Univar Holdco Canada ULC v. The Queen

Univar Holdco Canada ULC v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-06-22
Neutral citation
2016 TCC 159
File numbers
2013-2834(IT)G
Judges and Taxing Officers
Valerie A. Miller
Subjects
Income Tax Act
Decision Content
Docket: 2013-2834(IT)G
BETWEEN:
UNIVAR HOLDCO CANADA ULC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on June 8, 2015, at Toronto, Ontario
Before: The Honourable Justice Valerie Miller
Appearances:
Counsel for the Appellant:
Matthew G. Williams
Michael Colborne
Counsel for the Respondent:
Ronald MacPhee
Tamara Watters
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the Appellant’s 2007 taxation year is dismissed, in accordance with the attached Reasons for Judgment.
Costs are awarded to the Respondent.
Signed at Toronto, Ontario, this 22nd day of June 2016.
“V.A. Miller”
V.A. Miller J.
Citation: 2016TCC159
Date: 20160622
Docket: 2013-2834(IT)G
BETWEEN:
UNIVAR HOLDCO CANADA ULC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
INTRODUCTION [1] This case involves the anti-avoidance rule in section 212.1 and the definition of paid-up capital (“PUC”) in section 89 of the Income Tax Act (the “Act”).
[2] In 2007, CVC Capital Properties (“CVC”), a United Kingdom private equity firm, acquired Univar NV, a Netherlands public corporation. With the acquisition, CVC indirectly acquired a Canadian operating subsidiary with surplus in excess of $889,000,000. CVC carried out a series of transactions so that it could indirectly strip the surplus out of the Canadian subsidiary without paying withholding tax. The Appellant was the holding company used to accomplish the outcome in that series of transactions.
[3] The transactions were arranged to circumvent the application of the anti-avoidance rule in section 212.1 and to take advantage of the relieving exemption found in subsection 212.1(4) of the Act.
[4] The Minister of National Revenue (the “Minister”) relied on the general anti-avoidance rule (the “GAAR”) in section 245 of the Act to assess the Appellant for its 2007 taxation year. Counsel for the Appellant acknowledged that the transactions in issue resulted in a “tax benefit” for the purposes of subsection 245(1) and there was an “avoidance transaction” as that term is defined in subsection 245(3) of the Act. The sole issue before the Court was whether the transactions resulted in “abusive tax avoidance” within the meaning of subsection 245(4) of the Act.
[5] I have concluded that the transactions undertaken in this case circumvented the application of the anti-avoidance rule in section 212.1 in a manner that “frustrated or defeated the object, spirit or purpose” of section 212.1 in general and subsection 212.1(4) in particular: Canada Trustco Mortgage Company v Canada, 2005 SCC 54 at paragraph 45.
FACTS [6] The evidence at the hearing consisted of a Statement of Partially Agreed Facts; the testimony of Mr. Alexander Fotakidis, a senior managing director in the financing team of CVC Capital Partners (“CVC”); two volumes of Joint Documents; the memorandum to the GAAR Committee of the Canada Revenue Agency (“CRA”) with respect to the issue in this appeal; and, read-ins from the examinations for discovery of both parties.
[7] The Statement of Partially Agreed Facts is attached as an Appendix to these Reasons. A summary of that statement together with the evidence presented at the hearing is included below.
[8] CVC, a United Kingdom private equity and investment firm, is based in London, England. In early 2007, it identified Univar NV as a corporation it wanted to acquire.
[9] Univar NV, a Netherlands public corporation, distributes commodity and speciality chemicals to the global market. Its main business is to purchase commodities in bulk, then process, blend and repack them to meet the requirements of the industries it serves. Univar NV operates a network of distribution centres located throughout the world including the United States, Canada, Europe and China.
[10] Univar Holdco Canada ULC (the “Appellant” or at times referred to as “UHC”) was one of a group of entities which were controlled, directly or indirectly, by Univar NV. It was incorporated on September 21, 2007 under the laws of Alberta in anticipation of the reorganization that was undertaken. Counsel for the Appellant, in his submissions, stated that UHC was incorporated to act as a de facto acquisition corporation.
