Subsection 245(4)

Cases

Birchcliff Energy Ltd. v. The Queen, 2017 TCC 234

raising share equity through a lossco immediately before its amalgamation was abusive
replaces the judgement in 2015 TCC 232 which was nullified by 2017 FCA 89

A newly-launched public corporation ("Birchcliff") sought to access the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Rather than financing the properties directly, private placement investors were told that they could subscribe for subscription receipts of Veracel instead, which was not a problem to them because their subscription receipts would be converted into Veracel Class B common shares as a transitory step under a Plan of Arrangement in which Veracel was then amalgamated with Birchcliff. As the investors received a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided.

In finding that there was an abuse under s. 245(4), so that there was an acquisition of control of Veracel, Jorré J stated (at paras. 135-136):

The statutory provision itself shows that the policy underlying the provision is that the “minority” predecessor, i.e. the predecessor whose shareholders, were they acting in concert, would not have control in the amalgamated corporation, will lose its tax attributes, its losses, on an amalgamation with another corporation. It does not include what might be described as contingent shareholders like the Class B shareholders here.

The artificial insertion of Class B shareholders of Veracel, persons whose shares’ only purpose was to be converted into common shares, and whose shares had such a short existence that they had to be deemed by the plan of arrangement to be created before the amalgamation, is a manipulation of the shareholdings of a predecessor contrary to the object of the rules in subsection 256(7).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham ephemeral transactions under a Plan of Arrangement were not a sham 205
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(2) - Paragraph 251.2(2)(a) proxy which accorded no discretion to a class of shareholders did not render them a group 211
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) series of transactions found to be an avoidance transaction 288

Univar Holdco Canada ULC v. Canada, 2017 FCA 207

cross-border surplus-stripping transaction was not abusive as it occurred in same series as arm's length acquisition

A non-resident's acquisition of the shares of a Netherlands public company (Univar NV) indirectly holding the shares of a valuable Canadian subsidiary (Univar Canada) with nominal paid-up capital was structured to effectively step-up the paid-up capital of the shares of Univar Canada to fair market value by using the pre-2016 version of s. 212.1(4). This was accomplished by setting up a sandwich structure immediately after the acquisition, under which a new Canadian unlimited liability company, capitalized with notes and high-PUC shares, held the shares of a U.S. corporation holding Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada (on a Treaty-exempt basis) to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule. (See the more detailed summary of the TCC decision.)

Webb JA noted that the purpose of s. 212.1 “was not to prevent the removal from Canada, by an arm’s length purchaser of a Canadian corporation, of any surplus that such Canadian corporation had accumulated prior to the acquisition of control” since a non-resident could use a Canadian Buyco with full outside basis and paid-up capital to acquire an arm’s-length Canadian target and then extract the target’s surplus. Accordingly, the above transactions were not an abuse of s. 212.1 :

The shares of Univar NV were acquired in an arm’s length transaction and, at the time that such shares were acquired, the avoidance transaction was contemplated. Therefore, the avoidance transaction would be part of the series of transactions by which control of Univar Canada was indirectly acquired in an arm’s length transaction. Whether the surplus of the Canadian corporation is removed by completing the alternative transactions described … above or by completing the transactions that were done in this case, the same surplus is removed from Canada.

And at para. 31:

In this case, the Minister has not clearly demonstrated that the avoidance transaction completed in this case was abusive. The transactions were completed as part of an arm’s length purchase of Univar NV.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212.1 - Subsection 212.1(4) using old s. 212.1(4) to extract surplus from a non-resident target’s Canadian sub was not abusive 357

Canada v. Superior Plus Corp., 2015 DTC 5118 [at 6319], 2015 FCA 241, aff'g 2015 TCC 132

Minister compelled to disclose GAAR memoranda and minutes, and Finance correspondence, as relevant to alleged policy

The Superior Plus Income Fund (the "Fund") effectively converted (in accordance with the distribution method contemplated under s. 107(3.1)) into a public corporation using an existing corporation (the taxpayer, a.k.a. "Old Ballard") with non-capital losses and other tax attributes as the new corporate vehicle - rather than using a new corporation. The transactions were designed to ensure that there was no acquisition of control of the taxpayer (which would have resulted in a streaming of its losses). In particular, although the unitholders of the fund became shareholders of the taxpayer, this was considered not to entail an acquisition of control of the taxpayer by a group of persons. Subsequent to the conversion, s. 256(7)(c.1) was introduced, which would have deemed there to be an acquisition of control of the taxpayer, if it had had retroactive effect (which it did not). The Minister disallowed the use of the tax attributes, on the basis that there in fact had been an acquisition of control of the taxpayer or, alternatively, under s. 245(2) (i.e., GAAR).

At the discovery stage, the taxpayer moved to compel the Minister to answer various questions, or to produce documents, or previously redacted portions of documents previously requested under the Access to Information Act, which CRA had resisted principally on the grounds of irrelevance. The questions included whether the Department of Finance considered making the 2010 SIFT amendments retroactive, why it had changed its explanatory notes to say that s. 256(7)(c.1) "clarified" rather than "extended" the change-of-control rules and whether the Attorney General agreed that initially the policy choice of the SIFT conversion rules was to allow the use of existing corporations. Requested documents included GAAR Committee minutes including comments of individual members (whereas CRA had provided only the final Recommendation of the Committee), and correspondence between CRA and Finance (resulting in the drafting of s. 256(7)(c.1))and between the GAAR Committee and Aggressive Tax Planning, with the questions seeking particulars on the questions posed above and policy considerations brought to bear on this file, and respecting what initially may have been diffidence on the part of Finance as to how to proceed, if at all.

Following the reasons in Birchcliff, Hogan J in the Tax Court granted the taxpayer's motion in the main (including all the above-mentioned questions and documents).

In the Court of Appeal, Noël CJ stated (at para. 8):

As was held…in Lehigh Cement Ltd. v. R., 2011 FCA 120… information pertaining to the policy of the Act, even where it is not taxpayer specific, can be relevant on discovery. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 232 - Subsection 232(1) - Solicitor-Client Privilege non-tax legal opinion produced on discovery which potentially supported a GAAR argument did not entail implied waiver of tax memos until used in evidence 192

Inter-Leasing, Inc. v. Ontario (Revenue), 2014 ONCA 575

underlying rationale for exempting property income was no broader than the text

In order to minimize provincial income tax, a Canadian corporate group restructured so that various intercompany debts were owing (on a back-to-back basis through an intermediate company) to the taxpayer which, although it was resident in Canada and had a permanent establishment in Ontario for other tax reasons, was exempt from tax on the interest income by virtue of an exemption in the Corporations Tax Act (Ontario) for income from property earned by a corporation which had been incorporated outside Canada (here, the British Virgin Islands.) For more detail see under s. 115(1)(b) – and respecting the BVI situs issue, see summary under TA, s. 54(2)(b).

In finding found that Ontario's GAAR did not apply, as there was no abuse of the relevant provision, Pardu JA stated (at para. 55) that "in 1959, Ontario adopted the place of incorporation test [for residence], unlike the federal government and all other provinces," referred (at para. 60) to "the deliberate decision not to tax corporations incorporated outside Canada on income from property" and (at para. 61) noted that Copthorne stated that "in some cases the underlying rationale of a provision would be no broader than the text itself." She then stated (at paras. 62, 66):

Here, the purpose of s. 2(2) of the OCTA was to tax corporations incorporated outside Canada with a permanent establishment in Ontario on income from business but not on from income from property. Where such a corporation structures its affairs to earn income from property rather than income from business, it has not…defeated the underlying rationale of the provision… .

The approach taken by the appeal judge - to define the purpose of the provision as to raise revenue and to define the tax base as broadly as possible - renders "abusive" any transaction that has the effect of reducing tax. I do not accept that approach.

In rejecting an argument that situating the specialty debt instruments in the British Virgin Islands was an abusive transaction, Pardu JA noted (at paras. 95-7) that "the rule governing the situs of specialty debts instruments is a long-standing and well-established rule," "the situs for the instruments was not arbitrary, but was a place to which the corporation had some link, namely, its place of incorporation," and "the level of [the taxpayer's] activity in Ontario to generate the income from property was minimal."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) holding intercompany loans was not a business, corporate objects presumption not applied 318

Canada v. Global Equity Fund Ltd., 2013 DTC 5007 [5526], 2012 FCA 272

abuse of s. 9 to recognize losses not corresponding with commercial reality

The taxpayer subscribed for common shares of a new subsidiary for approximately $5.6 million, which then declared a stock dividend in the form of preferred shares having $56 of paid-up capital and a $5.6 million redemption price. Consequently, the value of the common shares was largely eliminated. (The taxpayer's subscription for an additional $200,000 was acknowledged to be "window dressing" to give the common shares some value.) The taxpayer (which was involved in the business of trading securities) disposed of the common shares in consideration for their depleted value and reported a business loss.

Mainville J.A. found that the transactions were abusive of ss. 3, 4, 9, and 111. He stated (at para. 62):

The fundamental rationale underlying these provisions is that, in order to be used for taxation purposes, business losses must be grounded in some form of economic or business reality. As noted in Canderel at para. 53, "[i]n seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer's profit for the year." That same common sense principle applies to a business loss, thus harmonizing the concept of business loss with the related concept of profit under the Act.

The Court concluded that the taxpayer's transactions were "nothing more than a paper shuffle," that "nothing was gained or lost," and that it would "defeat the underlying rationale of sections 3, 4, 9 and 11" for such paper losses to avoid "the payment of taxes otherwise owed on the profits resulting from the real-world business operations of Global" (para. 66-68).

The Minister argued in the alternative that no business loss had in fact occurred, given that the shares had not been acquired as inventory or as part of an adventure in the nature of trade. These arguments had not been raised at trial and entailed new evidence, and were therefore disallowed (paras. 35-37).

1207192 Ontario Limited v. Canada, 2012 DTC 5157 [at 7396], 2012 FCA 259, aff'g 2011 DTC 1301 [at 1686], 2011 TCC 383

capital loss from value shift did not reflect economic loss; purpose objectively determined

This was a companion case to Triad Gestco.

The taxpayer, which had realized a capital gain of $2,974,386, transferred cash and marketable securities with a value of $3 million to a newly-incorporated subsidiary ("Newco") as the subscription price for common shares of Newco. Newco then paid a stock dividend to the taxpayer consisting of preferred non-voting shares having a nominal paid-up capital and a total redemption value (in the hands of the initial holder) of $3 million, thereby effecting a "value shift" away from the common shares. Special voting shares of Newco having nominal value were issued to a trust for members of the family of the sole shareholder of the taxpayer ("Mr. Cross"). The taxpayer then sold the common shares of Newco to a second family trust for the sum of $100 and claimed a capital loss of nearly $3 million.

Paris J. denied the capital loss under s. 245(2). The taxpayer had clearly engaged in an avoidance transaction, and the transaction was an abuse of s. 38(b) of the Act. He stated (at TCC paras. 90, 92):

I find that the Respondent has shown that the purpose of paragraph 38(b) is to recognize economic losses suffered by a taxpayer on the disposition of property. The Respondent has also shown that despite the repeal of subsection 55(1) [a provision specifically aimed at stopping artificial capital losses such as surplus-stripping], the policy of the Act is still to disallow the artificial or undue creation or increase of a capital loss, which underlines the intention to allow capital losses only to the extent that they reflect an underlying economic loss. ...

These transactions did not reduce the Appellant's economic power in the manner contemplated by Parliament in allowing for the deduction of capital losses.

In accordance with its conclusions in Triad Gestco, the Court of Appeal affirmed Paris J.'s reasoning. Furthermore, in response to the taxpayer's argument that the main purpose of the transaction was to effect creditor protection for Mr. Cross, Sharlow J.A. stated (at FCA para. 20):

I am unable to accept this argument. In my view, Justice Paris followed the correct approach when he determined the purpose of the series of transactions on an objective basis – that is, by ascertaining objectively the purpose of each step by reference to its consequences – rather than on the basis of the subjective motivation of Mr. Cross, or his subjective understanding of what may or may not have been required to achieve creditor protection.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) purpose objectively determined 135

Triad Gestco Ltd. v. Canada, 2012 DTC 5156 [at 7385], 2012 FCA 258

paper loss rather than real loss

The taxpayer, which was directed and controlled by Mr. Cohen, and which had realized a capital gain of approximately $8 million, transferred $8 million of assets to a newly-incorporated subsidiary ("Rcongold") in consideration for the issuance of common shares. Rcongold declared a stock dividend of $1 on its common shares, which was payable through the issuance of 80,000 non-voting preferred shares with an aggregate redemption price of $8,000,000 and (presumably) a stated capital of $1. An unrelated individual settled, with $100, a trust of which Mr. Cohen was a beneficiary, so that under the "affiliate" definition then in effect it was an un-affiliated trust. The taxpayer then sold its common shares of Rcongold to the trust for $65 and claimed a capital loss of $7,999,935, which permitted it to offset the realized capital gain through a loss carry-back.

After noting (at para. 39) that after the taxpayer's disposition of its common shares it "was neither richer nor poorer," Noël J.A. (while citing Ramsay) stated (at para. 41) that "the capital gain system is generally understood to apply to real gains and losses" as contrasted to "paper gains or losses" (para. 44), so that, under the general capital loss provisions of the Act, there was:

relief as an offset against capital gain where a taxpayer has suffered an economic loss on the disposition of property... [and] offsetting a capital gain with the paper loss that was claimed [here] results in an abuse and a misuse of [these] relevant provisions... . (Para. 50.)

The Court found that the trial judge erred in his alternative finding that s. 40(2)(g)(i) reflects a general policy against the deduction of losses "within an economic unit" (paras. 54-56). Finally, although there was a corresponding accrued but unrealized gain on the taxpayer's preferred shareholding, the taxpayer had not "put forth a credible scenario indicating that the preferred shares were to be sold" (para. 59).

The taxpayer's appeal was dismissed.

Canada Safeway v. Alberta, 2012 DTC 5133 [at 7271], 2012 ABCA 232

replacing equity with borrowed money to reduce provincial income not abusive

This case was a companion decision to Husky Energy.

An Alberta taxpayer ("CSL") borrowed $600 million from its Alberta parent ("CSHL") over the course of a month, and used the borrowed funds to repay commercial paper which it previously had borrowed for an income-producing purpose. At the same time as these borrowings occurred, CSL paid dividends totaling $600 million to CSHL. CSHL then assigned the $600 million of debt to another subsidiary ("SOFC") which had been incorporated in the British Virgin Islands but had a permanent establishment in Ontario. CSL paid interest to SOFC, SOFC paid dividends to CSHL, and CSHL would make further loans to CSL. CSL deducted the interest paid to SOFC in computing its income for Alberta purposes, SOFC was not taxable in Ontario on the interest it received from CSL, and CSHL claimed the intercorporate dividend deduction respecting the dividends it received from SOFC.

In the course of finding that the series of transactions was not subject to Alberta's general anti-avoidance rule (on similar reasoning to Husky), Hunt J.A. stated (at para. 38):

I am not persuaded by Alberta's argument that Safeway did not "need" to borrow $600 million... . It is clear that a taxpayer is free to replace retained earnings with borrowed money and doing so does not by itself show that the purpose of section 20(1)(c) has been frustrated: Lipson at para 41; see also Ludco and Singleton.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) focus on whether individual transactions are avoidance transactions 133

Husky Energy v. Alberta, 2012 DTC 5132 [at 7262], 2012 ABCA 231

no corporate consolidation under policy of Act

An Alberta corporate taxpayer within the Husky group of companies ("Operations") used the proceeds of loan repayments received from other Alberta taxpayers within the group (the "Subsidiaries" - who had borrowed those proceeds from a bank) to subscribe for equity in a subsidiary ("Central") which had been incorporated in the British Virgin Islands but which was resident in Ontario. Central used the subscription proceeds to make an interest-bearing loan to another (BC) subsidiary of Operations ("West") which, in turn, on-lent those funds at interest to the Subsidiaries. The Subsidiaries deducted the interest payments made by them to West, West included those payments in its income and deducted the interest paid by it to Central - however, Central was not required to include such interest payments in its income for Ontario corporate income tax purposes. Central applied the untaxed interest payments so received by it to make dividend payments to Operations, which claimed the intercorporate dividend deduction.

Further transactions were engaged, which were viewed as raising the same issues under the general anti-avoidance rule ("GAAR") in the Alberta Corporate Tax Act (ACTA), which is essentially identical to the federal GAAR.

The Court dismissed the Minister's submission that the Subsidiaries' deduction under 20(1)(c) of the interest payments to West, and Operations' claiming of the intercorporate dividend deduction under s. 112(1), abused those provisions. The principle of corporate non-consolidation, set out in para. 97 of Copthorne, requires that each corporation's tax liability be considered independently (para. 47). It was therefore irrelevant for the Subsidiaries' tax position that Central had no corresponding income inclusion on the interest payments (paras. 45-46), and it was irrelevant for Operations' tax position that dividends from Central came from a non-taxable stream of income (paras. 52-56).

Copthorne Holdings Ltd. v. Canada, 2012 DTC 5006 [at 6536], 2011 SCC 63, [2011] 3 S.C.R. 721

policy of s. 87(3) is to avoid preservation of PUC on parent and sub amalgamation

The ultimate controlling family members decided that a Canadian subsidiary ("Copthorne I") should be amalgamated with a wholly-owned subsidiary of Copthorne I ("VHHC Holdings"), whose shares had a nominal fair market value but a paid-up capital of approximately $67 million. (The high paid-up capital of the shares of VHHC Holdings reflected the fact that it had previously been capitalized with those amounts by another family-owned Canadian-resident corporation, before it dissipated that capital through making a bad investment.) In order to preserve the paid-up capital in the shares of VHHC Holdings, the amalgamation was not accomplished as a vertical amalgamation. Instead, Copthorne I sold its shares of VHHC Holdings for a nominal amount to Copthorne I's non-resident parent company prior to a horizontal amalgamation of Copthorne I and VHHC Holdings (and some other Canadian corporations) to continue as Copthorne II.

With a view to effecting a substantial distribution to its non-resident shareholder (and after Copthorne II had amalgamated with another Canadian corporation to continue as Copthorne III), Copthorne III redeemed preferred shares held by the shareholder, with no Part XIII tax being withheld in light of the high paid-up capital of those shares.

After observing that s. 87(3) provides for the cancellation of the paid-up capital of a subsidiary on its vertical amalgamation, Rothstein J. stated (at para. 122):

Having regard to the text, context and purpose of s. 87(3), I would conclude that the object, spirit and purpose of the parenthetical portion of the section is to preclude preservation of PUC of the shares of a subsidiary corporation upon amalgamation of the parent and subsidiary where such preservation would permit shareholders, on a redemption of shares by the amalgamated corporation, to be paid amounts as a return of capital without liability for tax, in excess of the amounts invested in the amalgamating corporations with tax-paid funds.

Accordingly, the GAAR assessment was appropriate (para. 127):

The sale of VHHC Holdings shares to [the shareholder] circumvented the parenthetical words of s. 87(3) and in the context of the series of which it was a part, achieved a result the section was intended to prevent and thus defeated its underlying rationale. The transaction was abusive....

St. Michael Trust Corp. v. Canada, 2010 DTC 5189 [at 7361], 2010 FCA 309, aff'd sub nom Fundy Settlement v. Canada, 2012 DTC 5063 [at 6881], 2012 SCC 14

accessing Treaty residence not abusive

After finding against the taxpayers on the grounds inter alia that two Barbados trusts were resident in Canada, Sharlow, J.A. found that if Barbados trusts were in fact entitled to a treaty exemption based on their residence in Barbados, this would not result in a misuse or abuse of that Convention given that the treaty exemption (para. 90):

...flows from the fact that in the Barbados Tax Treaty, Canada has agreed not to tax certain capital gains realized by a person who is a resident of Barbados. If the residence of the trust is Barbados for tax purposes, the trusts cannot misuse or abuse the Barbados Tax Treaty by claiming the exemption.

Lehigh Cement Limited v. Canada, 2010 DTC 5081 [at 6844], 2010 FCA 124

withholding exemption where no money raised not abusive

After the terms of the debt owing by the taxpayer to a non-resident affiliate were amended so that they would comply with various requirements of the withholding tax exemption in s. 212(1)(b)(vii), the non-resident affiliate sold to an arm's length Belgian bank the right to be paid all interest payable under the debt for a sum of approximately $42.7 million, with the non-resident affiliate being required to buy back the sold interest coupon for a specified price in the event of a default by the taxpayer.

In rejecting a submission of the Crown that this transaction resulted in a misuse of such withholding tax exemption because the transaction did not result in the taxpayer "accessing funds in an international capital market" (para. 25) (which the Crown suggested was the purpose of the exemption, based on a brief statement in the related Budget papers respecting its introduction) Sharlow, J.A. noted (at para. 37) that the Crown had been unable to "establish by evidence and reasoned argument that the result of the impugned transaction is inconsistent with the purpose of the exemption, determined on the basis of a textual, contextual and propulsive interpretation of the exemption" (emphasis on the original) and that "no trace of the alleged fiscal policy can be discerned or reasonably inferred from subparagraph 212(1)(b)(viii) itself, from the statutory scheme of which subsection 212(1)(b)(viii) is a part, or from any other provision of the Income Tax Act that could possibly be relevant to its textual, contextual and purposive interpretation.

