MacKay v. The Queen

MacKay v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2007-02-21
Neutral citation
2007 TCC 94
File numbers
2001-2301(IT)G, 2001-2302(IT)G
Judges and Taxing Officers
Diane Campbell
Subjects
Income Tax Act
Decision Content
Dockets: 2001-2301(IT)G, 2001-2302(IT)G,
2001-2303(IT)G, 2001-2304(IT)G,
2001-2305(IT)G, 2001-2307(IT)G,
2001-2308(IT)G, 2001-2309(IT)G,
2001-2318(IT)G, 2001-2319(IT)G,
2001-2320(IT)G, 2001-2321(IT)G.
BETWEEN:
JOHN MacKAY, DEREK ROSS LEE,
ROBERT MACDONALD, ROBERT LEE LTD.,
AEBAG HOLDINGS LTD., BEACH AVENUE HOLDINGS COMPANY LTD.,
JOHN CASSILS, JOHN ZAYTSOFF,
TIMOTHY WALLACE, MARIA WONG,
ROBERT GLASS, BRIAN McGAVIN,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on April 3 to April 11, 2006 at Vancouver, British Columbia
Before: The Honourable Justice Diane Campbell
Appearances:
Counsel for the Appellant:
Edwin G. Kroft and
Elizabeth Junkin
Counsel for the Respondent:
Robert Carvalho and
Ron Wilhelm
____________________________________________________________________
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the taxation years are 1991, 1992, 1993, 1994, 1995, 1996 and 1998 are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
If the parties cannot resolve the question of costs, they may contact the Court with respect to submissions in this regard.
Signed at Ottawa, Canada, this 21st day of February 2007.
"Diane Campbell"
Campbell J.
Citation: 2007TCC94
Date: 20070221
Dockets: 2001-2301(IT)G, 2001-2302(IT)G,
2001-2303(IT)G, 2001-2304(IT)G,
2001-2305(IT)G, 2001-2307(IT)G,
2001-2308(IT)G, 2001-2309(IT)G,
2001-2318(IT)G, 2001-2319(IT)G,
2001-2320(IT)G, 2001-2321(IT)G.
BETWEEN:
JOHN MacKAY, DEREK ROSS LEE,
ROBERT MACDONALD, ROBERT LEE LTD.,
AEBAG HOLDINGS LTD., BEACH AVENUE HOLDINGS COMPANY LTD.,
JOHN CASSILS, JOHN ZAYTSOFF,
TIMOTHY WALLACE, MARIA WONG,
ROBERT GLASS, BRIAN McGAVIN,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
CampbellJ.
I. INTRODUCTION
[1] These appeals arise as a result of a series of transactions and events that took place between August and December 31, 1993, and resulted in the reassessment of the Appellants for various taxation years. The appeals were heard together on common evidence.
[2] The Appellants are involved in some manner in the business of investing in, developing and selling real estate. In August 1993, several of the Appellants were presented with the opportunity to purchase the Northills Shopping Centre (the "Shopping Centre") located in Kamloops, British Columbia. At this time, the National Bank of Canada (the "Bank") had possession of the Shopping Centre as a result of foreclosure proceedings pursuant to a mortgage that the Bank held on the Shopping Centre (the "Receivable"). The Bank's cost base for the Receivable was $16,072,865.
[3] The Appellants negotiated the sale of the Shopping Centre with the Bank for a price of $10,000,000. The sale resulted in a non-capital loss, equal to the difference between the cost base of the Receivable ($16,072,865) and the fair market value ($10,000,000), being transferred to a partnership and eventually allocated to each Appellant based on their proportionate share in the partnership. The basic series of transactions that allowed this loss to be transferred can be summarized as follows:
i. The Bank incorporated a wholly owned subsidiary;
ii. The Bank formed a partnership with this new company;
iii. The Bank assigned its interest in the mortgage Receivable to the partnership; and
iv. The Appellants purchased their partnership units in the partnership.