[11] In either March or April 2007, as part of its due diligence for its proposed acquisition of Univar NV, CVC and its acquisition vehicle for the purchase, Ulysses Luxembourg Sarl (“Ulysses”), sought advice from Deloitte Touche Tohmatsu Limited (“Deloitte”) with respect to certain taxation services. According to Mr. Fotakidis, there were two elements to the tax due diligence. One element was the tax itself including the tax liabilities of Univar NV and its subsidiaries and the second was the tax structuring.
[12] Deloitte gave detailed advice concerning the post-acquisition restructuring of Univar NV. This advice included the transactions at issue in this appeal. Mr. Fotakidis testified that Deloitte’s advice was used by CVC in July 2007 to obtain the desired debt package for the acquisition. This allowed CVC to propose a binding cash bid to Univar NV on July 9, 2007. CVC proposed cash of €1.5 billion (equivalent to approximately US$2.1 billion or $72.76 per share) for the acquisition of the shares of Univar NV and its subsidiaries. This bid was conditional upon tender of at least 95% of the outstanding shares of Univar NV and all necessary regulatory approvals.
[13] On August 20, 2007, a formal bid for all of the shares of Univar NV was announced.
[14] By letter dated September 6, 2007, Deloitte set out the terms on which it offered to perform certain taxation services to CVC and Ulysses. The letter contained the contractual terms between the parties in respect of matters concerning the proposed acquisition of Univar NV and its subsidiaries. The advice was to be presented through a “Final Report” which was completed by Deloitte on October 11, 2007.
[15] On September 18, 2007, the European Commission approved the proposed acquisition by CVC.
[16] On October 4, 2007, 97.2% of Univar NV’s outstanding shares had been acquired by Ulysses with the result that CVC and the Univar group of companies no longer dealt at arm’s length with each other.
[17] By the end of October, 2007, 99.4% of Univar NV’s outstanding shares had been acquired by Ulysses with the result that CVC effectively acquired Univar NV in 2007. Mr. Fotakidis explained that Univar NV was the only company in the group whose shares were listed publicly and by acquiring Univar NV, CVC also acquired the Univar group. Mr. Fotakidis further stated that no real consideration had been given to acquiring the various operating companies of the group because there were no listed shares available at the individual operating levels. In addition, if they had to acquire the various operating companies separately, it would have negatively impacted the value, speed and certainty of delivering the offer.
[18] Mr. Fotakidis explained that, in order to obtain the desired debt package, CVC had agreed with the banks in July 2007 that the reorganization giving rise to the present appeal would take place. The banks which underwrote the financing did so based on the consolidated assets and earnings of Univar. As part of the commitment package signed with the banks, it was necessary to have all the assets of the Univar group “lined up” under the U.S. borrower.
[19] On cross-examination, counsel for the Respondent asked Mr. Fotakidis if one of the global goals of the financing was to enable access to the surpluses of the Canadian subsidiary to help pay the debt. Mr. Fotakidis replied that one of the objectives was to set up the “most efficient tax structure” and “extraction structure” in terms of cash distribution and ultimately to service the debt. Mr. Fotakidis explained what he meant by the expression the “most efficient tax structure”. He said the meaning was twofold. It meant the ability to regularly distribute reserves or cash to service the debt on a quarterly basis rather than semi-annually and it also meant, in terms of the cost involved, the ability to minimize withholding taxes and other expenses when extracting cash out of Canada.
[20] Deloitte submitted the Final Report of its “Tax Structure Memorandum” on October 11, 2007. Deloitte called it “Project Monaco” and the key tax objectives were listed in that report as:
• Maximize interest deductions on indebtedness related to the acquisition of the relevant entities/assets;
• Optimize lenders’ security over assets and cash flow;
• Minimize withholding tax on returns to the Sponsors; and
• Allow for a flexible tax-free exit on disposal.
[21] The subsidiaries which were used in the reorganization transactions at issue were:
a) Univar Inc. is a corporation governed by the laws of the State of Delaware and incorporated on November 21, 1974. Prior to the reorganization, all 468 common shares of Univar Inc. were owned directly or indirectly by Univar NV.
b) Univar North American Corporation (“UNAC”) was a corporation resident in the United States and governed by the laws of the state of Washington. At all relevant times the shares of UNAC were owned directly or indirectly by Univar Inc.
c) Univar Canada Ltd. (“Univar Canada” or sometimes referred to as the target corporation) is a Canadian resident corporation incorporated pursuant to the laws of the Province of British Columbia in 1950. Univar Canada was Canada’s largest and most successful distributor of industrial chemicals and crop protection products. Prior to the reorganization described herein, all shares of Univar Canada were owned by UNAC and had an adjusted cost base (“ACB”) of $10,000[1], PUC of approximately $911,729 and a fair market value (“FMV”) of approximately $889,000,000.