Canada v. Remai, 2009 DTC 5188 [at 6257], 2009 FCA 340

no abuse in controlling funds established

In order to make promissory notes that he had donated to a charitable foundation cease to be non-qualifying securities, the taxpayer arranged for the Foundation to sell those promissory notes to a corporation ("Sweet") owned as to 90% by his nephew, with Sweet issuing notes with identical terms to the Foundation as consideration for the purchase.

In rejecting a submission of the Crown that the "non-qualifying security" provisions of the charitable gift rules were intended to prevent donors from claiming a charitable tax credit for the value of the gift when they still retain control of the funds from which the obligation would be satisfied (which was the case on the facts in this case), the Court noted (at para. 58) that nothing in the text of the provisions supported this purpose, and that the associated Budget statements instead referred only to loan-back situations, which was not the case in the transactions under consideration before the Court.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) providing a favour is consistent with arm's length dealing 218
Tax Topics - Statutory Interpretation - Redundancy/reading in words 38

Collins & Aikman Products Co. v. The Queen, 2009 DTC 1179 [at 958], 2009 TCC 299, aff'd 2010 DTC 5164 [at 7293], 2010 FCA 251

limited scope of PUC provisions reflected a policy choice

The taxpayer ("Products"), which was a corporation resident in the U.S., transferred the shares of its subsidiary ("CAHL"), which was non-resident in Canada notwithstanding that it had been incorporated in Canada in 1929, to a newly incorporated Canadian-subsidiary of Products ("Holdings") in consideration for a common share of Holdings that had a paid-up capital equal to the fair market value of CAHL. After CAHL became resident in Canada (as a result of its central management and control moving to Canada), CAHL paid dividends to Holdings, which distributed the same amounts to Products as distributions of paid-up capital.

In finding that it was not abusive for the stepped-up paid-up capital of the common share of Holdings to be utilized by Products to receive a distribution free of Part XIII tax, Boyle, J. rejected the Crown's submission that there was a scheme under the Act that should treat most distributions as subject to tax (noting (at paragraph 72) that any alleged legislative purpose "should be demonstrably evident from the provisions of the Act"), and noted (at paragraph 86) that the real reason the reorganization plan "worked" was that CAHL was a non-Canadian holding company whose shares were not taxable Canadian property and were excluded from the application of s. 212.1. On the appeal, Sharlow J.A. remarked: "We see no reason to conclude that the limited scope of those provisions was anything other than a deliberate policy choice by Parliament."

After finding for the taxpayer, Boyle J. went on to reject a taxpayer submission that there was no use of s. 84(4) and therefore no misuse of s. 84(4) because s. 84(4) did not apply: s. 84(4) applies every time a corporation returns capital even if a deemed dividend does not arise.

Words and Phrases
apply

Canada v. Landrus, 2009 DTC 5085 [at 5840], 2009 FCA 113

carefully crafted anti-avoidance provisions reflect a correlatively-limited policy scope

A partnership of which the taxpayer was a member ("Roseland II") and another partnership ("Roseland I") owning a similar and adjacent condominium development, sold all their assets to a newly-formed partnership ("RPM") with the purchase price being paid by way of set-off against the subscription price for the partnership interests in RPM, with such partnership interests in RPM being distributed to the partners of Roseland I and II.

In response to a submission of the Crown that various stop-loss provisions in the Act evidenced "a general policy to disregard dispositions of property to persons amongst related parties or parties within 'the same economic unit", Noël, J.A. noted (at para. 44) that "the precise and detailed nature of these provisions show that they are intended to deny losses in the limited circumstances set out in these provisions" and stated (at para. 47) that "where it can be shown that an anti-avoidance provision has been carefully crafted to include some situations and exclude others, it is reasonable to infer that Parliament chose to limit their scope accordingly." After noting (at para. 56) that he accepted "that the transactions in issue would be arguably abusive if they had given rise to the tax benefit in circumstances where the legal rights and obligations of the Respondent were otherwise wholly unaffected," he went on to note that here the changes in the position of the taxpayer were "material both in terms of risk and benefits" (para. 57) given that as a result of the transactions, the taxpayer acquired an undivided interest in assets that were double in size and shared in an expanded rental pool. Finally, having regard to the "overall result" test established in the Lipson case, the overall result in this case did not frustrate the object, spirit and purpose of the relevant stop loss provision (s.20(16)). Accordingly, the Crown's appeal was dismissed.

Lipson v. Canada, 2009 DTC 5528, 2009 SCC 1, [2009] 1 S.C.R. 3

policy of spousal attribution rule: cannot exploit spousal status on property transfers

The taxpayer's wife ("Jordanna") borrowed $562,500 from the Bank of Montreal under an interest-bearing demand promissory note in order to purchase some of the shares of a family corporation from the taxpayer for that sum, with the sale proceeds being used by the taxpayer to purchase a family home. The next day, a mortgage loan on the home received from the Bank was used to retire the demand promissory note. The taxpayer did not report a capital gain on the sale of the shares (on the basis that the inter-spousal rollover in subsection 73(1) applied) and included in the computation of his income both the dividends on the shares purchased by Jordanna, and the interest expense incurred by her on the mortgage loan, on the basis that the attribution rules in subsection 74.1(1) applied.

Lebel J. found (at para. 42):

"As ... the purpose of s. 74.1(1) is to prevent spouses from reducing tax by taking advantage of their non arm's length relationship when transferring property between themselves ..., the attribution by operation of s. 74.1(1) that allowed Mr. Lipson to deduct the interest in order to reduce the tax payable on the dividend income from the shares, and other income, which he would not have been able to do were Mrs. Lipson dealing with him at arm's length, qualifies as abusive tax avoidance ... . Indeed, a specific anti-avoidance rule is being used to facilitate abusive tax avoidance.":

Respecting the position of Rothstein, J. who, in his dissenting reasons, stated (at para. 108) that "if there is a specific anti-avoidance rule [such, as here, s. 74.5(11)] that precludes the use of an enabling rule to avoid or reduce tax, then the GAAR will not apply", Lebel J. stated (at para. 45):

"Where the language of and principles flowing from the GAAR apply to a transaction, the court should not refuse to apply it on the ground that a more specific provision - one that both the Minister and the taxpayers considered to be inapplicable throughout the proceedings - might also apply to the transaction."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.1 - Subsection 74.1(1) purpose of attribution rules: preventing use of related-person status to reduce tax when transferring property/attribution of interest expense 240

Canada v. MIL (Investments) S.A., 2007 DTC 5437, 2007 FCA 236

real transactions to access Treaty portfolio investment exemption not abusive

In March 1993 an individual ("Boulle") transferred his shares of a Canadian public junior exploration company ("DFR") to the taxpayer, which was a newly-incorporated Cayman Islands company wholly owned by him. By June 1995, the taxpayer exchanged, on a rollover basis pursuant to s. 85.1, a portion of its DFR shares (which had substantially appreciated) for common shares of a large Canadian public company ("Inco"), with the result that the taxpayer's shareholding in DFR was reduced below 10%. This result positioned the taxpayer to clearly fit within an exemption from Canadian capital gains tax under Article XIII of the Canada-Luxembourg Income Tax Convention (the "Treaty") on a subsequent disposition of that block of shares once the taxpayer became resident in Luxembourg. In July 1995, the taxpayer was continued into Luxembourg, in August 1995 the taxpayer sold its shares of Inco and in August 1996 it sold its DFR shares to Inco.

In rejecting the submission of counsel for the Crown that the claiming of exemption under the Treaty on the August 1996 sale represented an abuse or misuse, Pelletier, JA stated (at para. 6-7):

"It is clear that the Act intends to exempt non-residents from taxation on the gains from the disposition of treaty exempt property. It is also clear that under the terms of the Tax Treaty, the respondent's stake in DFR was treaty exempt property. The appellant urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose.

If the object of the exempting provisions was to be limited to portfolio investments, or to non-controlling interests in immoveable property (as defined in the Tax Treaty [including real estate company shares]), as the appellant argues, it would have been easy enough to say so. Beyond that, and more importantly, the appellant was unable to explain how the fact that the respondent or Mr. Boulle had or retained influence or control over DFR, if indeed they did, was in itself a reason to subject the gain from the sale of the shares to Canadian taxation rather than taxation in Luxembourg."

The Court also summarily dismissed an argument that the Treaty should not be interpreted so as to permit "double non-taxation", i.e., a result where there was no income tax under the laws of either jurisdiction.

Mathew v. Canada, 2005 DTC 5538, 2005 SCC 55, [2005] 2 S.C.R. 643

accrued loss preservation rule assumed non-arm's length transaction

An insolvent trust company ("STC") transferred a portfolio of mortgages with unrealized losses to a partnership of which a wholly-owned subsidiary was a general partner and in which it received a 99% interest ("Partnership A"). S.18(13) deemed the cost of the mortgages to be the same to Partnership A as their cost to STC. STC sold its partnership interest in Partnership A to a second partnership ("Partnership B") of which the taxpayers were members. Partnership A realized the losses on the mortgage portfolio, allocated 90% of the loss to Partnership B which, in turn, allocated those losses to its partners including the taxpayers.

In finding that the transactions defeated the purposes of s. 18(13) and the partnership provisions of the Act, the Court stated (at p. 5546):

"Section 18(13) preserves and transfers a loss under the assumption that it will be realized by a taxpayer who does not deal at arm's length with the transferor. Parliament could not have intended that the combined effect of the partnership rules and s. 18(13) would preserve and transfer a loss to be realized by a taxpayer who deals at arm's length with the transferor."

Canada Trustco Mortgage Co., v. The Queen, 2005 DTC 5523, [2005] 2 S.C.R. 601, 2005 SCC 54

policy of CCA provisions relied on cost irrespective of risk mitigation

The taxpayer purchased trailers from the U.S. user of the trailers ("TLI"), with the taxpayer appointing TLI as its agent to hold title on its behalf. The taxpayer leased the trailers to an English company ("MAIL") which in turn subleased the trailers to TLI. TLI then immediately made a lump sum prepayment of all the rents payable by it under the sublease, and MAIL used a portion of this sum to make a deposit with the bank that had helped fund the purchase by the taxpayer of the trailers in an amount equal to the bank loan and paid the balance of the prepayment to a Jersey affiliate of the bank on the condition that the affiliate use those funds to purchase a Government of Canada bond to be pledged to secure MAIL's obligations under the lease.

The claiming by the taxpayer of capital cost allowance on the acquired trailer was consistent with the object and spirit of the capital cost allowance provisions of the Act which did not, except in specified circumstances, reduce cost to reflect a mitigation of economic risk. Accordingly, the transactions did not defeat or frustrate the object, spirit or purpose of the capital cost allowance provisions read textually, contextually and purposively.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit 126
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) "in contemplation" references "because of" or "in relation to" 115
Tax Topics - Statutory Interpretation - Certainty 127
Tax Topics - Statutory Interpretation - Ordinary Meaning primacy to ordinary meaning if unequivocal 90

Canada v. Imperial Oil Ltd., 2004 DTC 6044, 2004 FCA 36

accessing foreseeable loophole

The Court affirmed the finding of the Tax Court that the claiming of an investment allowance by the taxpayer on short-term loans made by it close to the end of its calendar fiscal period to a bank subsidiary, with the loans being guaranteed by the parent bank, did not result in a misuse or abuse for purposes of s. 245(4). The taxpayer was not indirectly lending money to a bank, as the business of the borrower was different than that of its parent and the money was available for use by it and not the bank; and "the fact that the bank guaranteed the loan did not make it a borrower of the money lent" (p. 6054). Although the taxpayer "took advantage of a loophole in the statutory scheme, namely the failure to deal with the consequences of different corporate year ends" ... "it must have been perfectly foreseeable to Parliament that large corporations would make short term loans to other large corporations which span the end of the lender's financial year, but not the borrower's, so that both corporations would escape that LCT on the amount of the loans" (p. 6055). Further, the Court could not agree with the Minister's submission "that there is a clear policy that a corporation's capital at the end of the fiscal year should be representative of its capital throughout the year", as Parliament had not chosen to require companies to report the value of their capital at several points during the year (p. 6055).

Canada v. Produits Forestiers Donohue Inc., 2003 DTC 5471, 2002 FCA 422

asset strip to affiliate before tax motivated sale at loss

In order to realize an allowable business investment loss on its investment in a corporation ("DMI") held jointly by it and a third party ("Rexfor"), the taxpayer and Rexfor formed a new corporation ("DMI 1993") owned jointly by them, arranged for DMI to transfer all its assets and liabilities to DMI 1993 save for two sawmills worth $2.5 million and $2.5 million of debt owing to a third party, and then sold the shares of DMI to an unrelated third party for nominal consideration.

In finding that realization of the loss did not result in a misuse or abuse, Noël, J.A. stated (at p. 5475) that:

"There is nothing in the Act that bars a taxpayer from realizing a loss on the sale of shares to arm's length third parties, even if a significant portion of the assets to which the loss on the shares may be attributed remains within the group of corporations."

Novopharm Ltd. v. Canada, 2003 DTC 5195, 2003 FCA 112

A profitable Canadian corporation ("Novopharm") acquired losses approximating $20 million of an arm's-length corporation ("Lossco") through a complicated series of transactions, which in simplified form were as follows:

  1. two special-purpose subsidiaries of Lossco formed a limited partnership ("Millbank") which borrowed $195 million from First Marathon Capital Corporation ("FMCC") and lent $195 million to First Marathon Inc. ("FMI") with FMI then immediately paying $20 million to Millbank as a prepayment of one year's interest and Millbank utilizing $20 million to pay down the principal of loan owing by it to FMCC to $175 million;
  2. Lossco acquired a 99.99% limited partnership in Millbank shortly thereafter (and immediately prior to the first fiscal year end of Millbank) thereby resulting in $20 million of income of Millbank being allocated to it, which eliminated its losses;
  3. the 99.99% partnership interest was transferred for nominal consideration by Lossco to an indirect special purpose subsidiary of Lossco ("540") and 540 then was sold to Novopharm;
  4. FMCC lent $175 million to Novopharm which used those proceeds to subscribe for shares of 540; 540 made a capital contribution of the same amount to Millbank, which paid off the $175 million loan owing by it to FMCC;
  5. a year later after $20 million of interest had accrued on the loan owing by Novopharm to FMCC, FMI repaid the $195 million principal amount owing by it to Millbank, Millbank distributed this sum to its partners (substantially 540), 540 purchased for cancellation most of the shares of Novopharm and 540 for $195 million (giving rise to a deemed dividend of $20 million), and Novopharm used the $195 million to discharge the amount owing by it to FMCC (including the $20 million of interest).

The deduction of interest by Novopharm was a result that was contrary to the object and spirit of the Act (given that the sole purpose of the series of related transactions "was solely to create a net interest deduction for Novopharm that reduced its income, the antithesis of the object of subparagraph 20(1)(c)(i), to create an incentive to accumulate capital with the potential to produce income") and the transactions were not in accordance with normal business practice (and instead "were pre-ordained, circular and limited in time" (p. 5205)). Accordingly, s. 245(1) of the Act as it applied in June 1987 denied the deduction of the interest along with fees that were incurred in connection with entering into the transactions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) borrowing to receive deemed dividend 332

Canada v. Canadian Pacific Ltd., 2002 DTC 6742, 2002 FCA 98

transaction not to be recharacterized to make it an avoidance transaction

The taxpayer borrowed 216 million in Australian dollars under debentures bearing interest at 16.125% per annum and that had been issued at a 2% premium and then, under a master swap agreement: exchanged the Australian dollar principal amount for Japanese yen at the current spot rate of exchange; swapped the Japanese yen proceeds for Canadian dollars at the current spot rate of exchange; under a series of forward contracts agreed to purchase Australian dollars using Japanese yen on the interest payment date and the principal maturity date; and agreed to exchange Canadian dollar payments for Japanese yen at the relevant future dates. The effect was to convert the proceeds of the debenture issues into Canadian dollars as soon as it received the borrowed funds, and to secure the future delivery of foreign exchange necessary to make the periodic payments of interest and to retire the principal. Sexton J.A. rejected a submission of the Crown that the taxpayer's act of denominating the debentures in Australian dollars was in and of itself a transaction.

In rejecting a submission that there was an abuse because the borrowing was structured so as to result, in effect, in the deduction of Canadian dollar principal payment (i.e., the high nominal rate of Australian-dollar interest was matched with a capital gain that would be realized on maturity under the forward arrangements), Sexton J.A. indicated that the amounts labelled as interest clearly were interest and that "a transaction cannot be portrayed as something which it is not, nor can it be recharacterized in order to make it an avoidance transaction."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) primary purpose of a borrowing in a tax-advantageous currency was to raise money 286

OSFC Holdings Ltd. v. Canada, 2001 DTC 5471, 2001 FCA 260

policy against corporate loss trading

After becoming insolvent, a company ("Standard") in the mortgages business established a partnership, transferred a mortgage portfolio to the partnership and, prior to the end of the partnership's first fiscal year, sold its 99% direct interest in the partnership to the taxpayer who then sold a portion of its partnership interest to other parties. S.18(13) deemed the partnership to have the same cost amount for the portfolio as Standard, with the result that losses generated on the sale of the portfolio were allocated to the taxpayer and the other partners, rather than to Standard.

Although, in the view of the majority, the transactions did not result in a misuse of subsection 18(13) having regard to the policy of that provision (which was to preclude the transferor from realizing a loss on a disposition of non-capital property to a non-arm's length transferee, and to preserve the loss for recognition on a later occasion by the transferee), the transactions resulted in an abuse having regard to the general policy of the Act against the trading of non-capital losses by corporations, subject to specific limited circumstances. Accordingly, the denial of the losses to the taxpayer under s. 245 was confirmed. Rothstein J.A. noted that the Court should proceed cautiously in carrying out the unusual duty imposed upon it under s. 245(4) to invoke policy to override the words Parliament had used.

Longley v. The Queen, 99 DTC 5549 (B.C.S.C.)

Quijano J. found that GAAR would not apply to an arrangement under which taxpayers made contributions to a fringe political party on the basis that the money would be spent by the party on matters for the benefit of the taxpayer.

See Also

9199-3899 Québec inc. v. Agence du revenu du Québec, 2017 QCCA 1524

using the investment allowance to generate a capital tax savings abused its purpose of merely avoiding double taxation

In order to reduce Quebec capital tax, the taxpayer lent $350M on a non-interest-bearing basis to its parent on January 27, 2005, and claimed this amount as an investment allowance in computing its capital tax liability at its taxation year end of January 31, 2005. On February 15, 2005, the loan was repaid so that the parent did not account for this loan in its capital when it, in turn, calculated its capital tax liability. In confirming the application of the Quebec general anti-avoidance rule to deny the benefit to the taxpayer of the investment allowance, Vézina JCA stated (at paras. 29, 35, TaxInterpretations translation) that the reduction under the investment allowance:

is intended to “avoid double taxation” and is not intended to exclude all taxation.

…The reduction did not serve to rectify a prejudice, but created a benefit, which is contrary to the object and spirit of this disposition of simply addressing double taxation and not creating a tax exemption.

2763478 Canada Inc. v. The Queen, 2017 CCI 98

value-shift transactions were abusive

An individual did not sell his shares of an operating company (Groupe AST) directly to a third-party purchaser. Instead he rolled his shares into a holding company (276), following which some internal transactions occurred in which the adjusted cost base of the Groupe AST shares was stepped up to fair market value - including a non-rollover drop-down of those shares to a subsidiary (9144) in exchange for high-basis common shares - with 276 realized corresponding capital gains. The Groupe AST shares were then sold to the purchaser at no additional gain.

276 then engaged in “value shift” transactions of the same general type as were struck down in Triad Gestco and 1207192, i.e., a stock dividend of high-low preferred shares was paid on the high-ACB common shares that 276 held in 9144, thereby rendering those common shares almost worthless, and then the capital loss was realized by selling those common shares for $1 to a corporation owned by the son of 276’s shareholder.

Although the realization of the capital gain – to be offset by the value-shift loss – was realized in internal transactions, unlike Triad Gestco and 1207192, this was not a relevant difference.

After quoting with approval from Triad Gestco, Paris J stated (at para. 56, TaxInterpretations translation):

For the same reasons, there is an abuse with respect to the transactions in this case having regard to the ITA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) not every transaction had estate-freezing objective 285

Fiducie Financière Satoma v. The Queen, 2017 CCI 84

use of s. 75(2) attribution rule and s. 112(1) DRD to extract surplus to a family trust was abusive

$6.3 million in funds was extracted from a private operating company (“Gennium”) by paying those dividends to a holding company (“9134”), which contributed those funds to a trust to which s. 75(2) applied (namely, the taxpayer, or “Satoma Trust”), which then contributed those funds to another holding company (“9163”), which then paid those funds back to Satoma Trust as dividends. Although the funds thus landed in Satoma Trust, which it used to make new investments, those dividends were attributed under s. 75(2) to 9134, which used the dividends-received deduction in s. 112(1) to avoid any inclusion in its taxable income. Lamarre ACJ noted (at para. 24) that the result of the above transactions was that “9134 was stripped of its assets in favour of the appellant without any payment of tax.” Although this description of the steps may be sufficient, they are described in somewhat more detailed (but still summary) fashion below.

