GAAR in the Tax Court After Canada Trustco: A … in the tax court after canada trustco: a...

canadian tax journal / revue fiscale canadienne (2007) vol. 55, no 4, 745 - 76

745

GAAR in the Tax Court After Canada Trustco: A Practitioner’s Guide

Brian Kearl and Bruce Lemons*

P r é c i s

Cet article porte sur l’interprétation et l’application de la règle générale anti-évitement (rgaé) par la Cour canadienne de l’impôt depuis la première incursion de la Cour suprême du Canada dans le débat sur la rgaé dans les arrêts Hypothèques Trustco Canada et Kaulius. Plus précisément, les auteurs ont exploré les arrêts de la Cour canadienne de l’impôt qui ont suivi pour en dégager les tendances émergentes, la constance dans les motifs des juges et les lignes directrices dont peuvent s’inspirer les fiscalistes pour élaborer et mettre en œuvre des stratégies de planification fiscale pour leurs clients.

Cette série de décisions a réservé une surprise, à savoir le degré de succès des contribuables à l’étape de l’ « opération d’évitement » lors de l’application des critères de la rgaé : Evans, Overs, MIL Investments, McMullen et MacKay ont tous été favorables au contribuable à cette étape. Ces arrêts ainsi que l’arrêt Univar montrent une tendance de la Cour canadienne de l’impôt à établir une série de normes prévisibles pour interpréter la rgaé, conformément à la préférence exprimée par la Cour suprême du Canada pour la certitude, la cohérence et la prévisibilité dans l’application de la règle. Cependant, quatre autres jugements—Desmarais, Lipson, CeCo et Copthorne—s’écartent, à des degrés divers, de l’approche directive étroite retenue par la Cour canadienne de l’impôt.

Les auteurs concluent que la Cour canadienne de l’impôt dégage des normes additionnelles d’interprétation de la rgaé qui, selon eux, aideront les fiscalistes à naviguer dans les eaux parfois troubles des stratégies de planification fiscale complexes dans l’environnement postérieur à Hypothèques Trustco.

A b s t r A c t

This article considers the interpretation and application of the general anti-avoidance rule (gaar) by the Tax Court of Canada since the Supreme Court of Canada first waded into the gaar debate in Canada Trustco and Kaulius. More specifically, the authors have mined the post-Canada Trustco decisions of the Tax Court for emerging trends, uniformity in the judges’ decisions, and guidance for tax practitioners in developing and implementing tax plans for their clients.

* BrianKearl,formerlyofOlsonLemonsLLP,Calgary,isataxassociatewithGowlingLafleurHendersonLLP,Calgary;BruceLemonsisataxconsultanttoOlsonLemonsLLP.TheauthorswouldliketothankThomasOlsonofOlsonLemonsLLP,Calgary,forhiscommentsonthisarticle.

746 n canadian tax journal / revue fiscale canadienne (2007) vol. 55, no 4

c o n t e n t s

Introduction 747The general anti-avoidance rule 748The Supreme Court Speaks on gaar 748Tax Court Decisions after Canada Trustco 751

“Tax Benefit” 751Univar 752Copthorne 753Summary 756

“avoidance Transaction” 756evans 757overs 759MIL Investments 760McMullen 761MacKay 763Desmarais 765Copthorne 766

abusive Tax avoidance 767evans 768McMullen 769Desmarais 769Lipson 770CeCo 773Copthorne 774

Conclusion 775addendum 776

one surprise in this series of decisions is the level of success enjoyed by taxpayers at the “avoidance transaction” stage of the gaar test: Evans, Overs, MIL Investments, McMullen, and MacKay were all decided in the taxpayer’s favour at that stage. These cases, along with Univar, show an inclination on the part of the Tax Court to establish a set of predictable standards for the interpretation of gaar, in accordance with the Supreme Court’s preference for certainty, consistency, and predictability in the application of the provision. However, four other decisions—Desmarais, Lipson, CECO, and Copthorne—represent, to differing degrees, a departure by the Tax Court from a narrow guideline approach.

The authors conclude that additional standards of gaar interpretation are emerging in the Tax Court, which, in their view, will assist tax practitioners in the post-Canada Trustco environment in navigating the often uncertain waters of complex tax planning.

Keywords: General anti-avoidance rule n Gaar n statutory interpretation n tax planninG

gaar in the tax court after canada trustco: a practitioner’s guide n 747

[E]veryone in this country is entitled to arrange his or her affairs . . . or his or her company’s affairs to avoid taxes, to minimize the impact of taxes. That is lesson number one in law school and accounting school. Tax avoidance is an expectation on the part of the government and taxpayers are entitled to arrange their affairs accordingly.

TheHonourableJohnMcKay,ParliamentarySecretarytotheMinisterofFinance,HouseofCommons,Debates,December14,2004,2746

intro duc tio n

TheIncomeTaxActcontainsallmannerof“shoalsandtraps,”1makingtaxplan-ninganoftenchallengingtestofpractitioners’navigationalskills.Themostnotableoftheseshoalsandtrapsissection245,commonlyreferredtoasthegeneralanti-avoidanceruleorGAAr.

TheSupremeCourtofCanadahasemphasizedthattheintentionofParliamentinrespectoftheActgenerally,andGAArspecifically,istomaintaincertaintyand/orconsistency, predictability, and fairness.2 In its first two decisions pertaining toGAAr,Canada Trustco3andKaulius,4thecourtrecognizedthattheinterpretationofGAArthatbestrealizesParliament’s intentionisonethat limitsthegeneralanti-avoidanceruletoaprovisionof“lastresort.”5However,thecourtalsorecognizedthattheapplicationofGAArisaninherentlyfactualexercise.6OnemightthereforeexpectthattheapplicationofGAArbythelowercourts,followingCanada Trustco,wouldbesusceptibletosomeuncertainty,inconsistency,andunpredictability,de-spitetheSupremeCourt’sexpressedpreferencetothecontrary.Thishas indeedprovedtobethecase.

ThisarticleexaminestheapplicationofGAArbytheTaxCourtofCanadaincasesdecidedsincetheSupremeCourt’sjudgmentinCanada Trustco.Thisexamin-ationwillshowthattheTaxCourt’sdecisionsinthesecasesaremoreuniformthanitsearlierGAArdecisions;however,thepost-Canada Trustcodecisionsdodemon-strateadegreeofinconsistency.AnumberoftheselaterjudgmentsreflecttheTax

1 Geransky v. The Queen,[2001]2CTC2147,atparagraph42(TCC);andIncomeTaxAct,rSC1985,c.1(5thSupp.),asamended(hereinreferredtoas“theAct”).Unlessotherwisestated,statutoryreferencesinthisarticlearetotheAct.

2 See,inparticular,The Queen v. Canada Trustco Mortgage Co.,[2005]5CTC215,atparagraphs1,12,31,42,50,and61(SCC).Forexample,thecourtstates,atparagraph12,“TheprovisionsoftheIncome Tax Actmustbeinterpretedinordertoachieveconsistency,predictabilityandfairnesssothattaxpayersmaymanagetheiraffairsintelligently”;and,atparagraph31,“DespiteParliament’sintentiontoaddressabusivetaxavoidancebyenactingtheGAAr,Parliamentnonethelessintendedtopreservepredictability,certaintyandfairness.”

3 Supranote2.

4 Subnom.Mathew v. The Queen,[2005]5CTC244(SCC)(hereinreferredtoasKaulius).

5 Canada Trustco,supranote2,atparagraph21.

6 InCanada Trustco,supranote2,thecourthighlightedthefactualnatureofeachstageoftheGAAranalysis—namely,thetaxbenefitinquiry(atparagraph19),theavoidancetransactioninquiry(atparagraph29),andtheabusivetaxavoidanceinquiry(atparagraph44).


Court’sinclinationtoestablishasetofstandardsfortheinterpretationofGAAr,inaccordancewiththeSupremeCourt’semphasisoncertainty,consistency,andpre-dictability.Otherdecisionrepresent,todifferingdegrees,adeparturefromanarrowguidelineapproach.

In any event, it is clear that additional standards of GAAr interpretation areemergingfromtheTaxCourt’srulingsinrecentcases.These,webelieve,willbehelpfultopractitionersinnegotiatingthetechnicalhazardsofcomplextaxplanningfollowingtheSupremeCourt’sdecisioninCanada Trustco.

the Gener A l A nti - Avo idA nce rule

GAAr applies where a taxpayer (1)enjoyed a “tax benefit,” (2)entered into an“avoidancetransaction,”and(3)engagedinabusivetaxavoidance.Alloftheforego-ing“tests”mustbemetbeforeGAArwillapply.

A“taxbenefit,”asdefinedinsubsection245(1),means

areduction,avoidanceordeferraloftaxorotheramountpayableunderthisActoranincreaseinarefundoftaxorotheramountunderthisAct,andincludesareduction,avoidanceordeferraloftaxorotheramountthatwouldbepayableunderthisActbutforataxtreatyoranincreaseinarefundoftaxorotheramountunderthisActasaresultofataxtreaty.

An“avoidancetransaction,”asdefinedinsubsection245(3),meansanytransaction

(a) that,butforthissection,wouldresult,directlyorindirectly,inataxbenefit,unlessthetransactionmayreasonablybeconsideredtohavebeenundertakenorar-rangedprimarilyforbona fidepurposesotherthantoobtainthetaxbenefit;or

(b) thatispartofaseriesoftransactions,whichseries,butforthissection,wouldresult,directlyorindirectly,inataxbenefit,unlessthetransactionmayreasonablybeconsideredtohavebeenundertakenorarrangedprimarilyforbona fidepurposesotherthantoobtainthetaxbenefit.

Under subsection 245(4), abusive tax avoidance exists where the impugnedtransaction(s)wouldresultdirectlyorindirectlyinamisuseoftheprovisionsoftheActoranabuseoftheActreadasawhole.

the suPreme co urt sPe A K s o n G A A r

InCanada Trustco,theSupremeCourtoutlinedtheapproachtobetakenindecidingGAArcases.ThisapproachhasbeenheavilycitedbytheTaxCourtinsubsequentGAArdecisions.7ItwassummarizedinCanada Trustcoasfollows:

7 SeeEvans,infranote18,atparagraph13;McMullen,infranote22,atparagraph32;MacKay,infranote23,atparagraph54;Desmarais,infranote24,atparagraph16;andCopthorne,infranote27,atparagraph26.


1. ThreerequirementsmustbeestablishedtopermitapplicationoftheGAAr:

(1) Ataxbenefitresultingfromatransactionorpartofaseriesoftrans-actions(s.245(1)and(2));

(2) thatthetransactionisanavoidance transactioninthesensethatitcannotbesaidtohavebeenreasonablyundertakenorarrangedprimarilyforabona fidepurposeotherthantoobtainataxbenefit;and

(3) thattherewasabusive tax avoidanceinthesensethatitcannotbereason-ablyconcludedthatataxbenefitwouldbeconsistentwiththeobject,spiritorpurposeoftheprovisionsrelieduponbythetaxpayer.

2. Theburden ison the taxpayer to refute (1) and (2), andon theMinister toestablish(3).

3. Iftheexistenceofabusivetaxavoidanceisunclear,thebenefitofthedoubtgoestothetaxpayer.

4. Thecourtsproceedbyconductingaunifiedtextual,contextualandpurposiveanalysisoftheprovisionsgivingrisetothetaxbenefitinordertodeterminewhytheywereputinplaceandwhythebenefitwasconferred.ThegoalistoarriveatapurposiveinterpretationthatisharmoniouswiththeprovisionsoftheActthatconferthetaxbenefit,readinthecontextofthewholeAct.

