Gervais v. The Queen

Gervais v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-09-12
Neutral citation
2016 TCC 180
File numbers
2010-70(IT)G, 2010-71(IT)G
Judges and Taxing Officers
Gaston Jorré
Subjects
Income Tax Act
Decision Content
Docket: 2010-71(IT)G
BETWEEN:
GUY GERVAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeal of Lysanne Gendron (2010­70(IT)G), on March 31, 2016, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the Appellant:
Serge Fournier
Camille Janvier
Counsel for the Respondent:
Mélanie Sauriol
Josée Tremblay
JUDGMENT
The appeal filed under the Income Tax Act is dismissed for the attached reasons.
With respect to costs, if the parties cannot come to an agreement before October 31, 2016, they will need to contact the Tax Court Registry, and I will hear their submissions on a date set by the Registry, or if they prefer, they can file written submissions in accordance with the guidelines that will be provided.
Signed at Québec, Quebec, this 12th day of September, 2016.
"Gaston Jorré"
Jorré J.
Docket: 2010-70(IT)G
BETWEEN:
LYSANNE GENDRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeal of Guy Gervais (2010­71(IT)G), on March 31, 2016, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the Appellant:
Serge Fournier
Camille Janvier
Counsel for the Respondent:
Mélanie Sauriol
Josée Tremblay
JUDGMENT
Based on the reasons that I rendered on April 23, 2014, the reasons rendered by the Federal Court of Appeal on January 6, 2016, and the attached reasons, the appeal of reassessments established under the Income Tax Act for the 2002, 2003 and 2004 taxation years is allowed, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is not taxable on the gain that she made by selling her shares of Vulcain Alarme inc. to BW Technologies Ltd. in October 2002. For the 2003 and 2004 taxation years, the Minister will need to reassess the minimum tax accordingly.
With respect to costs, if the parties cannot come to an agreement before October 31, 2016, they will need to contact the Tax Court Registry, and I will hear their submissions on a date set by the Registry, or if they prefer, they can file written submissions in accordance with the guidelines that will be provided.
Signed at Québec, Quebec, this 12th day of September, 2016.
"Gaston Jorré"
Jorré J.
Citation: 2016 TCC 180
Date: 20160912
Dockets: 2010-71(IT)G
2010-70(IT)G
BETWEEN:
GUY GERVAIS,
LYSANNE GENDRON,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
[1] The issue in dispute is whether the Minister of National Revenue was correct in applying the general anti-avoidance rule when assessing Guy Gervais. The general anti-avoidance rule is cited by the respondent in circumstances where the appellants used a plan which, apparently, is often referred to as a "half-loaf" in English.
[2] In my reasons dated April 23, 2014, I allowed Lysanne Gendron’s appeal and dismissed Guy Gervais’s appeal. I also found that I did not need to consider the general anti-avoidance rule. In its January 6, 2016 decision, the Federal Court of Appeal granted Guy Gervais’s appeal and dismissed the respondent’s appeal in the case involving Lysanne Gendron. The Court of Appeal referred both matters to our Court to have the application of the general anti-avoidance rule examined and determined.[1]
Simplified overview[2] [3] There is no dispute regarding the amounts at issue, and to simplify this overview, I will round off the numbers.
[4] In early 2002, Mr. Gervais was a shareholder in a family business. Ms. Gendron, his spouse, was not a shareholder.
[5] In the summer of 2002, an arm’s length company, BW Technologies Ltd., offered to buy the business, and the shareholders, Mr. Gervais and his brother Mario Gervais, accepted the offer to purchase before September 26, 2002.
[6] On September 26, 2002, Mr. Gervais sold one million of his shares in the family business to Ms. Gendron for $1,000,000, the fair market value of the shares, and he elected to realize his gain by disposing of his shares,[3] which resulted in Ms. Gendron’s adjusted cost base being $1,000,000.
[7] Ms. Gendron knew that the offer to purchase had been accepted before she became a shareholder, and at the time that she purchased the shares, she was intending to sell them a few days later.