  1. Gennium paid dividends to a family trust (Louis Pilon Family Trust) to which s. 75(2) did not apply.
  2. That trust distributed the dividends to a corporate beneficiary (“9134”), which excluded the dividend amounts from its taxable income under s. 112(1).
  3. 9134 then made a $100 gift to the taxpayer (Satoma Trust), which used those funds to acquire Class F shares of another corporation (9163) that did not have an active business. The gift was intended to engage the application of s. 75(2), so that dividends on the shares would be attributed to 9134.
  4. 9134 made capital contributions of the dividends amounts received by it in 2 to 9163.
  5. 9163 then paid those funds to Satoma Trust as dividends. Those dividends were not required to be included in the income of Satoma Trust as s. 75(2) applied to include them in the income of 9134, which claimed the s. 112(1) deduction to exclude them from its taxable income.

CRA assessed under s. 245(2) to include the dividends paid in 5 in the income of Satoma Trust.

Consistently with Lipson, which established that GAAR can apply where a specific avoidance rule is misused to achieve a result that is contrary to its object and spirit (para 84), Lamarre ACJ found that the series of transactions represented abusive tax avoidance for purposes of s. 245(4), stating (at paras. 115, 117-119, TaxInterpretations translation):

It was only by taking advantage of the introduction of the reversionary trust, established by a beneficiary corporation, that Gennium's profits could end up in the hands of the Satoma Trust without any tax impact, through the combined operation of the attribution rule in subsection 75(2) and the dividend deduction accorded to corporations under subsection 112(1)… .

…The interaction of these two provisions created a tax advantage, in that Gennium was stripped of its surplus in favour of a trust at zero tax cost, which is contrary to the object and spirit of these two provisions.

Subsection 75(2) seeks to prevent income splitting by a transferor who transfers property to a trust while enjoying the right to recover the property. Subsection 112(1) provides for the non-taxation of inter-company dividends.

The object and spirit of these two provisions is not to allow the transfer of funds from a corporation to a trust by taking advantage of a total tax reduction. The avoidance transactions at issue run counter to the purpose of these provisions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit tax benefit even though corporate surplus stripped in favour of family trust had not so far been distributed 207
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) s. 75(2) application ousts dividend inclusion to income recipient (in absence of GAAR) 102

MP Western Properties Inc. v. The Queen, 2017 TCC 82

required production of all documents showing GAAR consultations

Predecessors of the taxpayers had been acquired for their losses in transactions where less than 50% of their voting shares, but more than 90% of their non-voting participating shares, had been acquired. The Minister had reassessed to deny the acquired losses primarily on the basis that there had been an acquisition of control, but secondarily through applying the general anti-avoidance rule.

In discussing the scope of the obligations of CRA and Finance to provide correspondence relating to loss utilization schemes that had been requested by the taxpayers, V.A. Miller J stated:

… It is my view that in a GAAR appeal, draft documents prepared in the context of a taxpayer’s audit or considered by officials involved in or consulted during the audit and assessment of the taxpayer should be disclosed. They inform the Minister’s mental process leading up to an assessment. They may also inform the Minister’s understanding of the policy at issue.

V.A. Miller J found that most of the redacted portions did not have to be produced, including on the basis that there was no evidence that the particular document was considered by CRA during the audit.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 95 - Subsection 95(1) Crown must produce all documents “considered by officials involved in or consulted during” a GAAR-related audit 292

1245989 Alberta Ltd. v. The Queen, 2017 TCC 51

use of PUC-averaging rule to bump outside PUC was abusive

An individual (Mr. Wild) stepped up the adjusted cost base of his investment in a small business corporation (PWR) by transferring his PWR common shares to two new Holdcos for him and his wife in exchange for preferred shares of the Holdcos, and electing under s. 85 at the right deemed proceeds amount to use up his capital gains exemption. However, the paid-up capital of those preferred shares was ground down to essentially nil under s. 84.1.

The solution adopted was for PWR to then transfer high basis assets to the Holdcos in consideration for preferred shares of the same class, so that the PUC of the preferred shares held by Mr. Wild personally could be bumped due to the class-averaging rule in s. 89(1). It was of no import that there was a corresponding shifting of PUC away from the preferred shares taken back by PWR, because those shares were then redeemed for a note in reliance on the s. 55(3)(a) exception (and their relatively high basis anyway).

Lyons J, in finding that there was an abuse under s. 245(4), so that the MInister's assessment reversing the step-up to the preferred shares held directly by Mr. Wild was confirmed, stated:

[T]he…transactions…achieved a result (extraction of corporate surplus indirectly and use of his [capital gains] exemption) that section 84.1 was intended to prevent and defeats its underlying rationale and did so by misusing the PUC computation in subsection 89(1) to trigger the share averaging thus artificially inflated the PUC in The Shares held by Mr. Wild without any new capital contribution made by him.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) the use of class PUC-averaging to bump the PUC of personally-held shares was an abuse of s. 84.1 633
Tax Topics - Income Tax Act - Section 245 - Subsection 245(5) assessment of PUC without current income effect 32

Veracity Capital Corp. v. The Queen, 2017 BCCA 3 (Informal Procedure)

avoidance of provincial capital gains tax was not GAARable in B.C. as there was no abuse of the B.C. Act itself

The following transactions occurred under a KPMG-advised “Q-Yes” plan for the avoidance of 90% of the B.C. income tax that otherwise would have been payable on the taxable capital gain realized on the July 8, 2002 closing of the arm’s-length sale of the shares of a corporation (“ALI”):

  1. On June 14, 2002, shareholders of ALI transferred their shares on a rollover basis under ITA s. 85(1) to a newly-incorporated B.C. corporation (“Veracity,” which was the taxpayer), which had selected a June 30 fiscal year-end for federal and B.C. income tax purposes.
  2. Shortly after the closing, Veracity paid $2,000 in directors’ fees to two B.C. directors and lent the net sales proceeds of approximately $23.5 million on a non-interest-bearing basis to one of its shareholders (a corporation).
  3. In late July 2002, Veracity purchased 15,000 units (with a cost $266,337) of a publicly-traded limited partnership (“Gaz Metro”) carrying on regulated natural gas utility business in Quebec, having a permanent establishment there and having a September 30 fiscal year end (so that a proportionate part of its gross revenues and payroll would be allocable to the purchased units at that year end on the basis inter alia that Veracity as a partner also had a Quebec establishment).
  4. Veracity selected an August 31, fiscal year end for Quebec income tax purposes.
  5. In September 2002, Veracity acquired a further 30,000 Gaz Metro units.

The payment of the directors’ fees before August 31, 2002 (together with allocations on the Gaz Metro units not occurring until after August 31, 2002) ensured that when the taxable capital gain was reported for the August 31, 2002 Quebec taxation year, the Quebec allocation formula allocated 100% of that income to B.C. On the other hand, in the federal/B.C. return for the year ended June 30, 2003, the allocation of gross revenues and payroll on the Gaz Metro units in that year resulted in 90% of the income (mostly the taxable capital gain from the sale) being allocated to Quebec for B.C. allocation purposes.

The Minister assessed Veracity under the B.C. GAAR provision (s. 68.1 of the Income Tax Act (B.C.)) on the basis that 100% of the taxable capital gain was taxable in B.C.

After noting that s. 68.1(1)(d) (the B.C. equivalent of ITA s. 245(4)) referenced a misuse or abuse of the provisions of the B.C. Act, MacKenzie JA rejected the Crown’s submission that the transactions constituted an abuse of the ITA s. 85 rollover rule, stating (at paras. 68-69):

[S]. 68.1(1)(d)… does not apply to provisions in the federal Act that are not expressly incorporated into the BC Act. …

Had the Legislature intended the BC GAAR to cover misuse or abuse of provisions beyond the BC Act and its regulations, such as the federal Act, it could easily have adopted the explicit language in subsection (c) [the equivalent of ITA s. 245(3), which referred to the reduction, avoidance or deferral of tax under the B.C. Act or “under any other federal or provincial Act.”]

(Similarly, Veracity exploited the ability to choose a different year end under the Quebec Act “but the provisions of the Quebec Act are clearly not within the scope of s. 68.1(1)(d)…” (para. 123).)

She went on to note that, in any event, although “s. 85’s purpose encompasses both deferral and preservation of a taxable capital gain such that upon the transferee’s ultimate disposition, the taxable capital gain, if any, will be realized and included in the transferee’s taxable income” (para. 85), its purpose was not “ensuring that the gain will give rise to an actual tax liability” (para. 86, emphasis in original), so that here “s. 85…operated as intended” even though “100% tax did not result” (para. 90). To reach a finding of a general abuse of the capital gains provisions of which s. 85(1) was a part would require an impermissibly “broad reading of the GAAR whereby any transaction that leads to lower taxes payable would trigger an abuse of general provisions such as s. 3” (para. 92).

In contrast to ITA s. 85(1), the inter-provincial “Allocation Rules” in Part IV of the ITA Regulations were specifically referenced in s. 13.3 of the B.C. Act. However (paras. 102-103, emphasis in original):

The purpose of the Allocation Rules is to allocate the income to the provinces. How the provinces tax that income, if at all, is beyond the purpose, object and spirit of the Allocation Rules. … I note the… comment in Copthorne…that:

… in some cases the underlying rationale of a provision would be no broader than the text itself. …

[T]he underlying rationale of providing a mechanism of allocation is fully explained by the formula it provides, choosing, as it did, to use gross revenues and salaries and wages as the factors.

S. 68.1(1)(d) should not have been applied.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Inserting Words Crown's interpretation entailed the addition of words that were already in a closely related provision 184

594710 British Columbia Ltd. v. The Queen, 2016 TCC 288

GAAR did not apply to the sale to a lossco of partner corps with pending condo sale profit allocations

The taxpayer was a holding company and Canadian-controlled private corporation which wholly-owned a “Partnerco” holding a 24.975% limited partnership interest in a strata development partnership (“HLP”) which, by May 25, 2006, had realized income of $13 million from the sale of most of the strata units, and was projected to realize another $863,546 of profit from the sale of the remaining six units. The three siblings of the shareholder of the taxpayer (“Rossano”) held their interests in HLP under the same Holdco-Partnerco structure, and the general partner, holding a 0.1% interest, was held by Rossano.

On May 25, 2006, HLP lent $8.5 million ($2.1 million each) to the four Partnercos, and then each Partnerco immediately declared a stock dividend of preferred shares with a paid-up capital and redemption amount of $2.1 million to each Holdco, with each Partnerco using the proceeds of such loan to redeem the preferred shares. Each Partnerco then paid a further stock dividend of preferred shares in the amount of the anticipated gain on the unsold strata units (for which it had been granted a put option by the developer).

On May 29, 2006, each Holdco sold its shares of its Partnerco to an arm’s length public corporation (“Nuinsco”) with substantial resource pools (and Nuinsco acquired the shares of the general partner for $1.) HLP then lent its cash of $4.4 million to Nuinsco.

On May 30, 2006, each Partnerco was wound up into Nuinsco and Nuinsco was admitted as sole limited partner of HLP. On May 31, 2006, HLP allocated its income of $12.1 million to its partners (mostly, Nuinsco). HLP then sold its remaining strata units, and HLP was dissolved.

In finding that the transactions did not entail an abuse of s. 111(5), Rossiter CJ stated (at paras. 87-89):

Subsection 111(5) was never contemplated to apply to a situation where it is the entity with accrued losses (Nuinsco) that acquires another entity. To put it another way, I am unconvinced that subsection 111(5) applies to profit trading with a loss corporation acquirer such that it can even be said that the parties relied on subsection 111(5) in transacting as they did. …

[T]here is no indication in subsection 111(5) that it was meant to prevent the acquiring party from using its own losses against post-acquisition income allocable to that acquiring corporation indirectly due to its acquisition of the target corporation. …

In finding that there also was no abuse of the provisions of the Act for allocation of partnership income (ss. 103 and 96), he stated (at paras. 99, 101, 109):

In this case, the allocation scheme in the HLP partnership agreement had not changed since the creation of the partnership. … There is no indication that this scheme was chosen for tax purposes or that it was unreasonable. …

It was open to the Respondent to argue that the combination of paragraph 96(1.01)(a) and section 103 demonstrate a general policy against profit trading between new and former members; having failed to do so, it is not for me to expand the lis of the parties. …

[N]othing in the partnership regime prevents a partnership agreement from basing its allocation of income on the membership at its fiscal year-end. …

He acknowledged that the transactions entailed an indirect transfer of property from the LP to the Holdcos from a s. 160 perspective, but did not consider that there had been any receipt of property on other than FMV terms. However, he considered that if he were wrong on this mechanical valuation point, the transactions would have entailed an abuse of s. 160, stating (at para. 167):

I find that the Respondent has sufficiently demonstrated the existence of an underlying policy against allowing those who incur liability for income tax from reducing, through transfers to non-arm’s length parties at a time where the transferor is so liable or reasonably likely to anticipate incurring such liability, the pool of assets with which they may satisfy that tax debt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) indirect transfer of property to taxpayer did not entail departure from FMV 442
Tax Topics - Income Tax Act - Section 245 - Subsection 245(2) GAAR reassessment must reflect the abuse 305
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) LP profits can be allocated to purchasing partner at year end 266

Pomerlau v. The Queen, 2016 CCI 228

abusive avoidance of s. 84.1 by converting soft into hard ACB

An individual taxpayer engaged in a surplus-stripping transaction similar to transactions in a ruling which CRA had resiled from following Descarries. He held shares of a holding company whose adjusted cost base reflected the step-up of predecessor shares’ ACB in capital gains crystallization transactions by him and other family members. Such additional “soft” ACB would have been ignored under s. 84.1 if those shares had been transferred to a personal holding company in exchange for the issuance of shares with a purported paid-up capital equal to the transferred shares’ soft ACB.

Instead, he retracted his own soft ACB shares (as well as soft ACB shares that had been gifted to him by family members), which resulted in a capital loss under s. 40(3.6) that was added to the ACB of his common shares of the corporation under s. 53(1)(f.2). This s. 53(1)(f.2) bump was not caught by s. 84.1(2), so that he could transfer the bumped common shares to a personal holding company, taking back high PUC shares which he promptly redeemed.

Favreau J agreed with CRA that this conversion of soft ACB into hard ACB, in order to receive a tax-free return of capital, contravened GAAR, stating:

This series of transactions permitted the appellant, on the redemption of the Class G shares of [his new holding company], to extract as a tax-free return of capital, $994,628 derived from the surplus of his corporation by virtue of utilizing his capital gains deduction and that of his mother and sister. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1) GAAR applied to converting soft ACB (generated from crystallizing the capital gains deduction) into pseudo-hard ACB under s. 53(1)(f.2) for use in extracting surplus 692

Oxford Properties Group Inc. v. The Queen, 2016 TCC 204

no abuse in using 88(1)(d) bump to avoid s. 100 after 3-year s. 69(11) period

A corporation (“BPC”), which was mostly owned by a Canadian pension fund (“OMERS”), obtained the agreement of a predecessor of the taxpayer (“OPGI Amalco”) that, prior to BPC’s acquisition of OPGI Amalco, it or an OPGI Amalco subsidiary (“MRC Amalco”) would transfer various of its rental real estate properties (including the “Three Real Estate Properties”) on a s. 97(2) rollover basis to newly formed LPs (the “First Level LPs”). Following the acquisition on October 16, 2001 of OPGI Amalco by a subsidiary of BPC, the cost of the interests in the First Level LPs was bumped under s. 88(1)(d) on an amalgamation which formed the taxpayer. In 2004, the First Level LPs transferred the Three Real Estate Properties to respective newly-formed LPs (the “Second Level LPs”) on a s. 97(2) rollover basis and the First Level LPs were wound–up, thereby permitting the high ACB in their units to be pushed down onto the cost of the interests in the Second Level LPs under s. 98(3)(c). The taxpayer then sold its interests in the Second Level LPs, somewhat after the three-year period referenced in s. 69(11), to entities that were exempt from Part I tax.

In finding that the use of the s. 97(2) rollovers in these transactions was not abusive, D’Arcy J stated (at para. 193):

Parliament…made the positive decision to limit the application of subsection 69(11) to transfers to tax-exempt entities that occur within the three-year period [in s. 69(11).] In my view, it is reasonable to conclude that Parliament was of the view that transfers after this three-year period did not abuse subsection 97(2).

In rejecting a Crown position that an “indirect” bumping of the cost of depreciable property frustrated s. 88(1)(d) (and similarly respecting s. 98(3)(c)), D'Arcy J noted that CRA had not reassessed transactions in which tax exempts had been sold bumped LP interests in LPs which had been formed before planning for the OMERS transactions had commenced, as well as not reassessing respecting sales of bumped LP interests (in LPs that had been formed as part of the series) to non-tax exempts, so that the Crown effectively was "arguing that it is only when all three elements are present, i.e., the prepackaging, the bump and the sale to the tax-exempt entity that abuse occurs" (para. 203), and stated (at para. 204) that this approach was contrary to Copthorne as it sought a “finding of abuse on a broad policy statement…without attaching the policy to specific provisions of the Act.” He further stated that “section 88…did not require the Appellant to look at the nature of the assets of the First Level LPs to determine the amount by which it could bump its interest in the limited partnerships” (para. 206) and that when subsequently amending the bump rule “Parliament decided to substantially narrow the amount by which a partnership interest may be bumped” (para. 212).

Finally, in arguing an abuse of s. 100(1), the Crown was in effect asking him “to find that one of the purposes of subsection 100(1) is to base the capital gain not on the gain otherwise calculated under the Act, but rather on accrued gains (including recapture) of property held by the partnership,” which was not reflective of the non-look through drafting of s. 100(1).

Accordingly, GAAR did not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) subsequent sale part of series as it utilized the benefit of previous LP packaging transactions 371
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) purpose not to tax underlying recapture on subsequent LP unit sale 415
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) purpose: to push down ACB of shares of sub to qualifying non-depreciable property 474
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) subsequent amendment shed light on scope of previous version 99
Tax Topics - Income Tax Act - Section 100 - Subsection 100(1) S. 100 operates only on outside basis gain 278
Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) Parliament provided safe harbour for sales after 3 years 197
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) - Paragraph 98(3)(c) purpose: to preserve high outside basis through push down 285

Gervais v. The Queen, 2016 TCC 180

basis averaging scheme to transfer half of a capital gain to the taxpayer’s wife was an abuse of the attribution rules

After a third party ("BW") had made an offer to purchase the shares of a Quebec manufacturing company ("Vulcain"), Mr. Gervais sold 1.04M Vulcain preferred shares (having a modest ACB) to his wife ("Mrs. Gendron") in consideration for a promissory note (payable in five annual instalments) and elected that s. 73 not apply to produce rollover treatment. Mr. Gervais then gifted a further 1.04M preferred shares to Mrs. Gendron on a rollover basis. Two weeks later and at the same time as the Vulcain common shares were sold by the other shareholders, Mrs. Gendron sold her 2.08M preferred shares to BW for $2.08M. She treated half of her $1M capital gain as being attributed to her husband (as that was the portion which she had acquired on a rollover basis), and treated the other half of the capital gain as being hers (for which she claimed the capital gains exemption). After Mrs. Gendron had succeeded before the Federal Court of Appeal on other grounds, the case was remitted to Jorré J to consider the correctness of the Minister’s application of GAAR to Mr. Gervais to increase his capital gain from $0.5M to $1M.

In finding that there was abuse under s. 245(4), Jorré J stated (at paras. 135, 141-142, TaxInterpretations translation):

Here, one must consider all the circumstances surrounding the series: the recourse to transfers of two blocs of Class E shares, one bloc by sale and one bloc by gift, the election to not transfer the shares sold to Mrs. Gendron on a rollover basis, and the election to have the rollover apply to the shares donated to Mrs. Gendron with the result that subsection 47(1) of the Act applied at the time that Mrs. Gendron sold those shares. It is evident that this produces a result that subsection 74.2(1) seeks to prevent and which thwarts the purpose of subsection 74.2(1) and the scheme of the Act by avoiding the attribution of part of the taxable capital gain to Mr. Gervais which would normally have occurred at the time Mrs. Gendron sold the shares. …

The legislator, in enacting subsection 69(11) and 110.6(7) of the Act, had no intention of neutralizing the effect of subsection 74.2(1) in circumstances such as these. …

In the context of the attribution rules, the purpose of the [s. 73] election is to permit a taxpayer to defer or not the realization of a gain, and not to permit a taxpayer to avoid attribution. Here, the election was made in order to circumvent attribution. This is an abuse.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) comparison with outright sale and gift 187
Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit benefit compared to straight sale and gift 162

R. v. Golini, 2016 TCC 174

use of corporate asset to create PUC was abuse of s. 84(1)

A family corporation (“Ontario”) used proceeds of a daylight loan to redeem shares of Holdco, which used those proceeds to purchase a life insurance policy (or, to be more precise, to purchase an annuity to fund the premiums on the acquired policy) from an accommodating offshore insurance company, with those funds making their way back, through a series of equally accommodating intermediaries, to the sole individual shareholder of Holdco (“Paul Sr.”) as a loan. This “Metropac” loan was guaranteed by Holdco, with the guarantee secured by Holdco’s life insurance policy. The loan terms limited the lender’s recourse thereunder to realization of such security. Paul Sr. used the loan proceeds to subscribe for preferred shares of Ontario, which repaid the daylight loan.

