the gaar - canadian bar association have the courts interpreted the gaar? where might the...

THE GAAR

Tax Law for Lawyers

Niagara-on-the-Lake

June 2, 2010Ed Kroft Q.C.

Ian MacGregor, Q.C.

Wayne Adams

Ed Harris Q.C.

#401811v42

Introduction

Over 20 years since GAAR was announced (June 1987 Tax Reform) and over 19 years since enactment (September 1988)

Landmark decision of SCC in Canada Trustco and Kaulius on October 19, 2005

SCC decides Lipson case in January 2009

SCC to hear Copthorne case in November 2010

#401811v43

Introduction (cont’d)

A number of lower court decisions have

emerged in the last 5 years

Desmarais, Overs, McMullen, CECO,

MacKay, Evans, Copthorne, Univar Canada,

MIL Investments, Collins & Aikman, Lehigh

Cement, Remai, Garron, Antle, Landrus

Provincial GAAR Assessment Being Raised

(OGT Holdings)

#401811v44

The Current CRA Environment

Tax avoidance = “Aggressive Tax Planning”

Aggressive international tax planning

initiatives (AITP)

Challenges to international transactions

Collaboration in CRA seems to have

increased with the reorganization (ILBD)

#401811v45

The Current CRA Environment (cont’d)

Use of specific anti-avoidance rules (95(6)),

103, 237.1, 247)

– Univar Canada, Aventis (95(6))

– Baxter (237.1)

– Penn West (103)

#401811v46

The Current GAAR Landscape

Cases at Tax Court of Canada level at

various stages

Audit activity on various projects which

involve the application of provincial GAAR

legislation

Rulings still being provided on GAAR

Other countries contemplating adoption of a

GAAR (US, UK)

#401811v47

Focus of the Presentation

How have the courts interpreted the GAAR?

Where might the jurisprudence be tending?

What type of transactions are before the

courts?

What type of transactions are being

challenged at the audit level?

Some predictions about GAAR in tax

practice

#401811v48

Does CRA Give Rulings on GAAR?

Yes (2005 BC Tax Conference Paper –

Adams/Sinclair)

Ruling will be referred to GAAR Committee

GAAR can be applied to transactions

described in the ruling in a manner not

contemplated by the specifically requested

rulings

CRA will warn taxpayers of

caveats/limitations

#401811v49

GAAR Statistics as of March 2009

Issue Y N N/A Total %

Surplus Strips 102 31 25 158 15%

Kiddie Tax 62 6 3 71 7%

Losses, Capital & Non-Capital 35 18 12 65 6%

Part I.3 Tax 38 11 7 56 5%

Loss Creation via Stock Dividend 52 0 2 54 5%

Debt Forgiveness 32 10 7 49 5%

Interest Deductibility 17 17 10 44 4%

Capital Gain 21 9 7 37 4%

Indirect Loan 28 3 4 35 3%

Charitable Donations 14 10 3 27 3%

Debt Parking 17 7 3 27 3%

Losses, Stop Loss 9 5 5 19 2%

Part XIII Tax 3 9 4 16 2%

Offshore Trusts 11 1 2 14 1%

Kiwi Loan 14 0 0 14 1%

Losses, Rental 11 2 0 13 1%

Cross-Border Lease 11 0 0 11 1%

Treaty Exemption Claim 5 2 3 10 1%

Provincial GAAR 0 3 6 9 1%

Tower Structure 1 3 2 6 1%

Miscellaneous (see page 2) 131 106 51 288 28%

614 253 156 1023 100%

Cases referred to GAAR committee: 867

* see note below

GAAR Applied 614 71%

GAAR Not Applied 253 29%

GAAR as Primary Position 287 47%

GAAR as Secondary Position 327 53%

* Note: Statistics do not take into account the following:

- RRSP Project 1363 files Legend

- Barbados Spousal Trust project 76 files Y GAAR applicable

In these cases GAAR was applied as a secondary position N GAAR not applicable

N/A Technical Issue only, not referred to GC

- More than 300 files to which the Provincial GAAR

was applied

#401811v410

GAAR Statistics as of March 2009

Y N N/A Total

Partnership Issues 12 6 3 21

Income Splitting 8 3 1 12

Foreign Tax Credits 6 3 2 11

Losses - Other 3 6 1 10

GST 3 1 5 9

Capital Gain Reductions 0 3 4 7

Credit Union Amalgamation 7 0 0 7

FAPI 3 2 2 7

Capital Cost Allowance 3 3 0 6

Income Trust 4 2 0 6

RRSP 4 2 0 6

PUC issues 3 0 2 5

Small Business Deduction 0 4 1 5

ACB - Foreign 3 1 0 4

Employee Stock Options 1 1 2 4

Part IV tax 3 1 0 4

RCA 0 1 3 4

Stripped Debt Obligations 4 0 0 4

Shareholder Benefits 1 0 2 3

Rollover 0 2 1 3

95(6) 1 1 1 3

ABIL 2 1 0 3

Departure Trade 2 1 0 3

Exempt Surplus 2 1 0 3

Income 1 2 0 3

Mark to Market 2 1 0 3

Wind up 2 1 0 3

Capital Dividend Account 1 1 0 2

Amalgamations 2 0 0 2

Commodity Straddles 0 2 0 2

Deemed Association 0 1 1 2

Insurance Corporations 1 1 0 2

ITC - Refundable 2 0 0 2

Leases 0 0 2 2

Manufacturing and Processing 0 2 0 2

Mutual Funds 0 2 0 2

Part IV.1 and VI.1 tax 0 2 0 2

Safe Income 0 1 1 2

Term Preferred Shares 1 0 1 2

Thin Capitalization 1 0 1 2

Other 43 45 15 103

131 106 51 288

#401811v411

How Have The Courts Interpreted The GAAR?

Categories of cases

– Cases decided before the Supreme Court of

Canada in Canada Trustco and Kaulius (16

cases)

– The Supreme Court of Canada: Canada Trustco

and Kaulius

– Post Trustco interpretation by the Tax Court and

Federal Court of Appeal.(10 cases)

– Lipson in the Supreme Court of Canada

#401811v412

Canada Trustco: Summary of the SCC’s approach – Basic Principles

To permit application of the GAAR, there

must be (a) tax benefit, (b) avoidance

transaction; and (c) abusive tax avoidance

The burden is on the taxpayer to refute (a)

and (b), and on the Minister to establish (c)

#401811v413

Canada Trustco: Summary of the SCC’s approach (cont’d)

If abusive tax avoidance is unclear, the

benefit of the doubt goes to the taxpayer

The courts conduct a unified textual,

contextual and purposive analysis of the

provisions giving rise to the tax benefit

#401811v414

Canada Trustco Summary of the SCC’s approach (cont’d)

Whether the transactions were undertaken

for a non-tax purpose may be relevant but is

by itself insufficient in establishing abusive

tax avoidance

The appellate courts should not interfere

with the trial court‟s conclusion, absent a

palpable and overriding error

#401811v415

Canada Trustco Summary of the SCC’s approach (cont’d)

Abusive tax avoidance may be found where:

– documented relationships and transactions lack

a proper basis relative to the object, spirit or

purpose of the provisions conferring the benefit,

or

– where they are dissimilar to the transactions

contemplated by the provisions

#401811v416

Kaulius: Application of Canada Trustco

Appeal of the taxpayer dismissed

The use of the partnership rules by persons who deal at arm‟s length with the original vendor would frustrate or defeat the object, spirit or purpose of the statutory preservation of the losses on the transfer to the partnership

The provisions of the Act establish a general policy against the transfer or sharing of losses between arm‟s-length taxpayers, subject to specific exceptions intended to promote a particular purpose

#401811v417

Tax Benefit – 245(1)

The “tax benefit” denied under the

legislation:

– reduction

– avoidance or

– deferral

of tax or other amount payable under the

Act or an increase in a refund of tax or other

amount under the Act

#401811v418

Canada Trustco: Tax Benefit –Subsection 245(1)

A tax benefit is a question of fact that would usually

be determined at trial

Magnitude of benefit is irrelevant

The burden is on the taxpayer to show there is no

tax benefit

Taxpayer must have reduced, avoided or deferred

Canadian income tax

If a deduction against taxable income is claimed,

the existence of the tax benefit is clear

#401811v419

Canada Trustco: Tax Benefit –Subsection 245(1) (cont’d)