[8] Four days later, on September 30, 2002, Mr. Gervais gave gratuitously to Ms. Gendron one million of his shares,[4] and there was a rollover under subsection 73(1) of the Income Tax Act. As a result, he did not realize a gain, and Ms. Gendron was deemed to have acquired the shares at Mr. Gervais’s adjusted cost base, a minimal amount. For purposes of this overview, let us say this amount was $0.
[9] Seven days after the gift, on October 7, 2002, Ms. Gendron sold all her shares in the family business to BW Technologies for the sum of $2,000,000.[5]
[10] In her income tax return for the 2002 taxation year, Ms. Gendron included a capital gain in respect of the sale of shares. In calculating her gain, she applied the mechanism in subsection 47(1) of the Act. Consequently, she considered that the cost[6] of all of her shares[7] in the family business was $1,000,000. She made the following calculations in her return:[8]
Proceeds of disposition
$2,000,000
Minus:
Adjusted cost base
($1,000,000)
Capital gain
$1,000,000
Minus:
Portion of the gain attributed to Mr. Gervais
($500,000)[9]
Ms. Gendron’s capital gain
$500,000
Ms. Gendron’s taxable capital gain
$250,000
Minus:
Capital gain deduction
($250,000)
Final result
$0
[11] Consequently, Ms. Gendron paid no taxes on her disposition of the company’s shares and half of the gain was attributed to Mr. Gervais.
[12] According to the Minister, this result does not comply with the Act, and the $250,000 taxable capital gain must be removed from Ms. Gendron’s income and added to Mr. Gervais’s income under the general anti-avoidance rule.
Facts [13] Vulcain Alarme inc., a medium-sized family business, was sold in 2002.
[14] In May or June 2002, when BW Technologies made the first offer to purchase the business, Mr. Gervais and his brother Mario were shareholders; Ms. Gendron was not a shareholder.
[15] After certain transactions described below, on October 7, 2002, BW Technologies purchased the business from, among others, Mr. Gervais and Ms. Gendron.
[16] In her income tax return for the 2002 taxation year, Ms. Gendron reported a taxable capital gain in respect of the sale of her shares in the business. She used the capital gain exemption.[10]
[17] The Minister made a reassessment in respect of Ms. Gendron on the basis that her gain from the sale of shares was income, not a capital gain.
[18] The Minister also reassessed Mr. Gervais, applying the general anti‑avoidance rule in order to include the taxable capital gain realized by Ms. Gendron in Mr. Gervais’s income.
[19] The Minister conceded that he could not be correct in both appeals. It is now established that the Minister erred when assessing Ms. Gendron.
[20] The Vulcain corporation is a family company started by Mr. Gervais’s father, Clément Gervais. Vulcain is, among other things, a manufacturer of toxic gas monitors. The monitors are most often used to measure carbon monoxide in parking garages.
[21] When the business was first started, Mr. Gervais’s father and mother worked together, and the offices were in the basement of the family home.
[22] At age 14, Mr. Gervais started working in the family business in the summers.
[23] Mr. Gervais is an engineer by trade. After his studies at the École Polytechnique, he started working at the family business.[11]
[24] In 1988, when he started working for the business, the company office moved from the basement of the family home to the garage; there were four employees including his father and him.[12]
[25] When he started, the sales were around $750,000 to $800,000, 20% lower than the best year two years before that.
[26] After that, the business grew significantly. The business moved from the garage to a 3,600-square-foot facility. In 2000, there were about 100 employees.
Partial Agreements on the Facts [27] The parties filed Partial Agreements on the Facts. The facts are reproduced below.[13] To make the statement of facts more logical, I have also added some facts from evidence other than the Partial Agreements on the Facts; I have indicated the additions in footnotes.
The parties agree that the facts listed below are true[14] [28] Vulcain was incorporated by Clément Gervais on February 29, 1968, under Part IA of the Quebec Companies Act.
[29] Vulcain operated a business in the field of manufacturing toxic gas and explosives detectors.
[30] On or about February 16, 1983, Guy Gervais acquired a common share of Vulcain for $10. Since then, the share capital of the corporation has been held by Clément Gervais and his three sons, Guy, Mario and Robert.
[31] Guy Gervais and Lysanne Gendron were married in 1987.
[32] In 1988, Guy Gervais became a director of Vulcain.
