Substance

Although accepting (per BLP) that a mere borrowing by a company is not a supply by it, Arden LJ accepted the finding below that the services provided by ING to its on-line depositors (including 24-hour access to their deposits) were more than merely “peripheral” to the borrowing represented by the deposits, so that ING was engaged in an exempt banking business. After referring (at para. 27) to a submission of taxpayer’s counsel that “the additional service was not one of the economic purposes of the transaction” (para. 27) she stated (at paras 29, 37):

…[O]n Mr Prosser's submission, the Upper Tribunal erred in law in not seeking to determine and apply the economic purpose of the contract of deposit. …

I accept that, when determining the nature of a transaction for VAT purposes, the court must look at the economic purpose of the transaction. However, the starting point is to determine what the parties have agreed. … [T]he court only goes behind the contract if the contract does not reflect the true agreement between the parties.

An agreement for the purchase of a new condo by the appellant was amended shortly before closing at the insistence of the mortgage lender to add her friend as a co-purchaser. Hershfield J found that the amended purchase agreement entailed, at most, a supply of a co-ownership interest in the property by the appellant to her friend in consideration for her friend’s guarantee – and did not result in any interest in the condo also being supplied by the builder to the friend (so that the new housing rebate was not denied to the appellant). In this regard, he stated (at para. 23):

The amended agreement did nothing of substance. Indeed, if such an agreement had been entered into to gain an unintended tax advantage, it might be seen as a wholly artificial transaction – a sham. That it should stand in the way of allowing an intended incentive, would be to allow for a re-characterization of the true legal relationships, entitlements and obligations that exist in this case.

Before going on to find that an agreement under which the appellant was stipulated to act as agent in fact created an agency relationship, Lord Neuberger stated (at para. 32):

When interpreting an agreement, the court must have regard to the words used, to the provisions of the agreement as whole, to the surrounding circumstances in so far as they were known to both parties, and to commercial common sense. When deciding on the categorisation of a relationship governed by a written agreement, the label or labels which the parties have used to describe their relationship cannot be conclusive, and may often be of little weight. As Lewison J said in A1 Lofts Ltd v Revenue and Customs Commissioners [2010] STC 214, para 40, in a passage cited by Morgan J:

• "The court is often called upon to decide whether a written contract falls within a particular legal description. In so doing the court will identify the rights and obligations of the parties as a matter of construction of the written agreement; but it will then go on to consider whether those obligations fall within the relevant legal description. Thus the question may be whether those rights and obligations are properly characterised as a licence or tenancy (as in Street v Mountford [1985] AC 809); or as a fixed or floating charge (as in Agnew v IRC [2001] 2 AC 710), or as a consumer hire agreement (as in TRM Copy Centres (UK) Ltd v Lanwall Services Ltd [2009] 1 WLR 1375). In all these cases the starting point is to identify the legal rights and obligations of the parties as a matter of contract before going on to classify them."

The fact that the payment of a dividend out of the share premium account of a Caymans company reduced the capital that would have been distributable on a winding-up of the company was not relevant as "it is the form by which the payments are made which determines their character" (para. 25). Accordingly, the character of the distribution as a dividend under Caymans company law governed its characterization for UK taxation purposes.

In finding that "bursary" amounts a postdoctoral fellow received from his university were in fact remuneration from employment, Archambault J. stated (at para. 75):

[T]he case law has consistently held that the terms used by the parties to describe the nature of their contractual relationship or of the payment one of them receives, although relevant, are not determinative.

The taxpayer, a family trust, made a non-arm's-length sale of shares to a numbered corporation ("404") for a promissory note of approximately $2.6 million. The numbered corporation then immediately sold the shares at arm's length to a third party ("Keolis") for approximately $2.8 million. The lower sale price on the first transfer reflected that it had been determined that 404 would bear the cost of professional fees, relating to the structuring of the sale to Keolis, of $233,786. In finding that the $233,786 was a deemed dividend received by the taxpayer by operation of s. 84.1(1)(b), Archambault J. stated (at para. 15):

I can understand that in his testimony, the tax consultant whose services the Gaunthier family retained contended that the market value had to be $6,010 [per share] in order to take account of the fact that 404 was to pay the $233,786 in fees. However, in my opinion, it more accurately reflects reality to say that Fiducie transferred 433 shares whose unit market value was $6,550, that the actual selling price of those shares was $2,836,423 (433 × $6550), an amount which, in fact, 404 obtained when it resold the shares to Keolis, and that the consideration given for this market value of $2,836,423 included two elements: a $2,602,637 promissory note, and 404's agreement to pay fees that Fiducie would have had to pay if 404 had not been interposed in the series of transactions carried out to sell the shares in question to Keolis.