It may be necessary to compare the tax

result obtained with that of an alternative/

normative arrangement (Para. 20)

– e.g., characterization of an amount as an annuity

rather than as a wage, or as a capital gain rather

than as business income, will result in

differential tax treatment

#401811v420

Canada Trustco: Tax Benefit –Subsection 245(1) (cont’d)

This analysis was done in Copthorne by the

TCC (para. 44-47)

– “Tax benefit” said to have resulted from a “series

of transactions”

– “Tax benefit” said to be the failure to remit Part

XIII tax on deemed dividend

– TCC sees the amount of “PUC preserved” as the

tax benefit when shares with high PUC were

parked and not eliminated

#401811v421

Subsection 245(3) of the Act

Subsection 245(3) of the Act states:

– “An avoidance transaction means any transaction

that, but for this section, would result, directly or indirectly, in

a tax benefit, unless the transaction may reasonably be

considered to have been undertaken or arranged primarily

for bona fide purposes other than to obtain the tax benefit; or

that is part of a series of transactions, which series, but for

this section, would result, directly or indirectly, in a tax

benefit, unless the transaction may reasonably be

considered to have been undertaken or arranged primarily

for bona fide purposes other than to obtain the tax benefit”

#401811v422

“Avoidance Transaction” Canada Trustco

The function of subsection 245(3) was found by the Supreme Court of Canada to be as follows:

“… to remove from the ambit of the GAAR transactions or series of transactions that may reasonably be considered to have been undertaken or arranged primarily for a non-tax purpose. The majority of tax benefits claimed by taxpayers on their annual returns will be immune from the GAAR as a result of s. 245(3).”

Canada Trustco, supra, paragraph 21

#401811v423

“Avoidance Transaction”Canada Trustco

Involves an examination of the relationships

between the parties and the relevant transactions

leading to an objective assessment of the relative

importance of the purposes of the transaction

Burden is on the taxpayer to prove these facts

A non-tax purpose is broader than a business

purpose and may include family or investment

purposes

#401811v424

“Avoidance Transaction” Canada Trustco

“If at least one transaction in a series of transactions

is an "avoidance transaction", then the tax benefit

that results from the series may be denied under the

GAAR. This is apparent from the wording of s.

245(3). Conversely, if each transaction in a series

was carried out primarily for bona fide non-tax

purposes, the GAAR cannot be applied to deny a

tax benefit”.

Canada Trustco, supra, paragraph 34

#401811v425

“Avoidance Transaction” –Judicial Consideration

Subsection 245(3) has not been subject to extensive judicial consideration

In many appeals to the Tax Court of Canada and the Federal Court of Appeal, the taxpayers have conceded that the transactions at issue were “avoidance transactions” within the meaning of ss. 245(3) of the Act (e.g. Canada Trustco, Kaulius, Lipson)

#401811v426

“Avoidance Transaction” –Subsection 245(3): Recent Issues

Issues recently considered and under

consideration by the Courts:

– How does an objective determination of “primary

purpose” occur? (MacKay, Copthorne)

– Does the “overall purpose” of the series affect

the purpose of each transaction in the series?

(MacKay, Copthorne)

– When is a transaction part of the series?

(Copthorne, MIL Investments)

#401811v427

“Avoidance Transaction” –Subsection 245(3): Responses

Primary purpose determined through many objective factors (MacKay, Copthorne)

The “how” of a transaction is subordinate to its “why”

– The “why” is the purpose

– The “how” is the way it was implemented –(MIL, MacKay, Landrus)

Has the “how” and “why” test survived Copthorne?

#401811v428

“Avoidance Transaction” –Subsection 245(3): Responses

If primary purpose of a transaction is non-tax, it

does not matter that transaction is effected in tax

effective manner – (MIL, MacKay)

Not every transaction forms part of the series –

(MIL)

Degree of connectivity required for series – Canada

Trustco – (MIL, Copthorne)

Recent cases reject Taxpayer‟s submission on the

facts (Landrus, Remai)

#401811v429

“Avoidance Transaction” –Primary Purpose

“While the inquiry proceeds on the premise that both

tax and non-tax purposes can be identified, these

can be intertwined in the particular circumstances of

the transaction at issue. It is not helpful to speak of

the threshold imposed by s. 245(3) as high or low.

The words of the section simply contemplate an

objective assessment of the relative importance of

the driving forces of the transaction.”

#401811v430


The focus on the taxpayer‟s primary purpose is clearly intended “to preserve the right of the taxpayer to structure a business-driven transaction in a tax effective manner.”

The recognition of tax planning as a “legitimate and accepted part of Canadian tax law” necessarily involves distinguishing between the “purpose” of a transaction and the “structure” or “form” used to implement the transaction

Canada Trustco, paragraphs 30 and 31

#401811v431


The use of the term “primarily” in subsection

245(3) recognizes that there can be more

than one purpose for a transactionCanada Trustco, paragraph 27

#401811v432


Again, this is a factual inquiry. The taxpayer cannot avoid the application of the GAAR by merely stating that the transaction was undertaken or arranged primarily for a non-tax purpose. The Tax Court judge must weigh the evidence to determine whether it is reasonable to conclude that the transaction was not undertaken or arranged primarily for a non-tax purpose. The determination invokes reasonableness, suggesting that the possibility of different interpretations of the events must be objectively considered.” [emphasis added]

Canada Trustco, supra, paragraphs 28 and 29

#401811v433

MacKay et al v. the Queen

Facts

– Two of the taxpayers wished to buy a shopping

centre for $10,000,000

– Plan was to improve it and then sell it for

$14,000,000

– Bank was lender to owner of shopping centre

– Owner in default and shopping centre‟s value

was less than principal amount of the receivable

($16,000,000)

#401811v434

MacKay et al v. the Queen (cont’d)

Bank agrees to sell shopping centre for $10,000,000 to taxpayers

After basic terms were locked up, taxpayers obtained advice on how to structure transaction

Other taxpayers join in to become participants in the transaction

Some or all taxpayers had history of buying property/mortgage receivables and doing business in a partnership

Taxpayers were all very experienced in the real estate industry and most had done transactions with each other previously

#401811v435


Loss arose at year end when property written down to FMV of

$10,000,000 from deemed cost of $16,000,000

Partnership continued to fix up property, stabilize rents and

attempted to sell the property by 1996

Forecloses and

acquires Property

Transfer of

Mortgage Partnership

Bank TaxpayersBank Sub

#401811v436


Transactions similar to those considered in

Kaulius and OSFC Holdings Ltd. In those

cases, MNR was held to have been correct

to use GAAR to disallow the transfer of

losses from a corporation to taxpayers

unrelated to that corporation

The transactions in issue in these twelve

cases resulted in a similar transfer of losses

#401811v437


TCC finds:

– Not an “avoidance transaction”

– 7 day case with 14 witnesses

– Witnesses credible and documents reliable

– Said to have considered each individual

transaction and not just overall purpose (paras.