[4] After the transfer of the Shopping Centre to the partnership, in which the Appellants owned partnership units, they wrote-down the cost of the Shopping Centre and realized a loss of $5,820,875. The Appellants then utilized their proportionate share of the loss to offset income from other sources. The transfer and subsequent write down of the value of the Shopping Centre were in accordance with subsections 18(13) and 10(1) of the Income Tax Act (the "Act").
[5] The Appellants were reassessed on the basis that section 245 of the Act, the General Anti-Avoidance Rule ("GAAR"), applied to deny the claimed losses respecting the mortgage. The Respondent submits that the transaction or transactions that gave rise to the tax benefit were avoidance transaction(s) within the meaning of subsection 245(3) of the Act because they were completed in this manner to obtain a tax benefit of the transfer of the non-capital losses, resulting in the eventual reduction of income tax payable by each Appellant based on their proportionate share in the Partnership.
[6] The Appellants submit that "the primary purpose of each of the transactions, and the series of transactions as a whole, was to enable the vendor of the Shopping Centre (the Bank), the purchaser (the Partnership in which the Appellants were members) and each of the Appellants to complete the acquisition of the Shopping Centre" [Appellants' Submissions, paragraph 3]. The Appellants further state that "obtaining tax losses was not the primary purpose of any of the transactions" [Appellants' Submissions, paragraph 3].
II. ISSUES
[7] The Appellants abandoned the argument that section 245 of the Act violated section 7 of the Canadian Charter of Rights and Freedoms.
[8] At paragraph 4 of the Appellants' written opening statement it was conceded that:
(a) The transactions in question gave rise to a "tax benefit" (as defined in subsection 245(1) of the Act); and
(b) In the circumstances, there is no need for thisHonourable Court to engage in any review of the defence found in subsection 245(4) of the Act.
[9] The sole issue in these appeals is whether, in considering the application of section 245 of the Act, there was an avoidance transaction as contemplated by subsection 245(3) of the Act.
III. FACTS
[10] The facts in these appeals are quite lengthy. Over the course of seven days of hearings, a total of 14 witnesses testified. Those witnesses included 11 of the Appellants; Bill Kennedy, the representative of the Bank; Tony Letvinchuk, the Property Manager of the Shopping Centre; and Gilbert Lee, an Appeals Officer with the Canada Revenue Agency. In addition, 226 documents were presented in a Joint Book of Documents.
[11] The parties entered an Agreed Statement of Facts, which is attached to my Reasons as Schedule "A". I have also attached, as Schedule "B", a brief summary of the evidence of each of the Appellants, or nominee in the case of a corporate Appellant. Both Schedules are relevant to and referred to in my Reasons. A brief summary of the essential facts will suffice as background to my discussion and analysis of the issue.
[12] Prospero International Realty Inc. ("Prospero") is owned by Robert Lee (who is the principal of the Appellant, Robert Lee Ltd.) and his family (the "Lee Family") including his son, the Appellant, Derek Lee. Prospero was hired in 1991 to be the Property Manager of the Shopping Centre.
[13] The Lee Family had prior knowledge of the Shopping Centre as they had briefly owned it before selling it back to the original owners, York-Hannover Developments Ltd. ("York-Hannover"), in 1992 for approximately the same price that they had paid for it. In Derek Lee's opinion, the investment was neither good nor bad; it was merely a non-event.
[14] Prospero employed Tony Letvinchuk as its property manager. He first became acquainted with the Shopping Centre at the time of Prospero's purchase from York-Hannover. Tony Letvinchuk became the official Property Manager at the end of 1992.
[15] During the period from 1990 to 1992, the Shopping Centre operated at a deficit. By December 1992, the Bank filed a petition (the "Foreclosure Proceedings") in the British Columbia Supreme Court against York-Hannover to foreclose on their interest in the Shopping Centre.
[16] In February 1993, the Court issued an order giving the exclusive conduct of the sale of the Shopping Centre to the Bank. As of February 3, 1993, $16,072,865 was owing to the Bank. On February 9, 1993, the Bank and Prospero entered into an Exclusive Agency Agreement to sell the Shopping Centre at a sale price of $12,500,000.