An agreement dated October 16, 1998, with an effective date of January 1, 1998, between the taxpayer and shareholder which provided for the purchase by the taxpayer or the shareholder's 99% interest in a partnership, and a January 3, 1998 agreement for the purchase by the taxpayer of the remaining 1% interest in the partnership, were not documents that the taxpayer was now permitted to disavow on the basis that they did not reflect the true state of affairs. The Courts have given short shrift to such taxpayer arguments.

In finding that a transfer by the taxpayer of business assets to a partnership in consideration for partnership units and non-units consideration ("boot") should not be recharacterized as a transfer by the taxpayer solely for boot, notwithstanding that the partnership thereafter indirectly distributed cash to the holding-company shareholders of the taxpayer by subscribing for preferred shares, Bonner J. noted that cases cited to him involving a preference for the supposed substance of transactions over their form were contrary to the approach taken by the Supreme Court of Canada in Shell Canada Ltd. v. The Queen.

An amount paid by the taxpayer that had been labelled a "fee" was found to represent a reduction of indebtedness owing by it to the recipient of the payment given that it was agreed that the payment should be so applied.

Payments made by Canadian franchisees to the taxpayer that were calculated as a mark-up on the value of products sold by the taxpayer to them were found not to be royalties for purposes of s. 212(1)(d) notwithstanding that, in order to avoid the application of the Robinson Patman Act, the franchise agreement provided that the mark-ups "shall be deemed to be considered a license fee charged for the license granted by the Franchise Agreement to Franchisee to use the Proprietary Marks in connection with the Franchisee's operation of an Entré Computer Center at the Center Location".

Before rejecting a submission that the taxpayer had held half of his shares of a private company on a resulting trust for his wife, Bowman TCJ. refer to the complex and sophisticated legal structure that the taxpayer, his wife and their advisors had adopted for holding their business interests and stated (at p. 1039):

"If one knowingly and intentionally adopts one legal structure to achieve a particular fiscal or commercial result it would take far more cogent evidence than I have seen here to permit a taxpayer to discard one portion of that structure when that portion turns out to be fiscally inconvenient."

Before rejecting a submission that the taxpayer should be regarded as having received options on behalf of another person notwithstanding the form of the documents, Bonner J. stated (p. 441):

"Any conclusion as to the substance of a transaction must rest not on words chosen by the parties to describe the transaction or on some loose or imprecise view of what the transaction amounted to. Rather they must rest on the legal nature of the transaction ..."

Before going on to find that an agreement, which was in the form of a lease, in substance was a sale agreement, Brulé J. stated (p.354) that:

"It is evident from the case law that in determining the true character of an agreement between parties, the substance (as opposed to the form) of the agreement is of paramount importance. In assessing the common intent of the parties to a transaction, one must analyze the agreement itself, the language used therein, the purpose and the circumstances surrounding the transaction in their entirety."

After finding that a transaction was in substance a re-allotment of shares rather than their redemption notwithstanding that a resolution referred to the shares being redeemed, Mr. Boisvert referenced (at p. 411) the principle in Granby “that mistaken nomenclature in documents may be ignored if the course of conduct of a taxpayer is consistent throughout with the governing intention… .”

Payments received by the taxpayer which were stipulated to be consideration for his agreement not to engage in the lobster business within two specified counties were found not to be employment income to him pursuant to what now is s. 6(3)(e) because of the words in that provision referring to "irrespective ... [of] the form or legal effect" of the agreement, and on the basis of evidence that the company and the taxpayer were not engaged or even interested in the lobster business and that the covenant was only given in order to make the obligation to make the payments legally enforceable.

The legal effect of a lease and option-purchase agreement entered into the taxpayer was found to be a sale agreement, with the result that "rent" payments received by the taxpayer represented tax-free capital receipts.