After finding that there was a shareholder benefit arising from Holdco permitting its policy to be used to pay off the Metropac loan, C Miller J went on, in the alternative, to find (at para. 139) that if it had been necessary to rely on GAAR, he would have found “there is an abuse of the underlying policy of subsection 84(1) of the Act and the Minister’s assessment of a deemed dividend is correct,” after having noted that the policy of s. 84(1) was “a limitation on returns to shareholders on a tax‑free basis to only the shareholder’s tax paid investment in a corporation, where such investment creates an equivalent increase in the company’s assets or decrease in its liabilities.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) a loan to a shareholder with recourse limited to an asset pledged by the corporation was a shareholder benefit 536
Tax Topics - General Concepts - Sham sham doctrine did not apply to a "minor pretence" 326
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) interest deduction on limited recourse loan 293
Tax Topics - Income Tax Act - Section 84 - Subsection 84(1) policy of 84(1) 215

Univar Holdco Canada ULC v. The Queen, 2016 TCC 159

exception to an anti-avoidance provision should not be interpreted to undercut that anti-avoidance

An acquisition of the shares of a Netherlands public company indirectly holding the shares of a valuable Canadian sub (Univar Canada) with nominal paid-up capital was structured to effectively step-up the PUC of the shares of Univar Canada to fair market value by using (or, according to V. Miller J, abusing) the pre-2016 version of s. 212.1(4) rule. This was accomplished by setting up a sandwich structure immediately after the acquisition under which a new Canadian ULC, with high outside PUC, held the shares of a U.S. corporation holding the low-PUC shares of Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule.

Her analysis was informed by her starting point (at para. 83):

Subsection 212.1(4) is placed as an exception within an anti-avoidance section… . [I]t is reasonable to infer that subsection 212.1(4) cannot be used so that it would defeat the very application of section 212.1. …[S]ubsection 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.

She went on to say (at para. 97):

The exception should not apply in the situation where a non-resident owns shares of the Canadian resident purchaser corporation.

and referred (at paras. 96-8) to the 2016 proposed amendments to s. 212.1(4) as evidencing this policy of the old s. 212.1(4) rule.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212.1 - Subsection 212.1(4) creating a sandwich structure in order to access s. 212.1(4) was an abuse of the s. 212.1(1) anti-surplus stripping rule 593
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(3) policy of current version of s. 212.1(4) confirmed by proposed amendment 130

Veracity Capital Corporation v. M.N.R., 2015 DTC 5136 [at 6421], 2015 BCSC 2278

abuse of inter-provincial income allocation formula “designed to prevent both the over-taxation and the under-taxation of income"

The following transactions occurred under a KPMG-advised plan in order to avoid 90% of the B.C. income tax that otherwise would have been payable on the taxable capital gain on a sale of the shares of a corporation (“ALI”) which closed on July 8, 2002:

  1. Shareholders of ALI transferred their shares on a rollover basis under ITA s. 85(1) to a newly-incorporated B.C. corporation (the taxpayer, and “Veracity”), which had selected a June 30 fiscal year-end for federal and B.C. income tax purposes.
  2. Shortly after the closing, Veracity paid $2,000 in directors’ fees to two B.C. directors and lent the net sales proceeds of approximately $23.5 million on a non-interest-bearing basis to one of its shareholders (a corporation).
  3. In late July 2002, Veracity purchased 15,000 units (with a cost $266,337) of a publicly-traded limited partnership (“Gaz Metro”) carrying on regulated natural gas utility business in Quebec, having a permanent establishment there and having a September 30 fiscal year end (so that a proportionate part of its gross revenues and payroll would be allocable to the purchased units at that year end on the basis inter alia that Veracity as a partner also had a Quebec establishment).
  4. Veracity selected an August 31, fiscal year end for Quebec income tax purposes.
  5. In September 2002, Veracity acquired a further 30,000 Gaz Metro units.

The payment of the directors’ fees before August 31, 2002 (together with allocations on the Gaz Metro units not occurring until after August 31, 2002) ensured that when the taxable capital gain was reported for the August 31, 2002 Quebec taxation year, the Quebec allocation formula allocated 100% of that income to B.C. On the other hand, in the federal/B.C. return for the year ended June 30, 2003, the allocation of gross revenues and payroll on the Gaz Metro units in that year resulted in 90% of the income (mostly the taxable capital gain from the sale) being allocated to Quebec for B.C. allocation purposes.

Before affirming CRA’s assessment to apply the B.C. GAAR to allocate 100% of the taxable capital gain to B.C., Macintosh J found (at paras. 23, 27) that although the LP units purchased were “a reasonable, stand-alone investment,” the targeted tax savings were five-times the investment return on the LP units and the units were purchased primarily for the purposes of these “Quebec Year-end shuffle” transactions.

Before finding that the transactions were “abusive of the inter-provincial income allocation provisions” (para. 56), Macintosh J stated (at para. 50) that the

legislative scheme intends that capital gains earned in Canada by corporations be taxable as income by the provinces based on an allocation formula designed to prevent both the over-taxation and the under-taxation of income earned by a corporation which is active in more than one province.

Other abuses also were identified, including the use of s. 85(1) as “using a tax deferral provision in that way, resulting in the tax being avoided completely” (para. 54).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) investment in LP units with 7.2% return was primarily for tax avoidance reasons/year end selections were avoidance transactions 455

Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232, nullified on procedural grounds 2017 FCA 89

abusive reverse takeover by Lossco through diverted private placement
see summary of 2017 FCA 89

Shortly after it became a public company, a predecessor ("Birchcliff") of the taxpayer entered into an agreement for a major acquisition of producing oil and gas properties and also negotiated a plan to merge with a corporation ("Veracel"), which had discontinued its medical equipment business, in order to access Veracel's non-capital losses and credits. Investors subscribed for subscription receipts of Veracel and received voting common shares of Veracel therefor under a Plan of Arrangement, Veracel and Birchcliff amalgamated immediately thereafter under the Plan, and the proceeds were used in the purchase of the oil and gas properties. The previous Veracel shareholders could elect to receive retractable preferred shares on the amalgamation, which most did.

As the voting common shares received by the investors on the amalgamation represented "a majority of the voting shares of the amalgamated entity (the "Majority Voting Interest Test")" (para. 13), no acquisition of control of Veracel occurred under s. 256(7)(b)(iii)(B), so that the loss-streaming rules under s. 111(5) were avoided. In upholding the Minister's finding that this avoidance was an abuse under s. 245(4), Hogan J stated (at paras. 105, 106):

[T[he Majority Voting Interest Test indicates that Parliament did not want amalgamations and reverse takeovers being used as techniques to avoid an acquisition of control in situations where the original Lossco shareholders do not collectively receive shares representing a Majority Voting Interest in the combined enterprise.

…Parliament adopted the Majority Voting Interest Test to prevent Lossco from being subsumed by Profitco without an acquisition of control of Lossco.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham transitory share issuance under plan of arrangement was not a sham 167
Tax Topics - Income Tax Act - Section 111 - Subsection 111(5) - Paragraph 111(5)(a) grant of proxy did not detract from investors acting individually in own interest 223
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) share subscription was avoidance transaction notwithstanding its "overarching purpose" was financing 142

HMRC v Pendragon plc, [2015] UKSC 37

abuse of rule intended to avoid double tax

A scheme, which exploited a UK VAT rule which was intended to avoid double-taxation, so as to avoid tax, was found to be abusive. See summary under ETA, s. 274(4).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 274 - Subsection 274(4) scheme, exploiting a rule intended to avoid double-taxation so as to avoid tax, was abusive 713

Superior Plus Corp. v. The Queen, 2015 DTC 1124 [at 765], 2015 TCC 132, aff'd 2015 FCA 241

Minister compelled to disclose GAAR Committee and ATP memoranda and minutes, and correspondence with Finance, as they were relevant to the alleged policy abuse

The Superior Plus Income Fund (the "Fund") effectively converted (in accordance with the distribution method contemplated under s. 107(3.1)) into a public corporation using an existing corporation (the taxpayer, a.k.a. "Old Ballard") with non-capital losses and other tax attributes as the new corporate vehicle - rather than using a new corporation. The transactions were designed to ensure that there was no acquisition of control of the taxpayer (which would have resulted in a streaming of its losses). In particular, although the unitholders of the fund became shareholders of the taxpayer, this was considered not to entail an acquisition of control of the taxpayer by a group of persons. Subsequent to the conversion, s. 256(7)(c.1) was introduced, which would have deemed there to be an acquisition of control of the taxpayer, if it had had retroactive effect (which it did not). The Minister disallowed the use of the tax attributes, on the basis that there in fact had been an acquisition of control of the taxpayer or, alternatively, under s. 245(2) (i.e., GAAR).

At the discovery stage, the taxpayer moved to compel the Minister to answer various questions, or to produce documents, or previously redacted portions of documents previously requested under the Access to Information Act, which CRA had resisted principally on the grounds of irrelevance. The questions included whether the Department of Finance considered making the 2010 SIFT amendments retroactive, why it had changed its explanatory notes to say that s. 256(7)(c.1) "clarified" rather than "extended" the change-of-control rules and whether the Attorney General agreed that initially the policy choice of the SIFT conversion rules was to allow the use of existing corporations. Requested documents included GAAR Committee minutes including comments of individual members (whereas CRA had provided only the final Recommendation of the Committee), and correspondence between CRA and Finance (resulting in the drafting of s. 256(7)(c.1))and between the GAAR Committee and Aggressive Tax Planning, with the questions seeking particulars on the questions posed above and policy considerations brought to bear on this file, and respecting what initially may have been diffidence on the part of Finance as to how to proceed, if at all.

Following the reasons in Birchcliff, Hogan J granted the taxpayer's motion in the main (including all the above-mentioned questions and documents). The scope of "relevance" in discovery is extremely broad. Hogan J stated (at para. 33):

As correctly pointed out by the Appellant's counsel, discovery serves a much broader purpose than eliciting evidence that is admissible at trial. For example, the discovery process allows the parties to gauge the weakness of their opponent's case.

Certain documents were irrelevant, or contained specific portions that should be redacted because of privilege, and certain questions improperly asked the Minister to draw conclusions of law.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 232 - Subsection 232(1) - Solicitor-Client Privilege disclosure of commercial legal opinion did not entail waiver of privilege for tax legal opinions 137

Barrasso v. The Queen, 2014 TCC 156

stock-dividend value shift failed notwithstanding offsetting-gain to be realized on death; no basis adjustment requested

The taxpayer, who had realized a capital gain of $30 million earlier in the year, subscribed for Class A common shares of a corporation newly incorporated by him ("Immeubles Molibec") in consideration for a demand promissory note of $22.5 million. The next day, Immeubles Molibec paid a stock dividend to the taxpayer consisting of preferred shares having a nominal paid-up capital and a total redemption value of $22.5 million, thereby effecting a "value shift" away from the common shares. On the same day, the taxpayer sold all his common shares to his two sons for their nominal value, and realized a capital loss of approximately $22.5 million. He engaged in similar transactions in the two subsequent years to realize capital losses of approximately $35 million and $7.5 million.

The taxpayer sought to distinguish 1207192 and Triad Gestco on the basis that he was an individual rather than a corporation (so that offsetting gain would be realized on the preferred shares no later than his death) and had sold to his sons rather than family trusts. Paris J considered that "the fact that the appellant is an individual and not a corporation does not change the academic ["théorique"] nature or quality of the claimed losses" (para. 19) as "during the years under appeal, the appellant simply had not sustained a financial loss from the sale of the shares to his sons" (para. 20), and furthermore, "as in Triad Gestco, the taxpayer has not presented any evidence that he had sold the shares received as a stock dividend and has not requested an adjustment to the tax attributes arising under the application of the GAAR to take into account an eventual sale of the shares" (para. 21). Respecting the second point, the "decisions… in the two cases would have been the same irrespective of the identity of the share purchaser… with whom the taxpayer did not deal at arm's length" (para. 23).

His appeal from reassessments denying the losses under GAAR was dismissed.

Descarries v. The Queen, 2014 DTC 1143 [at 3412], 2014 TCC 75 (Informal Procedure)

use of outside basis to step up PUC abused s. 84.1

The six taxpayers, who were siblings (or a step-daughter of their deceased father), held all the shares, having an aggregate fair market value (FMV), adjusted cost base (ACB) and paid-up capital (PUC) of $617,466, $361,658 and $25,100 respectively, of a Canadian real estate company (Oka). They sought through the transactions described below to reduce the deemed dividend of $592,362, that otherwise would have arisen on the redemption of their shares, to approximately $265,505 (see 4 and 7 below [minor discrepancy in figures]). CRA assessed on the basis that a deemed dividend of the larger amount had been realized, as there had been an indirect distribution from Oka described in s. 84(2).

  1. Oka lent $544,354 to a newly-incorporated company (9149) in December 2004.
  2. In March 2005, the taxpayers exchanged their shares of Oka under s. 85(1) for Class B and C preferred shares of Oka, so that they realized a capital gain of $361,658 (which was offset by the current year's capital loss realized in 4 below and a carryback of the capital loss in 7 below) and with the Class B and C preferred shares having ACBs of $269,618 and $347,848 and low PUC.
  3. They exchanged their shares of Oka for Class A common shares of 9149 having an ACB and PUC of $347,848 (with such PUC "step-up" complying with s. 84.1) and Class B preferred shares of 9149 having an ACB and PUC of $269,618 and nil.
  4. Also in March 2005, 9149 redeemed the Class A common shares for their PUC and ACB of $347,848 (so that no deemed divided or capital gain resulted) and redeemed approximately ¾ of the Class B preferred shares, giving rise to a deemed dividend and capital loss of $196,506 to the taxpayers.
  5. Oka sold its real estate in December 2005, but with title issues not resolved until December 2006.
  6. Oka was wound-up into 9149 in December 2006, with the loan in 1 being extinguished.
  7. At the end of 2008, 9149 redeemed the (¼) balance of the Class B preferred shares for $69,000, giving rise to a deemed dividend and capital loss to the taxpayers of $69,000 and $73,112.

In finding that the transactions abused the object of s. 84.1, Hogan J stated (at paras. 56, 59):

The tax specialist was aware of the fact that section 84.1 of the Act would cause the Class B shares issued by 9149 [step 3] to have an adjusted cost base that is higher than their paid-up capital, which would prevent the additional value accumulated before 1971 from being used to strip Oka of its surpluses. However, applying this rule ensures that the redemption of these shares will generate a capital loss that is sufficient to erase the capital gain realized in the preceding step, namely, the internal rollover of Oka's common shares [step 2].

...

The result of all three transactions ... is that the tax-exempt margin made it possible for part of Oka's surplus to be distributed to the appellants tax-free in a manner contrary to the object, spirit or purpose of section 84.1 of the Act.

Having regard to $66,940 of capital gain having been realized on the death of the taxpayers' father, the Minister was directed to assess on the basis that the taxpayers received a deemed dividend of $525,422.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) free to raise an interpretation not advanced by either party 71
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) holdco distribution made out of loan from still-operating sub - s. 84(2) did not apply 478

Pièces automobiles Lecavalier Inc. v. The Queen, 2014 DTC 1126 [at 3319], 2013 TCC 310

avoidance of debt forgiveness rules was abusive

A Canadian subsidiary ("Greenleaf") of Ford U.S. paid down to $9,750,000 (including accrued interest) a debt of $24,369,439 (plus accrued interest) owing by it to Ford U.S. through the application of share subscription proceeds of $14,843,596 received by it from Ford U.S.A. and the application of a small amount of cash on hand of $100,706. Eighteen days later, a predecessor of the taxpayer ("392"), which was at arm's length with Ford U.S., purchased all the shares of Greenleaf from Ford U.S. for consideration of $1, and purchased the debt at only a slight discount to the amount owing, so that the debt-parking rules in ss. 80.01(6) to (8) did not apply. The Minister applied s. 245(2) on the basis that Greenleaf had sustained a debt forgiveness in the amount of the debt-paydown.

In dismissing the taxpayer's appeal, Bédard J found (at para. 126-127) that the transactions were abusive having regard to s. 80(2)(g) (TaxInterpretations translation):

The spirit and object of paragraph 80(2)(g) are to ensure that, when a debt is settled in exchange for shares, the debt forgiveness rules apply by taking into account the actual value of the shares which are issued. ... In adopting this paragraph, the legislator sought to prevent a taxpayer from transforming a debt into shares with low value, thereby avoiding the debt forgiveness rules. ... In proceeding in two stages rather than effecting a direct conversion of debt to shares, the appellant circumvented the application of paragraph 80(2)(g) and, thus, a gain on debt settlement.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence Canadian tax accountant's testimony on US tax consequences accorded little weight 138
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) debt-paydown transactions were avoidance transactions 236
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) debt-paydown transactions effected in contemplation of sale transaction were part of same series as the sales transactions 216

Gwartz v. The Queen, 2013 DTC 1122 [at 640], 2013 TCC 86

policy inferred from specific anti-avoidance provisions

The taxpayers ("Brianne and Steven") were minors and beneficiaries of a family trust (the "Trust"). The Trust held all the common shares (as well as Class C preferred shares) of a management corporation ("FHDM") for a dental practice of the beneficiaries' father (Dr. Gwartz). The following transactions occurred:

  • 1a. In 2003 and again in 2005, FHDM declared a stock dividend consisting of 150,000 Class D preferred shares, redeemable and retractable for $1 each, and having a total paid up capital of $1 (300,000 shares, $2 total PUC).
  • 1b. In each of 2003 to 2005, the Trust disposed of 75,000 Class D shares to Dr. Gwartz for a $75,000 promissory note.
  • 2. In 2005, Dr. Gwartz sold the 225,000 Class D shares to a numbered corporation ("206"), wholly owned by Dr. Gwartz's spouse, for $225,000 in promissory notes.
  • 3. FHDM redeemed 206's Class D shares for $225,000.
  • 4. Both sets of notes were repaid out of such redemption proceeds, effecting a transfer of $225,000 from 206 to the Trust.

The Trust reported a capital gain of $74,999.50 from step 1b for each of 2003 to 2005, which it allocated to the taxpayers for inclusion (as to the taxable capital gains portions) in their returns. The Minister reassessed the taxpayers under the general anti-avoidance rule on the basis that, by effecting the realization of capital gains and their distribution to the beneficiaries, rather than the distribution of taxable dividends, the series of transactions had abusively circumvented s. 120.4 of the Act. (The Minister conceded that reassessment of Steven's 2005 taxation year should be vacated as he was 18 in that year.)

Hogan J. allowed the taxpayers' appeals. Although s. 120.4 was circumvented, there was no abuse. He stated (at para. 65):

The fact that specific anti-avoidance provisions were enacted long before the introduction of section 120.4 leads me to infer that Parliament was well aware of the fact that taxpayers could arrange to distribute corporate surpluses in the form of taxable dividends or of capital gains subject to the application of those specific anti‑avoidance provisions. The fact that those provisions were not amended and that a specific rule was not included in section 120.4 to curtail well-known techniques leads me to infer that Parliament preferred simplicity over complexity when it enacted section 120.4.

The present case was distinguishable from Triad Gestco, which involved the creation of an artificial capital loss, rather than the shifting of an already-accrued capital gain on common shares of a taxpayer to other shares (namely, the Class D shares) of the taxpayer.

Swirsky v. The Queen, 2013 TCC 73, 2013 DTC 1078 [at 431], aff'd 2014 FCA 36

Paris J. noted obiter (at para. 75) that Overs v. The Queen, 2006 TCC 26, "has been implicitly overruled by the Lipson decision."

MacDonald v. The Queen, 2012 TCC 123, rev'd 2013 DTC 5091 [at 5982], 2013 FCA 110

no abuse in surplus stripping if integration
rev'd on other grounds, 2013 DTC 5091 [at 5982], 2013 FCA 110

The taxpayer planned to move to the U.S.. Although the capital gain on the shares of his wholly owned corporation ("PC") that would have arisen (under s. 128.1(4)(b)) on his emigration would have been sheltered for Canadian purposes by unutilized capital losses, there would have been no corresponding step up in the tax basis of his shares of PC for US tax purposes. In light of this issue, he sold his shares of PC (which held liquid assets) to his brother-in-law ("J.C.") in exchange for a promissory note, which was satisfied (within the following serveral months) with funds that J.C. extracted from PC (by first transferring his high-basis shares of PC to a "Newco" in consideration inter alia for a promissory note, which was repaid by Newco with funds which it, in turn, extracted from PC).