[17] Derek Lee, the primary person at Prospero who was responsible for the marketing and sale of the Shopping Centre, prepared a sales brochure [Joint Book of Documents, Vol. 2, Tab 38]. Several offers were made to purchase the Shopping Centre but none were completed. In an attempt to sell the property, Prospero contacted other business contacts and clients who might be interested in the property. One of those individuals was the Appellant, Robert Macdonald, the principal of Macdonald Development Corporation.
[18] Robert Macdonald testified that he first became aware of the Shopping Centre in the spring of 1993 through the Bank. He was later contacted by Derek Lee and given a copy of Prospero's sales brochure. Initially, Robert Macdonald was not overly enthusiastic about the deal since he was already involved with the Bank on other transactions and felt that he could not "hammer" out as low a price concerning the property [Transcript page 530]. However, Derek Lee and Tony Letvinchuk convinced him that it was an attractive deal.
[19] Robert Macdonald testified, and his diary [Joint Book of Documents, Vol. 6 Tab 208] indicates, that he visited the Shopping Centre in May 1993. At this time, the Shopping Centre was described as "shabby" and lacking in "curb appeal". It needed modernization and many of the tenants were on month-to-month leases. However, Robert Macdonald did not believe that the financial and physical condition of the Shopping Centre would be a detriment and based on his business experience, and discussions with Tony Letvinchuk, he considered the Shopping Centre to have a significant upside potential.
[20] Robert Macdonald testified that he was interested in purchasing this property only if the Lee Family became involved because he felt it would be beneficial if the property manager, Prospero, had an ownership stake in the Shopping Centre. At this time, he did not discuss the purchase with any other potential partners.
[21] Robert Macdonald testified that his plan was to see if he could acquire the Shopping Centre at a base price based on a "bricks and mortar basis and on a cash flow basis". He stated that "if we could get it for 10 [million], ... we would spend some money to undertake improvements, bring in some new tenants, get the income up and then in some time frame hopefully resell the shopping centre for a profit" [Transcript page 557]. He stated that he did not have any discussions about tax or tax losses with either Derek Lee or Tony Letvinchuk at this time.
[22] It was during these discussions that Derek Lee and Robert Macdonald, with the assistance of Tony Letvinchuk, created a business plan (the "Business Plan") for the Shopping Centre. The Business Plan consisted of the following steps:
(a) Purchase the Shopping Centre for a price of $10,000,000 (a price which reflected a capitalization rate of 11.5 percent);
(b) Physically improve and update the Shopping Centre to make it more physically attractive to a potential purchaser;
(c) Lease up and stabilize the tenants at the Shopping Centre, to make it more economically attractive to a potential purchaser;
(d) Increase the value of the Shopping Centre through the physical and financial improvements;
(e) Achieve an annual net operating income from the Shopping Centre of approximately $1,400,000; and
(f) Profit from the resale of the Shopping Centre for a sale price of $14,000,000 (based on a 10 percent capitalization rate) at the earliest and most optimum time.
[23] Before meeting with the Bank on August 5, 1993, Robert Macdonald prepared for the meeting by familiarizing himself with the sales brochure for the Shopping Centre and also pursued discussions with Tony Letvinchuk. These discussions centred around the determination of a potential purchase price for the Shopping Centre together with a cost for improvements. Tony Letvinchuk prepared notes on the Shopping Centre [Joint Book of Documents, Vol. 2 Tab 41] which outlined a potential purchase price of $10 million, the amount of required financing, the amount required for improvements, and the cash flow that would be expected "out of the gate". The notes also included a reference to the importance of obtaining Tim-BR Mart as a tenant. Barrie Sali was the President of Tim-BR Mart, a chain of lumber and hardware stores. Because of tenant vacancies at the Shopping Centre, it was Robert Macdonald's hope that Barrie Sali would become a partner in the Shopping Centre and move Tim-BR Mart into the location.
[24] On August 5, 1993, Robert Macdonald and Derek Lee met with Bill Kennedy, Peter Brennan, and Jim Dysart, the Bank representatives. Bill Kennedy and Peter Brennan were in the special loans section, and Jim Dysart was responsible for North American real estate held by the Bank. Robert Macdonald described the meeting as a "negotiating session" respecting the purchase price and financing terms for the Shopping Centre.