61, 79 and 126)

– Distinguished OSFC and Kaulius on the facts

#401811v438

MacKay: FCA (2008)

Appeal by the Crown to FCA

FCA allowed appeal and overturned TCC

judgment

#401811v439

MacKay: FCA (2008)

TCC did not reach the conclusion that each transaction within the series of transactions was undertaken primarily for purposes other than tax by determining separately the purpose of each transaction within the series

Rather, TCC determined the primary purpose of the series of transactions and attributed that purpose to each transaction within the series. TCC considered that any other approach would undermine the object of subsection 245(3)”

#401811v440

MacKay: FCA (2008)

Paragraph 245(3)(b) requires a determination of the primary purpose of any transaction (or transactions) within a series of transactions that would result in a tax benefit. It follows that a subset of transactions within a series of transactions is an avoidance transaction unless the subset of transactions may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit

The conclusion that a series of transactions was undertaken primarily for bona fide non-tax purposes does not preclude a finding that the primary purpose of one or more steps within the series was to obtain a tax benefit

#401811v441

MacKay: FCA (2008)

The TCC should have determined the primary purpose of the transactions by which the Bank became a partner of the Partnership at the outset, transferred the mortgage receivable to the Partnership before any of the respondents became partners, and remained a partner for more than 30 days after the transfer. Nothing in the record suggests that the non-tax business objectives of the respondents required those steps to be taken

The primary purpose of those transactions was to transfer the $6 million accrued loss on the mortgage receivable from the Bank to the Partnership so that the loss could be deducted by the respondents in computing their income

#401811v442

#401811v443

STEP 1

Aco Sisterco

$100 PUC

Lossco

$100 PUC

Non-Resident

$100 PUC

#401811v444

STEP 2 – 1993 Sale

$100 PUC

Aco Sisterco

$100 PUC

Lossco

$100 PUC

Non-Resident

#401811v445

STEP 3 – 1995 (Redemption of Shares for $200 after Amalgamation)

$200 PUC

AcoAmalco

$100 PUC

Non-Resident

#401811v446

FCA

#401811v447

FCA

#401811v448

FCA

#401811v449

FCA

#401811v450

SCC

#401811v451

Subsection 245(3): Series of Transactions

Canada Trustco (para 23-26) briefly

discussed this concept

not clear on face

agreement with FCA in OSFC (Rothstein, J.)

and H.L. concept (Craven, Ramsay) –

“Common Law Test”

– preordained to produce a given result

– not practical likelihood that the pre-planned

events would not take place in order ordained

#401811v452


Expansion of Common Law Test by

Subsection 248(10)

Acceptance of para.36 in OSFC re

subsection 248(10)

– Parties know of series

– Took it into account when deciding to complete it

#401811v453


SCC in Trustco (para. 26):

– “in contemplation of” = “because of” or “in

relation to” the series

– events before or after the basic avoidance

transaction

#401811v454


Series considered in both MIL Investments

and Copthorne

Copthorne distinguished MIL (para.41)

Copthorne analysis in paras. 28-43 of the

Reasons

#401811v455


Copthorne – Crown argues 1993 and 1995

events are a series:

– connected by subsection 248(10) and not

Common Law Test

TCC finds a strong nexus and not

independent events

#401811v456


Redemption done in 1995 in contemplation

of the first series in 1993 even though 1995

redemption not planned in 1993

First series in 1993 related to redemption in

1995 in the sense that taxpayer had

knowledge of the prior preservation of PUC

and took into account when completing the

redemption

#401811v457

LANDRUS

Partnership 1 Partnership 2

Condo

Rental

Pool

Condo

Rental

Pool

UCC less than FMV

(potential terminal loss)

#401811v458

LANDRUSSale of Assets for Units


Partnership 3

Condo

Rental

Pool

Condo

Rental

Pool

Distribution of

Partnership 3 units

Partners Partners

Sale of assets

for units

Sale of assets

for units

#401811v459

LANDRUS Subsection 85(5.1) n/a to Deny Terminal Losses


Partnership 3

partners partners

Condo

Rental

Pool

Condo

Rental

Pool

allocate terminal loss

#401811v460

LANDRUS

Misuse or Abuse?

Then 85(5.1) did not apply to stop loss

…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

#401811v461

Landrus – F.C.A. Decision

The Tax Court decision denying application of the GAAR was affirmed by the Federal Court of Appeal

Several specific anti-avoidance rules that might deny a terminal deduction under 20(16) did not apply here

– “…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”

The appellant‟s economic interest did change: he became a member of a different and larger partnership, which had more partners

Unlike in Lipson, no specific anti-avoidance provision was used to obtain a tax benefit

The terminal deduction claimed by the appellant reflected a real economic loss

Consequently there was no misuse or abuse

#401811v462

REMAI

Mr. Remai

Managementco

management fees = promissory notes

#401811v463

REMAI

Managementco

Mr. RemaiRemai

Foundation

donate notes

credit disallowed

under 118.1(13)(a)

#401811v464

REMAI

Managementco Sweet

Remai

Foundation

Mr. Remai

(2) credit allowed under 118.1(13)(c)

(1) sell Managementco

Notes to Sweet for equal

notes

Nephew

100%

#401811v465

REMAI (cont'd)

Sweet and Foundation said to deal at arm‟s length

Tax benefit conceded

Sale of Note to Sweet an “avoidance transaction”

Only reason Foundation sold the notes was to allow Remai the charitable tax credit – “Transaction would not have occurred but for” – Is this a reason or a purpose?

Not abusive tax avoidance

Quoted Bowman, C.J. in Jabs Construction

“Where a taxpayer structure a transaction to take advantage of a specific provision (non anti-avoidance Interpretation of the Act) – no misuse or abuse of the Act”

#401811v466

Remai (FCA)

The Tax Court decision was upheld on appeal

Its conclusion that uncle and nephew dealt at arm‟s length was a mixed question of law and fact and should not be disturbed

The only GAAR issue was whether there was a “misuse or abuse”

There was no abuse of 118.1(13)(c)

Rejects Crown‟s argument that the provisions relating to “non-qualifying securities” were intended to prevent taxpayers from receiving a charitable tax credit while retaining the use of the related funds

#401811v467

Subsection 245(4) of the Act

Subsection 245(4) of the Act states:– Subsection (2) applies to a transaction only if it may reasonably

be considered that the transaction: would, if this Act were read without reference to this section, result

directly or indirectly in a misuse of the provisions if any one or more of

– (i) this Act,(ii) the Income Tax Regulations,(iii) the Income Tax Application Rules,(iv) a tax treaty, or

– (v) any other enactment that is relevant in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purpose of that computation; or

would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole

#401811v468

“Abuse” or “Misuse” Issues –Subsection 245(4)

Some issues emerging from the case law:

– What is abusive?

– Why do similar cases get decided differently?

– Who has to prove it?

– What is the role of economic substance?

#401811v469

Canada Trustco: “Misuse” or “Abuse” – Subsection 245(4)

The analysis of a misuse and abuse is

inseparable

Specific provisions must be interpreted in

their legislative context

The “economic substance” is only relevant

where the statutory provisions focus on

economic concepts

#401811v470

Canada Trustco: “Misuse” or “Abuse” – Subsection 245(4)

Whether the transactions were motivated by

a non-tax purpose may be relevant but is by

itself insufficient to establish abusive tax

avoidance

The Crown has the onus of proving abusive

tax avoidance

#401811v471

“Abuse” or “Misuse” Issues –Subsection 245(4)

The Supreme Court notes that subsection 245(4) "has given rise to the most difficulty in the interpretation and application of the GAAR"

Notwithstanding both the former and the current wording, it held that "abuse" and "misuse" are part of the same concept

A court's task is to interpret the allegedly abused or misused statutory provisions in light of their purpose, determined by reference to their text and context

#401811v472

Lipson: Facts

Parties to the Tax Court Appeal concluded

an Agreed Statement of Facts (ASF)

Agreement also made about the basis of the

assessing positions taken by the CRA

#401811v473

Lipson: Facts (cont’d)

Mr. & Mrs. Lipson purchased a residence for $750,000

Mr. & Mrs. Lipson had secured a mortgage for $562,500 from financial institution

Mrs. Lipson borrowed $562,500 from same financial institution in exchange for a promissory note and used the proceeds to purchase family corporation shares from Mr. Lipson for a fair market value price

#401811v474


Mr. & Mrs. Lipson then used mortgage advance to pay off the promissory note

Mr. Lipson admitted that all transactions were avoidance transactions

Mr. Lipson argued that, by virtue of subsections 73(1) and 74.1(1), Mrs. Lipson‟s income from the dividends on the shares and loss from the payment of interest was attributed to Mr. Lipson, who claimed the interest expense net of the dividends as income (1995) or loss (1994 and 1996) from the shares

#401811v475


History of reassessments important

Crown argued interest expense first denied by

Singleton

Crown changed to GAAR as sole basis for

challenge after Singleton wins in 2001

Crown never raised subsection 74.5(11) to deny

attribution rules and acknowledged in ASF that

attribution rules applied but for GAAR

#401811v476

Lipson v. The Queen

Share Purchase Transaction

House Purchase Transaction

Step 1$562,500 Loan(“Loan 1”)

Husband

Step 2Share Purchase

$562,500

Step 3House Purchase

$562,500

Vendor

Step 4$562,500 Loan

Secured by House (“Loan 2”)