After finding that s. 84(2) did not apply to deem any portion of the sale proceeds to be a dividend, Hershfield J. found that s. 245(2) did not apply to produce the same result. The alleged abuse was that the capital gains, which enabled the use of the taxpayer's losses, arose from payments that, being funds from the taxpayer's own corporation, would normally be treated as dividend income. Hershfield J. stated (at para. 116):

Indeed, triggering capital gains to utilize capital losses is not discouraged by the Act in any way. Transfers to a corporation without a section 85 election can be used to realize capital gains as can transfers between spouses. There is nothing abusive about realizing capital gains for no other purpose than to utilize available net capital losses.

Furthermore, allowing capital gains treatment of the sale produced a "fair result" (para. 139), whereas "to deny a tax benefit to which he was entitled by an express provision of the Act [i.e., s. 128.1(4)(b)] because he achieved it by a different legally effectively means is, frankly, bizarre" (para. 121). Although the transactions entailed surplus stripping, "it is doubtful whether in an integrated corporate/shareholder tax system, a surplus strip per se can be said to abuse the spirit and object of the Act" (para. 101).

Antle v. The Queen, 2009 DTC 1305, 2009 TCC 465, aff'd 2010 DTC 5172 [at 7304], 2010 FCA 280

interjection of Barbados trust defeated policy
aff'd on other grounds 2010 DTC 5172 [at 7304], 2010 FCA 280

A plan for the taxpayer to avoid capital gains on his sale of shares of a corporation ("PM") would have entailed him gifting the shares to a Barbadian trust of which his wife was the sole beneficiary (so that the trust was intended to be a spousal trust), with the trust then selling the shares to his wife for a promissory note equal to the fair market value of the shares, and the trust distributing the promissory note to her on a wind-up of the trust and her selling the shares of PM to the purchaser. In finding that the transaction, if effective, would have given rise to an abuse for GAAR purposes, Campbell Miller, J. stated (at para. 119):

"Sleight of hand to inject a non-resident trust (not a legal entity but deemed an individual only for tax purposes) in the middle of a Canadian resident couple to take advantage of the tax treatment of a non-resident trust's own jurisdiction is intended to defeat Canada's policy of taxing residents on their capital gains."

Garron Family Trust v. The Queen, 2009 DTC 1568, 2009 TCC 450, aff'd sub nom St. Michael Trust Corp. v. The Queen, 2010 DTC 5189 [at 7361], 2010 FCA 309, aff'd sub nom Fundy Settlement v. Canada, 2012 SCC 14

Woods, J. rejected a submission of the Crown that it would have represented an abuse of the Canada-Barbados Income Tax Convention to use the gains exemption in Article XIV(4) to avoid an anti-avoidance rule such as s. 94 of the Act (after noting that in the OECD Commentary, the OECD indicated that contracting states may need to explicitly provide in income tax conventions for the preservation of the right to apply domestic anti-avoidance provisions).

She also rejected a submission that it represented an abuse of that Convention to rely on such treaty exemption where the trust in question had very little connection with Barbados. She noted (at para. 381) that such an approach would result in a selective application of the Treaty to residents of Barbados, on the basis of criteria other than residence, and that the object and spirit of the Treaty was that residents of Barbados qualified for exemption.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 126

OGT Holdings Ltd. v. Deputy Minister of Revenue (Québec), 2009 DTC 5705, 2009 QCCA 191

The taxpayers engaged in a "Québec shuffle" transaction in which they transferred shares of subsidiaries to a related Ontario purchaser on a rollover basis for Québec purposes but on a non-rollover basis for federal purposes (so that for Ontario corporate purposes the Ontario purchaser had full basis in the acquired subsidiaries) with the Ontario purchaser then selling the shares without any Ontario corporate tax being payable. In finding that these transactions represented abusive tax avoidance under s. 1079.10 of the Québec Taxation Act, the Court noted that the purpose of the Québec rollover provision (s.518) was to defer the realization of a capital gain, and not to be used in a scheme to avoid the payment of any Québec income tax on the gain.

Landrus v. The Queen, 2008 DTC 3583, 2008 TCC 274, aff'd supra.

A partnership of which the taxpayer was a member ("Roseland II") and another partnership ("Roseland I") owning a similar and adjacent condominium development, sold all their assets to a newly-formed partnership ("RPM") with the purchase price being paid for by way of set-off against the subscription price for the partnership interests in RPM with such partnership interest in RPM having been distributed to the partners of Roseland I and II.

After finding that these transactions were undertaken primarily to realize a tax benefit (the realization of terminal losses), Paris J. went on to find that the transactions did not result in an abuse or misuse and rejected a submission of the Crown (at para. 122) that "there is a general or overall policy in the Act prohibiting losses on any transfer between related parties, or parties described by counsel as forming an economic unit". Paris J. stated (at para. 120):

"In my view, the particularity with which Parliament has specified the relationship that must exist between the transferor and transferee for the purpose of each stop-loss rule referred to by the Respondent is more indicative that these rules are exceptions to a general policy of allowing losses on all dispositions."

He went on to state (at para. 123):

"I would also point out that Parliament has chosen to define the circumstances in which the terminal loss would be denied on transfers of depreciable property between partnerships in subsection 85(5.1) (now subsection 13(21.2)) and in doing so would appear to have chosen to allow taxpayers who are not within the circumstances set out in that provision to claim their terminal losses."

McMullen v. The Queen, 2007 DTC 286, 2007 TCC 16

The taxpayer and an unrelated individual ("DeBruyn") accomplished a split-up of the business of a corporation ("DEL") of which they were equal common shareholders by transactions under which (i) DeBruyn converted his (Class A) common shares into Class B common shares, (ii) the taxpayer sold his Class A common shares of DEL to a newly-incorporated holding company for DeBruyn's wife ("114") for a purchase price of $150,000, (iii) DEL issued a promissory note to 114 in satisfaction of a $150,000 dividend declared by it on the Class A shares, (iv) 114 as signed the promissory note to the taxpayer in satisfaction of the purchase price for the Class A shares, (v) the taxpayer transferred the promissory note owing to him by DEL to a holding company ("HHCI"), and HHCI purchased assets of the Kingston branch of the business of DEL in consideration for satisfaction of the promissory note.

After finding that none of the transactions was an avoidance transaction, Lamarre J. went on to indicate (at p. 298) that the Crown had not established "that the policy of the Act read as a whole is designed so as to necessarily tax corporate distributions as dividends in the hands of shareholders".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) 266
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) mutual benefit and same advisors insufficient to establish non-arm's length in structured sale transaction 253
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) 225
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) arm's length: negotiation based on self-interest 253

Ogt Holdings Ltd. v. Deputy Minister of Revenue of Québec, 2006 DTC 6604 (Court of Québec)

The taxpayers accomplished an indirect sale of their indirect investment in an operating company ("Canstar") to an arm's length purchaser ("Nike") by transferring their shares of holding companies for Canstar to a newly-incorporated Ontario corporation on a rollover basis for Québec purposes but not for federal purposes, followed by a sale of their shares of the Ontario corporation to Nike.

In determining that this transaction was abusive for purposes of the Québec anti-avoidance rule, De Michele J.C.Q. found that the purpose of the Québec rollover provision was to allow the deferral of capital gains tax, not its complete avoidance.

Ceco Operations Ltd. v. The Queen, 2006 DTC 3006, 2006 TCC 256

The taxpayer transferred assets of a business to a partnership in what was intended to be an s. 97(2) rollover transactions in consideration for cash, promissory notes and assumption of debt ("boot") totalling an amount less than the cost amount of the transferred assets, and a Class "F" partnership interest stipulated to have a value equal to the balance of the purchase price. The partnership used cash (derived in part from a third party who had subscribed for ¾ of the equity in the partnership) to subscribe for preferred shares of a sister company of the taxpayer ("Holdings"), with Holdings in turn using the proceeds to subscribe for preferred shares of holding companies ("Holdcos") for the various indirect individual shareholders of the taxpayer. A "back-flow preventor" clause in the Partnership Agreement provided that in the event that the partnership received any payments in respect of preferred securities held by the partnership, the partnership would make distributions to the holders of Class F units equalling such payments received.

After noting (at p. 3015) that "in the real world" the Class F partnership unit "represented nothing more than an undertaking to pay $18.7 million for Holdings preference shares, which were of no practical value to the Partnership by reason of the Partnership Agreement", Bonner J. went on to find that the transactions were abusive in that in substance it could be said that the supposed "tax deferred proceeds" for the sale (represented by the Class F units) had reached the Holdcos. The Minister had been substantially correct in reassessing the taxpayer on the basis that it had received additional boot of $18.6 million.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance 95
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 261
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) partnership subscription for taxpayer affiliate pref shares not boot 259

Lipson v. The Queen, 2006 DTC 2687, 2006 TCC 148, aff'd supra.

The taxpayer's wife ("Jordanna") borrowed $562,500 from the Bank of Montreal to fund the purchase of shares of a family company from the taxpayer for $562,500. A day later, the taxpayer and Jordanna borrowed, on a joint and several basis, $562,000 from the Bank secured by a mortgage on a new personal residence that they had just purchased, with the proceeds of that loan being used to pay off the loan the Bank had made to Jordanna. The taxpayer used the share sale proceeds to pay the vendor of the residence. The taxpayer filed his return on the basis that the inter-spousal rollover applied to the share sale and that s. 74.1(1) attributed to him the loss sustained by Jordanna resulting from the deduction of the interest expense on the mortgage loan from the dividend income she received on her purchased shares.

Bowman C.J. indicated (at p. 2692) that "paragraph 20.(1)(c) was intended to permit interest on money borrowed for commercial purposes to be deducted" and "that interest on money borrowed for personal use (such as buying a residence) is not deducible" and (at p. 2691) that "subsection 20(3) allows a deduction for interest on money borrowed to repay money previously borrowed for commercial purposes." Here, subsection 20(3) was being abused through "the purported attachment to the subsequent mortgage loan [of] the tax incidents of Jordanna's original and fleeting use of the proceeds of the first loan" (p. 2692).

Desmarais v. The Queen, 2006 DTC 2376, 2006 TCC 44

surplus stripping

The taxpayer, who held 14.28% of the common shares of a Canadian private corporation ("Consercom") transferred a 9.76% block to a wholly-owned holding company ("6311") in consideration for preferred shares of 6311 with a high paid-up capital (thereby giving rise to a capital gain eligible for the capital gains exemption). The taxpayer also transferred shares of a Canadian private corporation ("Gestion") that he owned together with his brother to 6311 in consideration for shares of 6311. The redemption of the taxpayer's preferred shares of 6311 was financed through dividends received by 6311 from Gestion.

After finding that s. 84.1 was intended to prevent the stripping of surpluses of an operating company, that although Parliament had assumed that a shareholder with less than a 10% block of shares would not be able to strip the surpluses of that company, such influence could be exercised when two related shareholders held all the shares of a company (Gestion), and that there would not have been an abusive transaction if the taxpayer had transferred to 6311 only the Consercom shares, Archambault J. found that there was an abuse here where 6311 used the surpluses from Gestion to redeem the preferred shares that had been issued in consideration for the Consercom shares.

The tax consequences to the taxpayer were to be determined on the basis that the sums received by him on such preferred shares in excess of their paid-up capital were a dividend to him.

Evans v. The Queen, 2005 DTC 1762, 2005 TCC 684

no general principle that all distributions are dividends

A corporation ("117679") owned by the taxpayer issued a stock dividend of non-voting shares to the taxpayer that were redeemable and retractable for an aggregate of $487,000. The next day, the taxpayer sold these shares to a partnership of which his wife was a general partner and three of his children held a 99% limited partnership interest in consideration for a $487,000 promissory note of the partnership bearing interest at the rate prescribed for purposes of s. 74.5. The taxpayer utilized the enhanced capital gains deduction in respect of his gain on the sale. Thereafter, dividends and proceeds of redemption of the redeemable shares of 117679 were paid by way of set-off against payments of principal and interest on the promissory note. The Minister recharacterized under s. 245 everything that the taxpayer received from the partnership as dividends.

In reversing the s. 245 reassessment of the taxpayer, Bowman C.J. indicated that he could not find that there was "some overarching principle of Canadian tax law that requires that corporate distributions to shareholders must be taxed as dividends, and where they are not the Minister is permitted to ignore half a dozen specific sections of the Act" and also noted that the transactions did not lack economic substance in that there was "a genuine change in legal and economic relations that took place as a result of the transactions".

XCO Investments Ltd. v. The Queen, 2005 DTC 1731, 2005 TCC 655

GAAR could be applied to unreasonable partnership allocation

A partnership owned by the taxpayers admitted a third party ("Woodward") as a member of the partnership with a view to selling an apartment building of the partnership and allocating 80% of the resulting gain for tax purposes to Woodward, with Woodward also receiving 80% of the net proceeds of sale of the property (which were substantially reduced due to the leveraging of the property) and then ceasing to be a partner.

The allocation of 80% of the income to Woodward was found to be unreasonable given that "Woodwards' contribution was both ephemeral and for all practical purposes risk free". The reasonable treatment of the arrangement under s. 103 would be to treat Woodward's share of the income as the amount of income it actually received.

However, Bowman C.J. went on to find that if he had concluded that s. 103(1) did not apply, on balance s. 245 would be applied to reach the same conclusion, but with the possibility that perhaps all of the profit, rather than most of the profit, should have been allocated to the taxpayers.

Canada v. Jabin Investments Ltd., 2003 DTC 5027, 2002 FCA 520

no evident policy against debt parking

In order to avoid the application of the pre-1994 version of section 80, debt owing by the taxpayer was sold by a bank (for consideration equal to 2.2% of the total amount owing) to a corporation ("W720") that had similar ownership to the taxpayer.

In finding that the avoidance of the application of section 80 by this transaction did not represent a "misuse". Rothstein J.A. stated (at p. 5028) that:

"If a provision of the Income Tax Act is not used cannot be misused",

and also found that there was no "abuse" stating (at pp. 5028-5029) that:

"We are not satisfied from the references given to us that there is a clear and unambiguous policy that debts that are not legally extinguished are to be treated as if they were."

Loyens v. The Queen, 2003 DTC 355, 2003 TCC 214

no abuse in profit trading

In order that the sale of a real estate property could be accomplished in a manner that utilized the losses of a loss company ("Lobro Stables") the taxpayers transferred the property to a partnership utilizing the rollover in subsection 97(2), transferred their partnership interests to Lobro Stables utilizing the rollover provision of subsection 85(1), with Lobro Stables then selling the property at a gain.

In finding that these transactions did not result in an abuse or misuse for purposes of s. 245(4), Campbell T.C.J. stated that the principles in OSFC Holdings with respect to loss trading should not be extended to profit trading, and the transactions simply utilized the provisions of the Act for the very purpose for which they were designed.

Hill v. The Queen, 2002 DTC 1749 (TCC)

no Crown explanation of different treatment of simple interest

Under a non-recourse loan owing by the taxpayer and other tenants of an office building to the non-resident landlord, 90% of the cash flow was applied first to the payment of interest and then designated and paid as rent. If the interest expense (which had been reduced to a 10% rate in the taxation years in question) exceeded the cash flow, the taxpayer could request in writing that the landlord advance the excess to him as an addition to principal, with such excess interest also being added to the principal if no such request was made. By the taxation years in question, the principal had accumulated to well over twice the value of the property.

After finding that the excess interest was deductible in full notwithstanding that a portion of it accrued on amounts that had been reinvested by the landlord as stipulated in the loan, Miller T.C.J. declined to find that this result represented in an abuse or misuse in the absence of being referred to any material that would assist him in understanding why the government permitted the deduction of simple interest on a payable basis and only permitted the deduction of compound interest on a paid basis. He stated (p. 1763):

"What is the policy? It is not my role to speculate; it is the Respondent's role to explain to me the clear and unambiguous policy. He has not done so."

Fredette v. The Queen, 2001 DTC 621 (TCC)

s. 245(4) did not apply to abuse of a Regulation - and not abusive to borrow at partner/shareholder level

A partnership ("SDF") of which the taxpayer and two trusts for his children were the partners owned substantially all the units in a second partnership ("SA") which, in turn, owned rental properties. SDF and SA had February 28 and January 31 fiscal periods with the result that net rental income of SA was not included in the income of the taxpayer for approximately two years. Archambault T.C.J. found that although the Act permitted income to be carried over for one year, the provisions of the Act, read as a whole, were contravened if a second, third or fourth partnership was interposed to defer the taxation of income for two, three or four years. Parliament's intent in enacting ss.96(1)(b), 248(1) and 249(2) was not to enable a taxpayer to defer the taxation of its income indefinitely. Accordingly, the fiscal period of SDF was to be treated as if it ended on February 28.

Given that s. 245(4) did not reference the Regulations, it was inappropriate for the Minister to assess on the basis that there was an abuse of the Reg. 1100(11) rental property restriction rules for the taxpayer to finance his investment at a personal level and deduct interest personally, so that the partnership's capital cost allowance claims were not restricted. Archambault, J.T.C.C. stated (at para. 72):

It is clear in administrative law that an act and regulations, although both enactments, are very different in nature. An act is passed by Parliament or a provincial legislative assembly, whereas regulations are most often adopted by a government (the executive) under the authority of an act. In my view, since subsection 245(4) of the Act does not say "the Act and Regulations read as a whole", one must not take into account the rules adopted by the government in the Regulations. If Parliament had wanted them to be considered, it would have clearly so stated in subsection 245(4) of the Act, as it has done in a number of other provisions of the Act.

Furthermore, even if Reg. 1100(11) could be considered in determining whether there was an abuse, there was none, given that it is quite common for a shareholder (or partner) to borrow in order to provide capital, and given that s. 245 cannot be used by the Minister as a tool to force taxpayers to structure a transaction in a manner most favourable to the tax authorities.

Geransky v. The Queen, 2001 DTC 243 (TCC)

The taxpayer, who owned a portion of the shares of the holding company ("GH") which, in turn, owned an operating company ("GBC") utilized the enhanced capital gains exemption in connection with the sale of a cement plant operated by GBC through the following transactions: the taxpayer and the other shareholders of GH transferred a portion of their shares of GH to a newly-incorporated company ("Newco") in consideration for shares of Newco having a value of $500,000; GBC paid a dividend-in-kind of most of the cement plant assets (having a value of $1 million) to GH; GH redeemed the common shares held in its capital by Newco by transferring to Newco the assets it had received from GBC; and the shareholders of Newco's sold their interests in Newco to the purchaser (who also purchased the remaining cement-plant assets directly from GBC).

Bowman T.C.J. found (at p. 250) that even if the transactions had been avoidance transactions, there would have been no abuse or misuse for purposes of s. 254(4):

"Simply put, using the specific provisions of the Income Tax Act in the course of a commercial transaction, and applying them in accordance with their terms is not a misuse or an abuse. The Income Tax Act is a statute that is remarkable for its specificity and replete with anti-avoidance provisions designed to counteract specific perceived abuses. Where a taxpayer applies those provisions and manages to avoid the pitfalls, the Minister cannot say 'Because you have avoided the shoals and traps of the Act and have not carried out your commercial transaction in a manner that maximizes your tax, I will use GAAR to fill in any gaps not covered by the multitude of specific anti-avoidance provisions'."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) 302

Jabs Construction Ltd. v. The Queen, 99 DTC 729

After it was determined as a result of settlement of litigation between the taxpayer and a co-venturer that it would sell its 50% interest in 13 properties to the co-venturer, the taxpayer gifted the 13 properties to a private foundation that had been funded and was controlled by its controlling shareholder, with the foundation then selling the properties to the co-venturer. Although the taxpayer avoided capital gains under s. 110.1(3), it realized recapture of depreciation and as part of the same transactions, received a loan from the private foundation sufficient to more than cover the tax realized by it.

In concluding that there was no abuse or misuse, Bowman TCJ. found that the taxpayer had used s. 110.1(3) "for the very purpose for which it was designed", namely, allowing "the tax consequences of a charitable gift to be mitigated", and further noted that section 245 was "an extreme sanction" which "should not be used routinely every time the Minister gets upset just because a taxpayer structures a transaction in a tax-effective way".

The Queen v. Central Supply Co. (1972) Ltd., 97 DTC 5295 (FCA)

The taxpayer acquired units in limited partnerships that had incurred Canadian exploration expense and then, within 24 hours and after the occurrence of the partnership year ends, resold their units for nominal consideration pursuant to "put" agreements.

Before going on to find that former s. 245(1) of the Act denied the deduction by the taxpayers of the Canadian exploration expense allocated to them by the limited partnerships, Linden J.A. found that such deductions by the taxpayers would have fallen outside the intended object and spirit of the resource provisions of the Act because the goals of the resource provision (the encouragement of exploration) were not furthered as a result of the taxpayer's fleeting investment in the partnerships at a time when no exploration or money was being carried out or contemplated.

Gibson Petroleum Co. Ltd. v. The Queen, 97 DTC 1420 (TCC)

The taxpayer which owned one-half of the shares of a company ("Wascana") having non-capital losses that were about to expire, transferred depreciable property to Wascana on a rollover basis and then, a few days later, purchased the depreciable property back at the same price but on a non-rollover basis. The other unrelated shareholder of Wascana engaged in similar transactions.

In finding that the deduction by the taxpayer of capital cost allowance on the stepped-up tax basis of the property did not give rise to an undue or artificial reduction of income for purposes of former s. 245(1), Teskey TCJ. stated that he did not believe that these transactions offended the object and spirit of the Act.