[25] Initially, Robert Macdonald tabled a price of approximately $9 million and Bill Kennedy countered with a price of $11 million. Eventually, the parties agreed on a $10 million price. The Bank offered to carry a mortgage of up to 75 percent of the sale price, but Robert Macdonald was seeking a greater degree of leverage. The parties negotiated a mortgage of $8.6 million, provided that personal guarantees were given by Robert Macdonald and Robert Lee in respect of the amount of financing beyond 75 percent of the purchase price.[1] The parties also discussed additional financing for capital improvements to the Shopping Centre, the mortgage rate, and other terms of the mortgage. Tax losses or tax benefits were never discussed at this meeting.
[26] Robert Macdonald was aware there could be an issue as the Bank held the mortgage but did not yet have legal title to the property. He stated "[w]e just kind of knew where we wanted to end up [...] which was owning the property so we could carry out [the] business plan" [Transcript page 568]. It is noteworthy that the terms established at this meeting substantially represent the essential terms of the agreement that were eventually settled upon by the Appellants and the Bank.
[27] In the days following this meeting, Robert Macdonald met with the Appellants, Maria Wong and John Zaytsoff, to discuss the structuring of the prospective purchase of the Shopping Centre. At that time, Maria Wong was the Vice President of Finance at Macdonald Development Corporation and was responsible for coordinating legal and accounting structuring advice. John Zaytsoff, a Chartered Accountant and partner at the accounting firm KPMG, was the external accountant for Macdonald Development Corporation. Mr. Zaytsoff worked in the areas of corporate finance, real estate and taxation and his role was to create investment structures to meet his clients' business objectives and tax needs.
[28] It was Robert Macdonald's normal practice to consult with John Zaytsoff after he had "tied-up" a property. In this case, Mr. Zaytsoff advised that the Shopping Centre could be structured using a partnership. He testified that every deal he worked on with Robert Macdonald was different, but that a partnership was a common acquisition vehicle used in Mr. Macdonald's property transactions. The fact that the Shopping Centre was the Bank's mortgage receivable also had to be factored into structuring the transaction. After stating that this was his first time that he had assisted Robert Macdonald with the purchase of a mortgage receivable, John Zaytsoff was asked the following question in his examination in chief.
Q. And what challenges did that present to you for purposes of structuring?
A. When you say challenges, you know, the challenges were that this was a mortgage that was receivable by the bank. The bank had conduct of sale, my understanding was, of the property. My understanding also was that the bank had ... non-performing loan and that the bank wanted to get it off its books ... and our client wanted to buy real estate, that they wanted to enhance value by renovating and solidifying the tenancies. And ... those were the challenges and ... the facts that we were working with in creating a structure for the acquisition of the real estate. [Transcript page 985]
[29] After the meeting with John Zaytsoff, Maria Wong prepared a draft letter of intent addressed to Bill Kennedy of the Bank [Joint Book of Documents, Vol. 2, Tab 42] and faxed a copy of the letter, dated August 9, 1993, to John Zaytsoff for his review. The third page of the letter outlines the structure of the transaction and states:
We understand that NBC is transferring substantially (99.999%) all its interest in the mortgage secured by First Hill [sic] Shopping Centre to a newly created B.C. partnership for realization purposes and that we will be purchasing NBC's interest in this partnership. We further understand that the partnership will obtain beneficial ownership of the Shopping Centre before or upon the Completion date. Legal ownership will be held by a shell company and the shares of this company will be transferred to us.
[30] Although this letter was drafted by Maria Wong, it was completed pursuant to John Zaytsoff's advice. John Zaytsoff was asked in examination in chief why this structure was suggested. He responded that:
... there's a number of reasons. Firstly, a partnership is the most efficient way of owning real estate where you have a number of partners or a number of persons involved that have diverse backgrounds and diverse requirements. Each of the individuals has more flexibility ... in structuring their own affairs so that they don't interfere with anybody else's, whether it be from an estate-planning viewpoint or a tax-planning viewpoint or a financing viewpoint.
It is just the most flexible structure to use in an acquisition of real estate, particularly where you have other partners and particularly where the objectives are you buy real estate, refurbish it and sell it within a very short period of time.