Step 5Repayment of Loan 1

with Loan 2 Proceeds

Bank Wife

#401811v477

Lipson: Decision of TCC Chief Justice Bowman

Reviewed the purpose of paragraph

20(1)(c), subsections 20(3) and 73(1), and

section 74.1 and found that the transactions

resulted in a misuse of these provisions

Not one of the purposes of these provisions

was being fulfilled by the series of

transactions

#401811v478

Lipson: Decision of TCC Chief Justice Bowman (cont’d)

The overall purpose as well as the use to

which each individual provision was put was

to make interest on money used to buy a

personal residence deductible

The Court did not look to any „overarching

policy‟ superseding the specific provisions of

the Act

#401811v479

Lipson: Decision of TCC

Cited 7 basic principles summarized in Canada

Trustco and noted:

– The SCC directs a unified textual, contextual and

purposive analysis not only of the sections giving rise to

the tax benefit, but of the very section which can deny the

benefit, i.e., section 245

– This textual, contextual and purposive analysis is a

general principle of statutory interpretation of broad

application that should be applied to section 245 as well

as to any other section of the Act

#401811v480

Lipson: FCA Decision (March 16, 2007)

In affirming the TCC‟s decision in Lipson,

the Federal Court of Appeal (FCA):

– indicated that the overall purpose of the series of

transactions as a whole was relevant in

determining "abuse" or "misuse“ (para. 45-50)

– followed Canada Trustco in giving weight to the

TCC‟s conclusion on the "abuse" or "misuse"

issue

#401811v481

Lipson: FCA Decision (March 16, 2007) (cont'd)

FCA said that if transactions are considered

without overall purpose, no misuse or abuse

of any provisions relied on (paras. 33-42)

FCA acknowledged that the transactions

were real from a legal and economic

perspective (para. 39)

#401811v482

Lipson: The Supreme Court of Canada

Leave and Hearing

– SCC granted leave on October 25, 2007 (Chief

Justice, Rothstein and Charron)

– SCC heard appeal on April 23, 2008 (Chief

Justice and Bastarache not sitting – 7 justices

only)

#401811v483

Lipson: The Supreme Court of Canada (cont’d)

Lipson: Issues Raised in the SCC Hearing

– Is the application of GAAR a “smell test”?

– Are the “choice of method” and Duke of Westminster

principles alive under GAAR?

– To what extent is “economic substance” relevant when

GAAR is applied?

– What is the role of GAAR when a specific anti-avoidance

rule (subsection 74.5(11)) does not apply?

– What is the effect of Lipson on Singleton and Ludmer?

#401811v484


Lipson: Issues Raised in the SCC Hearing– Is the “overall purpose” of series of transactions

relevant in an “abuse” analysis under subsection 245(4)?

– Does the use of an “overall purpose” analysis under subsection 245(4) amount to a “recharacterization”?

– What is the interaction between subsection 245(3) and 245(4) as they relate to the purpose of a series of transactions?

#401811v485


Lipson: Issues Raised in the SCC Hearing

– To what extent is “abuse” a question of fact

rather than one of mixed fact and law?

– Are there inconsistencies in decisions of the

lower courts and can there be certainty,

predictability and fairness (“CPF” concept) with

GAAR?

#401811v486


Lipson: The Supreme Court of Canada Majority Decision (January 8, 2009)

– The Majority Decision of Mr. Justice LeBel (Charron, Abella, Fish JJ) (53 paragraphs)

– Minister proved abusive tax avoidance

– Singleton not dispositive

– 2 Tax Benefits: Interest Expense for Mrs. Lipson and Attribution of Expense to Mr. Lipson

– “Followed” Canada Trustco methodology

#401811v487



Majority Decision (January 8, 2009)

– Identify tax benefits, identify tax provisions giving

rise to the benefits, identify object, spirit &

purpose of the tax provisions, identify whether

the “overall result” abuses the tax provisions

– No abuse of interest expense provisions –

20(1)(c) and 20(3) (para. 41)

– Abuse of section 74.1 (paras. 42-43)

#401811v488



Majority Decision (January 8, 2009)

– Reasonable consequences under 245(5) to

deny attribution of interest expense but leave Mr.

Lipson with dividends

– Subsection 74.5(11) not applicable on the facts

– Subsection 245(4) is not concerned with “overall

purpose” (paras. 33-34)

#401811v489


– No collapse of transactions into one transaction

or recharacterization (para. 33)

– Abuse must be related to specific transactions

forming part of the series (para. 34)

– Entire series of transactions should be

considered to determine abuse of provisions

(paras. 33-37)

#401811v490


Lipson: The Supreme Court of Canada Majority Decision (January 8, 2009)

– GAAR intended to create uncertainty but the Duke principle still alive (paras. 21, 52)

– Role of GAAR in the Act (para. 52)

– The GAAR overrides specific anti-avoidance rules (paras. 45-47)

– The abuse is the offset of net losses attributed against income from other sources (paras. 47, 117)

– Abuse to be proven on a balance of probabilities? (para. 21)

#401811v491


Lipson: The Supreme Court of Canada – Dissent #1

– The Dissenting Reasons of Mr. Justice Binnie

(Deschamps J.) (47 paragraphs)

Crown admitted GAAR n/a to Singleton (paras. 57-58)

Not abusive of section 74.1 to have GAAR with a “spousal

twist” (para. 59)

Interaction of sections 73 and 74.1 show result was what

Parliament intended (paras. 76-83)

Parliament didn‟t intend that only “income” and not “loss” be

attributed (paras. 62, 78, 83)

Subsection 74.5(11) n/a on facts (paras. 61 and 79)

#401811v492


– Minister had not proved the abuse of the

statutory provisions clearly (paras. 96, 98)

– Rejection of “overall purpose” as a component of

subsection 245(4)

– Analysis consistent with Canada Trustco

principles (paras. 63-83)

#401811v493


Lipson: The Supreme Court of Canada –Dissent #2 (cont‟d)

– The Dissenting Reasons of Mr. Justice Rothstein (24 paragraphs) No abuse of the interest expense rules (para. 100)

Taxpayers may arrange affairs to finance personal assets out of equity and income-earning assets out of debt (para. 100)

GAAR not applicable because a specific rule pre-empted application (para. 102)

#401811v494


Lipson: The Supreme Court of Canada –

Dissent #2 (cont‟d)

– Attribution of losses can occur from one spouse

to another when Subsection 74.5(11) not

applicable (para. 103)

– GAAR only available when no other recourse for

Minister (para. 104)

– GAAR NOT intended to introduce uncertainty in

tax planning (para. 104)

#401811v495




– GAAR a provision of last resort (paras. 104,

106–107, 116, 119)

– GAAR can only apply once Act read without

GAAR

– Reading Act requires a review of enabling rule

and the related specific anti-avoidance rule

(para. 108)

#401811v496




– Reasonable to conclude that one of the main

reasons for transferring shares was to reduce

Mr. Lipson‟s tax on the dividends (para. 110)

– Subsection 74.5(11) not applicable to catch use

of attribution rules to reduce income from other

sources through attribution of loss (para. 112)

#401811v497




– Subsection 74.5(11) precluded application of

attribution rules and therefore there would have

been no abuse/misuse and GAAR not applicable

(para. 113)

– Must apply a specific rule that could apply and

cannot then rely on the GAAR to assist the CRA

(paras. 114–115, 118)

#401811v498




– GAAR and a specific anti-avoidance rule cannot

apply concurrently (para. 116)

– GAAR not a catch-all provision to apply when

abusive tax avoidance is suspected (para. 116)

– Parties cannot agree that a provision of the law

did not apply (para. 118)

#401811v499




– The analysis of Binnie, J. was flawed

(paras. 119–120)

– The analysis of LeBel, J. was flawed

(paras. 115–118)

– Minister could only deny interest expense under

GAAR (para. 121)

#401811v4100




– Minister could only deny attribution under

subsection 74.5(11) (para. 121)

– Seems anomalous that subsection 74.5(11)

would deny attribution yet the rollover under

subsection 73(1) would still be available to the

transferor (para. 123)

#401811v4101

Common Ground and Themes in the Lipson Sets of Reasons

The Role of the Entire Series of

Transactions

No Recharacterization or Regard for

Economic Substance

The Continued Application of Canada

Trustco and Kaulius

Relevance of “Overall Purpose”

#401811v4102

Common Ground and Themes in the Lipson Sets of Reasons (cont.)