[22] Prior to the reorganization transactions, the corporate structure of Univar NV and its subsidiaries was:
UNIVAR NV
↓ 468 CS
Univar Inc (US)
↓
UNAC (US)
↓
Univar Canada
FMV=$889,000,000
ACB=$10,000
PUC=$911,729
[23] It was admitted by the Appellant that the reorganization of Univar NV and its subsidiaries was arranged to take advantage of subsection 212.1(4) of the Act. Subsections 212.1(1) and (4) provide:
Non-arm’s length sales of shares by non-residents
212.1 (1) If a non-resident person, a designated partnership or a non-resident-owned investment corporation (in this section referred to as the “non-resident person”) disposes of shares (in this section referred to as the “subject shares”) of any class of the capital stock of a corporation resident in Canada (in this section referred to as the “subject corporation”) to another corporation resident in Canada (in this section referred to as the “purchaser corporation”) with which the non-resident person does not (otherwise than because of a right referred to in paragraph 251(5)(b)) deal at arm’s length and, immediately after the disposition, the subject corporation is connected (within the meaning that would be assigned by subsection 186(4) if the references in that subsection to “payer corporation” and “particular corporation” were read as “subject corporation” and “purchaser corporation”, respectively) with the purchaser corporation,
(a) the amount, if any, by which the fair market value of any consideration (other than any share of the capital stock of the purchaser corporation) received by the non-resident person from the purchaser corporation for the subject shares exceeds the paid-up capital in respect of the subject shares immediately before the disposition shall, for the purposes of this Act, be deemed to be a dividend paid at the time of the disposition by the purchaser corporation to the non-resident person and received at that time by the non-resident person from the purchaser corporation; and
(b) in computing the paid-up capital at any particular time after March 31, 1977 of any particular class of shares of the capital stock of the purchaser corporation, there shall be deducted that proportion of the amount, if any, by which the increase, if any, by virtue of the disposition, in the paid-up capital, computed without reference to this section as it applies to the disposition, in respect of all of the shares of the capital stock of the purchaser corporation exceeds the amount, if any, by which
(i) the paid-up capital in respect of the subject shares immediately before the disposition
exceeds
(ii) the fair market value of the consideration described in paragraph 212.1(1)(a),
that the increase, if any, by virtue of the disposition, in the paid-up capital, computed without reference to this section as it applies to the disposition, in respect of the particular class of shares is of the increase, if any, by virtue of the disposition, in the paid-up capital, computed without reference to this section as it applies to the disposition, in respect of all of the issued shares of the capital stock of the purchaser corporation.
…
Where section does not apply
(4) Notwithstanding subsection 212.1(1), this section does not apply in respect of a disposition by a non-resident corporation of shares of a subject corporation to a purchaser corporation that immediately before the disposition controlled the non-resident corporation.
[24] Subsection 212.1 applies when a non-resident person sells shares of a Canadian resident corporation (the “target corporation”) to another corporation resident in Canada (the “purchaser corporation”) with which it does not deal at arm’s length at the time of the disposition. When this section applies, the paid-up capital (“PUC”) of the purchaser’s shares is limited to the historic PUC of the target corporation. If non-share consideration is received that exceeds the PUC of the target corporation, the excess is deemed to be a dividend paid to the non-resident vendor and the dividend is subject to withholding taxes.
[25] Subsection 212.1(4) is a relieving provision. It provides that subsection 212.1(1) does not apply where the non-resident corporation is controlled by the purchaser corporation (a Canadian resident corporation) immediately before the sale of the shares of the subject corporation.
[26] In this case the series of transactions was undertaken to circumvent subsection 212.1(1) and to take advantage of the exemption in subsection 212.1(4). As can be seen by the series of transactions which follow, when CVC purchased Univar NV, Univar NV and its relevant subsidiaries were in a “sandwich” so that Univar Canada was controlled by the non-resident Univar Inc. After a series of artificial contortions, the relevant subsidiaries were still in a “sandwich” relation; Univar Inc. still controlled Univar Canada but the surplus funds had been stripped out of Univar Canada.