[...]
The bank had a receivable, and that's the only thing that the bank had. My client wanted to buy real estate. It was our view that, and the receivable was under foreclosure proceedings and it was our view that if the bank was to transfer the receivable into a partnership and then foreclose and have the partnership foreclose on the property, that was just a much more efficient and effective way of having the property acquired by the partnership, as opposed to, you know, the bank going under a conduct of sale or first foreclosing on the property and then selling it. So that was another objective, another reason. [Transcript pages 988-989]
[31] Around the same time, Maria Wong drafted another document outlining the proposed steps of the transactions (the "Steps Document") [Joint Book of Documents, Vol. 2 Tab 43] which was faxed to Bill Kennedy. The Steps Document contained the following five steps:
1. National Bank ("NBC") transfers mortgage into a newly created General Partnership, the North Hills Partnership for a 99.999% interest. NBC sets up a new # Co. to hold remaining .001%. Pursuant to Sec.18(13) of ITA, NBC will be denied the loss on transfer and the denied loss will be added to the adjusted cost base of the mortgage. The resulting adjusted cost base of the mortgage will be the principal plus interest of the mortgage. North Hills Partnership shall be formed for the purpose of acquiring the problem mortgage to turn around and realize maximum proceeds therefrom.
2. North Hills Partnership then forecloses on mortgage and obtains title to Shopping Centre. Cost base of Shopping Centre will be the principal plus interest of the mortgage plus foreclosure expense.
3. NCB sells 99.999% of interest in North Hills Partnership to Macdonald Development Corporation ("MDC") and Prospero International Realty Inc. ("Prospero") for negotiated price. Which may include cash, 1st mortgage debt or other security. NBC realizes a loss on the sale of North Hills interest.
4. Pursuant to Sec. 10(1) of ITA, North Hills Partnership writes down the Shopping Centre to its FMV at the end of its first fiscal year and allocates the loss to its partners.
5. North Hills Partnership will carry out it [sic] business plan.
The second page of the Steps Document entitled "North Hills Shopping Centre Summary of Tax Structure" contained a diagram outlining these proposed steps.
[32] On cross examination, Maria Wong was adamant that the Steps Document did not disclose the reason for those steps, but merely listed the steps. She indicated that the Steps Document served to provide a complete picture of the structure of the transaction for the benefit of the Bank and that the only reason each transaction was proposed was to complete the acquisition of the Shopping Centre.
[33] On August 19, 1993, a draft letter of intent [Joint Book of Documents, Vol. 2 Tab 45A] was provided to Bill Kennedy for his review prior to a meeting later that same day with Robert Macdonald. The terms contained in this letter of intent were consistent with the terms discussed at the initial meeting on August 5, 1993. Robert Macdonald testified that the purpose of the meeting on August 19, 1993, was to determine if the Bank was amenable to implementing the structure proposed in the August 19, 1993 letter of intent and the Steps Document. Although Robert Macdonald could not recall whether there were any detailed questions regarding the proposed structure, he indicated that the discussion focused on the ability of the proposed steps to reach the "goal line" of owning the Shopping Centre while also achieving some tax benefits [Transcript page 627].
[34] As a result of this meeting, the Bank and Robert Macdonald reached a tentative agreement regarding the terms for the sale of the Shopping Centre to a group consisting of Robert Macdonald, Prospero and, potentially, Barrie Sali. A letter of intent was sent to the Bank's law firm, Fraser & Beatty on August 24, 1993 [Joint Book of Documents, Vol. 2 Tab 46], accompanied by a deposit of $50,000. The Completion Date contained in this letter of intent was November 15, 1993, reflecting the Bank's intention to close the transaction as soon as possible.
[35] In September 1993, Barrie Sali declined to participate in the Shopping Centre acquisition. Robert Macdonald began seeking alternative investors, including the other Appellants. As Robert Macdonald was heavily invested in other projects, he actively sought other investors to meet the project's capital requirements. Throughout September and October of 1993, Robert Macdonald was still in the process of creating a list of potential partners to raise the necessary capital. In his examination-in-chief, Robert Macdonald was asked whether he had concerns about the Bank forming the Partnership given the fact that the list of potential partners was changing over the period leading up to the establishment of the Partnership. He indicated that this was just part of the closing procedure and that the deal was proceeding according to plan.
