Window Dressing

In order that the taxpayer’s RRSP could indirectly invest in operating businesses in which he(and/or tow business colleagues) had a management role, he instigated the formation of various unit trusts (the “Income Funds”) which were intended to be mutual fund trusts on the basis that 171 individuals (the “Investors”) - immediate and extended family members, friends, employees, business associates and others - each subscribed approximately $750 for units of each Income Fund. The taxpayer’s RRSP then invested a large sum (e.g., over $150 million for one of the Income Funds) in subscribing for additional units. The Income Funds invested in underlying LPs carrying on the businesses through an intermediate sub trust and master limited partnership, or more directly.

Smith J sustained assessments of the RRSP under s. 146(10.1) on the basis that the Income Funds did not qualify as mutual fund trusts and, even if they had, their use as “alter egos” for the taxpayer would have been an abuse under GAAR. However, in rejecting CRA arguments based on the “window-dressing” doctrine, he stated (at paras. 402-403):

In the end, although the case law cited above suggests that “window dressing” is “a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayer’s intention for entering into the transaction” (my emphasis), I find that that analysis …is circumscribed by the “economic realities” of the transaction(s) at issue and is limited to an enquiry as to whether “the legal relations were bona fide”: Singleton.

Although the Court has concluded that the Income Funds were not qualified investments for RRSP purposes, and while it certainly finds that the Appellant had ulterior motives in connection with his RRSP, that is not sufficient to reach a finding that the Income Funds were “window dressing”.

Two Florida LLCs of two Florida residents (Pouncy and Vitrano) effectively had a joint venture to provide bussing services to the Olympic organizing committee for the 2010 Vancouver Olympics ("Vanoc"). A third LLC (“Edison”) was formed to provide many of the services. Although the documentation purported to make Edison’s key Canadian employee (Hill) the owner of its shares, Pizzitelli J found (at para. 28) that the purported transfer of shares to Hill was mere “window dressing to hide Pouncey’s involvement in the Appellant before Vanoc.” Accordingly, he rejected the Minister's position that purported fees paid by Edison to Pouncey's company were disgused consideration for Hill's purchase of Edison's shares.

Prior to the introduction of mark-to-market rules in 2007, the taxpayer (which to that point only carried on its life insurance business in Canada) scrambled to achieve a step-up to fair market value in the cost amount of its assets by purporting to commence carrying on business in Bermuda in December 2006.

Pizzitelli J found that the intended Bermuda business did not commence until 2008. In the meantime, there were just a few isolated acts, such as hiring a bookkeeper with essentially nothing to do, entering into a reinsurance contract with an affiliate which was backdated to December 2006, and getting a Bermuda licence which prohibited any business with third parties. This all was "window dressing" (para. 156). Pizzitelli J stated (at para. 158):

[T]he Supreme Court of Canada has distinguished a "sham" from "window dressing", which was recognized in Ludco Enterprises Ltd. v Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62, Backman v Canada, [2001] 1 S.C.R. 367, 2001 SCC 10 and Spire Freezers Ltd. v Canada, [2001] 1 S.C.R. 391, 2001 SCC 11, as a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayer's intention for entering into the transaction.

See summary under s. 138(11.3).