The Role of Subsection 74.5(11)

The Deductibility of Interest Expense

The GAAR is a Provision of Last Resort

The GAAR is Not a Penal Provision or a Hammer to

Pound Taxpayers into Submission

The GAAR was Designed to Restrain Abusive Tax

Avoidance But to Maintain Certainty and Fairness

#401811v4103


The Role of the Entire Series of Transactions

Individual transactions must be viewed within the

context of the series (paras. 22, 34)

This gives context for the individual parts of the

series (paras. 34, 36-37, 40)

Affirms Kaulius comments (paras. 46, 56)

Binnie, J. (para. 68) also agrees

#401811v4104


No Recharacterization or Regard for

Economic Substance

– Discussion by LeBel, J. at paras. 33-34, 38, 39

and 51 acknowledges this

– Binnie, J. affirms this (paras. 62, 64, 69, 87, 90

and 91)

– Crown fails in its argument that the interest

expense was a personal expense and the

interest was not deductible at all

#401811v4105


The Continued Application of Canada

Trustco and Kaulius

– 19 Different paragraphs of Canada Trustco and

six of Kaulius mentioned

– Methodology same (paras. 24-26)

– Interpret statutory provisions in issue (para. 27)

– Determine their essential object, spirit, purpose

(para. 27)

#401811v4106


The Continued Application of Canada Trustco and

Kaulius (cont‟d)

– Identify the tax benefits

– Identify which statutory provisions associated with which

tax benefit (para. 28)

– Determine if avoidance transaction frustrates the object,

spirit or purpose of relevant provisions (para. 33)

– Determine “reasonable consequences” under

subsection 245(5) (paras. 49-51)

#401811v4107


Relevance of “Overall Purpose”– Considered to be an error of law by LeBel, J.

(para. 38) and Binnie, J. (para. 86)

– Not determinative in an analysis under subsection 245(4)

– Motivation, purpose and economic substance only relevant to the extent that they establish whether transaction frustrates purpose of a relevant provision (paras. 57-60 Canada Trustco)

#401811v4108


The Role of Subsection 74.5(11)

– All justice referred to it but NO consensus about

its role in GAAR Analysis

– LeBel, J. (paras. 43-46)

– Binnie, J. (paras. 61 and 79)

– Rothstein, J. (paras. 102-124)

#401811v4109


The Deductibility of Interest Expense

– LeBel, J. (para. 41) says NO abuse of

subsection 20(3) and paragraph 20(1)(c)

– Binnie, J. (paras. 56-59, 60, and 70-73) says

there is NO abuse

– Rothstein, J. (para. 100) reaches a clear

conclusion after reading the reasons of LeBel, J.

and Binnie, J.

#401811v4110


The GAAR is a Provision of Last Resort

– LeBel, J. (para. 47) – “a residual provision”

– Binnie, J. (para. 94) and Rothstein, J.

(para. 104) quote para. 21 in Canada Trustco

– Rothstein, J. emphasizes this point many times

(paras. 104, 106-107, 116, 119)

#401811v4111


The GAAR is Not a Penal Provision or a

Hammer to Pound Taxpayers into

Submission

– LeBel, J. (para. 52)

– Rothstein, J. (para. 116) – Not a “catch-all

provision” for suspicion of abusive tax avoidance

– Binnie, J. (para. 55) – a “weapon” that must be

given a “meaningful role”

#401811v4112


The GAAR was Designed to Restrain Abusive Tax Avoidance But to Maintain Certainty and Fairness


– Binnie, J. (para. 54-55)

– Rothstein, J. (para. 116)

– Uncertainty results because not obvious whether purpose of a statutory provision frustrated by an avoidance transaction

#401811v4113

Points of Disagreement in the Reasons

Did the Minister Establish Abusive Tax Avoidance?

– Binnie, J. highlights the issue (paras. 59, 65, 94-98)

– LeBel, J. makes reference to this issue (paras. 3 and 21)

– LeBel, J. agrees NO abuse regarding interest expense

(para. 100)

– BUT NO demonstration of abusive tax avoidance without

proper consideration of subsection 74.5(11)

#401811v4114


The GAAR and Specific Anti-Avoidance Rules?

– LeBel, J. (para. 47) – GAAR designed to address the

complexity of provisions which fall outside the scope of

specific anti-avoidance provisions

– Relates to impact of complex series of transactions which

often depend on interplay of discrete provisions of the Act

– Rothstein, J. (para. 116) responds to LeBel, J.


#401811v4115


– GAAR can only be relied upon when a relevant

specific Anti-Avoidance rule does not apply

(Rothstein, J.)

– LeBel, J. (para. 45) – If GAAR might apply, then

courts should not refuse to apply it on ground

that a more specific provision might also apply

(Even if the parties considered it did not)

#401811v4116


Reasonable Consequences – Subsection 245(5) of

the Act

– First case to really apply the provision

– 4 possible results could have occurred:

– LeBel, J. : Mr. (Dividends) Mrs. (interest expense)

– Binnie, J. : Mr. (Dividends and interest expense)

– Rothstein, J. : Mrs. (Dividends an interest expense)

– Crown : Mr. (Dividends) No one (interest expense)

#401811v4117

What’s New or Different in Lipsonfrom Canada Trustco / Kaulius?

Rejection of “Overall Purpose” Test– Considered to be an error of law by LeBel, J.

(para. 38) and Binnie, J. (para. 86)

– Not determinative in an analysis under subsection 245(4)

– Motivation, purpose and economic substance only relevant to the extent that they establish whether transaction frustrates purpose of a relevant provision (paras. 57-60 Canada Trustco)

#401811v4118


Onus of Establishing Misuse or Abuse

– Binnie, J. highlights the issue (paras. 59, 65, 94-98)

– LeBel, J. makes reference to this issue (paras. 3 and 21)

– LeBel, J. agrees NO abuse regarding interest expense

(para. 100)

– BUT NO demonstration of abusive tax avoidance without

proper consideration of subsection 74.5(11)

#401811v4119


The Retreat from the Requirement and

Desirability for Certainty


– Binnie, J. (para. 54-55)

– Rothstein, J. (para. 116)

– Why does uncertainty occur? Abuse not

obvious whether purpose of a statutory provision

frustrated by an avoidance transaction

#401811v4120


Reasonable Consequences – Subsection

245(5) of the Act

– First case to really apply the provision

– 4 possible results could have occurred:

LeBel, J. : Mr. (Dividends) Mrs. (interest expense)

Binnie, J. : Mr. (Dividends and interest expense)

Rothstein, J. : Mrs. (Dividends an interest expense)

Crown : Mr. (Dividends) No one (interest expense)

#401811v4121


Specific Anti-Avoidance Rule v. the GAAR?

– LeBel, J. (para. 47) – GAAR designed to address the

complexity of provisions which fall outside the scope of

specific anti-avoidance provisions

– Relates to impact of complex series of transactions which

often depend on interplay of discrete provisions of the Act

– Rothstein, J. (para. 116) responds to LeBel, J.


#401811v4122

The Significance of Lipson –General Comments

Impact of Lipson on the Duke of

Westminster Principle

– LeBel, J. (para. 21) – Principle remains but not

absolute

– Binnie, J. (para. 54) – How healthy? Principle

tempered

– Rothstein, J. (para. 100) - Use words “arrange

affairs”

#401811v4123


Interest Deductibility, Interpretation Bulletin IT 533 and Singleton

– Singleton shuffle still alive? Yes

– Binnie, J. refers to and endorses Singleton(paras. 56-60, 62, 81, 87)

– Rothstein, J. endorses it in para. 100

– LeBel, J. (paras. 19, 20 and 52) says Singletonand tracing not dispositive or determinative of the appeal – no rejection of Singleton or tracing

#401811v4124


– LeBel, J. refers to Singleton as an “otherwise

valid transaction”

– Are IT 533 comments still applicable? Should

be, possibly with some new reference to GAAR

in the IT

– Will “tracing” immunize transactions from

GAAR? – not entirely (para. 52)

– Cash damming ok? – Should be OK

– Impact on section 18.2?