[36] On November 5, 1993, the Northills Shopping Centre Limited Partnership (the "Partnership") was established. Northills Shopping Centre Ltd. ("NSCL") was the general partner and the Bank was the initial limited partner in accordance with the Partnership Agreement [Joint Book of Documents, Vol. 2 Tab 73].
[37] The original Completion Date contained in the August 24, 1993, letter of intent was pushed back. Robert Macdonald indicated that this was not an uncommon practice in his real estate acquisitions.
[38] On November 19, 1993, several of the Appellants were invited to a business meeting to review the Business Plan, the structure of the transaction and tax issues related to the acquisition of the Shopping Centre. The meeting was scheduled for two hours. Much of the first half-hour was occupied with social discussions. Discussions regarding the Business Plan occupied approximately an hour. The remaining portion was spent discussing the structure and tax consequences arising from the structure. For this meeting, Maria Wong prepared an Acquisition Synopsis [Joint Book of Documents, Vol. 4 Tab 154] that outlined the tax consequences arising from the structure, including the potential losses that would be allocated to each investor based on their investment in the Partnership.
[39] Also on November 19, 1993, the Bank formally authorized the sale of the Shopping Centre to a group headed by Robert Lee and Robert Macdonald.
[40] On November 23, 1993, the Bank and the Partnership entered into an assignment agreement (the "Assignment Agreement") [Joint Book of Documents Vol. 3 Tab 90], which provided that the Bank would assign its interest in the Receivable and the Foreclosure Proceedings to the Partnership in exchange for 10,000 limited partnership units. On this same date, the Bank actually assigned its interest and acquired the 10,000 limited partnership units.
[41] On December 9, 1993, the Bank offered to provide financing totalling $9,715,000.
[42] On December 23, 1993, the terms of the Bank's offer of financing were accepted by the Partnership and NSCL. Also on this date, Robert Macdonald, Derek Lee, Tony Letvinchuk, Maria Wong and others met to discuss the Shopping Centre and the implementation of the Business Plan. This meeting was held in order to ensure that the Business Plan was implemented efficiently and effectively.
[43] On December 29, 1993, the Appellants became general partners of the Partnership. In total, the General Partners purchased 2,000 general partnership units of the Partnership for a total of $2,000,000. On this same date, NSCL, the Partnership and the Bank entered into the Loan Agreement and Security Agreement [Agreed Statement of Facts, paragraphs 25 and 26].
[44] According to the Loan Agreement, the Bank agreed to loan $8,600,000 ("Facility A") to NSCL and the Partnership for the purpose of redeeming limited partnership units of the Partnership held by the Bank, $850,000 ("Facility B") for the purpose of financing future capital improvements to the Shopping Centre and $265,000 ("Facility C") for the purpose of financing future tenant and sundry improvements to the Shopping Centre.
[45] Also on December 29, 1993, the Partnership acquired the Shopping Centre pursuant to an order that:
(a) Substituted NSCL as the petitioner in the Foreclosure Proceedings;
(b) Assigned the Receivable to NSCL;
(c) Granted an Order Absolute of Foreclosure which terminated the rights of the previous owners and charge holders of the Shopping Centre; and
(d) Discharged Deloitte & Touche Inc. as the Receiver Manager.
[46] On December 30, 1993, guarantees and postponement claims were given to the Bank by Robert Macdonald, Macdonald Development Corporation and Robert Lee. On the same date, the General Partners agreed to be bound by the terms of the Loan Agreement and Security Agreement. [Agreed Statement of Facts, paragraph 25]
[47] On December 31, 1993, the General Partners wholly owned the Shopping Centre, either directly or through NSCL.
[48] At the Partnership's December 31, 1993 year-end, the Partnership wrote down the value of the Shopping Centre to its fair market value. The Partnership then allocated among the General Partners a non-capital loss of $5,820,875 in accordance with the provisions of the Act.
