Lehigh Cement involved an attack by CRA on a foreign affiliate structure created by a Canadian taxpayer (Lehigh Cement Limited – referred to in the judgment as “CBR Canada”). While the precise details of the underlying transactions are quite complex, in a nutshell Lehigh provided financing to an American sister corporation (“CBR US”). The financing was accomplished by incorporating a new American corporation (“NAM LLC”) that was owned by CBR Canada (99%) and a wholly-owned Canadian subsidiary corporation of CBR Canada (“CBR Alberta”) (1%). CBR Canada borrowed funds, 99% of which was used to provide additional capital to NAM LLC, 1% of which was used to provide additional capital to CBR Alberta (which in turn used those funds to provide additional capital to NAM LLC). NAM LLC then loaned those funds to CBR US. CBR US paid interest to NAM LLC which was deductible for US tax purposes. NAM LLC was treated as a flow-through entity for US tax purposes and the interest paid by CBR US was treated as having been paid directly to CBR Canada and CBR Alberta and subject to a 10% US withholding tax. NAM LLC then distributed the funds to CBR Canada and CBR Alberta as dividends. The interest expense on the funds borrowed by CBR Canada was deductible in Canada by CBR Canada. The dividends paid by NAM LLC were taxable in Canada in the hands of CBR Canada and CBR Alberta but because they were paid out of the “exempt surplus” of a foreign affiliate, i.e., NAM LLC, they were deductible by CBR Canada and CBR Alberta under paragraph 113(1)(a) of the Income Tax Act (Canada). CRA initially considered attacking the structure under GAAR but then abandoned that line of attack. Instead they pleaded a specific anti-avoidance rule applicable to foreign affiliates: paragraph 95(6)(b):
For the purposes of this subdivision (other than section 90),
(b) where a person or partnership acquires or disposes of shares of the capital stock of a corporation or interests in a partnership, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition is to permit a person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, that acquisition or disposition is deemed not to have taken place, and where the shares or partnership interests were unissued by the corporation or partnership immediately before the acquisition, those shares or partnership interests, as the case may be, are deemed not to have been issued.
CRA’s argument was that the shares of NAM LLC were acquired for the principal purpose of avoiding, reducing or deferring the payment of tax otherwise payable on the interest payments made by CBR US. Both CBR Canada and CBR Alberta were accordingly reassessed to deny the deductions under paragraph 113(1)(a) and their appeals were heard together
Much of the reasons for judgment is taken up by a series of technical arguments as to why paragraph 95(6)(b) should not apply to the transaction in question. Unfortunately the Tax Court Judge simply would not entertain any of those arguments. For the first 92 paragraphs of the reasons for judgment it looked very much like CRA was going to prevail.
Then the court turned to the taxpayers’ submission that there had in fact been no reduction in the tax otherwise payable:
 In this case, I accept the appellants’ contention that the reasonable alternative arrangement for the purpose of assessing tax otherwise payable is one in which CBR Canada subscribes for shares directly in CBR US with borrowed funds. As the appellants’ counsel points out, this was in substance the arrangement that existed after 1997 when NAM LLC was dissolved. At that point, CBR Canada used $100 million of borrowed funds to subscribe for additional shares in CBR Alberta, which in turn used the money to subscribe for additional shares in CBR US. The routing of the financing through CBR Alberta was done to get around the bank covenant to which the respondent referred that restricted CBR Canada’s right to invest more than 20% of its assets in a corporation (other than a subsidiary) to which it was related.
 In the post-1997 scenario, the Canadian tax results are the same as those that flowed from the transactions in issue here. CBR Canada was entitled to deduct dividends received from CBR US under paragraph 113(1)(a) since CBR US was already a foreign affiliate. In addition, CBR Canada deducted the interest paid on the money borrowed to purchase the shares of CBR US.
 Therefore, I find that the appellants have shown that there is no tax that would have otherwise been payable had they carried out the alternative transaction described above that did not involve the acquisition of the NAM LLC shares. In other words, the tax savings that they obtained as a result of the transactions carried out in 1995 could have been obtained without the acquisition of the NAM LLC shares. Therefore, I find as well that there was no tax avoided by the appellants as a result of the share acquisition.
 Having reached these conclusions, it is not necessary to decide whether the appellants’ principal purpose in acquiring the shares was to avoid or reduce tax otherwise payable. However, since the tax savings in issue could have been obtained without acquiring the NAM LLC shares,
I accept that the principal purpose for the acquisition was to avoid U.S. tax rather than Canadian tax
. While I agree with the respondent that one of the main benefits of the overall series of transaction comprising the refinancing was the Canadian tax savings, those savings could also have been achieved by a direct investment by CBR Canada in CBR US.
Thus using an adroit bit of common sense advocacy the taxpayers’ counsel were able to overturn CRA’s reassessments in their entirety. One hopes to see more decisions like this from the Tax Court.