5. Whetherthetransactionsweremotivatedbyanyeconomic,commercial,familyorothernon-taxpurposemayformpartof thefactualcontext that thecourtsmayconsiderintheanalysisofabusivetaxavoidanceallegationsunders.245(4).However,anyfindinginthisrespectwouldformonlyonepartoftheunderlyingfactsofacase,andwouldbeinsufficientbyitselftoestablishabusivetaxavoidance.Thecentralissueis theproper interpretationof the relevantprovisions in lightof their context andpurpose.

6. Abusivetaxavoidancemaybefoundwheretherelationshipsandtransactionsasexpressed in the relevant documentation lack a proper basis relative to the object,spiritorpurposeoftheprovisionsthatarepurportedtoconferthetaxbenefit,orwheretheyarewhollydissimilartotherelationshipsortransactionsthatarecontemplatedbytheprovisions.

7. Where the Tax Court judge has proceeded on a proper construction of theprovisionsoftheIncome Tax Actandonfindingssupportedbytheevidence,appellatetribunalsshouldnotinterfere,absentapalpableandoverridingerror.8

InapplyingGAAr, theSupremeCourtrecognizedandreaffirmedtheDuke of Westminsterprinciplethattaxpayersareentitledtoarrangetheiraffairstominimizetheirtaxes,9withonlyaslightmodificationforGAAr.TheHonourableJohnMcKay(quotedintheepigraphtothisarticle)wasmerelyrestatingthisprinciplein21st-century termswhenhesaid,“Taxavoidance isanexpectationonthepartof thegovernmentandtaxpayersareentitledtoarrangetheiraffairsaccordingly.”


9 Inland Revenue Commissioners v. Westminster (Duke),[1936]AC1(HL).


Insupportofthetax-minimizationpolicyoftheAct,theSupremeCourtchar-acterizedGAArasaprovisionof“lastresort,”10notedthatitcanbeappliedonlywhere“theabusivenatureofthetransactionisclear,”11andmandatedthatanydoubtastotheapplicationofGAAristoberesolvedinfavourofthetaxpayer.12Thecourtexplainedtherationalefortheseconditionsasfollows:

Thetaxpayer,onceheorshehasshowncompliancewiththewordingofaprovision,should not be required to disprove that he or she has thereby violated the object,spiritorpurposeoftheprovision.ItisfortheMinisterwhoseekstorelyontheGAArtoidentifytheobject,spiritorpurposeoftheprovisionsthatareclaimedtohavebeenfrustratedordefeated,whentheprovisionsoftheActareinterpretedinatextual,con-textualandpurposivemanner.TheMinisterisinabetterpositionthanthetaxpayertomakesubmissionsonlegislativeintentwithaviewtointerpretingtheprovisionsharmoniouslywithinthebroaderstatutoryschemethatisrelevanttothetransactionatissue.13

Furthermore,asnotedabove,theSupremeCourtrecognizedthatthepolicyoftheActgenerally,andGAArspecifically,istoensurecertainty,consistency,predict-ability,andfairnessfortaxpayersastheyarrangetheiraffairs.Again,thefollowingstatementshighlightthecourt’srationaleforendorsingthesepolicyobjectives:

WhereParliamenthasspecifiedpreciselywhatconditionsmustbesatisfiedtoachieveaparticularresult,itisreasonabletoassumethatParliamentintendedthattaxpayerswouldrelyonsuchprovisionstoachievetheresulttheyprescribe....

It would introduce intolerable uncertainty into the Income Tax Act if clearlanguage in a detailed provision of the Act were to be qualified by un-expressedexceptionsderivedfromacourt’sviewoftheobjectandpurposeoftheprovision.14

ParliamentintendstaxpayerstotakefulladvantageoftheprovisionsoftheIncome Tax Actthatconfertaxbenefits.Indeed,achievingthevariouspoliciesthattheIncome Tax Actseekstopromoteisdependentontaxpayersdoingso.15

ThecourtthereforechosetolimitthescopeandapplicationofGAArinthreeways:(1)bylimitingtheapplicationofGAArtotheclearestofcases,ratherthanthoseinwhichanabuseismoreprobablethannot;(2)byresolvinganydoubtinfavour


11 Ibid.,atparagraph50.

12 Ibid.,atparagraph66,item3.


14 Ibid.,atparagraphs11-12,quotingIacobucciJin65302 British Columbia Ltd. v. Canada,[1999]3SCr804,atparagraph51.

15 Canada Trustco,supranote2,at31.


ofthetaxpayer,ratherthanbymerelyapplyingatestofreasonableness;and(3)byrequiringtheministertoestablishabusivetaxavoidance,ratherthanrequiringthetaxpayertodisprovetheminister’sallegation.Logically,thecourt’sapproachmakesitmorelikelythatcertainty,consistency,predictability,andfairnesswillbeachieved.

tA x co urt decisio ns A f ter c A n A dA trus tco

GiventheSupremeCourt’sstatedpreferencethatalargemeasureofdeferencebeaccordedtotheTaxCourt’sdecisionsonGAAr,16andgiventhattheapplicationofGAArisaninherentlyfactualexercise,17onewouldexpectatleastsomeinconsistencyandunpredictabilityinthedecisionsoftheTaxCourtinapost-Canada Trustcoworld.SinceCanada Trustco,theTaxCourthasconsideredtheapplicationofGAArin10cases.Ofthesecases,Evans,18Overs,19Univar,20MIL Investments,21McMullen,22andMacKay23seemtoshowtheTaxCourt’swillingnesstolimitthescopeandapplicationofGAArinaccordancewiththepoliciesunderlyingCanada Trustco.Unfortunately,Desmarais,24Lipson,25CECO,26andCopthorne27representadeparturefromthistrendandevidenceamuchmoreintrusiveinterpretationofGAArthanonewouldhavethoughttheSupremeCourtmandated.

Howeveroneviewsthesecases,theydorevealcertainimportantprinciplesthatwillclearlyassisttaxpractitionersindevelopingGAAr-resistanttaxplans.

“Tax Benefit”

With respect to the existence of a “tax benefit,” the Supreme Court in Canada Trustcostated:

Ifadeductionagainsttaxableincomeisclaimed,theexistenceofataxbenefitisclear,sinceadeductionresultsinareductionoftax.Insomeotherinstances,itmaybethat

16 Ibid.,atparagraph66,item7.

17 Seesupranote6.

18 Evans v. The Queen,[2006]2CTC2009(TCC).

19 Overs v. The Queen,[2006]3CTC2255(TCC).

20 Univar Canada Ltd. v. The Queen,[2006]1CTC2308(TCC).

21 MIL (Investments) SA v. The Queen,[2006]5CTC2552(TCC).

22 McMullen v. The Queen,[2007]2CTC2463(TCC).

23 MacKay et al. v. The Queen,2007DTC425(TCC).TheministerhasappealedthisdecisiontotheFederalCourtofAppeal.

24 Desmarais v. The Queen,[2006]3CTC2304(TCC).

25 Lipson v. The Queen,[2006]3CTC2494(TCC);aff ’d.[2007]3CTC100(FCA);leavetoappealtotheSupremeCourtofCanadagranted,SCCfileno.32041(andSCCfileno.34042forthecompanioncaseJordan B. Lipson v. The Queen).

26 CECO Operations Ltd. v. The Queen,[2006]5CTC2174(TCC).

27 Copthorne Holdings Ltd. v. The Queen,2007TCC481.


theexistenceofataxbenefitcanonlybeestablishedbycomparisonwithanalternativearrangement.28

Ofthe10GAArcasessubsequentlydecidedbytheTaxCourt,onlyinUnivarandCopthornehasthecourtbeenrequiredtoundertakeathoroughanalysisoftheexist-enceofataxbenefit.

Univar29

InUnivar,theappellant,awhollyownedsubsidiaryofaUS-residentcorporation(“UC”),useditsexcesscashandproceedsfromaloantocapitalizeaBarbadosforeignaffiliate(“Barbadosco”).Barbadoscothenusedthesefundstoacquirecertaininter-corporatedebtobligationsheldbyothermembersoftheUnivarcorporategroup—inparticular,debtowedtoUCbyitsEuropeansubsidiary(“UE”).AsaresidentofBarbados,theforeignaffiliateofUnivarwassubjecttoarelativelylowrateofcor-poratetaxonitsincomefromtheseintercorporatedebtobligations.Also,becauseBarbadosisatreatycountry,forCanadiantaxpurposes,theforeignaffiliate’sincomewasconsideredtobeincomefromanactivebusiness.Therefore,allthedividendspaidbyBarbadoscotoUnivarwerefromexemptsurplusandentitledUnivartoadeductionpursuanttoparagraph113(1)(a).

Univarasserted,andthecourtseemedtoagree,thatthepurposesofthesetrans-actionswereasfollows:(1)toadequatelyleverageUnivarandutilizeitsexcesscashreserves;(2) tomaximizeUnivar’srateofreturnonitsexcesscashreservesandthefundsfromitsdebtobligations;(3)toremovecertainintercorporatedebtobliga-tionsfromothermembersoftheUnivarcorporategroup;and(4)toresolvecertainUSincometaxissuesapplicabletotheUnivarcorporategroup.

AlloftheseobjectivesweresatisfiedbytheseriesoftransactionsenteredintobyUnivar.BellJacceptedUnivar’sargumentthatinthecircumstancestheseobjectivescouldnothavebeenachievedbyhavingUnivaracquiretheintercorporatedebtobli-gationsdirectly:

[T]heevidenceofPruitt,LundbergandTolewasclearthatnoconsiderationwasevergiven to theAppellantacquiring thenotes receivable itselfbecause thatwouldnothaveresolvedanyproblem.30

Onthebasisofthisfindingoffact,BellJdeniedtheminister’sattempttoestablishataxbenefitbywayofcomparingthedifferenttaxconsequencesthatwouldhaveresultediftheintercorporatedebthadbeenacquiredbyUnivarinsteadoftheforeignaffiliate.BellJrightlydeterminedthatbecausedirectacquisitionoftheintercorpor-atedebtbyUnivarwasneveranoption,itwasnotaproperalternativetransactiontoconsider:


29 Supranote20.



Throughouttheappeal,therespondent’scross-examinationofPruitt,LundbergandToleandtherespondent’ssubmissionsclungtothehypotheticalsituationoftheAp-pellanthavingacquiredthedebtowingbyUEtoUCasan“alternativearrangement.”EachofPruitt,LundbergandTolewere,withoutdoubt,credible....Theevidenceofallthree...witnesseswasclearthattherewasneveranyintentforUnivartoacquirethedebtand,infact,Univardidnotacquirethatdebt.ItwasacquiredbyBarbadoscowithmoniesusedbyUnivartosubscribeforsharesofBarbadosco.31

Noting that “the respondent’s case... is built solely upon the hypotheticalpremisethatthedebtofUEtoUCwaspurchasedbyUnivar,notbyBarbadosco,”32BellJrejectedtheminister’sattempttorecharacterizetheactualtransactionsen-teredintobyUnivarinordertoestablishataxbenefit:

Therespondentclearlycannotrecharacterizewhat, in fact,happened inassumingthat theAppellantpurchasedtheaforesaidnotes.That is simplynot inaccordancewiththeevidenceofthreecrediblewitnessesfortheAppellant.Theattemptedrechar-acterizationisnotanappropriatealternativearrangementtoestablishtaxotherwisepayable.33

BellJwentontoholdthatUnivardidnotenjoyataxbenefit:

Theonlyalternatearrangementthatcanbeconsideredisthepossibilityoftheallegedavoidancetransactionnothavingoccurred.HadthesharesofBarbadosconotbeenac-quired by the Appellant, there would be no tax otherwise payable which could beavoided,reducedordeferred.TheacquisitionofsuchsharesbytheAppellantdoesnotchangethat.34

Inlightoftheforegoing,wecanconcludethatiftheministerattemptstoes-tablishataxbenefitbyrecharacterizingtheactualtransactionassomealternativearrangement,35thealternativearrangementmustbecapableofaccomplishingalloftheobjectivesofthetaxpayer.Iftheminister’sproposedarrangementwouldnotachieve all of the taxpayer’s objectives, it cannot be the basis for a tax benefitchallenge.