IV. ANALYSIS
[49] The Respondent submits that the Court must look at the primary purpose of each transaction in the series independently to determine whether there is an avoidance transaction. Further, the Respondent asserts that the Appellants' economic reality of ultimately acquiring the Shopping Centre cannot be the focus of the inquiry. The Respondent relies on Singleton v. Canada, 2001 SCC 61, 2001 DTC 5533, to support the proposition that it would be incorrect to treat this as one simultaneous transaction.
[50] The Respondent relies on the words of subsection 245(3) and the Supreme Court's statements in paragraph 34 of Her Majesty the Queen v. Canada Trustco Mortgage Co., 2005 SCC 54, 2005 DTC 5523 ("Canada Trustco"). According to the Respondent, determining the primary purpose of a transaction is an objective test that must focus on the relevant facts and circumstances at the time the transactions were undertaken, and not the taxpayer's statements of intention.
[51] It is the Respondent's position that having the Bank create a partnership with a newly incorporated subsidiary and then having the Bank transfer the Receivable into that partnership cries out for an explanation. This explanation, in the Respondent's view, is that the transactions were primarily undertaken to transfer the losses and obtain the tax benefit.
[52] The Appellants submit that the correct characterization of the relationships and transactions at issue is that the parties reached an agreement in principle without any discussion of tax benefits at the meeting of August 5, 1993. This agreement embodied a commercial purpose: acquiring the Shopping Centre in order to improve the net operating revenue and to then sell it at a profit. This approach had been employed in prior acquisitions. As this commercial purpose was established prior to engaging in any tax planning, the Appellants submit that the losses arose as a consequence of a particular series of transactions that are inextricably linked to the transfer of the Shopping Centre and were, therefore, undertaken for a commercial purpose. As such, the Appellants argue that "the primary purpose of each of the transactions, and the series of transactions as a whole, was to enable the vendor of the Shopping Centre (the Bank), the purchaser (the Partnership in which the Appellants were members) and each of the Appellants to complete the acquisition of the Shopping Centre" [Appellants' Opening Statement, paragraph 7].
[53] The Respondent has characterized the Appellants' position as treating the acquisition as one simultaneous transaction. As a result, for the GAAR to apply each and every transaction in a series must be found to be an avoidance transaction. However, the Respondent argued that this position is contrary to the statements of the Supreme Court and the wording of subsection 245(3). While I agree that requiring each and every transaction in a series to be an avoidance transaction would be contrary to the words of the Act and the pronouncements of the Supreme Court, I do not agree with the Respondent's argument that the Appellant's position necessitates such a requirement. [emphasis added]
[54] The authoritative approach to the GAAR is set out at paragraph 66 of Canada Trustco, supra, where the Supreme Court of Canada established the three requirements necessary for the application of the GAAR as follows:
The approach to s. 245 of the Income Tax Act may be summarized as follows:
1. Three requirements must be established to permit application of the GAAR:
(1) A tax benefit resulting from a transaction or part of a series of transactions (s. 245(1) and
(2) that the transaction is an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit; and
(3) that there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer.
2. The burden is on the taxpayer to refute (1) and (2), and on the Minister to establish (3).
[...]
This same approach was applied by the Supreme Court in Mathew v. Canada, 2005 SCC 55, 2005 DTC 5538 (referred to as "Kaulius").
[55] Because of the Appellants' concessions, my analysis will address only the second requirement: whether the series of transactions, or any transaction within that series, was an avoidance transaction. This involves canvassing and answering the question: may they reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than to obtain the tax benefit. This is essentially a factual determination.
[56] During the taxation years in question, the relevant portions of subsection 245(3) of the Act read as follows:
(3) Avoidance transaction - An avoidance transaction means any transaction
(a) 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
(b) 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.
[57] In Canada Trustco at paragraphs 27 to 35, the Supreme Court provided guidance for determining whether a transaction is an avoidance transaction, with emphasis at paragraphs 30 to 33 on the underlying importance of a taxpayer's right to arrange his or her affairs so as to attract the least amount of tax. Those paragraphs read:
5.4.2. Primarily for Bona Fide Purposes
[27] According to s. 245(3), the GAAR does not apply to a transaction that "may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit". If there are both tax and non-tax purposes to a transaction, it must be determined whether it was reasonable to conclude that the non-tax purpose was primary. If so, the GAAR cannot be applied to deny the tax benefit.