[33] From 1968 until the outright sale of the Vulcain shares to BW Technologies in 2002, Vulcain share capital was always held by Clément Gervais and/or his sons.
[34] On January 26, 2001, a unanimous agreement of Vulcain’s shareholders was signed by Clément Gervais, Mario Gervais and Guy Gervais.
[35] In 2002, Guy Gervais was the sole director of Vulcain.
[36] In 2002, BW Technologies presented an offer to purchase with the goal of acquiring Vulcain.
[37] In May or June 2002, the appellants learned from an intermediary’s letter that a company wanted to purchase Vulcain. Soon after, they learned that it was BW Technologies in Calgary.[15]
[38] Some time later, the president of BW Technologies came to visit the company.[16]
[39] On June 12, 2002, a confidentiality agreement was signed between BW Technologies and Vulcain.
[40] Several weeks after the visit of the president of BW Technologies, the appellants received an offer to purchase for approximately $7,500,000. The offer provided a two‑week period in which to respond to it and came at about the time when the appellants were getting ready to go on a trip to Maine.[17]
[41] There was a non-binding offer to purchase signed on August 31, 2002, which was amended on September 26, 2002.[18]
[42] The offer to purchase the entire share capital was accepted by Vulcain’s shareholders, Guy Gervais and Mario Gervais, before September 22, 2002.[19]
[43] Lysanne Gendron was aware of the offer to purchase and knew that it had been accepted by the shareholders before she became a shareholder.[20]
Modifications made to the share capital[21] [44] On August 26, 2002, Vulcain’s only two shareholders were Guy Gervais and Mario Gervais,[22] with the shares divided as follows:
a) Guy Gervais held 790,000 common class A shares and 5,120 preferred class I shares; and
b) Mario Gervais, Guy Gervais’s brother, held 200,000 common class A shares and 5,120 preferred class I shares.
[45] On or about September 26, 2002, Guy Gervais converted his 790,000 common class A shares into 2,087,778 preferred class E shares and 4,168,192 common class B shares.
[46] For the purposes of the Act, Guy Gervais elected to use the tax rollover mechanism set out in section 85 of the Act.
[47] On or about September 26, 2002, Mario Gervais also converted his 200,000 common class A shares into 1,583,790 preferred class E shares.
[48] The preferred class E shares included, among other things, the following rights, privileges and restrictions: non-voting, non-participating, preferential and non-cumulative monthly dividend of 1% per month calculated on the "redemption value" with preference over class A, B, F, and G shares, but after class D, H, I and J shares, redeemable at the request of the shareholder or by mutual consent.
[49] On conversion, each of the class E and B shares had a fair market value of $1 per share.
[50] On September 26, 2002, Vulcain authorized the transfer of 4,168,192 common class B shares held by Guy Gervais to 9120-9957 Québec inc.
[51] On September 26, 2002, Guy Gervais transferred his 4,168,192 common class B shares to 9120-9957 Québec, a corporation in which he held all of the share capital.
[52] For the purposes of the Act, Guy Gervais elected to use the tax rollover mechanism set out in section 85 of the Act with regard to this transfer.
[53] Before September 26, 2002, Lysanne Gendron was not a shareholder in Vulcain.[23]
[54] As shown in the document entitled [translation] "Share Purchase Agreement" dated September 26, 2002, Guy Gervais sold 1,043,889 preferred class E shares to Lysanne Gendron for $1,043,889.
[55] The agreement sets out that Lysanne Gendron could not [translation] "assign her rights and obligations hereunder to any person without the prior consent of Guy Gervais to that effect."[24] Without Guy Gervais’s permission, Lysanne Gendron could not sell her shares to anyone other than BW Technologies.[25]
[56] As shown in the share purchase agreement, Lysanne Gendron had to pay the purchase price by giving Guy Gervais a promissory note payable within five years with an annual interest of 4.5%.
[57] Article 2.2 of the agreement provides for five equal payments of $208,777 on December 31, 2002, 2003, 2004, 2005 and 2006 plus interest (article 2.3). Lysanne Gendron made the payments.[26]
[58] For the purposes of the Act, in his tax return for 2002, Guy Gervais chose not to take advantage of the provisions in subsection 73(1) of the Act. Consequently (for the purposes of the Act[27]):
a) since the adjusted cost base of these shares is $43,889, Guy Gervais realized a capital gain of $1,000,000; and
b) the adjusted cost base of the shares purchased by Lysanne Gendron was $1,043,889.