A. The Series of Transactions [27] The parties agreed that the corporations participating in the series of transactions were not dealing at arm’s length.
[28] In September 2007, Univar Holdco Inc. (“UHI”) was incorporated in anticipation of the reorganization that was going to be undertaken. It was incorporated as a US resident and was a wholly owned subsidiary of Univar NV with nominal share capital.
[29] In September 2007, UHI incorporated the Appellant UHC as its Canadian resident subsidiary, taking back shares which had nominal ACB. As stated earlier, it also was incorporated in anticipation of the reorganization that would be undertaken. At no time did the Appellant have any employees.
[30] On October 12, 2007, UNAC amalgamated with Univar Inc. to become Univar Inc. thereby acquiring all of the shares of Univar Canada, the target corporation. UNAC filed an election regarding the disposition of the shares of Univar Canada to Univar Inc. on amalgamation (Form T2062 – Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property). Its net capital gain was reported as nil:
Proceeds of Disposition
$889,413,400
Less
ACB
$10,000
Capital Gain
$889,403,400
Article XIII of Canada –US Convention
Exemption
$889,403,400
Net Capital Gain
nil
[31] The resulting Univar structure was as follows:
>
UNIVAR NV
UHI (US)
468 CS
$
$
$
Univar Inc. (US)
(Amalco)
$
ACB/PUC/FMV nominal
$
UHC
(Appellant)
ACB= $889,413,400
$ FMV=$889,413,400
PUC=$911,729
Univar Canada
[32] On October 18, 2007, the following transactions were undertaken:
i. Univar NV sold 244.6 of its common shares of Univar Inc. to UHI in consideration for a promissory note having a principal amount of US$415,000,000 and common shares (“CS”) with a FMV of US$406,000,000 for a total consideration of US$821,000,000 ($800,967,600).
ii. The Appellant, UHC, then purchased the 244.6 shares of Univar Inc. that UHI had acquired from Univar NV plus the remaining 223.4 shares of Univar Inc. held by Univar NV in exchange for promissory notes and UHC shares as follows:
Number of shares of Univar Inc.
223.4
244.6
From:
Univar NV
UHI
In Exchange for:
Notes Payable
$731,700,000
$589,262,400
UHC shares
$211,705,200
$731,700,000
$800,967,600
[33] The structure was then as follows:
UNIVAR NV
$
(1) NOTE=US $415,000,000
SHARES =US $406,000,000
UHI (US)
$
(2) NOTE=$589,262,400
SHARES/PUC=$211,705,200
(3) NOTE: $731,700,000
UHC
(Appellant)
$
244.6 CS ACB = $800,967,600
223.4 CS ACB = $731,700,000
468 CS ACB = $1,532,667,600
Univar Inc. (US)
$
ACB/FMV = $889,413,400
PUC=$911,729
Univar Canada
[34] UHI then assumed the $731,700,000 promissory note which had been issued by the Appellant UHC, to Univar NV by subscribing for additional common shares of the Appellant valued at $731,700,000. As a result, the Appellant UHC had outstanding common shares held by UHI with PUC of $943,405,200 and a debt of $589,262,400 as follows:
UNIVAR NV
$
(1) NOTE=US $415,000,000
CS =US$406,000,000
(3) NOTE: $731,700,000
UHI (US)
$
(2) NOTE=$589,262,400
SHARES=$211,705,200
SHARES=$731,700,000
PUC=$943,405,200
UHC
(Appellant)
$
244.6 CS ACB = $801,000,000
223.4 CS ACB = $731,700,000
468 CS ACB = $1,532,700,000
Univar Inc. (US)
$
ACB/FMV = $889,413,400
PUC=$911,729
Univar Canada
[35] Univar Inc. then redeemed 273 of its 468 total common shares held by the Appellant UHC and paid the redemption proceeds ($891,698,400) by delivering all 627 common shares of Univar Canada to the Appellant UHC at FMV. This transaction was reported on Form T2062 as follows:
Proceeds of Disposition
$891,698,400
Adjusted Cost Base
$889,413,400
Capital Gain
$2,285,000[2]
Article XIII of Canada –US Convention
Exemption
$2,285,000
Net Capital Gain
nil
[36] It was the Appellant’s position that subsection 212.1(1) did not apply to this disposition because Univar Inc., the non-resident corporation, was controlled by the purchaser (the Appellant) immediately before the disposition. That is, the parties fit within the exception in subsection 212.1(4).