[28] 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.
[29] 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.
[30] The courts must examine the relationships between the parties and the actual transactions that were executed between them. The facts of the transactions are central to determining whether there was an avoidance transaction. It is useful to consider what will not suffice to establish an avoidance transaction under s. 245(3). The Explanatory Notes state, at p. 464:
Subsection 245(3) does not permit the "recharacterization" of a transaction for the purposes of determining whether or not it is an avoidance transaction. In other words, it does not permit a transaction to be considered to be an avoidance transaction because some alternative transaction that might have achieved an equivalent result would have resulted in higher taxes.
[31] According to the Explanatory Notes, Parliament recognized the Duke of Westminster principle "that tax planning -- arranging one's affairs so as to attract the least amount of tax -- is a legitimate and accepted part of Canadian tax law" (p. 464). Despite Parliament's intention to address abusive tax avoidance by enacting the GAAR, Parliament nonetheless intended to preserve predictability, certainty and fairness in Canadian tax law. Parliament intends taxpayers to take full advantage of the provisions of the Income Tax Act that confer tax benefits. Indeed, achieving the various policies that the Income Tax Act seeks to promote is dependent on taxpayers doing so.
[32] Section 245(3) merely removes from the ambit of the GAAR transactions that may reasonably be considered to have been undertaken or arranged primarily for a non-tax purpose. Parliament did not intend s. 245(3) to operate simply as a business purpose test, which would have considered transactions that lacked an independent bona fide business purpose to be invalid.
[33] The expression "non-tax purpose" has a broader scope than the expression "business purpose". For example, transactions that may reasonably be considered to have been undertaken or arranged primarily for family or investment purposes would be immune from the GAAR under s. 245(3). Section 245(3) does not purport to protect only transactions that have a real business purpose. Parliament wanted many schemes that do not have any business purpose to endure. Registered Retirement Savings Plans (RRSPs) are one example. Parliament recognized that many provisions of the Act confer legitimate tax benefits notwithstanding the lack of a real business purpose. This is apparent from the general language used throughout s. 245, as opposed to language which would have adopted a broad anti-avoidance test subject to exemptions for specific schemes like RRSP transactions.
[34] 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.
[35] Even if an avoidance transaction is established under the s. 245(3) inquiry, the GAAR will not apply to deny the tax benefit if it may be reasonable to consider that it did not result from abusive tax avoidance under s. 245(4), as discussed more fully below. [emphasis added]
[58] These passages underscore that the facts in each case will be central to a determination with respect to avoidance transactions and echo Justice Rothstein's comments in OSFC Holdings Ltd. v. Her Majesty the Queen, 2001 FCA 260, 2001 DTC 5471 ("OSFC Holdings") at paragraph 46:
The words "may reasonably be considered to have been undertaken or arranged" in subsection 245(3) indicate that the primary purpose test is an objective one. Therefore the focus will be on the relevant facts and circumstances and not on statements of intention. It is also apparent that the primary purpose is to be determined at the time the transactions in question were undertaken. It is not a hindsight assessment, taking into account facts and circumstances that took place after the transactions were undertaken.
[59] To answer the query, "whether it can reasonably be said that the purpose is primarily a non-tax purpose", the Supreme Court noted that the determination should be a factual inquiry by the Court which invokes reasonableness, suggesting "that the possibility of different interpretations of the events must be objectively considered" [Canada Trustco, paragraph 29]. This emphasizes the Supreme Court's departure from the more specific criteria used by the Federal Court of Appeal in OSFC Holdings, supra, and implicitly suggests that the Courts will have more flexibility in making such a determination.
[60] The Court in Canada Trustco recognized that the "inquiry proceeds on the premise that both tax and non-tax purposes can be identified" and these "can be intertwined in the particular circumstances of the transaction at issue". The Court stated at paragraph 28:
It is not helpful to speak of the threshold imposed by s. 245(3) as high or low. The words of the section simply contemp