[59] As shown in a notarial act dated September 30, 2002, Guy Gervais gave gratuitously to Lysanne Gendron 1,043,889 preferred class E shares.
[60] For the purposes of the Act, Guy Gervais did not choose to have his transaction performed on September 30, 2002, be exempt from the application of subsection 73(1) of the Act. Consequently (for the purposes of the Act[28]):
a) Guy Gervais is deemed to have disposed of shares for an amount equal to the adjusted cost base of the shares, namely, $43,889; and
b) Lysanne Gendron is deemed to have acquired shares for an amount equal to the adjusted cost base of the shares, namely, $43,889.
[61] From September 26 to October 7, 2002, Lysanne Gendron did not intend to keep the shares of Vulcain as an investment.[29]
[62] From September 26 to October 7, 2002, Lysanne Gendron did not intend to hold the shares of Vulcain over the long term and was not planning to earn property income from them.[30]
[63] Lysanne Gendron knew that she would not receive any dividends relative to the Vulcain shares during the period from September 26 to October 7, 2002.[31]
[64] On September 26, 2002, Lysanne Gendron’s intention was to sell the Vulcain shares she held on or about October 7, 2002, when the contract to sell Vulcain’s entire share capital to BW Technologies would be signed[32].
[65] When Lysanne Gendron bought the shares, she did not have the financial means to pay for the shares, but she could do so because she was going to resell the shares to BW Technologies[33].
Sale of Vulcain shares to BW Technologies[34] [66] On or about October 7, 2002, BW Technologies acquired the entire share capital of Vulcain for a total of $7,850,000.
[67] As shown in the contract of sale, the price was broken down as follows:
a) $2,087,778 for 2,087,778 preferred class E shares held by Lysanne Gendron;
b) $5,120 for 5,120 preferred class I shares held by Guy Gervais;
c) $5,120 for 5,120 preferred class I shares held by Mario Gervais;
d) $4,168,192 for 4,168,192 common class B shares held by 9120-9957 Québec; and
e) $1,583,790 for 1,583,790 common class B shares held by Mario Gervais.[35]
Guy Gervais’s and Lysanne Gendron’s tax returns[36] [68] In her income tax return for the 2002 taxation year, Lysanne Gendron established the average cost of 2,087,778 preferred class E shares at $1,087,778 ($1,043,889 + $43,889) by applying the mechanism provided in subsection 47(1) of the Act and reported a capital gain calculated as follows:
Proceeds of disposition
$2,087,778
Adjusted cost base
($1,087,778)
Capital gain
$1,000,000
Expenses incurred for the disposition
($13,809)
Capital gain
$986,191[37]
Capital gain allocated to Guy Gervais
($486,191)
Capital gain after allocation
$500,000
Taxable capital gain
$250,000
Capital gain deduction
($250,000)
Net
0
[69] In his income tax return for the 2002 taxation year, Guy Gervais reported a capital gain calculated as follows:
1st disposition/Lysanne Gendron/
September 26, 2002
Proceeds of disposition
$1,043,889
Adjusted cost base
($43,889)
Capital gain
$1,000,000
2nd disposition/gift to Lysanne Gendron/
September 30, 2002
Proceeds of disposition
$43,889
Adjusted cost base
($43,889)
Capital gain
0
Sale to BW Technologies
Proceeds of disposition
$5,120
Adjusted cost base
($5,120)
Capital gain
0
Total capital gain
$1,000,000
Expenses incurred for the disposition
($13,809)
Capital gain
$986,191
Capital gain allocated to Guy Gervais
$486,191
Capital gain after allocation
$1,472,382
Provision requested
($788,953)
Capital gain
$683,429
Taxable capital gain
$341,714
Capital gain deduction
($158,720)
[70] In 2002, the maximum amount that Guy Gervais could claim as a capital gain deduction was $158,720, namely, the balance available in respect of this deduction.