Copthorne36

ThefactsinCopthornearemesmerizinglycomplex,evenforataxcase,anditishaz-ardoustosummarizethem.Nevertheless,wemustattempttodoso—ordoublethesizeofthisarticle.





35 SeeCanada Trustco,supranote2,atparagraph20.

36 Supranote27.


Copthorneisataleoftwochainsofcorporations,bothownedbynon-residentsofCanada(“theLifamily”).Inoneofthechains(“chain1”),aCanadiansubsidiary(“CopthorneI”)ofaforeigncorporation(“BigCity”)soldahotelin1989atasub-stantialgain(“the1989gain”).BecauseCopthorneIhadpaid-upcapital(PUC)ofonly$1,thedistributionoftheproceedsfromthesaleofthehotelwouldhaveresultedinwithholdingtax.Apparentlyforthisreason,CopthorneIinvestedtheproceedsinaforeignsubsidiary(“COIL”)thattradedbondsoffshore.Undertheprovisionsof theAct then ineffect, thegains fromthe tradingactivitywerenot taxable inCanada.

Intheotherchainofcorporations(“chain2”),theLifamilyinvestedover$96millioninaCanadiancompany(“vHHCInvestments”),resultinginover$96millionofPUC.vHHCInvestmentsinturninvestedover$67millioninasubsidiary(“vHHCHoldings”),resultinginover$67millionofPUCwithrespecttovHHCHoldings.(This“doublingup”ofPUCforthesameinvestedfundsdroppeddownintoasubsidi-aryisnotunusual;itisaconsequenceoftheoperationofthedefinitionof“paidupcapital”insubsection89(1).)vHHCHoldingsthenorganizedasubsidiary(“vHSUB”).vHSUBtradedprincipallyinasinglestockthatresultedinsignificantcapitallosses.Allofthesetransactionsoccurredafterthe1989gainaroseand,apparently,wereunrelatedtotheactivitythatoccurredinchain1.

In1992,inanefforttoutilizethecapitallossesaccruedinvHSUBagainstthe1989gainrealizedbyCopthorneI,andtosimplifythecorporatestructure,vHHCInvestmentssolditsinterestinvHHCHoldingstoCopthorneIfor$1,000.WhilethefairmarketvalueofthesharesinvHHCHoldingswasonly$1,000,thePUCintheseshares(asnoted)totalledover$67million.

In1993,CopthorneIsolditssharesinvHHCHoldingstoBigCityfor$1,000(“the1993sharesale”).Asaresult,BigCitywasnowtheparentofbothCopthorneIand vHHC Holdings. The shares of vHHC Holdings had a fair market value of$1,000andPUCofover$67million.

In1994,BigCitycausedCopthorneIandvHHCHoldings(alongwithtwootherCanadiancorporations)tobeamalgamatedintoCopthorneHoldingsLtd.(“Cop-thorneII”).Thiscompletedthefirstseriesoftransactionsatissueinthecase.

TheeffectoftheamalgamationresultinginCopthorneIIwasthatthecapitallossinvHHCHoldingscouldbecarriedbackandappliedagainstthe1989gainrealizedbyCopthorneI.Furthermore,becausethereorganizationresultinginCopthorneIIwasahorizontal(notvertical)amalgamation,BigCity’sPUCinCopthorneIIwasequalto$1inrespectofitssharesinCopthorneIandover$67millioninrespectofitssharesinvHHCHoldings.IftheamalgamationhadoccurredwhenCopthorneIownedvHHCHoldings,the$67millionofPUCinthevHHCHoldingsshareswouldhavebeeneliminated.

In1994,andsubsequenttotheamalgamationresultinginCopthorneII,theDe-partmentofFinancereleaseditsrevisionstotheforeignaccrualpropertyincome(FAPI)rules.TheeffectoftheserevisionswasthattheinvestmentincomeearnedinCOILwouldnowbeconsideredFAPIandbetaxableinCanada.TheLifamilythereforedecidedtodisposeoftheirinvestmentinCOILandmovetheproceedsofdisposition


outsideCanada.ThefamilyalsodecidedtofurthersimplifytheirCanadianhold-ingsandconsolidatetheirCanadianinvestments.

Attheendof1994,thesharesinvHHCInvestments(theCanadianparentcom-panyofchain2)weretransferredtoL.F.Investments,anewBarbadoscorporationownedbytheLifamily.BigCity(theforeignparentcompanyofchain1)alsosolditsinterestinCopthorneIItoL.F.Investments.Asaresult,L.F.InvestmentsnowownedallofthesharesinCopthorneII,withitsPUCofover$67million,andallofthesharesinvHHCInvestments,withitsPUCofover$96million.Itisimportanttorememberthatthesamecontributionthatgaverisetothe$96millionofPUCwithrespecttovHHCInvestmentsalsogaverisetothe$67millionofPUCrelativetoCopthorneII,thesuccessortovHHCHoldings.

Atthebeginningof1995,CopthorneIIandvHHCInvestments(andtwootherCanadiancorporations)wereamalgamatedintoCopthorneHoldingsLtd.(“Cop-thorneIII”). Immediately following this amalgamation, CopthorneIII redeemedapproximately70percentofitssharesheldbyL.F.Investmentsforover$142mil-lion.BecausetheaggregatePUCofthesharesinCopthorneIIIwasover$164million(ascomputedbytheappellant),CopthorneIIIdidnotwithholdanytaxunderpartxIIIoftheAct.Thiscompletedthesecondseriesoftransactionsatissueinthecase.

Later,in2002,CopthorneIIIamalgamatedwithfiveothercompaniesintoCop-thorneHoldingsLtd.(“CopthorneIv”),theappellant.

Takingexceptiontotheresultsoftheforegoingtransactions,theministerre-assessedCopthorneIvandleviedwithholdingtaxinrespectoftheredemptionproceeds($142million)inexcessofthePUCattributabletovHHCInvestments($96million).Theministeralsoapplieda10percentwithholdingtaxpenaltyagainstCopthorneIvforfailingtowithholdandremitthepartxIIItax.

Theminister’sreassessmentwasbasedonGAAr.Accordingtotheminister,theapplicable tax benefit was the avoidance of the withholding tax. The avoidancetransactionwasthe1993sharesaleofvHHCHoldingstoBigCity.TheabusivetaxavoidancewasthemisuseofthePUCcalculationprovisionsoftheAct.

InthedecisionoftheTaxCourt,significantly,CampbellJdidnotclaimthattheproblemwasthattheLifamilyhadcausedthevHHCInvestmentschainofcorpora-tions(chain2)to“manufacture”PUCthroughtheestablishmentofasubsidiaryforthepurposeofbeingabletoextractearningsoffshoreinchain1.Giventhetemporaldisconnectbetweenthe1989gainandtheformationandestablishmentofvHHCInvestmentsanditssubsidiaries,thiswasacorrectapproach.

WhileCampbellJrecognizedthat“neitherthe1993ShareSale,northepreser-vationofPUCresultedinadirectreduction,avoidanceordeferraloftaxin1993,”37sheneverthelessfoundthatCopthorneIvenjoyedataxbenefit.Takingthe“alterna-tivearrangement” route,CampbellJdetermined thathad the1993 share saleofvHHCHoldingstoBigCitynotoccurred,thePUCof$67millioninthesharesinvHHCHoldingswouldhavebeeneliminatedinanamalgamationwithCopthorneIand



wouldnothavebeenultimatelyavailablefortax-freedistributiontoL.F.InvestmentsbyCopthorneIII.

UnlessCopthorneIvhadreasonsforenteringintothefirstseriesoftransactionsother than loss utilization and corporate structure simplification, both of whichcould have been achieved without the 1993 share sale, CampbellJ’s alternativetransactionanalysishereislikelycorrect.

SummaryInrespectofmosttaxplans,theexistenceofataxbenefitwillbeclear.Asaresultofthetaxplan,therewillvirtuallyalwaysbeareduction,avoidance,ordeferraloftaxes.However,wheretheministercannotfindanexplicittaxbenefitandattemptstoes-tablishataxbenefitbywayofanalternativearrangement(astheministerisentitledtodo),theexistenceofataxbenefitwillnotbesocertain.

InUnivar,theappellantwassuccessfulindemolishingtheminister’sassumptionof a tax benefit because the minister’s alternative arrangement would not haveachievedUnivar’sobjectivesinenteringintotheimpugnedtransactions.Conversely,inCopthorne,theappellantwasunsuccessfulatthetaxbenefitstageoftheGAAranalysis because the minister’s alternative arrangement apparently would haveachievedallofCopthorneIv’sobjectivesinrespectoftheimpugnedtransactions.

Intherarecaseinwhichnocleartaxbenefitwouldarisefromatransactionorseriesoftransactions,buttheintendedarrangementmayneverthelessbesusceptibletoaGAArchallenge,taxpractitionersshouldthoroughlyanalyzeanypotentialal-ternativearrangementstodeterminewhetherallofthetaxpayer’sobjectiveswouldbemetorsatisfiedifsuchalternativearrangementswerecompletedinsteadoftheimpugnedtransactions.Itisalsogoodpractice—notonlyinsuchcasesbutgeneral-ly—for taxadvisers todocumentall thebonafideobjectivesandreasons for theproposedtransactions,inordertoestablishthebasisforundertakingthosetrans-actions, to eliminatepotential alternative arrangement arguments, and to fortifyavoidancetransactiondefences,ifrequired.

“Avoidance Transaction”

Onthequestionofwhetherataxpayeremployedan“avoidancetransaction,”theSupremeCourtinCanada Trustcostated:

Accordingtos.245(3),theGAArdoesnotapplytoatransactionthat“mayreasonablybeconsideredtohavebeenundertakenorarrangedprimarilyforbona fidepurposesotherthantoobtainthetaxbenefit.”Iftherearebothtaxandnon-taxpurposestoatransaction,itmustbedeterminedwhetheritwasreasonabletoconcludethatthenon-taxpurposewasprimary.Ifso,theGAArcannotbeappliedtodenythetaxbenefit.38

Theexpression“non-taxpurpose”hasabroaderscopethantheexpression“businesspurpose.”Forexample,transactionsthatmayreasonablybeconsideredtohavebeen



undertakenorarrangedprimarilyforfamilyorinvestmentpurposeswouldbeimmunefromtheGAArunders.245(3).Section245(3)doesnotpurporttoprotectonlytrans-actionsthathavearealbusinesspurpose.Parliamentwantedmanyschemesthatdonothaveanybusinesspurposetoendure....