RMM Canadian Enterprises Inc. v. The Queen, 97 DTC 302, [1998] 1 C.T.C. 2300 (TCC)

A non-resident corporation ("EC") approached a business associate who, along with two other individuals, formed a Canadian corporation ("RMM") to buy the shares of a Canadian subsidiary ("EL") of EC for a cash purchase price approximating the cash and near cash on hand of EL and a Canadian subsidiary of EL ("ECL"). Immediately following the purchase, EL was wound-up into RMM and ECL was amalgamated with RMM; and three or four days later, RMM used the cash received by it from EL and ECL to pay off a loan that had financed the acquisition.

In finding that if this transaction had not already been caught by s. 84(2), s. 245 would deem the appropriate portion of the sale proceeds to be a dividend, Bowman TCJ. stated:

"The Income Tax Act, read as a whole, envisages that a distribution of corporate surplus to shareholders is to be taxed as a payment of dividends. A form of transaction that is otherwise devoid of any commercial objective, and that has as its real purpose the extraction of corporate surplus and the avoidance of the ordinary consequences of such a distribution is an abuse of the Act as a whole."

He also found that the Canada-U.S. Income Tax Convention could not prevent Canada from applying GAAR to recharacterize the transaction as one to which section 84 applied.

McNichol et al. v. The Queen, 97 DTC 111 (TCC)

The taxpayers sold their shares of a corporation ("Bec"), whose assets (following a sale of real estate) consisted largely of cash, to a corporate purchaser for a cash purchase price that reflected, in part, the savings that would accrue to the taxpayers from effectively receiving that cash as an exempt capital gain rather than as a liquidation dividend from Bec. Following the acquisition, the purchaser amalgamated with Bec and used the cash received on the amalgamation to pay off a bank loan that had funded the acquisition.

In finding that the taxpayers were correctly reassessed under s. 245(5) to treat the purchase price received by them as a taxable dividend from Bec, Bonner TCJ. stated (at p. 121):

"The transaction in issue which was designed to effect, in everything but form, a distribution of Bec's surplus results in a misuse of sections 38 and 110.6 and an abuse of the provisions of the Act, read as a whole, which contemplate that distributions of corporate property to shareholders are to be treated as income in the hands of the shareholders. It is evident ... that the section [245] is intended inter alia to counteract transactions which do violence to the Act by taking advantage of a divergence between the effect of the transaction, viewed realistically, and what, having regard only to the legal form appears to be the effect."

Administrative Policy

9 August 2016 Internal T.I. 2014-0526171I7 - Resettlement of a Trust

sale of trust with losses to 3rd party was abusive

A non-resident common-law commercial trust had been settled with cash and Canadian real estate by two (apparently non-resident) corporations. A subsequent sale of their interests in the trust to a third-party resident purchaser (along with the shares of the corporate trustee) was found to have given rise to a resettlement of the trust, so that losses of the trust disappeared and, thus, were not available to shelter gain on the immediately ensuing sale of the real estate by the trust (which on the sale had become resident in Canada).

After noting that in Mackay a transfer of losses to an unrelated party was found to be abusive, the Directorate went on to find (apparently in the alternative to the above resettlement finding) “that the effective transfer of losses of the Trust to benefit the unrelated new majority/sole beneficiary of the Trust should be subject to GAAR.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition sale of the two interests in a commercial trust to a 3rd party gave rise to a new trust 370
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) constructive resettlement of trust on sale of beneficial interests therein extinguished its losses 186

13 June 2017 STEP Roundtable Q. 2, 2017-0693321C6 - GAAR and 21-year planning

abusive distribution of trust property to corporate beneficiary to defer gain for lifetimes of current beneficaries

At the 2016 CTF Roundtable, Q.1, CRA considered that it generally would consider it to be an abusive circumvention of the rule for the realization by a trust of gains on its 21st anniversary (and of the related anti-avoidnace rule in s. 104(5.8)) to distribute the property of a discretionary trust to a corporate beneficiary who was owned by a new discretionary trust. At that time, CRA indicated that it was still considering whether it would also be objectionable from a GAAR perspective if under the structure the realization of the accrued gains on the trust property would not be deferred beyond the lifetime of those who were beneficiaries at the time of the 21st anniversary of old Trust. Thus, the realization event, i.e. the death of the individual beneficiary, would be consistent with that achieved by a deferred rollover of property to a Canadian resident individual beneficiary pursuant to s. 107(2) (although, in fact, the trust property would continue to be held indirectly in a discretionary trust.)

CRA confirmed that it would consider this more limited type of deferral to also represent an abuse of s. 104(5.8) on which it would not provide a GAAR ruling.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(5.8) GAAR generally applicable to using Canco to defer s. 104(4) deemed disposition only for lifetime of existing beneficiaries 290

12 May 2017 External T.I. 2017-0683511E5 F - Purpose tests of a dividend or repurchase of share

use of s. 55(3)(a) redemption exception to circumvent safe income limitation could be offensive

Opco, which has no safe income, avoids s. 55(2.1)(b) by using its cash to purchase most of the common shares held by its parent for cancellation. CRA stated:

[T]he utilization of paragraph 55(3)(a)…in order to replace a dividend not coming out of safe income, could be determined to be offensive.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) - Subparagraph 55(2.1)(b)(ii) redeeming common shares otherwise than out of safe income may be GAARable 324
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) using s. 55(3)(a) to distribute cash otherwise than from safe income likely abusive 181

29 November 2016 CTF Roundtable Q. 1, 2016-0669301C6 - GAAR & 21-year rule planning

avoidance of 21-year rule through 107(2) transfer to corporate beneficiary

A discretionary resident trust that is approaching its 21st anniversary distributes property with an unrealized gain to a corporate beneficiary that is wholly owned by a newly-established discretionary trust.

When this transaction was presented to it in a ruling request, the GAAR Committee observed that the new trust technically would start afresh under the 21-year deemed realization rule, and considered that it inappropriately circumvented this rule, which works hand in hand with the s. 70 rule for deemed realizations on death, to prevent indefinite deferrals of capital gains. CRA further indicated that a distribution to a corporate beneficiary will generally be acceptable if the individual shareholders of that corporation are resident in Canada, and that, as for non-resident individual beneficiaries, it will look to see that there will be taxation within Canada in their lifetime.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(5.8) making a s. 107(2) distribution to a corporate beneficiary held by a new trust is an abusive circumvention of the s. 104(4) 21-year rule 251

27 April 2016 External T.I. 2016-0625001E5 F - Surplus Stripping

funnelling deemed dividend to holdco trust beneficiary and resulting PUC to individual beneficiary/shareholder was surplus stripping

A discretionary trust of which X and his holding company (Holdco) are the beneficiaries receives a s. 84(1) deemed dividend of $100K from Opco (not in excess of applicable safe income) resulting from a PUC increase, and issues a $100K note to Holdco as the distribution of this deemed dividend. Opco uses its newly-created PUC to make a capital distribution to the trust, which makes a $100K capital distribution to X.

CRA stated that the transactions appeared “to strip the Opco surplus by converting a taxable dividend to a payment of a capital nature that is not taxable to Mr. X,” and that were such transactions submitted in a ruling request, the Directorate “would recommend to the General Anti Avoidance Committee to confirm the application of subsection 245(2).”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) using a trust to funnel a deemed dividend from creating PUC to a Holdco beneficiary and funnelling that PUC to the individual beneficiary, is surplus stripping 204
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distribution of s. 84(1) dividend effected with note issuance 223

2 May 2016 External T.I. 2016-0633351E5 F - Descarries Case and Document no. 2015-0610711C6

Descarries not to be construed narrowly

In 2015-0610711C6, CRA had indicated that as a result of Descarries, it would no longer issue rulings in which an individual can in effect use shares (e.g., preferred shares) whose ACB was stepped up using the capital gains deduction (by redeeming those shares to create a deemed dividend and a capital loss) to offset or reduce a capital gain on a disposition of his or her common shares. CRA now rejected a submission that 2015-0610711C6 read the purpose of s. 84.1 too broadly and that its purpose is only “to prevent persons from monetizing their lifetime CGD outside the context of an actual sales transaction occurring on a market basis” - so that s. 84.1 was not abused if, as in the reversed ruling, all that was going on was that “a taxpayer who, with a view to retiring, embarked on a process of business succession with a family member similar to one that could be undertaken with an arm's length third party.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) purpose of 84.1 not restricted to monetization transactions 150

13 January 2016 External T.I. 2015-0604521E5 - ACB increase in paragraph 55(3)(a) reorganization

objectionable for a s. 55(3)(a) spin-off to result in an increase in the aggregate outside basis

An intermediate holding company (Holdco) wishes to have its subsidiary (Opco) spin off a business to another Holdco subsidiary (Newco). This is accomplished by Opco selling that business to Newco for preferred shares, retracting those prefs for a note, and distributing the note to Holdco as redemption proceeds for a portion of the Opco shareholding, before that note is contributed to Newco. This will result in Holdco having full basis for its shareholding in Newco (i.e., a cost equal to the net fair market value of the business transferred to Newco), so that the aggregate ACB of its shareholdings in Opco and Newco increases as a result of the transactions. CRA considers that this increase is contrary to the object of s. 55(2), and “would consider the application of GAAR.”

If butterfly-style mechanics instead are used to spin-off the business to Newco, this is unobjectionable since the resulting ACB of Holdco’s Newco shareholding would be equal to a pro-rata portion of its previous ACB in the Opco shareholding.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) GAAR may be applied if the transactions produce an outside basis step-up 372
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount contribution of note by creditor to debtor 34

24 November 2015 CTF Roundtable Q. 11, 2015-0610711C6 - Impact of the Descarries decision

contrary to GAAR to use basis stepped up under CGD to create a capital loss permitting surplus extraction

In 2005-0134731R3 F, Mr. X realized a capital gain of selling all of the common shares of HOLDCO to his children in consideration for promissory notes, but did not claim the capital gains deduction (“CGD”) under s. 110.6(2.1). On a redemption by HOLDCO of all of the HOLDCO preferred shares owned by Mr. X, which had nominal paid-up capital (“PUC”) and a high adjusted cost base (“ACB”) as a result of a previous crystallisation of the CGD, Mr. X realized a deemed dividend and a capital loss. A portion of the capital loss was applied to offset the capital gain that arose on the earlier sale of the HOLDCO common shares to the children.

Following the Descarries decision (2014 TCC 75) would CRA still issue such a ruling? CRA responded:

In Descarries…the individual shareholders of…OKA… exchanged their OKA shares for shares of another corporation (“NEWCO”), some of which (the “NEWCO V-day Shares”) had low PUC and a high ACB equal to the FMV of the OKA shares on V-Day (December 22, 1971). As a result, the V-Day value of the OKA shares became isolated/crystallized in the ACB of the NEWCO V-day Shares.

The NEWCO V-day Shares were repurchased, giving rise to a deemed dividend to the individual shareholders as well as a capital loss that was applied to offset a capital gain realized earlier in the same series of transactions.

The Tax Court [stated]:

…[T] he additional value accumulated before 1971 was used to avoid the tax payable on the capital gain. Since the capital gain was created to allow the appellants to receive the Class A shares with a maximum adjusted cost base and paid-up capital, I find that the transactions at issue allowed the appellants to use the value accumulated before 1971 to indirectly distribute part of Oka’s surpluses tax-free. …

The result...is that the tax-exempt margin made it possible for part of Oka’s surplus to be distributed to the appellants tax-free in a manner contrary to the object, spirit or purpose of section 84.1 of the Act. For these reasons, I find that this provision was applied in an abusive fashion.

…[T]he CRA would now recommend to the GAAR Committee that subsection 245(2) be applied to a series of transactions similar to the proposed transactions described in F 2005-0134731R3. The proposed transactions result in the extraction of corporate surplus as capital gains. Furthermore, such capital gains are offset or reduced by capital losses realized on a disposition of shares whose ACB was increased by the CGD or V-day value.

In these circumstances and based on the Descarries decision, the CGD or the V-day value has been used to enable corporate surplus to be distributed to the shareholders tax-free, in a manner contrary to the object, spirit and purposes of section 84.1.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) abuse of s. 84.1 to use basis stepped up under CGD to create a capital loss permitting surplus extraction 311

24 November 2015 CTF Roundtable Q. 4, 2015-0610701C6 - Surplus Stripping and GAAR

deliberate triggering of s. 55(2) gain does not violate GAAR

Less overall tax is paid if, rather than Opco paying a taxable dividend to one of its shareholders (A, an individual), A rolls his shares into a new Holdco, Opco redeems the shares now held by Holdco (but without any s. 55(5)(f) designation being made by Holdco so that all of the redemption proceeds are subject to capital gains treatment under s. 55(2)), and then Holdco pays a capital dividend to A. CRA commented:

Although the GAAR Committee considered that [similar] Transactions circumvented the integration principle, it recommended that the GAAR not be applied. The GAAR Committee was of the view that it would be unlikely that the GAAR could be successfully applied to the Transactions given the current state of the jurisprudence.

…The CRA…has expressed [its] concerns to the Department of Finance.

…The CRA will still maintain its position of applying the GAAR and/or subsection 84(2) to cases like The Queen v. Macdonald where a taxpayer uses losses or other tax shelter to reduce a capital gain realized as part of a surplus stripping scheme. Also, the CRA will rely on the reasoning in Descarries where a taxpayer seeks to extract corporate surplus in a manner contrary to the object, spirit or purpose of specific anti-avoidance provisions, such as sections 84.1 and 212.1.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(5) - Paragraph 55(5)(f) deliberate non-use of s. 55(5)(f) designation does not violate GAAR 239

9 October 2015 APFF Roundtable Q. 15, 2015-0595641C6 F - Surplus Stripping and GAAR

GAAR did not apply where a taxpayer deliberately triggered the application of s. 55(2)

Less overall tax is paid if, rather than Opco paying a taxable dividend to one of its shareholders (A, an individual), A rolls his shares into a new Holdco, Opco redeems the shares now held by Holdco (but without any s. 55(5)(f) designation being made by Holdco so that all of the redemption proceeds are subject to capital gains treatment under s. 55(2)), and then Holdco pays a capital dividend to A. CRA commented:

[T]he GAAR committee…recommended that the GAAR not be applied [in a similar file] having regard to the current state of the jurisprudence.

Nonetheless, the CRA is concerned by this type of tax planning, which in particular, is contrary to the integration principle. Accordingly, we have brought our concerns…to…Finance.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) GAAR did not apply where a taxpayer deliberately triggered the application of s. 55(2) 133

9 October 2015 APFF Roundtable Q. 14, 2015-0595631C6 F - Indirect Monetization of CGD

Descarries not consistent with use of ACB on a previous capital gains crystallizatin to create a capital loss for use on a sale

Following Descarries, CRA will no longer issue rulings in which an individual can in effect use shares (e.g., preferred shares) whose ACB was stepped up using the capital gains deduction ("CGD") (by redeeming those shares to create a deemed dividend and a capital loss) to offset or reduce a capital gain on a disposition of his or her common shares. CRA stated (TaxInterpretations translation):

[T]he CRA recommended to the Committee on the General Anti-Avoidance Rule that it confirm that the provisions of subsection 245(2) apply respecting a series of transactions similar to those proposed in the advance ruling carrying the number 2005-0134731R3 F.

Such transactions effectively accomplish a distribution of surplus of a corporation in the form of a capital gain even while such capital gain is reduced by a capital loss sustained from the disposition of shares whose ACB arose from the CGD or from the FMV of such shares on V-Day.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1) individual cannot effectively use the ACB of shares previously stepped-up using the capital gains deduction to create a loss to offset a gain on the sale of common shares 125

28 May 2015 IFA Roundtable Q. 2, 2015-0581551C6 - IFA 2015 Q.2: GAAR and treaty shopping

treaty shopping

What is CRA's position on the application of the GAAR to treaty shopping arrangements? CRA stated:

The…comments on treaty shopping… made in the February 2014 Budget as well as in the August 2014 Finance news release [do not] preclude[e] the application of the GAAR to treaty shopping arrangements.

The CRA continues to contemplate the application of the GAAR to transactions undertaken primarily to secure a tax benefit afforded by a tax treaty and, in fact, the GAAR Committee has recently approved the application of the GAAR to certain treaty shopping arrangements.

GST/HST Memorandum 16-4 "Anti-avoidance Rules" 20 February 2015

3. ...Transactions that rely upon the strict wording of a provision in the Act to gain a tax benefit where none was intended and, therefore, defeat the purpose of the provision, would be a misuse or abuse of the legislation.

4. The anti-avoidance rules will override other provisions of the Act in order to maintain the spirit and intent of the legislation.

10 October 2014 APFF Roundtable Q. 21, 2014-0538091C6 F - 2014 APFF Roundtable, Q. 21 - Impact of the Descarries Case

Descarries failed to recognize scheme against indirect surplus stripping

What is the CRA position on Descarries? After noting that the case was not appealed because in the result it was favourable and it was only an informal procedure case, CRA then summarized the facts, stating that the Oka shareholders engaged in "three avoidance transactions" (TaxInterpretations translation) for appropriating the surplus of Oka which, in December 2004, had already "liquidated around 93% of its business assets... and was in the course of liquidating the remainder of its assets:"

First, on March 1, 2005, there was an internal rollover of their shares in the capital stock of Oka in order to crystallize in the adjusted cost base ("ACB") of new shares, the excess of the fair market value ("FMV") of the transferred shares over their ACB, thereby realizing a capital gain in respect of which the capital gains deduction in section 110.6 was not claimed.

The second transaction, effected on March 15, 2005, was to roll those new shares in the capital stock of Oka to a new corporation (9149-7321 Quebec Inc., hereafter « Quebec Inc. ») in exchange for shares of two classes in the capital of Quebec Inc.: the first class of shares having a low PUC and an ACB equal to their FMV (the "1971 FMV Shares") and the second class of shares having a high PUC (which was the purpose of the second transaction) and a high ACB equal to their FMV (the "Stripping Shares").

The third transaction was to redeem for cash on March 29, 2005 all of the Stripping Shares, and part of the 1971 FMV Shares, so as to generate a capital loss sufficient to eliminate the capital gain generated in the first transaction.

The CRA continues of the view that ITA subsection 84(2) should have applied in this case especially by reason of …MacDonald… . Furthermore, the CRA is concerned by the approach adopted by the TCC respecting the analysis of the avoidance transactions for purposes of the application of ITA subsection 245(2).

After describing how the decision failed to recognize the broad scope of s. 84(2), CRA discussed its concerns respecting the GAAR analysis:

The Tax Court in its analysis of abuse of the provisions of the ITA as a whole for purposes of determining whether the avoidance transactions were abusive in this case, had limited its analysis to two provisions: subsection 84(2) and section 84.1…as being the sole anti-avoidance provisions applicable to surplus stripping,

…One should also…take into account…[ss. 82(1)(b). 121, 84(1) to (4) and 15(1)] which support a tax policy whose purpose is to tax exclusively in the form of dividends direct payments of corporate surplus to shareholders… . These provisions reflect…a clear and unambiguous tax policy…called the integration rules, which also is supported by a wide range of provisions (among others, section 84.1 as well as subsections 84(2), 246(1) and 245(2), taking into account former subsection 247(1) and particularly the related explanatory notes of the Department of Finance) whose purpose is to prevent individual shareholders from indirectly accessing the surplus of a corporation otherwise than as a dividend. In short, in a situation such as in the Descarries case, the three avoidance transactions are…an abuse of the Integration Rules. …

We also are concerned by the specificity of the principle proposed by the TCC to the effect that in carrying out the three avoidance operations, subsection 84.1(1) could be utilized to distribute surplus of a corporation in the form of a capital gain to the extent that that the capital gain was not reduced y a capital loss which was sustained from the disposition of shares whose ACB is derived from the FMV of those shares on Valuation Day… . [This ] analysis…effectively modifies the nature of the "tax benefit," which consisted in a reduction of tax resulting from a transformation of part of a deemed dividend under subsection 84(2) into a capital gain. …

CRA will seek a decision of the Federal Court of Appeal or the Supreme Court of Canada:

…confirming the broad scope of subsection 84(2) recently established….in… MacDonald …and, also, whether or not there is a specific scheme under the Act for taxing any direct distribution of surplus of a Canadian corporation as taxable dividends in the hands of individual shareholders; as well as a specific scheme under the Act against indirect surplus stripping.

See also summary under s. 84(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) will not impose double taxation under s. 84(2) and (3) 36
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) Descarries failed to recognize breadth of s. 84(2) 517

2 December 2014 CTF Roundtable, Q. 6

avoidance of s. 100 through partnership boot paydown

Does the formation of a partnership with only Canadian partners in order to meet the requirement of a "Canadian partnership" under subsection 97(2) followed by the admission of a non-resident as a partner soon after (e.g. the next day) jeopardize the rollover?