#401811v4125


Impact on Tax Advice, Planning and Opinions

– Opinions will be given: Yet

– Lipson will require comment

– May result in qualifications

– Some transactions may not be the subject of favourable

opinions

– “Overall result” will be an area requiring comment

– Will tax rulings be sought more frequently?

#401811v4126


The CRA‟s Possible Future Approach to Tax

Audits and Tax Disputes

– Litigation risk exists for CRA and taxpayers

– Prospects for settlement should get better

– Crown lost many elements of the battle

#401811v4127


– Both taxpayers and the Crown lost certainty

– How aggressively will CRA apply the GAAR?

– The justices warn against indiscriminate application

– Specific anti-avoidance rules will be applied frequently – less defences and more certainty of result

– GAAR is uncertain because not always obvious if the purpose of a provision is frustrated –Lipson shows this

#401811v4128


Possible Impact of Lipson on the Lower

Courts

– Lipson principles will be followed - YET

– How will they be applied?

– Will a “smell test” emerge under the guise of

applying Canada Trustco?

#401811v4129

Collins & Aikman Products Co. V.The Queen, 2009 TCC 299

#401811v4130

FACTS

#401811v4131

FACTS

#401811v4132

ISSUE

#401811v4133

TAX COURT OF CANADA

#401811v4134

TAX COURT OF CANADA

#401811v4135

TAX COURT OF CANADA

#401811v4136

Garron (now St. Michael Trust Corp.)

Facts

– In 1992, PMPL Holdings Inc. (“PMPL”) was

formed to hold shares of two operating

companies

– 50% of PMPL shares were owned by Mr. Dunin

and 50% of shares were owned by Garron

Holdings Ltd. (GHL”)

– Mr. Garron (“Garron”) and other family members

held all of the shares of GHL

#401811v4137

Garron

Facts

– In 1998, PMLP underwent a reorganization

Dunin transferred his PMPL shares to a newly-

incorporated holding company (“DHI”)

GHL and DHI exchanged their common shares of

PMPL for preferred shares with a redemption amount

equal to FMV or $50 million

#401811v4138

Garron

Facts

– Common shares of PMPL were issued to

1287325 Ontario Ltd. (“325”) and to 1287333

Ontario Ltd. (“333) for nominal consideration

– Shares of 325 were issued to Summersby

Settlement (a Dunin family trust) and shares of

333 were issued to Fundy Settlement (a Garron

family trust) (the “Trusts”)

#401811v4139

Garron

Facts

– The Trustee of Summersby and Fundy was St.

Michael Trust Corp., a company incorporated

and licensed in Barbados

– Each Trust had a protector who had the power

to remove and replace the trustee

– During 2000, the shares of PMPL were sold to

an arm‟s length purchaser for $532 million

#401811v4140

Garron

Facts– As a result of the sale of PMPL, the trusts

disposed of the majority of the shares of 325 and 333

– Summersby and Fundy each realized capital gain on their respective dispositions of 325 and 333

– The Trusts claimed that the capital gain was exempt from Canadian income tax by virtue of provisions of the Treaty

#401811v4141

Garron

Facts

– Treaty Provision relied on by the Trusts - Article

XIV(4)

Gains from the alienation of any property, other than

those mentioned in paragraphs 1, 2 and 3 may be

taxed only in the Contracting State of which the

alienator is a resident

– The Trusts were not subject to Barbadian

income tax on the capital gains realized on the

disposition of shares of 325 and 333

#401811v4142

Garron

Facts– CRA issued reassessments on the basis that the

capital gains were subject to Canadian tax because, among other things, the trusts were resident in Canada and GAAR should apply on the basis that there was a misuse or abuse of the Treaty

– Residence tie-breaking rule in the Treaty was not engaged by agreement of Canadian and Barbadian competent authorities

#401811v4143

Garron

Corporate Structure Prior to April 6, 1998

Garron

Family Trust

Garron

Holdings Ltd.

PMPL

ANDREW

DUNIN

BERNA

GARRON

MYRON

GARRON

#401811v4144

Garron

Garron

Family Trust

Garron

Holdings Ltd.

PMPL

Dunin

Holdings Inc.

BERNA

GARRON

MYRON

GARRON

Corporate Structure As At April 6, 1998

ANDREW

DUNIN

333325

Barbados

Canada

Summersby

Settlement

Fundy

Settlement

#401811v4145

Garron

Key arguments that GAAR applies

– There was an abuse of the Treaty because the Treaty was

used to avoid a specific anti-avoidance rule in the ITA

which would result in the capital gain being subject to

Canadian income tax

– The Treaty is designed to exempt only true residents of

Barbados from Canada tax and the Trusts were not true

residents of Barbados

– The capital gains realized by the Trusts were not not

intended to be exempt from Canadian tax

#401811v4146

Garron

Key arguments that GAAR applies– The Treaty provision dealing taxation of gains

from the alienation of property is only intended to prevent double taxation and Barbados did not tax the capital gains realized by the Trusts

– The Treaty is not intended to permit an erosion of the Canadian tax base that could occur with widespread use of this type of tax planning

#401811v4147

Garron

TCC Decision

– The Taxpayer prevailed on all issues raised at

trial, including GAAR, except the residence of

the Trusts

– With respect to GAAR, the Taxpayers

acknowledged that the transactions gave rise to

a tax benefit and that the transactions were

avoidance transactions

#401811v4148

Garron

TCC Decision - GAAR– It is not an abuse of a tax treaty to use a

provision of the treaty to avoid an “anti-avoidance” rule in the ITA

– Tax treaties are not intended to assist tax avoidance but, in line with the OECD Commentary to the Model Double Taxation Convention, tax treaties should be amended to take account of domestic anti-avoidance legislation

#401811v4149

Garron

TCC Decision – GAAR

– Treaty abuse is not established just because a provision of

the ITA which would result in the capital gains of the

Trusts being taxable is found to be inapplicable

– The Treaty applies to exclude the taxation of capital gains

from Canadian taxation provided a taxpayer is a resident

of Barbados – it does not matter that the taxpayer‟s

connection with Barbados is minimal

#401811v4150

Garron

TCC Decision – GAAR

– A tax treaty allocates the right to tax – it does not

compel taxation of an amount in order for the

amount to be exempted from tax in the other

jurisdiction

– Erosion of the tax base is not a sufficient basis

to find on which to find a tax treaty has been

abused

#401811v4151

Garron

TCC Decision – Residence

– TCC determined that the Trusts were resident in

Canada and subject to Canadian tax on the

capital gain realized on the disposition of shares

of 325 and 333

#401811v4152

Garron

TCC Decision – Residence– The ITA does not contain specific provisions determining

residence of a trust

– Under common law, residence of a corporation is determined by the location of its “central management and control”

– The common law tests for determining residence of a corporation are equally applicable in a trust context

– Adopting the corporate tests of residency for trusts will promote consistency, predictability and fairness in tax law

#401811v4153

Garron

TCC Decision – Residence– Relevant time of determining residency is when

the Trusts disposed of the shares of 325 and 333

– Key reasons why the “central management and control” of the Trusts abided in Canada The Trustee provided only administrative services to

the Trusts

It was not expected that the Trustee would have decision making responsibility beyond administrative matters

#401811v4154

Garron


– The protector could replace the Trustee and Dunin and

Garron could replace the protector

– There was at least some evidence that which suggested

that investment of cash proceeds received from the sale of

shares of 325 and 333 was under the direction of Dunin

and Garron

– The beneficiaries of the Trusts (all located in Canada)

effectively chose the Trusts‟ investment advisors

#401811v4155

Garron

TCC Decision – Residence– Tax minimization strategies were under the

direction of Dunin for Summersby and Garron for Fundy

– The Taxpayers introduced virtually no documentation in support of the view that the Trustee actively managed the Trusts

– The Minister‟s evidence was consistent with the conclusion that the Trustee did not actively manage the Trusts

#401811v4156

Garron


– The Trustee was the arm of an accounting firm

at the relevant time and it was not clear that the

accounting firm had expertise in managing trust

assets

– Evidence of the Taxpayers‟ witnesses did not

support the view that the Trusts were managed

by the Trustee

#401811v4157

Garron

An important Canadian tax decision from both the

GAAR and residency perspectives

Application of “central management and control”

test in determining residence of a trust is new law

Does the “central management and control” test

really promote consistency, predictability and

fairness?