Ifatleastonetransactioninaseriesoftransactionsisan“avoidancetransaction,”thenthetaxbenefitthatresultsfromtheseriesmaybedeniedundertheGAAr.Thisisapparentfromthewordingofs.245(3).Conversely,ifeachtransactioninaserieswascarriedoutprimarilyforbona fidenon-taxpurposes,theGAArcannotbeappliedtodenyataxbenefit.39

SubsequenttoCanada Trustco,theTaxCourthasbeenextremelyactiveininter-preting,refining,andapplyingsubsection245(3).TaxpayershavesuccessfullydefeatedGAArattacksat theavoidance transaction stage inEvans,Overs,MIL Investments,McMullen,andMacKay.Furthermore, inUnivar,wherethecourt foundthatthetaxpayerdidnotenjoyataxbenefit,BellJstatedthatifhehadalsobeenrequiredtoaddresstheavoidancetransactionquestion,hewouldhaveheldthatnoneexisted.40

Evans 41

InEvans,theappellantmaintainedthattheprimary,non-taxpurposeofthetrans-actionsenteredintowastotransferwealthtothreeofhischildren.42Tothatend,theappellant(Dr.Evans)soldapproximately$500,000worthofsharesinanoper-atingcorporationtoapartnershipformedbyhisspouseandthreeofhischildren.Dr.Evansclaimedacapitalgainsdeductiontoshelterthecapitalgainrealizedonthesaleoftheshares.

Thepartnershippurchasedtheshareswithdebt,evidencedbyapromissorynoteissuedtoDr.Evans.Thepartnershipmadeinterestandprincipalpaymentsonthisnotewithproceedsthatitreceivedfromdeclareddividendsonthesharesandonshare redemptions. The members of the partnership included this dividend anddeemeddividendincomeintheirtaxableincomeintheappropriateyearsandalsoclaimedtheirrespectivesharesoftheinterestexpenseincurredonthenote.Dr.Evansreportedtheinterestincomethathereceivedonthenoteinhisincometaxreturn.

TheeffectofthesetransactionswastoshiftdividendincomefromDr.Evans,ahigh-tax-brackettaxpayer,tohischildren,whopaidlittleornotaxonthedividendincome,whileDr.Evans’scapitalgainwasshelteredbyhiscapitalgainsdeduction.

39 Ibid.,atparagraphs33-34.

40 Supranote20,atparagraph48.

41 Supranote18.

42 Accordingtofactsadmittedbytheminister,thispurposewasachievedtotheextentof$50,000bytheendof1998.Althoughthisfactwasadmitted,bothatdiscoveryandinthepartialstatementofagreedfacts(paragraph49)appendedtothedecision,thecourtmistakenlyfoundthatnowealthhadbeentransferred:Evans,supranote18,atparagraph19.Notethatthetaxationyearsinissue(1997through1999)precededtheintroductionofsection120.4,whichspecificallytargetedincome-splittingarrangementssuchasthatdisputedintheEvanscase.


TheministerarguedthattheresultofthetransactionswasessentiallytoallowDr.Evanstostripsurplusoutofthecorporation,analogoustoRMM43andMcNichol.44However,BowmanCJagreedwithcounselforDr.Evans,45thatRMMandMcNicholweredistinguishableonboth factual and legalgrounds, and that the transactionconstituted a legally permissible form of income splitting,46 rather than surplusstripping.

BowmanCJdeterminedthatthe“avoidancetransaction”partofGAArhadnotbeenestablishedbecausetheoverallpurposeofthetransactionswasnotprimarilytax-motivated,thoughthemethodofachievingthatpurposewastax-effective.47Hestated:

IfindasamatteroffactthattheprimarypurposeoftheseriesoftransactionswithwhichweareconcernedherewastoputthecorporatefundsinDr.Evans’hands.Themethodchosenwasonedesignedtoenablehimtodosoattheleasttaxcost.Iempha-sizethewordsoftheExplanatoryNotesadoptedbytheSupremeCourtofCanadainparagraph30ofCanada Trustco:

Subsection245(3)doesnotpermitthe“recharacterization”ofatransactionforthepurposesofdeterminingwhetherornotitisanavoidancetransaction.Inotherwords,itdoesnotpermitatransactiontobeconsideredtobeanavoid-ancetransactionbecausesomealternativetransactionthatmighthaveachievedanequivalentresultwouldhaveresultedinhighertaxes.

ThisiswhatIthinktheCrownisdoinghere.48

Taxpractitioners,whendevisingandimplementingtaxplans,mustnotneglectthecommercial,business,family,investment,orothernon-taxpurposesoftheplan.Whereataxplanhasanoverallnon-taxpurpose,andthatpurposeissolidifiedandsupportedbydocumentationthatfollowstheplanandbythebehaviouroftheplanparticipants,Evansmaybecitedinrebuttaltotheminister’savoidancetransactionposition.49

43 RMM Canadian Enterprises Inc. v. The Queen,[1998]1CTC2300(TCC).

44 McNichol v. The Queen,[1997]2CTC2088(TCC).

45 Evans,supranote18,atparagraph34.

46 Neuman v. The Queen,[1998]3CTC177,atparagraph35(SCC):“Infact,‘thereisnogeneralschemetopreventincomesplitting’intheITA(v.KrishnaandJ.A.vanDuzer,‘CorporateShareCapitalStructuresandIncomeSplitting:McClurg v. Canada’(1992-93),21Can. Bus. L.J.335,atp.367).”

47 Evans,supranote18,atparagraph20.

48 Ibid.,atparagraphs22-23.

49 Ibid.BowmanCJcommented(atparagraph3)onthe“complexityandthehighleveloftaxsophistication”ofthetaxplanand(atparagraph11)onits“carefully,indeedmeticulously,executed”implementation.TheclearimplicationisthatthevictoryforthetaxpayerinEvansisattributable,inpart,tothedocumentationthatfollowedtheplanandtheimplementationofallthenecessarystepsoftheplan.


Overs50

InOvers,theappellantsoldsomeofhissharesinacloselyheldcorporationtohisspouse.Inordertopayfortheshares,thespousesecuredaloanfromabank.Thisloanwasguaranteedbythecorporation.Theappellant(Overs)usedtheproceedsfromthesharesaletopayoffanoutstandingshareholderloanwiththecorporationinordertoavoidashareholderbenefitincomeinclusionpursuanttosubsection15(2).Thecorporationinturnusedtheproceedsfromtheshareholderloantoacquirecertaininvestmentsfromthesamebankthatprovidedtheloantothespouse,apply-ingtheseinvestmentsaspartialsecurityagainstitsguaranteeobligationsinrespectofthespouse’sloan.

Whenthesharesweretransferred,Oversandhisspousedidnotmaketheelec-tioninrespectoftherolloveravailableundersubsection73(1).Asaresult,Overswasnotrequiredtoincludeinhisincomeanycapitalgainrealizedonthedisposi-tion.However,anysubsequentincomeorlossattributabletotheshareswouldbeallocatedtohimpursuanttosubsection74.1(1).Consequently,followingthetrans-fer,Oversreportedasincomealldividendsreceivedbyhisspouseontheshares.Oversalsoclaimeddeductionsforinterestpaidontheloanandallguaranteefeespaidtothecorporation.

TheministerdisallowedthedeductionoftheinterestandguaranteefeesclaimedbyOvers,relyingonGAArinsupportofthereassessments.Theministertooktheposition thatOvers enjoyed three separate taxbenefits from the seriesof trans-actions.ThefirsttaxbenefitwastheavoidanceoftheshareholderbenefitincomeinclusionwhenOverspaidoffhisshareholderloanjustpriortothecorporation’sfiscalyear-end.ThesecondtaxbenefitwastheavoidanceoftherecognitionofacapitalgainonthedispositionoftheshareswhenOversandhisspousechosenottoelectoutofsubsection73(1).Thethirdtaxbenefitwasthereductionoftaxasaresultoftheoperationofthespousalattributionrulesinsubsection74.1(1),wherebytheinterestandguaranteefeespaidbyOvers’sspousewereattributedbacktoOvers.

WhilefindingthatOversdidreceiveataxbenefitbecausehe“claimedadeductionagainsttaxableincome,”LittleJdeterminedthathedidnotengageinanavoidancetransactioninrespectofthisoranyothertaxbenefit,becausehemerely“followedtherules”insubsections15(2),73(1),and74.1(1).51

InsupportoftheprinciplethatatransactioncanbeimmunizedagainstGAArby“following the rules,” referencemaybemade to this statementby theSupremeCourtinCanada Trustco:

WhereParliamenthasspecifiedpreciselywhatconditionsmustbesatisfiedtoachieveaparticularresult,itisreasonabletoassumethatParliamentintendedthattaxpayerswouldrelyonsuchprovisionstoachievetheresulttheyprescribe.52

50 Supranote19.




Followingthisprinciple,BowmanCJinEvansnotedthattheprovisionsrelieduponbytheappellant“wereusedfortheverypurposeforwhichtheyareintheAct.”53As a result, in respect of whether there was abusive tax avoidance, BowmanCJconcluded:

IdonotthinkthatitcanbesaidthatthereisanabuseoftheprovisionsoftheActwhereeachsectionoperatesexactlythewayitissupposedto.TheCrown’spositionseemstobepredicatedontheviewthatsinceeverythingworkedlikeclockworktheremusthavebeenanabuse.Theanswertothispositionis,ofcourse,thatifeverythinghadnotworkedlikeclockworkwewouldnotbehere.54

In lightof the foregoing, it seemsclear that relianceon specificanddetailedprovisionsoftheActmakesGAArattacksmuchlesslikely.Inotherwords,wheretaxpayers “follow the rules,” relyingonprovisions that “specif[y]preciselywhatconditionsmustbesatisfied”andusingthoseprovisions“fortheverypurposeforwhichtheyareintheAct,”suchthat“eachsectionoperatesexactlythewayit issupposedto,”theyareentitledtotheprescribedresultsofthoseprovisions.

MIL Investments55

InMIL Investments,theappellant(“MIL”)wasaCaymanIslandsholdingcompanyincorporatedbyaCanadianresident,Jean-raymondBouille.Takingadvantageofthetaxdeferralavailableundersection85,Bouilletransferredhissharesinapub-liclytradedminingcompany(“DFr”)toMIL.Asaresult,MILbecamea30percentminorityshareholderinDFr.

DFrdiscoveredapromisingminingprospectinvoisey’sBay,androlleditintoasubsidiarycompany(“vBNC”).Subsequently,IncoLimitedacquireda25percentinterestinvBNCandsomesharesinDFr.MILthentransferredsomeofitssharesinDFrtoIncoinexchangeforIncoshares,obtainingataxdeferralundersection85.1.Followingthetransfer,MILwascontinuedintoLuxembourg,ataxtreatycountrywithfavourablecapitalgains tax treatment.Shortly thereafter,MILsoldallof itsIncosharesandrealizeda$65millioncapitalgainthatwasexemptfromtaxundertheCanada-Luxembourgtaxtreaty.Amonthlater,MILsoldsomeofitssharesinDFrandrealizeda$4.5millioncapitalgainthatwasalsoexemptfromtaxpursuanttotherelevanttaxtreaty.

Thefollowingyear,oneofDFr’skeyofficersdied.Untilthen,themanagementandshareholdersofDFrhadresistedtakeoverattemptsandoffers,butinlightofthisunexpectedloss,theyagreedtoconsidertakeoveroptions.