[37] The new structure became:
UNIVAR NV
(1) NOTE=US$415,000,000
$ CS US$406,000,000
(3) NOTE= $731,700,000
UHI (US)
(2) NOTE=$589,262,400
$ SHARES = $211,705,200
SHARES = $731,700,000
PUC= $943,405,200
UHC
(Appellant)
>
195 CS = $640,969,200$
$
ACB/FMV = $891,698,400
PUC=$911,729
Univar Inc.
(US)
Univar Canada
[38] The Appellant UHC then authorized the distribution of 195 common shares of Univar Inc. to UHI as a return of capital in the amount of $640,969,200 and effected the reduction by delivering those shares. As a result, the PUC of the common shares of the Appellant UHC held by UHI was reduced to $302,436,000. Univar Canada was isolated beneath the Appellant so that the structure became:
UNIVAR NV
(1) NOTE= US$415,000,000
$ (3) NOTE= US$731,700,000
CS=US$406,000,000
>
UHI (US)
195 shares $640,969,200$
$
Univar Inc.
(US)
$
(2) NOTE= $589,262,400
SHARES/PUC = $302,436,000
UHC
(Appellant)
$ACB/FMV = $891,698,400
PUC= $911,729
Univar Canada
[39] On October 19, 2007, Univar Inc. and UHI amalgamated to form Univar Inc. The result was as follows:
UNIVAR NV
(1) NOTE=US$415,000,000
$ (3) NOTE=$731,700,000
CS=US $406,000,000
UHI (US)
Amalgamate
Univar Inc (US)
(2) NOTE= $589,262,400
$ SHARES/PUC=$302,436,000
UHC
(Appellant)
ACB=$891,698,400
$ PUC=$911,729
FMV=$891,698,400
Univar Canada
[40] After the reorganization, Univar Inc. held shares in the Appellant with PUC of $302,436,000 and a note payable by the Appellant of $589,262,400. The aggregate of the PUC and the note payable equalled the FMV of the Appellant’s sole asset, Univar Canada.
[41] As evidenced by the transactions and confirmed by Mr. Fotakidis, no shares of Univar Canada were sold and no money came into Canada to increase the PUC of its shares. No money was invested in Canada as a result of the purchase of Univar NV by CVC or as a result of the reorganization. The reorganization was structured to avoid a deemed dividend pursuant to subsection 212.1(1) and to take advantage of the exemption in subsection 212.1(4) of the Act.
THE REASSESSMENT [42] On February 18, 2013, the Minister relied on the GAAR to reassess the Appellant’s 2007 taxation year. The Appellant UHC was assessed Part XIII tax and interest on the issuance of its $589,262,400 promissory note payable to UHI. The PUC of the Appellant’s shares was reduced from $302,436,000 to $911,729. The tax assessed was $29,417,533.55.
[43] The Minister relied on the GAAR on the basis that:
i. a series of transactions was undertaken that included transactions not undertaken for bona fide purposes other than to obtain the tax benefit of a tax free return of amounts in excess of the capital contributed to Univar Canada, a Canadian corporation, through its indirect non-arm’s length transfer to another Canadian corporation; and that
ii. such transactions resulted in a circumvention of section 212.1 of the Act and resulted in a misuse of the provision and resulted directly or indirectly in an abuse having regard to the provisions of the Act as a whole.
LAW [44] The GAAR is contained in section 245 of the Act and it provides:
245 (1) In this section,
tax benefit means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty; (avantage fiscal)
tax consequences to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount; (attribut fiscal)
transaction includes an arrangement or event. (opération)
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, 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.
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 any one or more of
(i) this Act,
(ii) the Income Tax Regulations,
(iii) the Income Tax Applications 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 purposes of that computation; or
(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.
[45] In Canada Trustco, the Supreme Court discussed the approach to be taken and the principles to be applied by the courts when there has been an assessment under section 245 of the Act. It summarized its discussion at paragraph 66 of the decision as follows:
66 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));
(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).
3. If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer.
4. The courts proceed by conducting a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit in order to determine why they were put in place and why the benefit was conferred. The goal is to arrive at a purposive interpretation that is harmonious with the provisions of the Act that confer the tax benefit, read in the context of the whole Act.
