Lloyd v. The Queen, 2002 DTC 1493 (TCC)

taxapyer can argue legally ineffective transactions

Although the taxpayer signed an agreement with a holding company for the sale of shares in a company ("READ") to the holding company, Bowman T.C.J. found that the transaction was not completed, so that there was no disposition for purposes of s. 84.1. Among other things, none of the stipulated consideration was ever paid by the holding company and the directors of READ did not approve the transfer as required by the articles.

Bowman A.C.J. stated (at p. 1496):

"If the Minister can attack a transaction in this court or the Federal Court of Appeal on the basis it is legally ineffective or incomplete, so too can the taxpayer. There is no need to wait for a provincial court to set an incomplete or legally and valid transaction aside."

Thibault v. The Queen, 99 DTC 489 (TCC)

In addition to selling his shares of a company for $100,000, it was agreed that the company would hire a corporation controlled by the taxpayer as a consultant for a period of five years for $150,000 payable in 60 consecutive equal instalments. Lamarre Proulx TCJ. found that the contract for services in fact gave rise to additional proceeds of disposition notwithstanding a judgment of the Superior Court of Quebec in which was found the contract for services was valid rather than a simulation representing the price for shares.

Eli Lilly & Co. v. Novopharm Ltd. (1998), 161 DLR (4th) 1, [1998] 2 S.C.R. 129

In discussing E.I. De Pont De Nemours & Co. v. Shell Oil Co., 227 U.S.P.Q. 223 (1985), Iacobucci J. stated (at p. 34) that in that case:

"the unlicensed party actually manufactured the licensed article allegedly as the agent of the licensee, only then to 'purchase' the article from the licensee immediately upon its manufacture. This arrangement was characterized by the Delaware Supreme Court as a sham, and rightfully so. The only factor which distinguished it from an overt situation of an unlicensed party's manufacturing a patented article strictly for its own benefit was a series of paper transactions carried out between a subsidiary corporation and its parent for the purpose of obscuring the true character of the arrangement."

Giguère v. MNR, 93 DTC 488 (TCC)

The taxpayer was unsuccessful in his contention that although a contract for providing services to Télé - Métropole Inc. was with himself rather than a corporation of which he was the chief executive, the intention was for the services of the latter to be retained. Accordingly, fees received pursuant to the contract were income of the taxpayer.

Keewatin Tribal Council Inc. v. City of Thompson, [1989] 2 CTC 206 (Man QB)

After noting that it was likely that the only reason for the creation of a trust for an Indian band was the avoidance of municipal taxation, Jewers J. stated (p. 214):

"It is axiomatic in taxation law that one may arrange one's affairs as one sees fit in order to minimize the impact of tax. The Supreme Court of Canada has now made it clear that lack of any business purpose for a transaction is not enough to attract tax that otherwise would not be payable ..."

Kosmopoulos v. Constitution Insurance Co., 34 DLR (4th) 208, [1987] 1 S.C.R. 2

The corporate veil can only be lifted where enforcement of the separate entities principle would yield a result flagrantly opposed to justice, convenience or the interests of the Revenue.

Administrative Policy

9 November 2001 External T.I. 2001-0092495 - CTF ROUND TABLE-PROFESSIONAL CORPs

Notwithstanding the Wallsten decision, the CCRA will not accept that insurance agents or realtors can transfer their commission income to a corporation if they are legally prohibited from doing so by third parties.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality 37

11 October 1991 T.I. (Tax Window, No. 11, p. 17, ¶1523)

Where members of a farming partnership transfer a herd of cattle to a corporation utilizing the s. 85(2) election and have the corporation immediately thereafter sell the herd to an arm's length buyer and utilize the small business deduction, then if the corporation was interposed after negotiations with the purchaser had begun or were completed, Revenue Canada, depending upon the facts, may take the position that the corporation was merely acting as agent for the partnership, or that the arrangement amounted to a sham.

81 C.R. - Q.9

The Daly case was decided on very narrow legal grounds because of deficiencies in the taxpayer's documentation.


John Tiley, "Tax Avoidance Jurisprudence as Normal Law", British Tax Review, 2004 No. 4, p. 304.

Sawyer, "Blurring Distinction between Avoidance and Evasion - The Abuse of Tax Position", 1996 British Tax Review, No. 5, p. 483.

David A. Ward, "Judicial Responses to Tax Avoidance", European Taxation, January 1995, p. 1.

Thivierge, "Emerging Income Tax Issues: Substance Over Form Revisited, Section 160 of the Income Tax Act, and Series of Transactions", 1993 Conference Report, c. 4

Felesky, Jack, "Is There Substance to 'Substance or Form' in Canada?", 1992 Conference Report, c.50.

David A. Ward, "The Business Purpose Test and Abuse of Rights", 1985 British Tax Review, p. 68.