55 Supranote21.


IncoproposedtoacquirealloftheDFrshares.Theproposalwasaccepted,andMILsolditsremainingDFrsharestoInco,realizinga$425millioncapitalgainandagainclaimingexemptionfromtaxundertheCanada-Luxembourgtaxtreaty.WhiletheministerdidnotreassessMILinrespectofits$65millionand$4.5millioncapitalgains,itdidreassessMILinrespectofthe$425millioncapitalgain,relyingonGAArtodenythetreatyexemption.

BellJrejectedtheminister’sargumentsattheavoidancetransactionstageoftheGAAranalysis.BellJacceptedMIL’ssubmissionsthatthepurposeofthesaleofitsIncoshareswastoallowBouilletopayoffhisdebts,andfurthermore,thattherea-sonforMIL’scontinuance intoLuxembourgwasthatLuxembourgrepresentedabetterbaseofoperationsfromwhichtoconductitsminingoperations.

BellJwentontofind,inrespectoftheimpugnedtransactions,that“the‘how’issubordinate to the ‘why’”56 indeterminingwhether there is anavoidance trans-action.Inotherwords,wheretheoverallpurposeof the impugnedtransactions(the“why”)isabonafidenon-taxpurpose,theuseoftax-efficienttransactions(the“how”) to implement thispurpose is acceptable.For this reason, “theAppellanthavinghadabona fidecommercialreasonforselling,itwasopentoseektaxadvicerespectingtheappropriatestructureforconcludingthatSale.”57BellJ’sreasoningisconsistentwiththatofBowmanCJinEvans.

Anappealof thisdecisionbytheministerhasrecentlybeendismissedbytheFederalCourtofAppeal.58TheCourtofAppealrefusedtooverturnBellJ’sfindinginrespectofwhethertherewasanavoidancetransaction,andalsodeterminedthatafindingofabusivetaxavoidancewasunwarranted.

As can be seen from both MIL Investments and Evans, a trend appears to beemerginginrespectofwhatconstitutesanavoidancetransaction.Wheretheoverallpurpose(the“why”)oftheimpugnedtransactionsisnottax-motivated,thefactthatsuchtransactionsareimplementedinatax-efficientmanner(the“how”)willnotresultinanavoidancetransaction.Taxpractitionersmustthereforepaycloseatten-tiontothenon-taxpurposesoftaxplans—whetherbusiness,investment,familial,orestateplanning.Wheresuchpurposesaresupportablebytheevidence,includingdocumentationandthe implementationof theplan, taxpayerswill likelybepro-tectedfromsuccessfulGAArattacks.

McMullen59

InMcMullen,theappellantandhisbusinesspartnereachowned50percentofthesharesinanoperatingcompany(“DEL”).DELownedaheatingandairconditioning



58 The Queen v. MIL (Investments) SA,[2007]4CTC235(FCA).

59 Supranote22.


businessoperatingintwoseparatelocations.Thecompanywaslosingmoney,andtheownersdisagreedonhowtoproceedwiththebusiness.Theydecidedtosplitup.

Throughaseriesof transactions, theappellant (McMullen) soldhis shares inDELtoaholdingcompany(“114Co”)ownedbyhispartner’sspousefora$150,000note.DELthenpaida$150,000dividendto114Co,whichusedthefundstopayoffthenote.The$150,000dividendwasreceivedby114Cotax-free,pursuanttosec-tion112.McMullenrealizeda$50,000capitalgainonthesaleofhissharesandsheltered the taxable portion, $37,500, by a capital gains deduction pursuant tosection110.6.

McMullenthenincorporatedacompanywithhisspouseandcausedthisnewcom-panytoacquireoneofDEL’stwobranches.Thepurchasepricewaspaidforwithcashfromabankloan,theassumptionofcertainliabilitiesofDEL,McMullen’soutstand-ingshareholderloaninDEL,andthe$150,000receivedonthesaleofhisshares.

Thereafter,McMullenandhisspouse,throughtheircompany,operatedoneoftheformerbranchesofDEL,andtheformerpartnerandhisspouse,throughDEL,operatedtheotherbranch.

TheministersoughttoreassessMcMullenpursuanttothedeemeddividendpro-visionsofsubsection84(2)ortheconnectedcorporationrulesinparagraph84.1(1)(b),or,alternatively,todenythetaxbenefitpursuanttoGAAr.LamarreJrejectedtheminister’ssection84and84.1arguments,andthenconsideredtheargumentsinrespectofGAAr.

McMullenarguedthattherewerenoavoidancetransactionsbecausetheprimaryoverallpurposeoftheseriesoftransactionswastoseparatethesinglebusinessofDELintotwoindependentlyownedbusinesses.Hemaintainedthatthetaxplanningandthetax-effectivetransactionswereundertakentosupporthisownindependentbusinessgoalsandthoseofhisformerpartner.

Theminister argued that therewasno independentbusinesspurpose to thepre-salesharereorganizationinDEL,thesharesaleitself,the$150,000dividendto114Co,ortheassignmentofthedividendtoMcMullen.Therefore,theministerrecharacterizedthe$37,500taxablecapitalgain,forwhichMcMullenhadclaimedacapitalgainsdeduction,asa$187,500taxabledividend.

LamarreJrejectedtheminister’savoidancetransactionarguments,findingthatallfouroftheimpugnedtransactionswereenteredintoprimarilyfornon-taxpurposes.LamarreJalsorejectedtheminister’sattempttoestablishanavoidancetransactionbyrecharacterizingtheimpugnedtransactions:

TheCrowntriedtorecharacterizethesaleofsharesasadistributionofDEL’sfundsonareorganizationofDEL.IhavealreadyconcludedthattherewasnoreorganizationofDEL’sbusinessandthattherewere[sic]noappropriationofthecorporation’sfundsbythe appellant. The two shareholders severed their relationship and DEL continuedoperatingitsbusinesswithanewshareholderinplaceoftheappellant.TheagreementreachedwasthattheappellantwouldbuyuptheKingstonassets.Partofthepurchasepricewasoffsetbythe$150,000originallydeclaredasadividendto114Co.Buttherewas a consideration for that: the appellant released his shares in DEL, valued at$150,000,infavourofLindaDeBruyn[thepartner’sspouse]through114Co.Idonot


considerthisasatax-freeextractionofcorporatefunds.rather,Ifindthatthistrans-actionmayreasonablybeconsideredtohavebeenarrangedprimarilyforbonafidepurposesotherthantoobtainataxbenefit.60

LikeBowmanCJinEvans,LamarreJrejectedtheminister’sattempttorecharac-terize the impugned transactions in order to establish an avoidance transaction.Furthermore,theemploymentoftax-efficientstrategiesandtransactionstoachievenon-taxgoalsdidnotconstituteavoidancetransactionsunderGAAr.

MacKay61

InMacKay, theappellantwasamemberofapartnership thatacquiredanon-performingmortgage(“themortgage”)fromtheNationalBankofCanada(“thebank”).Thebankhadinitiatedforeclosureproceedingsinrespectofthemortgage.Themortgagepertainedtoashoppingcentre(“theproperty”)locatedinKamloops,BritishColumbia.Thebank’sadjustedcostbaseinthemortgagewasapproximately$16million.Thefairmarketvalueofthepropertywasapproximately$10million.

Throughaseriesoftransactions,thebankformedapartnership(“thepartner-ship”)alongwithasubsidiarycompanyandassigneditsinterestinthemortgagetothepartnership.Pursuanttosubsection18(13),thebankdidnotrecognizeacapitallossonthetransferofthemortgagetothepartnershipbecauseitwasnotdealingatarm’slengthwiththepartnership.

Theappellant(MacKay)andotherinvestorsthenpurchased20percentofthebank’sinterestinthepartnershipfor$2million.Thepartnershipobtainedfinancingfromthebankfor$8million.Thepartnershipusedthisfinancingfromthebanktoredeemthebank’sremaining80percentinterestinthepartnership.

The partnership then finalized the foreclosure proceedings in respect of themortgageandtheproperty.Asaresult,thepartnershipacquiredthepropertyandthemortgagewascancelled.

Attheendofthepartnership’sfirstfiscalyear,thepartnershipwrotedowntheadjustedcostbaseinthepropertypursuanttosubsection10(1)andrecognizedacapitallossofapproximately$6million.Thepartnershipallocatedthecapitallosstoitsmembersattheendoftheyearpursuanttosubsection96(1).Thepartnershipthenrenovatedandoperatedtheproperty.

TheministerreassessedthemembersofthepartnershipanddeniedthecapitallossrealizedonthewritedownofthepropertypursuanttoGAAr.

MacKayconcededtheexistenceofataxbenefitandadvancednodefenceinre-spectofabusivetaxavoidance.Consequently,CampbellJonlyconsideredwhetheranavoidancetransactionexisted.

Inrespectofthisdetermination,CampbellJrejectedtheminister’spositionthateachindividualtransactionmustbeconsideredindependently:


61 Supranote23.


Iagreewiththerespondentthatsubsection245(3)requirestheCourttodeterminethepurposeofeachtransactionwithinaseriestoascertainifthenon-taxpurposewasprimary. If thenon-taxpurposewasprimary foreach transaction in the series, theGAArcannotbeappliedtodenythetaxbenefit.However,Idonotagreethateverytransactionmustbeassessedindependentlywithoutregardtotheoverallpurposeoftheseries.Todosowouldclearlyfrustratethepurposeofsubsection245(3).Aspara-graph245(3)(b)explicitlyconsiders thata seriesof transactionsmayresult ina taxbenefit,itisappropriateforthisCourttoconsidertheoverallpurposeoftheseriesanditwouldbeinappropriatetoconsidereachtransactioninaseriesinisolationfromtheoverallpurpose.62

Furthermore:

Determiningthedrivingforcesforundertakingaparticulartransactionwithinaseriescannotbeundertakeninisolationfromtheoverallpurposeoftheseries.Whiletheoverallpurposeoftheserieswillnotbedeterminative,itremainsoneofthepertinentfactswhichthisCourtmustconsiderinadeterminationofavoidancebecausetheCourtmustdetermineiftheoverallpurposewastheprimarypurposeofeachtransaction.Thereforewhileatransactionmayinitiallypresentitselfasonewhichthetaxpayerhasundertakenforthesolepurposeofobtainingataxbenefit,itsprimarypurposemaystillbeanon-taxpurposewhenassessedwithreferencetotheoverallserieswherethefactssupportthatthedominantaimistoachieveacommerciallyreasonabledealinataxeffectivemanner.63

CampbellJthenwentontosummarizetheTaxCourt’sapplicationoftheavoid-ancetransactionpartofGAArpost-Canada Trustco.Indoingso,sheattemptedtoreconcilethedifferingdecisionsinEvansandDesmarais(discussedbelow):

BothEvansandDesmaraisinvolvedsurplusstripping;however,thefactsineachcasewereconsiderablydifferent.AlthoughtheconclusionsreachedinEvansandDesmaraisdiffered,bothdecisionshadregardtotheoverallpurposeoftheseriesoftransactions.InEvans,the“method”andtheaimofeachtransactionwasconsistentwiththeoverallpurpose.InDesmarais,JusticeArchambaultlookedateachtransactionindividuallybutalsocomparedthepurposeofeachindividualtransactiontotheoverallpurpose.The “method” chosen in Desmarais by the taxpayer was not consistent with the overall purpose of putting all the shares in one basket and, therefore, the purpose of that transaction was not primarily for non-tax reasons. The fact that there was an inconsistency between theoverallcommercialpurposeandthepurposeoftheindividualtransactionisextremelyrelevantinexplainingthedifferentconclusionsinthetwodecisions.Asthesubsection245(3)determinationisafactualinquiry,thedifferentconclusionsarebasedontheindividualfactsofeachcase,althoughbothappliedtheCanada Trustcotest.64



64 Ibid.,atparagraph69(emphasisadded).


InrespectofthefactsinMacKay,CampbellJconcluded:

Anobjectiveassessmentofallofthedrivingforcesofthetransactionsasawhole,andeachindividualtransaction,supportsmyconclusionthatobtainingtaxlosseswasnottheprimarypurposeofanyofthetransactions.Eachtransactionwaslegallyenforceable;validandbinding;andwasneithervacuousnorartificial.TheAppellant’scommercialpurposeofacquiringtheShoppingCentretocarryoutitsBusinessPlanwasthepri-mary purpose of each transaction. Thus, none of the transactions were avoidancetransactionswithinthemeaningofsubsection245(3).65

Theminister’sappealofthisdecisionhasbeensetdownforhearingbytheFederalCourtofAppealonFebruary7,2008.