5. Whether the transactions were motivated by any economic, commercial, family or other non-tax purpose may form part of the factual context that the courts may consider in the analysis of abusive tax avoidance allegations under s. 245(4). However, any finding in this respect would form only one part of the underlying facts of a case, and would be insufficient by itself to establish abusive tax avoidance. The central issue is the proper interpretation of the relevant provisions in light of their context and purpose.
6. Abusive tax avoidance may be found where the relationships and transactions as expressed in the relevant documentation lack a proper basis relative to the object, spirit or purpose of the provisions that are purported to confer the tax benefit, or where they are wholly dissimilar to the relationships or transactions that are contemplated by the provisions.
7. Where the Tax Court judge has proceeded on a proper construction of the provisions of the Income Tax Act and on findings supported by the evidence, appellate tribunals should not interfere, absent a palpable and overriding error.
[46] In this case, the Appellant admitted that there was a “tax benefit” both through the avoidance of Part XIII tax which would have applied to the distribution of $589,262,400 and from the increase in the PUC; and that there was an “avoidance transaction” as that term is defined in subsection 245(3) of the Act.
[47] Therefore the only issue is whether the avoidance transactions which gave rise to the tax benefit resulted directly or indirectly in a misuse or abuse of section 212.1 and the related provisions of the Act read as a whole. The burden to establish misuse or abuse under subsection 245(4) is on the Respondent.
APPELLANT’S POSITION [48] It was the Appellant’s position that the GAAR does not apply in the circumstances of this appeal because the object, spirit and purpose of section 212.1 were not frustrated by the transactions at issue. The transactions were arranged to take advantage of the relieving provision contained in subsection 212.1(4) of the Act.
[49] Section 212.1 applies only to dispositions where the vendor and purchaser do not deal at arm’s length. The concern with a shareholder accessing the undistributed income of a corporation is limited to circumstances in which the shareholder continues, directly or indirectly, to control the corporation in which the surplus was earned. Arm’s length purchasers are not within the scope of section 212.1 of the Act.
[50] In his Trial Brief, counsel for the Appellant wrote that the legislative purpose underlying section 212.1 is to prevent “incestuous” reorganizations which extract surplus without a change in constructive ownership. The section is not concerned with the manner in which a true purchaser structures an arm’s length acquisition.
[51] According to the Appellant, the reorganization of the Univar group occurred in the context of an arm’s length acquisition. This was not a situation where a corporate group decided to reorganize itself to access its accumulated surplus in Canada. The purpose of the reorganization was to allow CVC, the arm’s length purchaser, access to the acquired Canadian surplus.
[52] Counsel for the Appellant stated that the ideal acquisition structure would have been to have CVC acquire Univar Canada the target corporation through a Canadian holding company that was fully-capitalized to effect the purchase. This would have allowed a tax-free intercorporate dividend to be paid by Univar Canada to the holding company, which, in turn, could return capital, tax free, to CVC, the non-resident purchaser.
[53] According to the Appellant, in the circumstances of this case, it was not practical to use a Canadian acquisition company and a different route was needed to obtain the same result.
[54] It was in the context of the arm’s-length sale of Univar NV to CVC that the relieving rule in subsection 212.1(4) was relied on. This subsection was considered at the planning stage of the acquisition of Univar NV as a relief against the application of subsection 212.1(1).
[55] Subsection 212.1(4) required that the purchaser corporation (the Appellant) be a Canadian resident and it had to control the non-resident vendor immediately before the disposition. This occurred in this case. It was the Appellant’s position that the rule contemplates that non-arm’s length transactions which meet the criteria in subsection 212.1(4) are excluded from the application of subsection 212.1(1).
RESPONDENT’S POSITION [56] It was the Respondent’s position that the transactions undertaken by Univar NV were designed to avoid the application of subsection 212.1(1) of the Act and to take advantage of the relieving provision in subsection 212.1(4).In so doing, the transactions resulted in abusive tax avoidance because they misused section 212.1 in a manner which frustrated its object, spirit and intended purpose: Canada Trustco (supra) at paragraph 45.
[57] Counsel for the Respondent stated that section 212.1 is an anti-avoidance provision aimed at “dividend stripping”. Although there is no general anti-surplus stripping rule in the Act, the Supreme Court in Copthorne Holdings Ltd v Canada, 2011 SCC 63 (hereinafter referred to as Copthorne (SCC)) clearly established that there is a PUC scheme in the Act and section 212.1 plays an integral part in that scheme and cannot be disassociated with it.