Adventure or concern in the nature of trade[38] [71] On September 26, 2002, Lysanne Gendron:
a) knew the terms and conditions of the sale of the entire share capital of Vulcain to BW Technologies;
b) knew the sale price that had been negotiated between BW Technologies and Vulcain and/or Vulcain’s shareholders;
c) knew the time limit set for the sale of Vulcain’s shares to BW Technologies; and
d) knew that a significant profit would be made from the sale of Vulcain’s shares and, specifically, the preferred shares.
[72] The above paragraph is the last one from the Partial Agreements on the Facts.
Other facts [73] Ms. Gendron had worked as a salaried employee at Vulcain since 1992, but she had had some involvement in the company before then.
[74] Ms. Gendron was very active in the business. In the early 2000s, she was in charge of all of its management. Among other things, she was in charge of human resources at the New York and Toronto offices. She was constantly talking with Mr. Gervais about operations and about all of the important decisions that the business had to make.
[75] When the business bought the shares of Mr. Gervais’s father, money had to be borrowed and securities given. Ms. Gendron agreed, among other things, to a hypothec on the family home as security.
[76] Mr. Gervais testified that when they had made the decision to sell, they had decided to get advice from the law firm McCarthy Tétrault.[39]
[77] He asked their legal counsel to do three things:[40]
a) to advise them during the negotiations to ensure that their interests are protected;
b) to advise them on the taxation aspects; and
c) to advise them regarding Mr. Gervais’s wish to recognize Ms. Gendron’s contribution so that she may receive $1,000,000.
[78] McCarthy Tétrault proposed the transaction structure and the appellants accepted it.[41]
[79] Mr. Gervais and Ms. Gendron were both present at the meetings with McCarthy Tétrault.[42]
Analysis The general anti-avoidance rule [80] The general anti-avoidance rule is set out in section 245 of the Act. We also need to consider subsection 248(10) of the Act. Section 245 and subsection 248(10) are appended for these reasons.
[81] If we simplify section 245 by removing the portions of the text that are not relevant to this litigation, section 245 reads as follows:
Definitions
245(1) In this section,
tax consequences to a person means the amount of income, taxable income . . ., tax . . . or any other amount that is relevant for the purposes of computing . . . taxable income, or taxable income . . . of this person or the tax . . .
tax benefit means a reduction, avoidance or deferral of tax or other amount payable under this Act . . .
. . .
General anti-avoidance provision
(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.
Avoidance transaction
(3) An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit . . .;
(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]
Application of subsection (2)
(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction
(a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of . . .
(i) this Act,
. . .
(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.
Determination of tax consequences
(5) . . . in determining the tax consequences to a person as is reasonable . . . in order to deny a tax benefit that . . .
. . .
(b) . . . any income . . . or . . . other amount or part thereof may be allocated to any person;
. . .
[82] If we continue to simplify and reorganize the text, the critical part of section 245 in the context of this appeal is:
Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit.
However, this rule does not apply if the transaction does not result in a misuse of the provisions of the Act.
If the general anti-avoidance rule applies, in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit, an income or other amount may be allocated to a person.[43]
Definitions
Tax consequences to a person: his income, taxable income, tax or any other amount that is relevant for the purposes of computing the income.
Tax benefit: reduction, avoidance or deferral of tax.
Avoidance transaction: any transaction, or transaction that is part of a series of transactions, which would result 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.
[83] For our purposes, the general anti-avoidance rule can be summarized as follows:
If a transaction
1. Results in a tax benefit,
2. The main purpose of the transaction is to obtain the benefit and
3. The transaction is a misuse of the provisions of the Act
The tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit.[44]
[84] With respect to the facts, the burden is on the taxpayer to refute the Minister’s assumption that there is a tax benefit and an avoidance transaction.[45]
[85] With respect to the issue of determining whether there was an abuse:
65 . . . The taxpayer, once he or she has shown compliance with the wording of a provision, should not be required to disprove that he or she has thereby violated the object, spirit or purpose of the provision. It is for the Minister who seeks to rely on the GAAR to identify the object, spirit or purpose of the provisions that are claimed to have been frustrated or defeated, when the provisions of the Act are interpreted in a textual, contextual and purposive manner. The Minister is in a better position than the taxpayer to make submissions on legislative intent with a view to interpreting the provisions harmoniously within the broader statutory scheme that is relevant to the transaction at issue.[46]
[86] The Minister’s obligation to demonstrate the existence of abuse can largely be described as a "burden of persuasion." As Chief Justice Bowman said in Evans v. The Queen:[47]
. . . The words “burden of proof” of which the Supreme Court of Canada speaks may imply an evidentiary burden but primarily they impose a requirement that the Crown identify the object, spirit or purpose of the relevant legislation that is said to be frustrated or defeated. This might be described as a “burden of persuasion” although this is not the usual sense of the expression “burden of proof.” . . .[48]
[87] The following three issues therefore need to be examined:[49]
Was there a tax benefit?