Appealed to FCA as “St. Michael Trust Corp.”

Facta being filed

#401811v4158

Antle

GAAR Issue

– Will GAAR apply to a sale of shares by a spouse

to another through a Barbados spousal trust

which bumps the basis of the shares resulting,

ultimately, in a tax-free capital gain when the

shares are sold to a third party?

The case also address the validity of a trust

#401811v4159

Antle

Facts

– Paul Antle and Mukesh Kapila incorporated a company

(“PM”) in Newfoundland to acquire shares of SCC

Environmental Group Inc. (“SCC”)

– In 1998, PM acquired the SCC shares from Stratos Global

Corporation (“Stratos”)

– PM acquired the SCC shares from Stratos in exchange for

preferred shares of PM, debt and a right to 50% of profits

in the event of a future sale of the shares of SCC by PM

#401811v4160

Antle

Facts

– In August 1999, Antle entered into discussions with MI

Drilling (MI”) regarding the possible sale of PM to MI

– On behalf of SCC Antle accepted MI‟s purchase offer on

October 1, 1999 and a draft purchase and sale agreement

was prepared showing Antle and Kapila as the sellers of

PM shares

– After discussions and negotiation, Stratos consented to

the sale on November 23, 1999

– Closing date was set at December 14, 1999

#401811v4161

Antle

Facts - The Plan

– Antle would establish a Barbados resident

spousal trust (the “BTrust”) for his wife

– Antle would gift his PM shares to BTrust

– BTrust would sell the PM shares to Mrs. Antle

for FMV in exchange for a note from Mrs. Antle

#401811v4162

Antle

Facts - The Plan

– BTrust would be wound up and the note would

be distributed to Mrs. Antle as the sole

beneficiary of BTrust

– Mrs. Antle would sell the PM shares to MI for

FMV

– Mrs. Antle could subsequently gift the proceeds

from the PM share sale to Mr. Antle

#401811v4163

Antle

Fact – The Plan

– The plan relied on the interaction of three provisions,

including an anti-avoidance provision, of the ITA and

Article XIV(4) of the Canada-Barbados Income Tax Treaty

(the “Treaty”)

– The anti-avoidance provision deemed BTrust to be a

resident of Canada for tax purposes because Antle

transferred property to BTrust and a related party, Mrs.

Antle, was the beneficiary

#401811v4164

Antle

Facts – The Plan

– Antle was entitled to “roll-over” his PM shares to BTrust on

a tax deferred basis because BTrust was deemed to be a

resident of Canada

– However, by operation of the Treaty and another provision

of the ITA, any capital gain resulting from BTrust‟s sale of

PM shares to Mrs. Antle was exempt from Canadian

income tax notwithstanding BTrust was deemed a resident

of Canada under the anti-avoidance rule

#401811v4165

Antle

Additional Facts– A Barbados lawyer agreed to act as the trustee for BTrust

– The Trustee provided trust documents to Antle‟s lawyer in early November 1999

– The BTrust Deed dated December 5, 1999

– However, Antle did not sign the BTrust Deed until December 14, 1999

– There were other “issues” relating to the timing of transactions and execution of documents which were problematic

#401811v4166

Antle

Antle

OPCO

shares

ACB = $239

FMV = $1.64 million

#401811v4167

Antle

Antle Barbados

Trust

Mrs. Antle

(Beneficiary)

Trustee – Mr. Truss

(resident of Barbados)

Gifting

of OPCO shares

#401811v4168

Antle

Antle Barbados

Trust

Mrs. Antle

(Beneficiary)

Trustee – Mr. Truss

Sale of OPCO shares

for $1.64 million

#401811v4169

Antle

Mrs. AntleSale of OPCO Shares

for $1.64 million

ACB = $1.64 million

MI

#401811v4170

Antle

TCC Decision

– Tax Court found that the transactions ran afoul

of GAAR

– The parties agreed that the transactions gave

rise to a tax benefit

– TCC found that the transactions were avoidance

transactions because there was no bona fide

purpose of the BTrust other than to obtain a tax

benefit

#401811v4171

Antle

TCC Decision

– If Antle had sold the PM shares to MI directly,

Antle would have realized and paid tax on the

capital gain

– The general Canadian tax policy relating to

taxation of capital gains in a marital unit is that

the gains are taxable when the underlying

property is transferred outside the marital unit

#401811v4172

Antle

TCC Decision– Although Canada agreed not to tax capital gains

realized by Barbados residents on the disposition of Canadian property, Canada could still tax an individual resident in Canada where that individual has undertaken transactions to shift a capital gain to a Barbados trust

– The Treaty might save BTrust from Canadian taxation but it does not save Antle

#401811v4173

Antle

TCC Decision

– The transactions were designed to defeat the

object, purpose and spirit of the ITA

– The reasonable tax consequence is to include

the taxable portion of the capital gain in Antle‟s

income

#401811v4174

Antle

The TCC decision is an adoption of the Lipson form of analysis

The TCC focused on the overall result of the transactions and the overall purpose of the legislative provisions dealing with the taxation of transactions involving property within the marital unit and outside of the marital unit

Antle suggests that you can‟t use an anti-avoidance rule to further a tax planning objective

#401811v4175

Antle

TCC Decision

– TCC found also found that Antle did not intend to settle the PM

shares in BTrust but “simply signed documents on the advice

of professional advisors

– The TCC found that BTrust was not a duly constituted trust

because

Certainty of intention in terms of formation of BTrust and

certainty of subject matter were in question

There was no actual transfer of PM shares to BTrust by Mr. Antle

Appealed to FCA (facta being filed)

#401811v4176

Lehigh Cement

GAAR Issue

– Is a transaction undertaken to avoid Canadian

withholding tax on interest paid to a non-resident

subject to GAAR

#401811v4177

Lehigh Cement

Facts– Taxpayer borrowed funds from a group of Canadian banks

– Loan was subsequently purchased by a Canadian resident affiliate of the Taxpayer

– At time of purchase, loan terms were amended to make loan repayable on demand

– Loan was assigned to CBR International Services SA (“CBRIS”), a Belgium company

– From 1994-1997, the Taxpayer withheld Canadian withholding tax on interest remitted to CBRIS

#401811v4178

Lehigh Cement

Facts

– During 1997, CBRIS and Taxpayer restated loan in form of

a subordinated note with a fixed interest rate and a

maturity date in 2009

– 212(1)(b)(vii) of the ITA provided an exemption from

Canadian withholding tax in respect of interest paid to a

non-resident where

The note term exceeded five years and

Interest was legally payable to and was paid to an arm‟s

length non-resident

#401811v4179

Lehigh Cement

Facts

– To take advantage of the exemption, CBRIS sold the right

to receive all interest payments on the loan to an arm‟s

length Belgium bank

– CBRIS retained the note and the right to receive principal

payments from the Taxpayer

– The Taxpayer did not withhold Canadian tax on interest

payments made to the Belgium bank

#401811v4180

Lehigh Cement

#401811v4181

Lehigh Cement

#401811v4182

Lehigh Cement

#401811v4183

Lehigh Cement

TCC Decision

– Taxpayer conceded that it received a tax benefit

and that the sale of the right to interest

payments to the Belgium bank was an

avoidance transaction

– Only question was whether the impugned

transaction constituted an abuse of 212(1)(b)(vii)

#401811v4184

Lehigh Cement

TCC undertook a TCP analysis of 212(1)(b)(vii)

– Text of 212(1)(b)(vii) clearly provided for a withholding tax exemption because the note had a term exceeding five years and the interest was paid to an arm‟s length person

– Purpose of 212(1)(b)(vii) was to help Canadian corporations needing to borrow money by increasing access to international capital markets

#401811v4185

Lehigh Cement

TCC Decision– 212(1)(b)(vii) exemption only applies to arm‟s length

borrowing of capital from a non-resident lender

– Funds were lent to Taxpayer by non-arm‟s length company and no amount of principal was owed to the Belgium bank

– Sale of interest payments by CBRIS to Belgium bank frustrated object, spirit and purpose of 212(1)(b)(vii)

– GAAR applicable

Lehigh Cement is under appeal to FCA

Heard March 10, 2010 – decision reserved

#401811v4186

Lehigh Cement

The FCA has allowed the taxpayer’s appeal and has held

that the GAAR did not apply.