CRA indicated that the issues in a denied ruling request, entailing the transfer of a non-Canadian business into a partnership which a non-resident became a member, could be illustrated as follows: Corp A is a taxable Canadian corporation, which transfers the business, represented by depreciable property with a capital cost and FMV of $100,000 and a UCC of $50,000, on a s. 97(2) rollover basis to a newly-formed partnership between it and its wholly-owned Canadian subsidiary (holding 1 of the 100 initial units) in consideration for a $50,000 promissory note and 50,000 units. The next day, the non-resident becomes a partner by contributing $50,000 for 50,000 partnership units (49.95%), thereby diluting Corp A's interest to 50.04%, with the promissory note then being repaid. CRA stated:

As part of the series of transactions, there is a dilution on a percentage basis in favour of a non-resident but without any Canadian tax recognition of the latent income gain. The new anti-avoidance rules under subsections 100(1.4) and (1.5) do not yield taxation to Corp A on the admission of the non-resident as a partner because there is no dilution of its partnership interest on a fair market value basis (i.e. the FMV of Corp A's partnership interest is still $50,099). If instead there had been a direct disposition by Corp A to the non-resident of part (49.95%) of its partnership interest, amended subsection 100(1) would have resulted in a fully taxable gain to Corp A of $24,975, which amount is also equivalent to 49.95% of the latent recapture in the depreciable property of $50,000.

The CRA will challenge such an arrangement by applying the GAAR. In our view, the determination of a misuse or abuse of the Act must be made having regard to the 2012 amendments to subsection 100(1) that extend its application to acquisitions by non-residents and the addition of the anti-avoidance dilution provisions contained in new subsections 100(1.4) and (1.5).

See 2014 CTF Conference

.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(1) avoidance of s. 100 through partnership boot paydown 343

10 October 2014 APFF Roundtable Q. 20, 2014-0534671C6 F - D&D Livestock

unjustified duplication of fiscal attributes is abusive

What is the CRA position on D & D Livestock? CRA stated (TaxInterpretations translation):

[S]ubsection 245(2) was not applied in this case. However, the CRA would not hesitate to invoke the GAAR in similar files. … The CRA considers among other things that transactions or series of transactions permitting the double utilization of the same amount of safe income in order to reduce a capital gain realized on an ultimate disposition of shares of a corporation are abusive and go against the object of subsection 55(2). Moreover, Justice Graham emphasized at paragraphs 27 and 28 of the decision… that the transactions in the case resulted in stripping of capital gains.

Furthermore, the CRA is also concerned by planning which can result in an unjustified duplication of fiscal attributes, for example, the duplication of the adjusted cost base of a share, regardless of the fact the that adjusted cost base exists by reason of safe income of a corporation. Similar transaction will be contested by the CRA, as appropriate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) - Subparagraph 55(2.1)(b)(i) CRA is concerned by planining that can result in an unjustified duplication of fiscal attributes including ACB 163

2013 Ruling 2013-0504301R3 - Loss Consolidation

provincial GAAR ruling re loss shift

A public company (Lossco) is transferring losses to a "Profitco" which is a wholly-owned indirect subsidiary of another public company (Bco) which is partially owned by Lossco. See summary under s. 111(1)(a). See summary under s. 111(1)(a).

In addition to customary federal rulings including GAAR, CRA ruled:

The general anti-avoidance provision of a province with which the Government of Canada has entered into a tax collection agreement will not be applied, as a result of the Proposed Transactions, in and by themselves, to determine the tax consequences confirmed in the rulings given above, in respect of a taxation year in respect of which such a tax collection agreement is in effect.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) Lossco sale of Newco pref to profitco for profitco note; provincial GAAR ruling 392

24 November 2013 CTF Roundtable, 2013-0508161C6 - Loss on disposition of shares

loss preservation transactions which did not satisfy the s. 93(2.01) requirements

A shareholder having an accrued foreign exchange loss on common shares of an FA and an accrued foreign exchange gain on a related party debt used to acquire those shares acquires a separate class of the FA's shares and pays dividends thereon with a view to such dividends not reducing a loss to be realized on the a sale of the original FA shares owned - in order that such loss can offset the FX gain on settlement of the debt. Would the conclusion at the 2013 IFA conference (see below) that GAAR would apply change if the funds used to acquire the original FA shares had been borrowed from an arm's length party more than 30 days before the acquisition of the shares?

In responding "no," CRA indicated that a loss would be denied "unless the related debt is a debt described in subparagraph 93(2.01)(b)(ii), a provision which precisely specifies which gains are intended to have an effect on the computation of the amount of a loss to be denied on the disposition of FA shares," and that one such requirement was that an "arm's length foreign currency debt… was entered into within 30 days of the acquisition of the FA share."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3) loss preservation transactions which avoid s. 112(3) stop-loss rule 263
Tax Topics - Income Tax Act - Section 93 - Subsection 93(2.01) loss preservation transactions which did not satisfy the s. 93(2.01) requirements 201

5 October 2012 APFF Roundtable Q. 13, 2012-0454181C6 F - Discretionary Dividend Shares

Mr. X holds 100 Class voting participating shares of Opco with a fair market value of $5M and nominal adjusted cost base and paid-up capital. He incorporates Holdco whose shares have nominal fair market value, adjusted cost base and paid-up capital and exchanges his Class A shares of Opco for preferred shares of Opco with the same FMV, ACB and PUC as the exchanged Class A shares. Opco isssues Mr. X 100 Class A shares for nominal consideration and also issues 100 discretionary dividend shares to Holdco. In order to limit the net asset value of Opco to $5M (i.e., for creditor-proofing purposes), Opco annually pays dividends of $500K on the discretionary shares held by Holdco.

After noting that these transactions could result in the application of s. 15(1) or s. 110.6(7), CRA also stated that s. 245(2) could apply and noted (TaxInterpretations translation) that the Directorate:

would take into account, among others, paragraph 85(1)(e.2) ITA which does not permit a taxpayer to accord a benefit upon a corporation unless it is a wholly-owned subsidiary of the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) discretionary dividend shares issued for nominal consideration 146

5 October 2012 APFF Roundtable Q. 8, 2012-0454161C6 F - Computation of CDA and Acquisition of Control

Where Mr. A, who owns 50% of the shares of a CCPC ("Gesco") having cash as its only asset, purchases the other 50% shareholding of Mr. B, s. 245(2) potentially may apply (Tax Interpretations Translation):

...we are of the opinion that the acquisition of shares of a corporation whose sole asset is cash as in the given situation could occur as part of a surplus stipping scheme having regard to which subsection 245(2) I.T.A. could be invoked.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account CDA deduction of extinguished capital losses 109

3 July 2012 External T.I. 2012-0443421E5 F - 84.1 and partnership

A and B are Canadian-resident spouses who have not utilized their capital gains exemption and who each hold 50 Class A shares (the only issued and outstanding shares) of their family farm corporation ("Milkco," a CCPC which has carried on a dairy farm for 20 years) having an fair market value of $500,000 an adjusted cost base and paid-up capital of $50, and qualifying under s. 110.6(1) as shares of the capital stock of a family farm corporation. They also each hold a 1/2 "interest in a family farm partnership" as defined in s. 110.6(1), namely, Grainco s.e.n.c., which has operated a cereal growing farm for three years, with each such 1/2 interest having an acb of $50.

A and B each roll their shares of Milkco into Grainco s.e.n.c. for additional partnership interests in Grainco s.e.n.c.

Five years later, after the fmv of the interests in Grainco s.e.n.c. have appreciated to $1.5 million and such interests continue to qualify as interests in a family farm partnership, A (and then B several days later) transfers his or her partnership interest in Grainco s.e.n.c. to a newly-incorporated corporation ("Managementco") - in which each of A and B holds common shares with an acb of $50) in consideration for a note receivable of $750,000 and claims the capital gains exemption. As Grainco s.e.n.c. now only has one partner (Managementco), it is dissolved by operation of law (with a view to the aplication of s. 98(5).)

Provided that Grainco s.e.n.c. has legal existence and does not hold title to the shares of Milkco as mandatary or nominee, s. 84.1 does not apply.

A stratagem permitting a taxpayer to strip the surplus of a private company by means of a reorganization which results in an indirect holding of its shares by means of a partnership appears to avoid the application of section 84.1.

The concept of series of transactions is enlarged by s. 248(10) - see Canada Trustco and Copthorne.)

[I]n order to determine if there is an abuse having regard to section 84.1, the CRA would need in particular to consider the source of funds used to pay off the consideration for the disposition of the partnership interests, as well as the value attributable to the shares of the corporation [i.e., Milkco] held by the partnership relative to the total value of the interests in the partnership....The CRA is preoccupied by transactions which could result in a stripping of corporate surplus. Furthermore, the CRA has concluded in certain cases (for example where a partnership serves only to hold shares of a private company), that this type of reorganization engages the application of the general anti-avoidance rule.

In response to a question as to whether the answer would change if Managementco instead was owned by the child of A and B, CRA indicated that although it was aware of the intergenerational rollover in s. 70(9.21), s. 84.1 did not take this consideration into account, so that the answer would not change.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) use of partnership avoids 84.1 502

2011 Ruling 2011-0392171R3 - XXXXXXXXXX

A deposit-taking financial institution with significant non-capital losses (LossCo") was directed by the provincial regulator to quickly merge with a financially stronger institution. Accordingly, ProfitCo acquired all the LossCo shares of LossCo Shareholder (which included preferred shares), and ProfitCo and LossCo then amalgamated to form AmalCo, with each LossCo and ProfitCo shareholder receiving shares of AmalCo which were substantially similar to the shares in the capital of ProfitCo.

In order to avoid the application of the debt forgiveness rules to the extinguishing of redeemable subordinated debentures owed to another corporation in the same corporate group as LossCo Shareholder ("LossCo Lender"), the following additional transactions occurred: prior to the acquisition of LossCo, ProfitCo lent money to the LossCo Shareholder; LossCo Shareholder used that advance together with some of its own funds to subscribe for Class A participating shares of LossCo; LossCo paid off the subordinated debentures (also referred to as "subordinated debt") owing to LossCo Lender; and the advance owing by LossCo Shareholder to ProfitCo was then repaid by way of set-off against the sale price payable to LossCo Shareholder for its shares of LossCo.

After giving favourable s. 111(5)(a) rulings, CRA ruled that s. 245(2) will apply on the basis "that the repayment of the subordinated debt...will be considered a settlement of the subordinated debt for no consideration for the purposes of applying section 80." In its summary, CRA noted that these "transactions are essentially the same as transactions that the GAAR committee previously determined resulted in an abuse of section 80."

28 November 2010 CTF Roundtable Q. 21, 2010-0386361C6 - 2010 CTF Q21 - Reasonable Salary for Inc. Prof.

CRA stated that para. 1(j) of IT-189R2 ("Corporations Used by Practising Members of Professions") and para. 17 of IC 88-2 ("General Anti-Avoidance Rule) are both correct in context and are not contradictory.

(IT-189R2 provides that, in determining whether a corporation is carrying on a professional practice under s. 125, a relevant factor is whether the corporation pays the professional a reasonable salary in an employment relationship under a written agreement. IC 88-2 provides that it is not an abuse under s. 245(4) for a corporation, for tax reasons, to decline to pay a non-arm's-length employee so as to avoid generating losses.)

8 October 2010 Roundtable, 2010-0373291C6 F - Tuck-Under Transactions - Safe Income Extractions

despite the decision in Vaillancourt-Trembly 2010 FCA 119, CRA will continue to challenge abusive surplus stripping arrangements, including those taking the form of "tuck under" transactions, given that there was a strong dissent in that case based on the Smythe case ([1970] S.C.R. 64) and given that s. 245(2) was not argued in that case.

2010 Ruling 2009-0332571R3 - Loss consolidation - related or affiliated

loss shift between related but unaffiliated corporations

Mr A and Mrs B are siblings. Mr A holds all the voting shares of HA which, in turn, holds Lossco. HA also is the common shareholder of HASub. Mr. B and/or Mrs B indirectly control HBSub through a similar structure.

Lossco will make interest-bearing loans to HASub and HBSub, and HASub and HBSub will use the loan proceeds to subscribe for preferred shares of Lossco, thereby accomplishing a loss shift.

Standard rulings including GAAR. Summary states:

The transfer of losses between related, but not affiliated, corporations should not result "in an abuse having regard to [the provisions of the Act]...read as a whole", for the purposes of subsection 245(4), because specific provisions such as subsections 111(4) to (5.5), 256(7), 191.3(1), 112(2.4), paragraph 55(3.1)(c), section 80.04 etc. allow loss utilization transactions between related corporations, while only subsection 69(11) does not allow rollover where property is transferred to a person other than a person that is affiliated with the transferor.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) loss shift between related but unaffiliated corporations 153

2005 Ruling 2005-0123631R3 -

GAAR will apply to prevent what otherwise would be the avoidance of the thin capitalization rule when debts owing by a Canadian corporation to a non-resident affiliated corporation (Finco) are transferred by the Finco to a partnership organized by that Canadian subsidiary and a Canadian affiliate in consideration for the issuance of interest-bearing debt by the partnership to the Finco.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(4) 60

Income Tax Technical News, No. 34, 27 April 2006 under "Sale of Tax Losses"

Where Profitco avails itself of the benefit of tax losses of Lossco, a publicly traded corporation that is insolvent and has ceased to carry on its business, by transferring assets to Lossco in consideration for shares that represent only 45% of the votes but substantially all the value of Lossco, CRA would consider the application of GAAR.

2005 APFF Roundtable Q. 13, 2005-014106 -

S.245(2) generally would not apply where an individual ("X") owning 20% of the shares of Opco disposes of his shares of Opco to a newly-incorporated subsidiary of Opco for cash, provided that cash or near-cash does not constitute a significant portion of Opco assets, Opco continues to carry on its business, and Subco and Opco merge following this transaction.

2004 Ruling 2004-009475 -

GAAR did not apply where a Canadian securitization trust, in order to borrow at favourable rates provided by an arm's length foreign lender, entered into a back-to-back financing arrangement under which the lender lent to a newly-incorporated Alberta corporation owned by a trust with a charitable beneficiary, and that corporation lent, on similar terms, to the trust.

2004 Ruling 2004-008854 -

Loss utilization transactions in a related group of companies under which Profitco transfers its promissory note of a wholly-owned subsidiary of Profitco ("Subco") to a sister company with losses ("Lossco") in consideration for Class A preferred shares of Lossco, and Profitco then transfers the Class A preferred shares to Subco in exchange for Class AA preferred shares of Subco. Ruling that s. 245(2) will not apply.

2004 Ruling 2004-008431 -

On the transfer of the assets of a partnership to a corporation ("Newco") in consideration for shares and a promissory note, for reasons of legal simplification the shares and note are issued in the respective names of the partners (based on their pro-rata share) instead of the name of the partnership, with such pro-rata interest then being distributed to the respective partners on the subsequent wind-up of the partnership under s. 85(3). A comment that this manner of issuing the shares and promissory notes did not invalidate the application of ss.85(2) and (3).

2004 Ruling 2003-005398 -

A mutual fund trust (the "Fund") subscribes for Class A redeemable retractable shares of a newly-incorporated subsidiary ("MFC") and distributes the Class A shares to its unitholders as a return of capital with MFC then electing to be a public corporation, Fund transfers its common shares and notes of a subsidiary ("Holdco") which in turn holds limited partnership units in a partnership to MFC in consideration for redeemable retractable Class B shares of MFC, MFC and Holdco amalgamate, the amalgamated corporation ("Amalco MFC") merges into the Fund as described in s. 132 and the Fund transfers its partnership units to a subsidiary trust.

After noting that the taxable Canadian corporation (Holdco) that is converted to a mutual fund corporation ("MFC") is currently within a mutual fund family, so that the proposed transactions do not involve the type of conversion into an mutual fund corporation that has historically caused concern, the Directorate ruled that s. 245(2) would not apply.

Income Tax Technical News, No. 30, 21 May 2004

Under the scheme of the Act it is acceptable to transfer deductions within an affiliated group of corporations. The Agency will not feel comfortable providing a ruling on a loss consolidation transaction "that contemplates dollar amounts and time frames that are blatantly artificial". Respecting CRB Logging, the Agency has "provided rulings on some upstream shareholding situations. The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary".

2003 Ruling 2003-004182 -

The establishment by a pension corporation of a subsidiary pension corporation for the purpose of increasing the percentage of underlying foreign property that could be held on a consolidate basis would not offend the provisions of section 206 (or 259).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 206 - Subsection 206(2) 38

2003 APFF Roundtable Q. 1, 2003-0029955 -

General discussion as to whether s. 245(2) might be applied in the situation where shareholders of an operating corporation ("Opco") sell their shares of Opco, utilizing the enhanced capital gains exemption, after it transferred all its assets to a newly created subsidiary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) hybrid sale: internal step-up followed by share sale 431

2 June 2003 External T.I. 2003-000248 -

A farmer transfers farm property to an adult child at fair market value taking back a promissory note as consideration, then makes a gift to his child of enough funds to allow for repayment of the note. Such a transaction would appear to be undertaken primarily to avoid the consequences of section 80, which would otherwise apply on a straightforward forgiveness of the debt, and, accordingly, such transaction may be subject to s. 245(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(13) 72

31 March 2003 Internal T.I. 2002-016627 -

Where a trust issues debt and the only property held by the trust is foreign property, the Directorate indicated that although the technical provisions of the Act would be met:

"Taking into account the clear overall purpose of these rules to limit foreign property within registered plans and the additional detail contained in provisions such as paragraphs 206(1.1)(b) and (c) of the Act imposing a substantial Canadian presence test, it is the CCRA's view that it is appropriate to look at the underlying foreign property of a trust in determining whether the relevant tax policy has been abused. Accordingly, in situations involving debt of a trust, we have only ruled favourably where the facts and proposed transactions reflect that more than 50% of trust's assets will be invested in Canadian property."

9 September 2002 External T.I. 2002-014100 -

Technical Interpretation No. 9518785 (respecting a parent subscribing for shares of a sub, which uses the funds to repay debt owing) is being withdrawn given that technical interpretation should not be provided in respect of GAAR.

2001 Ruling 2001-009021 -

Description of loss consolidation transactions under which a public corporation lends money on an interest-bearing basis to a profitable subsidiary ("Subco"), the profitable subsidiary subscribes for preference shares of a newly incorporated subsidiary of the parent ("Newco") and Newco lends money on an interest-free basis to the parent. If such transactions resulted in a non-capital loss to Subco, they would be considered to be abusive as they effectively would permit the refreshing of non-capital losses of the parent.

2000 Ruling 2000-001072 -

A corporation ("TC") previously transferred a property to another corporation ("DC") and received non-voting preferred shares of DC as consideration. In connection with a butterfly reorganization of DC, the addition of voting rights to such preferred shares in order that DC would be connected with TC for Part IV tax purposes would not result in the application of s. 245(2) given that DC would have been connected from the outset if the preferred shares originally issued had been voting.

May 1999 CALU Conference No. 9908430., Q.3

GAAR likely would apply where holding companies for individual shareholders own and pay premiums for insurance policies on the lives of the other shareholders, and the operating company is designated as the beneficiary (so that the addition to its capital dividend account for the amount of life insurance proceeds received is not reduced by the adjusted cost bases of the policies).

Income Tax Technical News, No. 9, 10 February 1997

loss transfer must be to affiliated person - related not enough

As a result of an amendment to s. 69(11), "a series of transactions that results in the transfer of the benefit of the losses, deductions or other amounts from one corporation to a corporation with which it is not affiliated will generally be considered to result in an abuse ... ."

1997 Ruling 971700

In order to avoid averaging with the low ACB of shares currently held by them that are subject to an escrow agreement, employees of a public corporation transfer unexercised employee stock options to revocable trusts. Under the terms of each trust a registered charity is entitled in specified circumstances to receive a pecuniary bequest and the employee (and his estate) is otherwise the sole beneficiary, and the sole trustee. If the trust subsequently exercises the options, it borrows funds needed to pay the exercise price from the employee.

RC ruled that the trust and the employees will be separate and distinct taxpayers for the purposes of s. 47(1), and that s. 245(2) will not be applied to the tax consequences of the transactions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 47 - Subsection 47(1) 114

1996 A.P.F.F. Round Table No. 7M12910 (Item 3.1)

As an example of a transaction where a taxpayer sought to avoid application of s. 84.1, RC referred to a taxpayer who implemented a reorganization under s. 86 with the aim of converting voting shares of the corporation involved in the transfer into non-voting shares to avoid the transferred corporation being related to the purchaser.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 70

1996 A.P.F.F. Round Table No. 7M12910 (Item 3.1)

Where specific anti-avoidance provisions are not applicable to a transaction or series of transactions that results in tax abuse, the general anti-avoidance provision may be applied even before taking tax conventions into account." The ability in a country to apply general anti-avoidance provision in domestic tax law is recognized by the OECD, and the right to apply the GAAR is implicit in Article 29A, paragraph 7 of the Canada-U.S. Convention.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 53

6 July 1995 External T.I. 5-931646 -

In response to a proposal that a payment be made to a separated wife of a husband by her dissenting to the amalgamation of a corporation controlled by her husband and in which he had a minority interest with another corporation wholly-owned by her husband, RC stated that "where a payment to a shareholder pursuant to his/her right of dissent arises as a result of transactions the primary purpose of which is to realize a distribution of corporate surplus that is taxed as a capital gain rather than a dividend and the capital gains are taxed at a lower rate, it is our view that it would constitute an avoidance transaction and subsection 245(2) would be applicable unless it is not considered to result in an abuse ... . Transactions contrived to avoid the application of section 84.1 would be considered to result in an abuse for the purposes of subsection 245(4) of the Act".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) 151

21 June 1995 T.I. 951091 (see also 21 May 1996 T.I. 952686)

With respect to a loan by a wholly-owned foreign affiliate of a Canadian corporation ("Canco") to a non-resident corporation that was related to Canco but not a foreign affiliate of any person resident in Canada, RC indicated that "in the event the above transactions were part of a series of transactions that was designed to avoid the application of subsection 15(2) to monies acquired by a shareholder or a corporation connected to the shareholder of Canco, the series of transactions may be considered a misuse of subsection 15(8) of the Act and subsection 245(2) may apply".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.2) 93

12 April 1995 T.I. 950859 (C.T.O. "GAAR and Utilization of Losses")

S.245 will not apply in a situation where inventory is transferred by a corporation to a wholly-owned subsidiary for the purpose of utilizing the accumulated non-capital losses of the subsidiary.