Was the transaction giving rise to the tax benefit an avoidance transaction?
Was the avoidance transaction giving rise to the tax benefit abusive?
[88] If I find that these three conditions are satisfied and the general anti-avoidance rule applies, I must determine the tax consequences to Mr. Gervais as is reasonable in the circumstances in order to deny a tax benefit that results from the transaction or from the series of transactions.
First issue: Was there a tax benefit? [89] As we have seen in paragraph 81, the concept of a tax benefit is broadly defined.
[90] In cases where a deduction is requested, the tax benefit will usually be evident.[50] However, in other cases:
35 . . . the existence of a tax benefit can be established by comparison of the taxpayer’s situation with an alternative arrangement . . . If a comparison approach is used, the alternative arrangement must be one that . . . “might reasonably have been carried out but for the existence of the tax benefit” . . . By considering what a corporation would have done if it did not stand to gain from the tax benefit, this test attempts to isolate the effect of the tax benefit from the non-tax purpose of the taxpayer[51].
Arguments of the parties [91] Mr. Gervais is of the opinion that there is no tax benefit in his favour. According to him, if there is a tax benefit, it was realized by Ms. Gendron who used her capital gains deduction as set out in subsection 110.6(2.1) of the Act. As a result, because it is Mr. Gervais’s return, and not Ms. Gendron’s, which has been reassessed based on the general anti-avoidance rule, Mr. Gervais believes that the assessment made under subsection 245(2) should be cancelled.
[92] The respondent is of the opinion that the tax benefit arises from the fact that in the absence of the series of transactions at issue, Mr. Gervais would have been taxed on the sale of Vulcain’s entire share capital to BW Technologies, which he held on September 25, 2002, including the $250,000 taxable capital gain made by Ms. Gendron rather than Mr. Gervais. The tax benefit arises from the fact that Mr. Gervais did not pay tax on the $250,000 taxable capital gain.[52]
Analysis [93] For the following reasons, I agree with the respondent that Mr. Gervais received a tax benefit. This is evident if we apply the comparative method set out by the Supreme Court of Canada.
[94] Mr. Gervais had two different objectives: i) to sell his Vulcain shares, and ii) to give Ms. Gendron $1,000,000.
[95] These objectives could easily have been achieved by simply selling his class E shares to BW Technologies and then giving Ms. Gendron $1,000,000. If Mr. Gervais had done this, he would have realized all the capital gain from the sale of the class E shares, and he would have included the taxable capital gain from the sale of the class E shares in his income tax return.[53]
[96] It is clear that there is a tax benefit. Simply put, the tax benefit that Mr. Gervais received is that as a result of the plan,[54] he avoided being taxed on a $250,000 taxable capital gain.[55]
Second issue: Was the transaction giving rise to the tax benefit an avoidance transaction? [97] As we have seen above,[56] an avoidance transaction is a transaction, or a transaction that is part of a series of transactions, that result 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]
[98] The Supreme Court of Canada explained how to address this issue in Copthorne Holdings Ltd. v. Canada:[58]
40 Where . . . the Minister assumes that the tax benefit resulted from a series of transactions rather than a single transaction, it is necessary to determine if there was a series, which transactions make up the series, and whether the tax benefit resulted from the series. . . . If any transaction within the series is not undertaken primarily for a bona fide non-tax purpose that transaction will be an avoidance transaction.