Consequently the taxpayer was not liable to pay

withholding tax on the interest it paid to the Belgian

Bank.

#401811v4187

Lehigh Cement

The Crown could not prove, by reference to the text or

context of 212(l)(b)(vii), or even to budget documents

when it was introduced, that its purpose was limited to

assisting access to international capital markets, as the

TCC had held.

The FCA relies on Canada Trust, including its statement

that the taxpayer must be given any doubt on the

application of 245(4). No mention is made of Lipson.

#401811v4188

Lehigh Cement

It was not commercially unusual, even before enactment

of 212(l)(b)(vii), to split the ownership of the principal

and interest components of a debt.

“...the Crown cannot discharge the burden of

establishing that a transaction results in a misuse of an

exemption merely by asserting that the transaction was

not foreseen or that it exploits a previously unnoticed

legislative gap.”

#401811v4189

OGT Holdings c. Québec

This is a “Quebec Shuffle” case and the first

reported decision on provincial GAAR.

Taxpayer lost at the hearing (C.Q. Québec)

and in the Quebec Court of Appeal

Taxpayer has asked for postponement until

after Lipson has been decided by SCC

#401811v4190


QHoldco 1

Target

Commencement of Series

QHoldco 1

#401811v4191


QHoldco 1

Ontario Holdco

Target Target

Purchaser$

QHoldco 1

#401811v4192


QHoldco 1

Ontario Holdco

Target

Purchaser$

QHoldco 1

#401811v4193


Facts

– Election made for Quebec tax purposes by

Quebec Holdcos on rollover of Target shares to

an Ontario Holdco

– No such election made for federal tax purposes

(the “Shuffle”)

– Ontario Holdco sold the shares to third party

#401811v4194


Facts

– Ontario Holdco paid no Ontario tax because of

high ACB (resulting from lack of federal rollover)

– If Quebec Holdcos had sold shares directly, $7M

of Quebec tax on the capital gain

– Later, Quebec Holdcos and Ontario Holdco

amalgamated

#401811v4195


MRQ applied Quebec GAAR on the basis

that:

– The rollover to Ontario Holdco was a tax benefit

– The rollover was an avoidance transaction

– The series of transactions resulted in an abuse

of the Quebec rollover provisions

#401811v4196


Taxpayer‟s Position:

– The only tax benefit was a deferral of Quebec

tax

– Failure to make an election is not a “transaction”

– The series was undertaken for bona fide

reasons (desire to sell shares and consolidate

assets in Ontario)

#401811v4197


Court‟s Analysis:

– The principal witness admitted that the

transaction was a “Quebec shuffle”

– Rollover provisions are meant for a deferral of

tax, not for tax avoidance

– The taxpayer‟s goal was not in accordance with

the spirit of the QTA

#401811v4198

GAAR Jurisprudence After Canada Trustco/Kaulius

Lipson (SCC) – 4 to 3 for Crown – abuse of attribution rules; interest

expense ok

MacKay (FCA) – leave to SCC denied – “avoidance transaction”

Landrus (FCA) - affiliated loss rules – “bright line” test and GAAR

Remai (FCA) – charitable donation deductible

Lehigh Cement (TCC) – on reserve with FCA – non-resident

withholding tax

Collins & Aikman Products (TCC) appealed to FCA – surplus

stripping – taxpayer wins

Garron (TCC) – appealed to FCA - Barbados trusts/estate freeze/use

of treaty – GAAR not applicable but trusts resident in Canada

Antle (TCC) – appealed to FCA - Capital gains step-up plan using a

Barbados Treaty – GAAR applicable to ignore transfer to Barbados

Trust

#401811v4199

3. The GAAR Scorecard 2005 (Post Canada Trustco) to Sept. 2009

GAAR APPLIES

Kaulius (SCC)

– Loss Transfer

Desmarais

– Surplus Strip

Lipson (SCC)

– Reverse Attribution/Interest

CECO (TCC)

– Ptshp/Disguised Proceeds

OGT Holdings (QCA)

– Quebec Shuffle

Copthorne (SCC to hear)

– Duplication of PUC

MacKay (FCA)

– Avoidance Transaction

Lehigh (TCC) (under FCA appeal)

– Withholding Tax

Antle (TCC) (under FCA appeal)

– Capital Gains, Step-Up Strategy Using Barbados Trust

GAAR DOES NOT APPLY

Canada Trustco (SCC)

– Cost & “Economic Substance”

Evans (TCC)

– Surplus Strip/Income Splitting

Overs (TCC)

– Reverse Attribution/Interest

MIL (FCA)

– Treaty Shopping

Univar (TCC)

– Tiered Financing

McMullan (TCC)

– Capital Gains Strip

Remai

– Charitable Donations

Landrus (FCA)

– Terminal Loss Recognition

Collins & Aikman (under FCA appeal)

– Surplus Stripping

Garron (TCC) (under FCA appeal)

– Barbados Trust Plan

Maréchaux [not decided]

#401811v4200

GAAR Court Decisions Pending

Envision Credit Union – TCC (April 21 - 23, 2010)

– will be continued – broken amalgamation

Triad Gestco Ltd. – TCC (April 23, 2010) – value

shift/capital loss

Lehigh Cement – FCA (March 10, 2010) –

withholding tax

Walsh – TCC (May 4 – 7, 2010) – departure trade

#401811v4201

GAAR Cases in Court Process

Dynacast Canada – No. 113(i) Deduction

Future Electronic – Denial of 20(12) and

126 FTC

Doerksen/McClarty Trust – Kiddy Tax

#401811v4202

GAAR Cases in Court Process

Approximately 32 lead cases before the

Courts, GAAR primary in 15

Some areas involve many taxpayers:

– RRSP strips

– Barbados trusts

– Leveraged donations

– Capital loss creations

– Kiddie Tax

#401811v4203

Types of Transactions in Court

Capital loss creations through stock

dividends or other means (Global Equity

Fund)

Non-resident trusts (Garron Family Trust)

Duplication/creation of tax attributes

(Copthorne, ECL Investments)

Loss transfers

#401811v4204

What Types of Transactions Are Before The Courts?

Leveraged donations (Gould, Fiorante,

Kossow, Marechaux)

Departure trades (Walsh)

Surplus strips Involving 212.1, RCA‟s

(McLeod, Borttazzoni), Kiddie Tax

Broken Amalgamations and Credit unions

(Envision Credit Union)

#401811v4205

What Types of Transactions Are Before The Courts?

Debt settlements (STB Holdings)

Second tier finance companies (Aventis)

Interest deductibility/Reverse attribution

(Swirsky)

RRSP strips (Schiesser)

#401811v4206

Some GAAR Areas Under Review

Leveraged donations

RRSP strips

Tax attributes/value shifts/artificial capital losses

“Hologram tax events” – positive tax attributes in Canada but transactions ignored/neutral in other jurisdictions (USLP/check the box)

Foreign tax credits

Provincial tax arrangements (Québec trusts, Ontario NRO, Québec year ends)

#401811v4207

The Future – Predictions About GAAR in Practice

Harder to give opinions and advice?

Harder to predict results?

More or less GAAR litigation?

#401811v4208

Predictions About GAAR in Practice

More litigation on specific anti-avoidance

rules

GAAR just one tool

GAAR has two defences – why use it?

– Other specific rules have fewer defences (e.g.

247(2)(b), 95(6))

The cases will turn on the facts as well as

the law

#401811v4209


Documenting why transactions are done is

important

Important to have available personnel to talk

about why a transaction was done

Concessions on “avoidance transactions”

may not always be appropriate

What if series “abuses” but each transaction

in series does not?

#401811v4210


How will the changing judicial landscape

and the composition of the Courts (TCC,

FCA, SCC) affect the interpretation of

GAAR?

What you do now will be litigated years from

now when judicial attitudes may have shifted

the gaar - canadian bar association have the courts interpreted the gaar? where might the...

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