1995 Ontario Tax Conference Round Table, Q. 5 (No. 952503)

Where $500,000 worth of common shares of Opco are sold by its individual shareholder to a corporate purchaser, following which the purchased shares are purchased for cancellation by Opco for $500,000 and the purchaser then purchases the remaining net assets of Opco from Opco, RC will consider that the economic substance of the transaction is that the purchaser is buying assets rather than shares, and that there is a series of transactions one of the effects of which is to affect a significant reduction in the assets of Opco in order to avoid tax that would have been payable on distribution of its property to the individual shareholder. Accordingly, GAAR will apply on the basis that former s. 247(1) would have applied to the transactions.

27 May 1994 External T.I. 5-940894 -

GAAR potentially may apply where a taxpayer transfers to her spouse her interest in a partnership in which they are equal partners and receives a salary for her services in lieu.

1994 A.P.F.F. Round Table, Q. 34

Transactions, whereby an individual took advantage of the fact that he had preferred shares of a holding company with a fair market value and ACB (of $400,000) corresponding to the safe income and fair market value of shares of an operating company, in order to effect a disposition of the shares of Opco to a third-party purchaser on a tax-free basis, were considered to represent an abuse given that former s. 247(1) would have applied to such transactions and given that if the holding company had sold its shares of the operating company directly, the individual would have realized the proceeds of disposition by way of a taxable dividend.

Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")

S.245(2) will be applied where CCA claims effectively are doubled-up by having Partnership B acquire all but one of the interests in Partnership A on the day Partnership A's fiscal year ends (two days before Partnership B's fiscal year end), with the sole purpose of becoming, on the following day, the owner of a 99.9% undivided interest in the film once Partnership A is dissolved pursuant to s. 98(3).

Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")

RC will accept investors in film limited partnerships being accorded the right to put their units to an entity related to the film promoter provided that the principal purpose of the put arrangement is not to convert income to capital gains (as opposed to providing the investors with liquidity).

1993 A.P.F.F. Round Table, Q. 2

"In a situation where a non-resident of Canada carries out a series of transactions whose purpose is to secure an exemption from or reduction of Canadian tax through a tax convention that Canada has concluded with another country, the Department will examine this type of situation closely in order to establish whether it results in an abuse."

93 CPTJ - Q.14

Where a transaction is structured to avoid the application of a specific anti-avoidance rule, the general anti-avoidance rule may still be applicable if it may reasonably be considered that the transaction results in a misuse or abuse of the provisions of the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) 30

26 January 1993 T.I. (Tax Window, No. 28, p. 1, ¶2383)

Whether s. 245(2) would apply where a profitable corporation provides services at less than fair market value to an affiliated company with losses would be a question of fact.

11 January 1993 T.I. (Tax Window, No. 27, p. 14, ¶2358)

A capital gain realized on a cash distribution of paid-up capital on preferred shares that constitute qualified small business corporation shares and that have a low adjusted cost base will be eligible for the enhanced exemption, without application of GAAR, even if the distributed funds are immediately loaned back to the corporation.

December 1992 B.C. Tax Executives Institute Round Table, Q. 1 (No. 9230390)

Where a corporation grants investors an option to acquire a debenture with terms identical to those of an existing callable debenture, RC will consider applying s. 245(2) given that the economic effect of the arrangement is to convert a capital receipt (proceeds of sale of the option) into an income deduction in respect of the interest payments.

16 December 1992 T.I. 920178 (November 1993 Access Letter, p. 511, ¶C245-050)

Discussion of whether s. 245 will apply where additional shares are required, or shareholdings are pooled, in order that Part IV tax will not apply to an intercorporate dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 186 - Subsection 186(4) 28

1 December 1992 T.I. (Tax Window, No. 27, p. 9, ¶2319)

If one of the purposes of a series of transfers of a capital property within a related corporate group is to utilize non-capital losses of one of the corporations and if the vendor corporation has no intention of re-acquiring the particular assets, then GAAR will not apply.

92 C.R. - Q.24

Transactions whereby a stock dividend is issued to the sole shareholder of a corporation who transfers the stock dividend shares to Newco, followed by a redemption of the shares by Newco in order to "purify" the corporation for super-exemption purposes, should generally not be subject to the general anti-avoidance rule.

31 August 1992 Memorandum (Tax Window, No. 24, p. 3, ¶2191)

The use of s. 55(3)(b) to effect a transfer of assets deriving their value principally from real estate in the guise of a treaty-protected share sale was a misuse of the Act within the meaning of s. 245(4).

24 June 1991 T.I. (Tax Window, No. 4, p. 2, ¶1313)

GAAR does not apply to an arrangement whereby, in order to satisfy the 24-month hold period for the enhanced capital gains exemption, the vendor has his common shares changed under a s. 86 reorganization into preferred shares, and agrees to sell those preferred shares to the purchaser in 24-months' time.

2 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 11, ¶1083)

A butterfly reorganization involving the distribution of land inventory which is achieved on a rollover basis under ss.97(2) and 90(3) through the use of partnerships could entail an abuse through circumvention of the provisions of s. 85 which deny the benefits of the rollover to real estate inventory.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1) 44

6 December 1990 T.I. (Tax Window, No. 2, p. 9, ¶1197)

RC could not give an opinion as to whether GAAR would apply to deny the current deduction of cost of distributing units of a mutual fund incurred by a taxable Canadian corporation which markets such units.

5 December 1990 Memorandum F-3973 (Tax Window, Prelim. No. 2, p. 17, ¶1063)

Transactions whereby a corporation with non-capital losses which are about to expire transfers its capital properties at a gain to a newly-incorporated subsidiary which it then winds-up, should fall within the stated lenient policy of RC respecting in-house loss transfers.

9 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 17, ¶1035)

GAAR will not apply to a transfer of farmland by an individual to his child pursuant to s. 73(3) following shortly thereafter by a sale by the child to an arm's length third party at a gain.

90 C.R. - Q22

The fact that an estate freeze has been accomplished in favour of a discretionary trust of which the freezor is a beneficiary would not generally result in the application of GAAR.

90 C.R. - Q20

Where, in order to "crystallize" his capital gains deduction, the individual sells shares to his spouse and does not elect to have the provisions of s. 73(1) apply, s. 245(2) will not apply, there being no indication in the Act that a capital gain must arise from an arm's length disposition in order to be eligible for the capital gains deduction.

90 C.R. - Q21

S.245(2) will apply where an individual owns the shares of a corporation ("Caschco") the assets of which are primarily liquid assets, sells the shares of Cashco to an arm's length purchaser, and claims a capital gains exemption, following which Cashco is wound up by the purchaser which uses the liquid assets to pay the purchase price to the individual.

14 June 1990 T.I. (November 1990 Access Letter, ¶1535)

The French word "abus" is broad enough to encompass both "misuse" and "abuse".

30 May 1990 T.I. (October 1990 Access Letter, ¶1487)

RC will consider applying s. 245(2) to an arrangement which has been set up primarily to change income received by one corporation from an inactive business into active business income.

9 May 1990 Meeting (October 1990 Access Letter, ¶1474)

S.245(2) will not normally be applied to transactions whose purpose is to qualify a corporation as a small business corporation.

20 April 1990 T.I. (September 1990 Access Letter, ¶1435)

An arrangement whereunder employees participating in an employee share purchase plan are permitted to realize capital gains treatment rather than deemed dividend treatment as a result of purchases by related corporations, would not generally be subject to GAAR although the particular circumstances of a real situation will have to be examined before a final determination can be made.

23 February 1990 Memorandum (July 1990 Access Letter, ¶1346)

GAAR will not apply where a parent corporation transfers publicly-traded shares with unrealized gains to a wholly-owned subsidiary on a rollover basis, and the subsidiary (which has shelter) immediately sells the shares back to the parent corporation for fair market value consideration.

6 February 1990 Memorandum (July 1990 Access Letter, ¶1345)

GAAR applies to transactions whereby (a) on the last day of Partnership A's fiscal year, Partnership B acquires a 99.9% interest in A, (b) in calculating its income for that fiscal period A deducts the maximum CCA for that fiscal year in respect of a depreciable asset owned by it, (c) on the following day A is wound-up pursuant to s. 98(3), and (d) B, in calculating its income for the fiscal year of 365 days ending two days following the end of A's fiscal year, deducts the maximum allowable CCA regarding that asset - assuming that the primary purpose of the transaction was to double the amount of CCA deductions and to avoid the application of s. 13(21)(f)(iv).

11 January 1990 T.I. (June 1990 Access Letter, ¶1283)

The use of cash and term deposits to pay off liabilities in order to qualify as a qualified small business corporation at the time of the disposition of the corporation's shares would not constitute an abuse or misuse.

15 November 89 T.I. (April 90 Access Letter, ¶1187)

A corporation ("Opco") is owned by brothers and sisters who wish to realize the value of its shares on a tax-free basis and to transfer those shares to their children. Each child would incorporate a holding company and each brother and sister would sell his or her shares to one or more holding companies for a note and/or preferred shares. In the view of RC, these transactions would avoid s. 84.1 and provide the brothers and sisters with a tax benefit in the form of an s. 110.6 deduction. Accordingly, the transactions would result in tax benefits under s. 245(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) 109

15 November 89 T.I. (April 90 Access Letter, ¶1186)

X amalgamates its subsidiary A (which has not depreciated its assets for tax purposes) with subsidiary B (whose depreciable property is fully depreciated), in order to avoid recapture of depreciation on a sale of the assets formerly held by B. It was assumed that A and B carried on the same business. RC was of the view that because there are no restrictions in the Act against transferring property between related corporations, these transactions would not result in an abuse or misuse.

25 October 89 T.I. (March 1990 Access Letter, ¶1161)

The exemption in s. 245(4) potentially could apply to an arrangement whereby a corporation with non-capital losses becomes a personal services business and uses those non-capital losses to offset what, in substance, is employment income.

20 October 89 T.I. (March 1990 Access Letter, ¶1158)

The sale by a corporation with non-capital losses which are about to expire of a capital property to its wholly-owned subsidiary at fair market value would not ordinarily be considered to result in a misuse or abuse. However, there will be considered to be a misuse or abuse if the transfer of the assets was undertaken to avoid a specific rule.

25 September 89 Memorandum (February 1990 Access Letter, ¶1127)

Arrangements that may circumvent the charitable donations limitation in ss.110.1(1)(b) and 118.1(1) are not subject to s. 245(2).

89 C.R. - Q.41

S.245 will not be applied where a taxpayer sells property to sustain a loss and then repurchases the property 31 days later. "Since this transaction would have been subject to the scrutiny of a specific provision of the Act, but would clearly be outside of its stated ambit, it would not result in a misuse."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Superficial Loss 54

89 C.R. - Q.42

RC will not apply s. 245 to subject offshore trust, of which Canadian residents are beneficiaries, to Canadian tax prior to the exploration of the 16-month period referred to in s. 94, unless the offshore trust has been structured in a manner to avoid the application of other provisions such as s. 75(2).

89 C.R. - Q.43

A partnership which is subject to the rental-property restriction rules as a result of being over-leveraged has its partners borrow money, and use those monies to make capital contributions to the partnership which in turn are used to pay off debt of the partnership. "The holding of the debt outside the partnership in order to circumvent the Regulation 1100(11) restriction on CCA would be considered to result in an abuse." However, if the funds were borrowed by the partners at the date the rental property was originally acquired by the partnership, these transactions might reasonably be considered to have been undertaken primarily for non-tax purposes, e.g., the financing of the partnership in order to permit it to acquire the rental property.

89 C.R. - Q.44

GAAR would not ordinarily apply to the transfer by an individual of his shares of a family farm corporation to his children using the provisions of s. 73(4) immediately followed by the sale by the children of their shares to a non-related party for proceeds resulting in a capital gain eligible for the $500,000 lifetime capital gain exemption.

89 C.R. - Q. 3

The deposit by a non-resident of funds with the non-resident financial institution that in turn loans funds to a Canadian corporation with which the non-resident individual does not deal at arm's length could constitute an avoidance transaction. Assuming that it is an avoidance transaction, it would be considered to be a misuse of s. 212(1)(b)(vii).

October 1989 Revenue Canada Round Table - Q.23 (Jan. 90 Access Letter, ¶1075)

An individual transfers all the shares of Holdco, which are "qualified small business corporation shares", to Newco, elects under s. 85(1) in order to realize $400,000 in capital gain, and then amalgamates Newco with Holdco, with the result that he now holds shares of Newco with a stepped-up basis. Such transaction does not result in a misuse or an abuse. The answer would be different if the transaction were structured to void the application of ss.84.1, 85(2.1) or to result in dividends stripping.

October 1989 Revenue Canada Round Table - Q.21 (Jan. 90 Access Letter, ¶1075)

In the context of a discussion of Friedberg, RC indicated that s. 245 might be applied to control abusive practices by taxpayers. However, GAAR might not be applied when there is a legitimate reason to use the "lower of cost or market" method, for example, where that method is used by manufacturing concerns as a hedge against the risk of losses arising from the production of certain goods.

October 1989 Revenue Canada Round Table - Q.11 (Jan. 90 Access Letter, ¶1075)

It is acceptable for an individual taxpayer to stepped-up the basis of his qualified small business corporation shares by exchanging those shares for other shares of the same corporation having the same paid-up capital, but with an elected amounts sufficient to trigger the requisite amount of capital gain.

October 1989 Revenue Canada Round Table - Q.4 (Jan. 90 Access Letter, ¶1075)

The temporary injection of capital into a partnership in order to avoid the realization of gain on a rollover transaction would appear to contravene the precise goal of s. 100(2) which is the realization of a capital gain in such circumstances. However, the previously observed practice of RC was to show tolerance where the transaction was motivated by economic or commercial considerations.

29 Aug. 89 T.I. (Jan. 90 Access Letter, ¶1084)

Because specific provisions such as ss.67, 69 and 56(2) are sufficient to address abuses which might otherwise arise from the use of professional service corporations, GAAR should normally not apply to such arrangements.

89 C.R. - Hiltz Paper (C.7)

88 C.R. - "Small Business Corporation Shares" - "'GAAR' and QSBC Shares"

The "purification" of a CCPC in order to qualify its shares as QSBC's, and dispositions made in order to use up the capital gains exemption, do not constitute a misuse or abuse.

89 C.M.TC - "Section 245 of the Income Tax Act"

The incorporation of a special purpose sub to hold debt on an amalgamation, thereby avoiding the application of s. 80(2), is an abuse.

Borrowing at the partner, rather than the partnership, level in order to avoid the application of s. 18(3.2) or 18(2), is not an abuse.

M. Hiltz, "Section 245 of the Income Tax Act", 1988 Conference Report, c.7.

IT-96R5 "Options Granted by Corporations to Acquire Shares, Bonds or Debentures" under "Anti-Avoidance Provisions"

ATR-44

An arrangement where a parent company uses borrowed funds to invest in the preference shares of a subsidiary which lends those funds to the parent at prime plus 1%, results in a tax benefit, but not an abuse.

Articles

Alan M. Schwartz, Kevin H. Yip, "Policy Forum: Defending Against a GAAR Reassessment", Canadian Tax Journal (2014) 62:1, 129-46.

Admissibility of broader range of extrinsic evidence (pp. 136-7)

Rather than determining the meaning of the statute, the GAAR analysis requires a search for "the rationale that underlies the words that may not be captured by the bare meaning of the words themselves" [citing: Copthorne…2007 TCC 481, at para. 66.]

This suggests to us that the extrinsic evidence supporting the GAAR analysis should be broader than that normally used to interpret…other provisions of the Act. Such evidence includes contemporaneous documents indicating what the government policy makers and legislative drafters were considering at the time the provisions were drafted and introduced. We also suggest that extrinsic evidence should be broader than the "official policy" set out in the technical notes and could, for example, include the policy choices not to do certain things….

Access to Information requests for policy papers (p. 138)

One strategy that taxpayers may find useful is making a request for information from the CRA or...Finance. ...There are exemptions and exclusion from disclosure such as..."advice or recommendations," and third-party information. However, these exceptions and exclusions should be interpreted in a limited and specific way. [citing Canadian Council of Christian Charities v. Canada, [1993] 3 CTC 123, at para. 15 and Ontario (Finance) v. Ontario (Information and Privacy Commissioner), 2012 ONCA 125. [See also Access to Information Act, s. 21]] ...[T]he taxpayer should be entitled to access information about the tax policy of the specific provisions at issue.

No general stop-loss policy (p. 140)

The courts have found that there is no general unexpressed policy regarding the stop-loss provisions, but appear to have expressed a general policy regarding business losses [citing: Landrus, 2009 FCA 113, 1207192, 2011 TCC 383, Triad Gestco, 2011 TCC 259 and Global Equity, 2012 FCA 272.

Policy against income-splitting? (p. 141)

It is less clear whether there is an overarching purpose against income splitting. [citing: Overs, 2006 TCC 26, Lipson, 2009 SCC 1, at para. 31, Swirsky v. The Queen, 2013 TCC 73 [aff'd 2014 FCA 36].]

No general policy against surplus-stripping (p. 143)

[T]he courts have found that there is no overarching policy against surplus stripping [citing: Evans, 2005 TCC 684, at para. 30, McMullen, 2007 TCC 16, Copthorne, 2011 SCC 63 at para. 118, Gwartz, 2013 TCC 86, at paras. 50-51, MacDonald, 2012 TCC 123, rev'd 2013 FCA 110, cf. Desmarais, 2006 TCC 44.]

David H. Sohmer, "Copthorne, Global Equity Fund, and the GAAR: Stubart Redux", The Canadian Taxpayer, January 25, 2013 – Vol. XXXV No.2, p. 9

At p.11:

As a result of the dilution of the requirements for clarity of text and clarity of legislative purpose, the GAAR now appears to have reverted to a statutory codification of the guidelines established by the Supreme Court in the case of Stubart....

Steve Suarez, "Tax Court Compels Disclosure in GAAR Case", Tax Notes International, Vol. 69 No. 3, 21 January 2013, p. 238

Regarding the significance of the finding in Birchcliff that the CRA can be compelled in GAAR litigation to disclose what it determined to be the policy of the provisions in question at the time the GAAR assessment was made, Suarez stated:

While it is open to the Crown during the course of the litigation to allege the existence of a different object, spirit or purpose than the one relied on in making the reassessment, that variation in its reasoning will now be transparent and the courts may question the strength of the CRA's arguments in situations in which it has changed the policy it says has been contravened.

David H. Sohmer, "Copthorne and the Supreme Court: Did the Court Cross the Line?", The Canadian Taxpayer, Vol. XXXIV, No. 3, February 10, 2012, p. 9

Copthorne effectively equates abuse with a failure to be reasonable, which conflates ss. 245(4) and (5).

David H. Sohmer, "The Supreme Court Decision in Copthorne: A Move To The Middle", The Canadian Taxpayer, Vol. XXXIV, No. 2, January 27, 2012, p. 9

The GAAR can now be applied in the absence of a clear and unambiguous legistlative intent.

David H. Sohmer, "GAAR or GAAR Lite: What Did Parliament Really Want?", The Canadian Taxpayer, Vol. XXX, No. 4, February 12, 2008 - February 25, 2008, p. 25.

Corcoran, Porter, "The General Anti-Avoidance Rule - Application to Second-Tier Finance Company Structures", International Tax Planning, Vol. VI, No. 3, 1997, p. 403.

"Applying the General Anti-Avoidance Rule", Tax Profile, February 1992, p. 190: Summary of discussion by Mark Symes and Jim Pearson of the potential application of GAAR in a number of situations.

D.J. Arnold, J.R. Wilson, "The General Anti-Avoidance Rule - Part 1, Part 2 and Part 3", 1988 Canadian Tax Journal, p. 829, p. 1123, p. 1369.

R.F. Lindsay, "The General Anti-Avoidance Rule: Points to Consider", 1988 Conference Report, c.5.

T.E. McDonnell, "Legislative Anti-Avoidance: The Interaction of the New General Rule and Representative Specific Rules", 1988 Conference Report, c.6.