https://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/344715/index.do
Canada v. 594710 British Columbia Ltd. (September 20, 2018 – 2018 FCA 166, Dawson, Gleason, Woods (Author) JJ.A.).
Précis: The Appellant was part of a very sophisticated strategy whereby profits within a partnership were, in essence, absorbed, for a fee, by a new corporation brought into the partnership (the new corporation used its own losses to absorb those profits). The Tax Court held that GAAR did not apply to the transaction. The Federal Court of Appeal disagreed and allowed the Crown’s appeal, reserving on the question of costs pending submissions of the parties.
Decision: The avoidance strategy was set out by Justice Woods in a summary format (followed by a much more detailed account of the transaction steps):
[10] Holdco is a member of the Onni Group, which is in the business of real estate development and is actively managed by members of the De Cotiis family. This appeal involves one of the real estate projects, a strata development called the Marquis Grande. The project was undertaken by a limited partnership created for this purpose, the Onni Halifax Development Limited Partnership (the partnership).
[11] The partnership was indirectly owned by four brothers of the De Cotiis family. They indirectly held 99.9 percent of the partnership equally by means of limited partnership interests. The remaining nominal interest was a general partnership interest held indirectly by one of the brothers.
[12] As the project was nearing completion in 2006 with only a few strata units remaining to be sold, the members of the partnership were facing the prospect of having to pay tax on almost $13 million of income. The brothers undertook to avoid this tax by entering into a series of transactions with Nuinsco Resources Limited (Nuinsco), an unrelated public corporation which had available tax losses and deductions.
[13] The arrangement involved Nuinsco becoming the sole limited partner just before the partnership’s year end. This was designed to enable an allocation to Nuinsco of virtually all the partnership’s income for tax purposes (herein referred to as taxable income) in accordance with the original partnership agreement. As a result, none of the partnership’s taxable income was allocated to entities owned by the De Cotiis family.
[14] Although Nuinsco included in its income virtually all of the partnership’s taxable income from the project, approximately $13 million, Nuinsco’s sole economic gain was an amount equal to ten percent of the taxable income that was to be sheltered by Nuinsco’s losses and deductions. Other than this amount, the profit from the development was passed on to corporations owned by the De Cotiis siblings.
She went on to find that the planning offended GAAR and allowed the Crown’s appeal from the Tax Court:
[122] The next question is whether the object, spirit or purpose was frustrated by an avoidance transaction. As described in the Partnerco abuse analysis, this will be the case where “(1) where the transaction achieves an outcome the statutory provision was intended to prevent; (2) where the transaction defeats the underlying rationale of the provision; or (3) where the transaction circumvents the provision in a manner that frustrates or defeats its object, spirit or purpose. … At this stage, the Minister must clearly demonstrate that the transaction is an abuse of the Act, and the benefit of the doubt is given to the taxpayer” (Copthorne at para. 72).
[123] In this case, section 160 was circumvented by the acquisition of control of Partnerco which resulted in a deemed year end on May 28, 2006. The deemed year end defeats section 160 because the transfer of property (i.e., stock dividends/redemption) occurred in a taxation year prior to when the tax liability arose. As discussed above, the acquisition of control of Partnerco arose as part of a series of transactions that was devoid of any purpose or effect except to obtain a tax benefit, or in this case two tax benefits – the avoidance of tax by Partnerco and the avoidance of liability under section 160 by Holdco.
[124] Holdco submits that the Tax Court’s abuse analysis is contrary to the principle set out by this Court in Canada v. Landrus, 2009 FCA 113 at para. 47, 2009 D.T.C. 5085:
… [W]here 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.
[125] With respect, this excerpt from Landrus only tells part of the story. In another part of the reasons in Landrus, the Court makes it clear that abuse may be established by the vacuity of transactions. At paragraph 56, the Court states:
I accept that the transactions in issue would be arguably abusive if they had given rise to the tax benefit in circumstances where the legal rights and obligations of the respondent were otherwise wholly unaffected. …
[126] The Landrus decision supports the conclusion that the acquisition of control of Partnerco is abusive of section 160. There is no error in the Tax Court’s conclusion on abuse.
Costs were reserved pending submissions of the parties.