41 The first consideration is whether there was a series that resulted in a tax benefit. As I will explain below, it will be necessary to consider when a transaction which is related to a common law series of transactions is part of a series of transactions as defined in s. 248(10) of the Income Tax Act. The second consideration is whether any of the transactions within the purported series is an avoidance transaction.
. . .
43 . . . this Court accepted that the scheme of the Act provides for an expansive approach to the series issue. The starting point is the common law series taken from English law where “each transaction in the series [is] pre-ordained to produce a final result” . . . This common law series is expanded by s. 248(10) of the Act which deems any “related transactio[n]” which is completed “in contemplation of” (i.e. “in contemplation of” the following series Trustco) a series to be part of that series. . . .
[Emphasis added.]
[99] 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. An objective assessment of the relative importance of the driving forces of the transaction is sufficient.[59]
Arguments of the parties [100] The appellants’ counsel maintains that exercising a choice cannot be considered an avoidance transaction within the meaning of subsection 245(3) of the Act. He also argues that to choose one transaction over another transaction, which would have achieved an equivalent outcome, but would have resulted in a higher amount of tax, does make the transaction an avoidance transaction.[60]
[101] He also maintains that the transactions were performed to enable Ms. Gendron to benefit from the proceeds of the sale. In support of his argument, he notes that Ms. Gendron actively participated in developing Vulcain. He also points out that she used part of the funds that she received from the sale to purchase a condominium for her father and make personal investments. As a result, each transaction in the series had a bona fide purpose and, consequently, the general anti-avoidance rule should not apply.
[102] The respondent argues that the transactions at issue constitute a series of transactions because they were "pre-ordained in order to produce a given result" with "no practical likelihood that the pre-planned events would not take place in the order ordained."[61] The respondent also maintains that each transaction performed in the series constituted an avoidance transaction:
1. Reorganization of the share capital to create the class E non-voting, non-participating shares, whose transfer was limited;
2. Sale and gift of these shares to Ms. Gendron;
3. Choices made or not made by Mr. Gervais under subsection 73(1) of the Act;
4. Use of the mechanism set out in subsection 47(1) of the Act to compute the gain made by Ms. Gendron;
5. Ms. Gendron’s use of her capital gains deduction set out in subsection 110.6(2.1) of the Act.
[103] She points out that the purpose of the series of transactions was to "maximize taxation"[62] on the sale of Mr. Gervais’s shares and that the transfer of the shares to Ms. Gendron was only a transitional step.
Analysis [104] Because the alleged tax benefit results from a series of transactions, it is first necessary to identify the series of transactions at issue and then determine whether each transaction in the series was performed mainly for bona fide purposes.
Series of transactions [105] I must therefore determine whether the steps of the plan at issue were "pre-ordained in order to produce a given result" [with] "no practical likelihood that the pre-planned events would not take place in the order ordained."[63]
[106] Before proceeding with this analysis, I must determine which steps constitute a "transaction" within the meaning of subsection 245(2) of the Act. In this regard, I note the reorganization of share capital to create the class E shares, the sale of the first block of class E shares to Ms. Gendron, the gift of the second block of class E shares to Ms. Gendron and finally, Ms. Gendron’s sale of class E shares to BW Technologies.[64]
[107] Ms. Gendron was aware of the offer to purchase, which she discussed with Mr. Gervais. Mr. Gervais and Ms. Gendron both participated in the meetings with McCarthy Tétrault, who prepared the plan. Before purchasing the class E shares, Ms. Gendron knew that she would soon resell them to BW Technologies. The share purchase agreement stipulated that she could not cede her shares to anyone but BW Technologies, without having obtained prior consent from Mr. Gervais. Everything was planned in advance.
[108] I have no difficulty finding that the various transactions listed above were pre-ordained in order to produce a given result and that there was no practical likelihood that the pre-planned events would not take place in the order ordained. Therefore, there was obviously a series of transactions.