Inlightoftheforegoing,taxpayersshouldbeentitledtothetaxbenefitsoftheirtaxplansprovidedthattheprimaryoverallpurposeoftheseriesoftransactionsisnottax-motivated,andthateachoftheindividualtransactionsintheseriesiscon-sistentwiththisoverallnon-taxpurpose.AstheTaxCourtheldinMacKay,Evans,MIL Investments,andMcMullen,employingtax-effectivestrategiestoachieveanon-taxpurposedoesnotinitselfconstituteanavoidancetransaction.66

Desmarais67

InDesmarais,theappellantincorporatedaholdingcompany(“6311”)ofwhichhewasthesoleshareholder.Hethenrolledinallofhissharesinacompany(“Gestion”)thathecontrolledwithhisbrotherinexchangeforadditionalsharesof6311.Theappellant(Desmarais)andtheholdingcompanythenjointlyelectedundersection85,suchthattheagreed-uponbasisofthe6311shareswasequivalenttothebasisintheGestionshares.

Desmaraisthenrolledinto6311two-thirds(41)ofthe60sharesthatheownedinanothercompany(“Comsercom”),whichhedidnotcontroleitherindividuallyoraspartofarelatedgroup,inexchangeforadditionalsharesof6311.ThisrolloverwasdoneatfairmarketvaluesuchthatDesmaraisrealizedacapitalgain.Desmaraisshelteredthiscapitalgainusingpartofthecapitalgainsdeductionavailableundersection110.6.Because6311ownedlessthan10percentoftheComsercomshares,section84.1didnotapplytogrindthePUConthesharesthatDesmaraisheldintheholdingcompany.ThePUConDesmarais’s6311shareswasincreasedbythefair


66 Thisprincipleisconsistentwiththepre-Canada TrustcodecisionoftheTaxCourtinGeransky,supranote1,wherein,atparagraphs36and37,thecourtdeterminedthattherewasnoavoidancetransactioneventhoughtheappellanthadundertakencertaintransactionstoachieveatax-effectiveresult.Atparagraph28,thecourtheld,“Whatwehavehereisapurelycommercialtransactionconceivedbybusinesspersonswithoutanyparticulartaxmotivationandcarriedoutwiththeassistanceoftaxprofessionalsinamannerthatisdesignedtoachievethatresultwiththeleastunfavourabletaxconsequences.”

67 Supranote24.


marketvalueofthe41Comsercomsharestransferredto6311.When6311subse-quently redeemed someof its sharesheldbyDesmarais, therewasnodeemeddividendbecausetheconsiderationreceivedbyDesmaraisforthesharesdidnotexceedthePUCinrespectofthoseshares.

Asaresultoftherolloverandsubsequenttransactions,Desmaraiseffectivelycon-vertedwhatwouldotherwisehavebeentaxabledividendsintoatax-shelteredcapitalgainfollowedbyatax-freeredemptionofshares.TheministerreassessedDesmaraisandincludedtheredemptionproceedsinhisincomeastaxabledividends.

In determining whether the taxpayer engaged in an avoidance transaction,ArchambaultJrejectedbothDesmarais’sandtheminister’sarguments.Desmaraisarguedthattheprimaryoverallpurposeoftheseriesoftransactionswasmerely“thereorganizationofhispatrimony,inparticularbyseparatinghisshareintheliquidassetsofGestion.”68TheministeracceptedDesmarais’soverallnon-taxpurposebutclaimedthat

Mr.DesmaraiswentfurtherthanmerelytransferringhisshareoftheliquidassetsofGestionto6311.HesucceededinstrippingGestionof$123,000withoutpayinganytax,andtheredemptionofthe123,000classDshares[of6311]wasnotessentialtoattainhisprimarypurpose.69

Choosinghisownpathintheavoidancetransactionanalysis,ArchambaultJdeter-minedthat

thetransactioninwhichMr.Desmaraistransferredonly41ofhissharesofComsercom,amountingto9.78%ofthiscompany’sshares,cannotbeconsideredtohavebeencon-cludedprimarilyforbona fidepurposes,otherthannon-taxpurposes.70

NotwithstandingCampbellJ’s explanation inMacKay,ArchambaultJ’sfindingwithrespecttoanavoidancetransactionisdifficulttoreconcilewiththeotherpost-Canada Trustcodecisionsdiscussedabove.Asinthoseothercases,inDesmarais,theappellant’s overall purpose was not tax-motivated. Desmarais merely sought toachievehisnon-taxpurposeinatax-efficientmannerbyavoidingtheapplicationofthespecificanti-avoidanceruleinsection84.1.

CopthorneInCopthorne,CampbellJdeterminedthatthesaleofsharesbyCopthorneItoBigCity(the1993sharesale)wasanavoidancetransaction,notwithstandingtheappel-lant’s position that the primary purpose of this transaction and the subsequentamalgamationofCopthorneIandvHHCHoldingswasthereorganizationoftheLifamily’scorporateholdings.Inthisrespect,CampbellJheld:





WhiletheoverallpurposeoftheFirstSeriesofTransactions,includingtheFirstAmal-gamation,couldbeviewedashavingalegitimatenon-taxpurpose,the1993ShareSalewasnotanintegralcomponenttoachievingthecommercialpurposeofsimplifyingtheLifamilycorporateholdings.71

CampbellJ’sreasoninginCopthorneappearstodepartfromthepreviousGAArdecisionsof theTaxCourt, includingherowninMacKay. InEvans, tax-efficientmeanstoachieveanoverallnon-taxpurposewereacceptable.Asdiscussedabove,inMacKay,CampbellJexplainedthatdifferingconclusionswerereachedinDesmaraisandEvansbecauseinEvans,allofthetransactionsundertakenbythetaxpayerwereconsistentwiththestatedoverallnon-taxpurposes,whereasinDesmaraisthiswasnotthecase.YetinCopthorne,theavoidancetransactiontestwasinterpretedmorebroadlytoincludeatransactionthatwasnotintegraltoachievingtheoverallnon-taxpurposeoftheseries.

CampbellJ’sdecisioninCopthorne,ifcorrect,mayberegardedasanexpansionofthetestforavoidancetransactions,whichwouldweakentheprinciplesofcer-tainty,consistency,andpredictabilityasespousedbytheSupremeCourtinCanada TrustcoandthesubsequentTaxCourtdecisionsinEvansandMacKay.ThisideawasrecognizedbyCampbellJinMacKaywhenshestated:

TheSupremeCourtwasinsistentinCanada TrustcothatParliamentintendedtopre-servepredictability,certaintyandfairnessinCanadiantaxlaw.Thiscannotbeachievedif every business deal or arrangement undertaken with the benefit of tax advice issubjecttotheabuseanalysisinsection245.Theinquirytodeterminewhetheratrans-actionisanavoidancetransactionisnotaresults-basedtest.72

Assuming that the Tax Court’s reasoning in Evans and MacKay carries moreweightinitsfutureGAArdecisionsthanthereasoninginCopthorne(andassumingthatCopthorne iscorrectandupheldonappeal), taxpractitionersmay takesomecomfortfromtheearlierdecisions,whichhaveconsiderablynarrowedtheavoidancetransactiontest.OnthebasisofEvansandMacKay,itmaybesaidthattax-efficientstrategiesandtacticstoachieveprimarynon-taxgoalswilllikelynotbesubjecttoGAArattacks.Furthermore,MacKayoutlinesthepathtotakeinordertodistinguishan arrangement fromDesmarais, andperhapsCopthorne.Where the transactionsundertakenbythetaxpayerdonotdirectlycontradicttheoverallnon-taxpurposeoftheplan,thetaxpayershouldbeentitledtoenjoythetaxbenefitsoftheplan.

Abusive Tax Avoidance

Onthedeterminationofwhetherornotabusivetaxavoidanceexists,theSupremeCourtinCanada Trustcostated:

71 Copthorne,supranote27,atparagraph54.

72 MacKay,supranote23,atparagraph75.


Theheartoftheanalysisunders.245(4)liesinacontextualandpurposiveinterpret-ationoftheprovisionsoftheActthatarereliedonbythetaxpayer,andtheapplicationoftheproperlyinterpretedprovisionstothefactsofagivencase.Thefirsttaskistointerprettheprovisionsgivingrisetothetaxbenefittodeterminetheirobject,spiritandpurpose.Thenext task is todeterminewhether the transaction fallswithinorfrustratesthatpurpose.Theoverallinquirythusinvolvesamixedquestionoffactandlaw.Thetextual,contextualandpurposiveinterpretationofspecificprovisionsoftheIncome Tax Actisessentiallyaquestionoflawbuttheapplicationoftheseprovisionstothefactsofacaseisnecessarilyfact-intensive.

ThisanalysiswillleadtoafindingofabusivetaxavoidancewhenataxpayerreliesonspecificprovisionsoftheIncome Tax Actinordertoachieveanoutcomethatthoseprovisionsseektoprevent.Aswell,abusivetaxavoidancewilloccurwhenatransactiondefeatstheunderlyingrationaleoftheprovisionsthatarereliedupon.Anabusemayalsoresultfromanarrangementthatcircumventstheapplicationofcertainprovisions,suchasspecificanti-avoidancerules,inamannerthatfrustratesordefeatstheobject,spiritorpurposeofthoseprovisions.Bycontrast,abuseisnotestablishedwhereitisreasonabletoconcludethatanavoidancetransactionunders.245(3)waswithintheobject,spiritorpurposeoftheprovisionsthatconferthetaxbenefit.73

TheSupremeCourtalsodeterminedthattheministerbearstheburdenoronusofestablishingabusivetaxavoidance.74InPlacer Dome Canada Ltd. v. Minister of Finance (Ontario),theSupremeCourtnotedthatthisburdenoronusisproperlytheminister’s where the taxpayer has already complied with the letter of the law,because

[i]twouldbebothimpracticalandundulyoneroustorequireataxpayerwhosetrans-actionfallswithinthefourcornersofataxprovisiontoalsodisprovethatheorshehasviolatedtheobject,spiritorpurposeoftheprovision.75

IntheTaxCourtcasesdiscussedaboveinwhichthetaxpayerhasbeensuccessful,theministerhaseitherfailedtoestablishataxbenefit(Univar)orfailedtoestablishanavoidance transaction (Evans,Overs,MIL Investments,McMullen, andMacKay).Thus, in none of these cases has the court’s decision hinged on the abusive taxavoidancepartoftheGAArtest.Nevertheless,thesedecisions,aswellasthoseinwhichthetaxpayerhasnotbeensuccessful,maybeminedforimportantprinciplesrelativetotheabusivetaxavoidance.

EvansInEvans,BowmanCJaddressedtheissueofabusivetaxavoidance,eventhoughhewasnotrequiredtodoso(havingfoundinfavouroftheappellantontheavoidancetransactionpartofthetest).Asnotedabove,hefoundthattheappellanthadused

73 Canada Trustco,supranote2,atparagraphs44-45.

74 Ibid.,atparagraphs52and63-65.

75 2006DTC6532,atparagraph28(SCC).


therelevantprovisions“fortheverypurposeforwhichtheyareintheAct,”andobserved,“IdonotthinkthatitcanbesaidthatthereisanabuseoftheprovisionsoftheActwhereeachsectionoperatesexactlythewayitissupposedto.”76

McMullenInMcMullen,LamarreJfollowedtheleadofBowmanCJinEvansonthequestionofabusivetaxavoidance:

Inlightofthoseprinciples,Idonotfindthatthetransactionshereindefeatorfrustratetheobject,purposeor spiritof anyof theprovisionsof theAct referred to above.Thosetransactionsdonotlackeconomicsubstance.Theywererealandhadlegalef-fect.Theywerenotshams.TherewasagenuinechangeinthelegalandeconomicrelationsbetweenthetwoformershareholdersinDEL.AsstatedinEvans,“[t]otreatthetransactionsasabusivesothattheirresultscanberecharacterizedwouldnotpre-servebutratherwoulddestroycertainty,predictabilityandfairnessandwouldfrustrateParliament’sintentionthattaxpayers‘takefulladvantageoftheprovisionsoftheActthatconfertaxbenefits’ ”(paragraph35(c)).77

DesmaraisInDesmarais,ArchambaultJultimatelydeterminedthattheappellantengagedinabusivetaxavoidance,onthefollowingbasis:

n “itispossiblethatComsercomwillnotbeableforseveralyearstodistributesubstantialdividendstoitsshareholders”;78and

n “whoistosaythatthesurplusesofComsercomwillnecessarilybedistributedtoitsshareholders?”79

Inconclusion,ArchambaultJstated:

[T]hefactthatthefundsfromGestionreceivedasdividendsby6311wereusedtoredeemtheclassDshareswasanabusivecircumventionoftheruleinsection84.1and,consequently,alltheconditionsfortheapplicationofsection245werepresent.80

ArchambaultJ’sreasoninginsupportofhisconclusionthattransactionsundertakenbyDesmaraisfrustratedaspecificprovisionoftheActissurprisinglyspeculative,andismoreapplicabletoaconsiderationofwhethertheappellantenjoyedataxbenefitthanwhetherheengagedinabusivetaxavoidance.ArchambaultJprovidednoanalysisastohowtheobject,spirit,andpurposeofsection84.1wasfrustrated.Evenassumingthathisspeculationastothefuturepaymentofdividendsprovedtobeaccurate,

76 Evans,supranote18,atparagraphs28and29.

77 McMullen,supranote22,atparagraph54.

78 Desmarais,supranote24,atparagraph39.




howcantheobject,spirit,orpurposeofaprovisionwitha10percentbrightlinetestbefrustratedifthetestisnotmet?IfParliamentdidnotintendfortaxpayerstorelyonthisbrightlinetest,theremedyisforParliamenttochangethetest.

ToreiteratetheSupremeCourt’sstatementinCanada Trustco,appliedbytheTaxCourtinEvans,81Overs,82andMcMullen,83

[w]hereParliamenthasspecifiedpreciselywhatconditionsmustbesatisfiedtoachieveaparticularresult,itisreasonabletoassumethatParliamentintendedthattaxpayerswouldrelyonsuchprovisionstoachievetheresulttheyprescribe.84

Section84.1specifiespreciselywhatconditionsmustbesatisfiedtoavoiditsappli-cation.Inourview,DesmaraiscontradictstheprinciplesoutlinedinCanada TrustcoandignoresthedecisioninEvans.Asaresult,itmuddiesthewatersfortaxplannersseekingtoavoidrunningagroundonGAAr.

Lipson85

InLipson,theappellant,EarlLipson,soldsharesinafamilyinvestmentcompanytohisspouse,Jordanna,whopurchasedtheshareswiththeproceedsfromabankloan.EarlusedthefundshereceivedfromJordannatopurchaseapersonalresidence.Thenextday,EarlandJordannatookoutanotherloanfromthebankandusedtheproceedstopayoffJordanna’soriginaldebt.ThebankusedthehousepurchasedbyEarlassecurityonthissecondloan.

EarlandJordannachosenottoelectoutofthespousalrolloverprovisionsinsubsection73(1),suchthatEarlwasnotsubjecttoacapitalgainonthedispositionof his shares. Furthermore, pursuant to the operation of the spousal attributionrulesinsubsection74.1(1),alldividendsreceivedontheshareswereattributedtoEarl,aswastheinterestexpenseincurredonthesecondloan.

Asthetransactionwasstructured,theinterestonthefirstloanwasdeductiblepursuanttoparagraph20(1)(c),andtheinterestonthesecondloanwasdeduct-iblepursuanttosubsection20(3).

Unfortunately,Earladmittedtheexistenceofavoidancetransactionsattrial.86GiventheTaxCourt’sinterpretationofwhatconstitutesanavoidancetransactioninEvansandOvers,aswellasthesubsequentcasesofMIL Investments,McMullen,andMacKay,itseemsthatastrongargumentcouldhavebeenmadethatEarldidnotinfactengageinanyavoidancetransactions.TheoverallpurposeoftheseriesoftransactionswasthesaleofEarl’ssharestoJordanna,abonafidenon-taxpurpose.

81 Supranote18,atparagraphs28-29.




85 Supranote25.



Noneoftheindividualtransactionsintheserieswereinconsistentwiththisoverallnon-taxpurpose.

AttheabusivetaxavoidancestageofGAAr,BowmanCJseemedintentonrevisit-inghisdecisioninSingleton,87whichwasoverturnedbytheFederalCourtofAppeal.88TheFederalCourtofAppeal’sdecisionwasaffirmedbytheSupremeCourt.89

AttheTaxCourtinSingleton,BowmanJ(ashethenwas)hadespousedthe“trueeconomicpurpose”doctrine,referringto

theinescapablefactualdeterminationthatthetrueeconomicpurposeforwhichtheborrowedmoneywasusedwasthepurchaseofahouse,nottheenhancementofthefirm’sincomeearningpotentialbyacontributionofcapital.90

Inallowingthetaxpayer’sappealinSingleton,theFederalCourtofAppealstated:

Inthecaseatbar,thedirectuseoftheborrowedfundswastorefinancetheappellant’scapital account at thefirm.Treating theborrowed funds asused forfinancing thepurchaseofthehomeignoreswhattheappellantactuallydid,i.e.usedtheborrowedfundstoreplacethefundsrequiredforhiscapitalaccountatthefirm.AsstatedbyDickson,C.J.C.inBronfman Trust,theCourtcannotignorethedirectusetowhichtheappellantputtheborrowedmoney.91

Indismissingtheminister’sappealinSingleton,theSupremeCourtrejectedtheTaxCourt’ssearchforthe“trueeconomicpurpose”anddeterminedthatBowmanJhadappliedthe“wronglegaltest.”92

Nevertheless,inLipson,BowmanCJchosetoapplythesametest,findingthat

[t]hepurposeoftheschemewastocreatetheimpressionthatmoneywasborrowedtorepaymoneyusedtobuyshareswheninrealityitwasborrowedtobuyahouseandtoallowEarltodeducttheinterestonborrowedmoneyusedtobuythehouse.93

Upondeterminingthe“trueeconomicpurpose”oftheimpugnedtransactions,BowmanCJfoundthatEarlLipsonhadengagedinabusivetaxavoidance:

Thepurposeof the seriesof transactionswas tomake the interest deductible thatwouldnotbedeductibleifthemoneywassimplyusedtobuythehouse.94

Thus,BowmanCJconcluded,paragraph20(1)(c)hadbeenmisused.

87 Singleton v. The Queen,[1996]3CTC2873(TCC). 88 Singleton v. The Queen,[1999]3CTC446(FCA). 89 The Queen v. Singleton,[2002]1CTC121(SCC). 90 Singleton,supranote87,at2878-79. 91 Singleton,supranote88,atparagraph19. 92 Singleton,supranote89,atparagraph22. 93 Lipson,supranote25,atparagraph9. 94 Ibid.,atparagraph16.


HavingrejectedthecommercialpurposeoftheinitialloanreceivedbyJordannaLipson,BowmanCJfoundthattherefinancinghadnocommercialpurpose:

Theinitialandsupposedlycommercialusewasneverintendedtocontinueintotherefinancing.Thatisevidencedby(a)thenullificationfortaxpurposesoftheeffectofthesaleofthesharesbyEarltoJordannacoupledwith(b)theimmediateandinevit-ableflowoftheborrowedmoneyfromthebankthroughthehandsofJordannaandEarltoitsultimatedestinationinthehandsofthevendorofthehome.95

Insofinding,BowmanCJignoredtheeconomicsofthedealinfavourofthefic-tioncreatedbyprovisionsoftheAct.WhilethetaxconsequencesinrespectofthesharessoldbyEarl(thetaxpayer)tohisspouseremainedwithEarl,theeconomicconsequencesoftheownershipoftheshareswereinfacttransferredtohisspouse.ThefactthatEarlusedthefundshereceivedonthesaleofhissharestoacquireahousedidnotchangetheeconomicsofthedeal.

Notwithstandingtheforegoing,havinglookedbehindthetransactionsenteredintoby theappellantandhis spouse todetermine the“trueeconomicpurpose,”BowmanCJconcludedthatvariousprovisionsoftheActhadbeenmisused:

Ithinkthattheseriesoftransactionsinvolvedhereresultedinamisuseoftheprovi-sionsoftheITA,specificallyparagraph20(1)(c)andsubsection20(3).Totheextentthatsubsection73(1)andsection74.1areusedtoachievethatmisuseandtoexecutetheschemeasawhole,theytooarebeingmisused.Notoneofthepurposesoftheprovi-sions that I referred to above is being fulfilled by this series of transactions. Theoverallpurposeaswellastheusetowhicheachindividualprovisionwasputwastomakeinterestonmoneyusedtobuyapersonalresidencedeductible.96

GivenBowmanCJ’sdeterminationofabusivetaxavoidance,theappellant’sdecisionnottochallengetheminister’stax-avoidanceargumentattheavoidancetransactionstageoftheGAArtestwasfatal.Itwouldhavebeendifficultforthecourttodistin-guishtheprinciplesespousedinEvansandOversindeterminingwhatconstitutesanavoidancetransaction.Furthermore,inEvans,BowmanCJrecognizedthatthecourtmaynotrecharacterizeanimpugnedtransactioninanefforttodemonstratetheex-istenceofanavoidancetransaction.97

Inparticular,thefacts inOversandLipsonaresosimilarthatdisparateresultswouldhavebeendifficulttoreconcile.Inbothcases,

n theappellantsoldsharesinacloselyheldcorporationtohisspouse;n thespouseborrowedmoneytobuytheshares;n theproceedsfromthesaleoftheshareswerenotsubjecttotaxpursuantto

section73;



97 SeethequotationfromEvansreproducedinthetextaboveatnote48.


n thespouse’sinterestexpensedeductionsanddividendreceiptswereattribut-ablebacktotheappellant;and

n theappellantusedthefundsfromthesaleofthesharesforpersonalpurposes—inOvers,topayoffashareholderloan,andinLipson,tobuyahouse.

recently,theFederalCourtofAppealaffirmedtheTaxCourt’sdecisioninLipsonand its finding of abusive tax avoidance. The Court of Appeal determined that“BowmanC.J.wasentitledtoconsiderthetransactionsasawholeandtheiroverallpurposeintheconductofhismisuseandabuseanalysisandtogivethisfactortheweightthathedid.”98CitingtheSupremeCourt’sdecisionsinCanada TrustcoandKaulius,theCourtofAppealdeferredtotheTaxCourt’sfindinginrespectofabu-sive taxavoidance.99EarlLipsonhasapplied for leave toappeal to theSupremeCourtofCanada,whichhasbeengranted;100thecourthassetApril23,2008asthehearingdate.