[109] Before turning to the issue of whether there is an avoidance transaction, I will make the following comment. Tax considerations and choices were also involved in the various transactions identified. The choice allowed under subsection 73(1) of the Act was made in connection with the sale of the first block of shares so as to produce a capital gain for Mr. Gervais. Not exercising the choice allowed under subsection 73(1) of the Act regarding the second block of shares received by Ms. Gendron as a gift resulted in a rollover of the adjusted cost base. This triggered the application of subsection 47(1) of the Act, under which the adjusted base price of the two blocks of shares held by Ms. Gendron was combined after they were transferred. Subsequently, the sale of the two blocks of shares to BW Technologies triggered a $1,000,000 capital gain. As a result of that gain, a taxable capital gain of approximately $250,000[65] was attributed to Mr. Gervais pursuant to subsection 74.2(1) of the Act. Finally, Ms. Gendron eliminated the tax on her remaining capital gain by using her capital gains deduction under subsection 110.6(2.1) of the Act.[66]
Avoidance transaction? [110] We now need to determine whether all the transactions in the series of transactions were performed for bona fide purposes. In this regard, the appellants argue that the main purpose of the plan was to allow Ms. Gendron to benefit from the proceeds of the sale of Vulcain to BW Technologies.
[111] I am satisfied that Ms. Gendron contributed to the development of the business. I am also satisfied that Ms. Gendron benefited from the sale; she used the money from the sale to buy a condominium for her father and for various purchases in addition to making several personal investments. The plan also sought to "maximize taxation."[67]
[112] There is a bona fide purpose: gifting $1,000,000 to Ms. Gendron in recognition of her contribution to the business. This purpose coexisted with the purpose of reducing taxes.
[113] However, "[i]f any transaction within the series is not undertaken primarily for a bona fide non-tax purpose that transaction will be an avoidance transaction."[68] However, Mr. Gervais’s sale of shares to Ms. Gendron was not absolutely necessary in order to make a gift to Ms. Gendron[69] and, as a result, there is no bona fide purpose for this transaction.
[114] This transaction, the sale of the shares to Ms. Gendron, was necessary only to obtain a tax benefit: preventing Mr. Gervais from having to pay tax on part of the capital gain. This benefit was obtained by transferring this same part of the capital gain to Ms. Gendron.[70]
[115] As a result, there was an avoidance transaction.[71]
Third issue: Was the avoidance transaction abusive? Applicable law [116] The last of the three issues is the most difficult: does the avoidance transaction that resulted in the tax benefit constitute an abuse in the application of the provisions of the Act? In Copthorne,[72] the Supreme Court of Canada stated:
66 The GAAR is a legal mechanism whereby Parliament has conferred on the court the unusual duty of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer. While the taxpayer’s transactions will be in strict compliance with the text of the relevant provisions relied upon, they may not necessarily be in accord with their object, spirit or purpose. In such cases, the GAAR may be invoked by the Minister. The GAAR does create some uncertainty for taxpayers. Courts, however, must remember that s. 245 was enacted "as a provision of last resort" . . .
67 A court must be mindful that a decision supporting a GAAR assessment in a particular case may have implications for innumerable "everyday" transactions of taxpayers. . . .
68 For this reason, "the GAAR can only be applied to deny a tax benefit when the abusive nature of the transaction is clear" . . . The court’s role must therefore be to conduct an objective, thorough and step-by-step analysis and explain the reasons for its conclusion.
69 In order to determine whether a transaction is an abuse or misuse of the Act, a court must first determine the "object, spirit or purpose of the provisions . . . that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids" . . . The object, spirit or purpose of the provisions has been referred to as the "legislative rationale that underlies specific or interrelated provisions of the Act" . . .
70 The object, spirit or purpose can be identified by applying the same interpretive approach employed by this Court in all questions of statutory interpretation — a "unified textual, contextual and purposive approach" . . . While the approach is the same as in all statutory interpretation, the analysis seeks to determine a different aspect of the statute than in other cases. In a traditional statutory interpretation approach the court applies the textual, contextual and purposive analysis to determine what the words of the statute mean. In a GAAR analysis the textual, contextual and purposive analysis is employed to determine the object, spirit or purpose of a provision. Here the meaning of the words of the statute may be clear enough. The search is for the rationale that underlies the words that may not be captured by the bare meaning of the words themselves. However, determining the rationale of the relevant provisions of the Act should not be conflated with a value judgment of what is right or wrong nor with theories about what tax law ought to be or ought to do.
71 Second, a court must consider whether the transaction falls within or frustrates the identified purpose . . . where it is part of a series, it must be viewed in the c