CECO101

InCECO, theappellantsoughttodisposeof itsbusinessassetstoanarm’s-lengthpurchaser.Toachievethisobjective,CECOtransferredtheassetsintoapartnership,pursuanttosubsection97(2),inexchangeforapartnershipinterestand“othercon-sideration.”Theagreed-uponelectedamountforpurposesofsubsection97(2)wasthe“otherconsideration”receivedbyCECOontherolloverintothepartnership.ThepartnershipinterestreceivedbyCECOwasvaluedatapproximately$18million.

Subsequently,thepartnershipsubscribedforsharesinCECO’ssistercompany,forwhichitpaidapproximately$18million.Thesistercompanydistributedthesepro-ceedstoitsparentcompany,whichthenflowedthemuptoCECO’sultimateprincipals.BecausethesubscriptionproceedswerenotreceivedbyCECOasconsiderationforthebusinessassets,CECOwasnotrequiredtorecognizesuchconsiderationinitsincome.

TheministerissuedaGAArreassessmentinrespectofthetax-freerollover.AttheTaxCourt,BonnerJupheld the reassessment,finding that therehadbeena“patentabuseofss.97(2).”102

SeveralimportantfactsassistedBonnerJinfindingthatCECOhadengagedinabusivetaxavoidance:

1. Thesistercompanysharesacquiredbythepartnershipwereworthonly1⁄10ofwhatthepartnershippaid.103

98 Supranote25(FCA),atparagraph43.


100 Supranote25.

101 Supranote26.


103 Ibid.,atparagraphs4and43.


2. Thepartnershipwasnotentitledtoenjoyanybenefitsofitsownershipofthesistercompanyshares.104

3. ThecosttothepartnershipofthesistercompanyshareswasapproximatelythesameasCECO’spartnershipinterest.105

4. TheevolutionofthetransactionsundertakenbyCECOwasexposed(owingtothelackofprivilegeattachedtoanyofCECO’sdocumentsandcorrespond-ence),thusevidencingtheunderlyingtaxmotivation.106

5. CECO’sownwitnessconfirmedthattheimpugnedtransactionswereexclu-sivelytax-motivated.107

Whiletheoutcomeinthiscaseisnotsurprising,giventhebadfacts,badevi-dence,anddiscoverabletax-planningdocuments,CECOisusefulinillustratingtheimportanceoffirmingupataxplanwithadefensibleoverallnon-taxpurpose.

CopthorneGivenCampbellJ’sfindinginCopthorneinrespectoftheexistenceofataxbenefitandanavoidancetransaction,herfindingpertainingtoabusivetaxavoidanceisnotpar-ticularlysurprising.Afteranalyzingsubsections89(1),87(3),and84(3),CampbellJconcluded:

Atfirstglanceinthisappeal,itisnotimmediatelyobviousthatanyofthetransactionsinthisappealconstituteabusivetaxavoidance.TheprovisionsoftheActappeartohaveoperatedpreciselyastheywereintendedto,producingtheresultsthatwouldbeexpected....However,whentheredemptionisviewedtogetherwiththe1993ShareSaleofvHHCHoldingstoBigCity, theabusiveelementbecomesapparent.WhenvHHCInvestmentsislateramalgamatedwithCopthorneII,theunderlyingprinciplesrespectingthecalculationofPUCareoffendedbecauseapproximately$67millionofPUCisessentiallydoublecountedinthePUCofthenewlyamalgamatedcorporation.Itisthisdoublecountingthatcircumventstheproperapplicationoftherelevantpro-visionsinamannerthatfrustratesanddefeatstheobject,spiritandpurposeofthoseprovisions, which individually, together and when read in conjunction with otherprovisionsintheAct,aremeanttooperatetopreventtheartificialincreaseofPUConamalgamationand itssubsequentreturntoshareholdersona tax freebasis.Ofthetotal PUC of $164,138,025 associated with ClassD Preference shares, $96,736,845belongedtovHHCInvestmentsand$67,401,280belongedtoCopthorneII.However,the$67,401,279canbetracedbacktotheinvestmentmadebyvHHCInvestmentsinthecommonsharesofvHHCHoldings,alowertieredsubsidiary....Thisistheoriginofthedouble countingof $67,401,279of PUCand the aggregateof $67,401,279 and$96,736,845resultsinthisartificialincrease.Instead$142,035,895wasdistributedasatax-freereturnofcapitalwhenonly$96,736,845ofPUCwasactuallyeveravailablefor

104 Ibid.,atparagraphs5and42.



107 Ibid.,atparagraphs48-52and70.


distribution.Consequently,theoverallresultthattherelevantprovisionsweremeanttoaddresshasbeencircumvented.Indoingso,thepurposeandunderlyingrationaleofthesestatutoryprovisions(aswellascorporateprinciples)havebeenfrustratedandtheirobject,spiritandpurposedefeated.Theresultingartificialpreservationandinfla-tion in PUC allowed the stripping of surplus without appropriate withholding tax.Whenthemanytransactionsherearedistilleddowntotheessentialcore,itisclearlyanabuseoftheActtowhichsection245shouldapply.108

EventhoughtheprovisionsrelieduponbytheappellantinCopthorneappearedto work exactly as they were supposed to (as was the case in Evans and Overs),CampbellJultimatelyfoundthatthePUCprovisionsoftheActwereinfactcircum-ventedorfrustrated.ThedecisioninCopthornefurtherunderscorestheimportanceoftheavoidancetransactionpartoftheGAArtest,where,withtherighttaxplanningandimplementation,taxpayersmayenjoysomemeasureofcertainty,consistency,fairness,andpredictability.

Conclusion

FollowingtheSupremeCourt’sfirstGAArdecisionsinCanada TrustcoandKaulius,itwasexpectedthattaxpayersandtheiradviserswouldfacesomelevelofuncertaintyastotheeffectivenessoftheirtaxplans.GiventhedisparatedecisionsoftheTaxCourtinEvansandDesmarais,OversandLipson,andMacKayandCopthorne,thisexpectationhasmaterializedtosomeextent.Thatsaid,thepost-Canada TrustcodecisionsoftheTaxCourthaveexhibitedalevelofcertainty,consistency,andpredictability,whilealsorevealingimportantprinciplesthatmayassisttaxpractitionersindeveloping,documenting,andimplementingtheirtaxplans.

AsnotedinUnivar,wheretheministerattemptstoestablishataxbenefitbyre-ferringtoanalternativearrangement,therewillbeataxbenefitonlyifthealternativearrangementwouldhaveachievedallofthetaxpayer’sobjectivesinenteringintotheactualtransactions.Inthesecases,taxpractitionersshoulddocumentallofthevari-ousbonafideobjectivesandreasonsforthetransactions,inordertoestablishthebasisforthetransactions,eliminatepotentialalternativearrangementarguments,andfortifyanyavoidancetransactiondefences.

Intermsofwhetheranavoidancetransactionexists,Evans,Overs,MIL Investments,McMullen,MacKay,andevenDesmaraisrevealanunexpectedlevelofconsistencyandpredictability.NotwithstandingCopthorne,thereshouldbenoavoidancetrans-actionprovidedthatthetaxplanhasaprimary,bonafide,non-taxpurposeandtheindividualtransactionscarriedoutundertheplanarenotinconsistentwiththatpur-pose.TobenefitfromtheforegoingTaxCourtinterpretationsofwhatdoesanddoesnotconstituteanavoidancetransaction,taxpractitionersshoulddothefollowing:109

108 Copthorne,supranote27,atparagraph74.

109 Foramoredetailedarticledealinggenerallywith“litigationproofing”taxplans,seeAlMeghji,GeraldGrenon,andJennyP.Mboutsiadis,“PuttingTogetheraWinningDeal—ALitigator’sPerspective”(2003)vol.16,no.1Canadian Petroleum Tax Journal53.


1. Solidifythecommercial,business,family,investment,orothernon-taxpur-poseoftheplan.

2. Structuretheplansothateachindividualtransactionisconsistentwiththeoverallnon-taxpurpose.

3. Ensurethatthepaperworkdocumentingtheplanisconsistentwiththeplanandsupportsitsoverallnon-taxpurpose.

4. Advisetheplanparticipantsofwhattheyneedtodoinordertocomplywiththeplan,andensurethattheyactaccordingly.

ProvidedthattheTaxCourtconsistentlycontinuestointerprettheavoidancetransactionpartofGAArinthemanneroutlinedabove,thattaxpractitionersproperlystructureanddocumenttheirtaxplans,andthatplanparticipantsactinaccordancewiththoseplans,wemayyetseeanunprecedentedlevelofcertainty,consistency,predictability,andfairnessintheapplicationofGAAr.

A ddendum

OnMarch19,2008,shortlybeforethisarticlewenttopress,theFederalCourtofAppealrendereditsdecisioninMacKay v. The Queen(2008FCA105).Inallowingtheminister’sappeal, thecourtappearstohaveexpandedconsiderablythescopeandapplicationoftheavoidancetransactionpartofGAAr.Atparagraph21ofthedecision,thecourtstated:

ImustrespectfullydisagreewithJusticeCampbell’sinterpretationofsubsection245(3).Inmyview,herinterpretationisincorrectbecauseitisnotconsistentwiththelan-guageorthepurposeofsubsection245(3),particularlyparagraph245(3)(b).AsIreadparagraph245(3)(b),itrequiresadeterminationoftheprimarypurposeofanytrans-action(ortransactions)withinaseriesoftransactionsthatwouldresultinataxbenefitiftheGAArdoesnotapply.Itfollowsthatasubsetoftransactionswithinaseriesoftransactionsisanavoidancetransactionunlessthesubset of transactionsmayreasonablybe considered tohavebeenundertakenor arrangedprimarily forbona fide purposesotherthantoobtainthetaxbenefit.Inmyview,theconclusionthataseriesoftrans-actionswasundertakenprimarilyforbona fidenon-taxpurposesdoesnotprecludeafindingthattheprimarypurposeofoneormorestepswithintheserieswastoobtainataxbenefit.

Amoredetailedanalysisofthisdecisionisnotfeasiblehere,butpractitionersshouldtakethecourt’srulingintoconsiderationinthedevelopment,implementation,anddefenceoftheirtaxplans.

Aswehavenoted,theSupremeCourtofCanadaisexpectedtoheartheappealoftheLipsondecisioninApril2008;however,whatconstitutesanavoidancetrans-action is not at issue in that case. It is therefore hoped that the respondents inMacKaywillseekleavetoappealthedecisionoftheFederalCourtofAppeal,andthusprovidetheSupremeCourtwiththeopportunitytoclarifytheavoidancetrans-actionpartoftheGAArtest.

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