[58] The definition of PUC is provided in section 89 of the Act.
[59] The Respondent provided a textual, contextual and purposive analysis of sections 212.1 and 89. She concluded that the object, spirit and purpose of section 212.1 is to prevent the tax free distribution of a corporation’s retained earnings to a non-resident corporation through transactions designed to distribute funds in excess of the initial investment.
[60] The Respondent concluded her written submissions with the following:
94. At the commencement of the series, the amount that could be repatriated tax-free from Canada was nominal. At the end of the series, corporate surpluses of approximately $899,000,000 were available for distribution to a non-resident with no Canadian tax consequences.
95. The non-resident taxpayer was able to access corporate surpluses with no Canadian tax consequences through a non-arm’s length transfer of a Canadian corporation to, as the corporate structure suggests at the end of the series of transactions, another Canadian corporation. Clearly, the reorganization was put in place to circumvent the application of section 212.1 and defeated its purpose and the PUC scheme of the Act as established by the Supreme Court in Copthorne. As such, the series of transactions results in an abuse of the relevant provisions of the Act having regard to those provisions read as a whole.
ANALYSIS [61] In Lipson v Canada, 2009 SCC 1, the Supreme Court summarized the principles from Canada Trustco with respect to “abuse and misuse” under subsection 245(4). It stated:
40According to the framework set out in Canada Trustco, a transaction can result in an abuse and misuse of the Act in one of three ways: where the result of the avoidance transaction (a) is an outcome that the provisions relied on seek to prevent; (b) defeats the underlying rationale of the provisions relied on; or (c) circumvents certain provisions in a manner that frustrates the object, spirit or purpose of those provisions (Canada Trustco, at para. 45). One or more of these possibilities may apply in a given case. I should reiterate that in a case like the one at bar, the individual tax benefits must be analysed separately, but always in the context of the entire series of transactions and bearing in mind that each step may have an impact on the others, in order to determine whether any of the provisions relied upon for each tax benefit was misused and abused.
[62] Subsection 245(4) requires a two-step analysis. The first step is to determine the object, spirit or purpose of the provisions of the Act relied on for the tax benefit. In this step, I must consider the overall scheme of the Act, the relevant provisions and permissible extrinsic aids. The second step is to examine the factual context of this appeal in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purpose of the provisions in issue: Canada Trustco (supra) at paragraph 55. The proper approach is a unified textual, contextual and purposive analysis of the sections of the Act which gave rise to the tax benefit: Canada Trustco (supra) at paragraph 66.
[63] The provisions of the Act which are relevant in this appeal are section 212.1 and subsection 89(1). Subsection 89(1) provides the definition of PUC, a term referenced in section 212.1.
[64] Section 84.1 is the domestic counterpart of section 212.1. These sections have been described as “anti-avoidance” sections aimed at preventing “dividend-stripping”: Collins & Aikman Products Co v R, 2009 TCC 299 at paras.55 and 105, aff’d 2010 FCA 251.
[65] In his article, “The 1977 Amendments to the Corporate Distribution Rules”(1978) 16:1 Osgoode Hall LJ 155 at 181, Blake Murray described a dividend strip as follows:
In theory, any transaction by a taxpayer that involves the shares of a Canadian corporation and that, directly or indirectly, effects a distribution to the taxpayer of all or part of that corporation’s surplus at a tax cost that is less than the tax otherwise payable on a dividend of that surplus to the taxpayer would be regarded as a dividend strip.
[66] I am mindful that there is no ‘general policy’ in the Act that prohibits dividend stripping and the courts have held that surplus stripping does not inherently constitute abusive tax avoidance: Gwartz v R, 2013 TCC 86 at paragraphs 63 to 65. In Copthorne v The Queen, 2007 TCC 481, Campbell J. wrote at paragraph 73:
…While the Act contains many provisions which seek to prevent surplus stripping, the analysis under subsection 245(4) must be firmly rooted in a unified textual, contextual and purposive interpretation of the relevant provisions. As such, reliance on a general policy against surplus stripping is inappropriate to establish abusive tax avoidance….
However, in this appeal, the issue does not involve a ‘general policy’ but a specific anti-avoidance section aimed at preventing non-residents from withdrawing dividends out of Canada on a tax-free basis. Any tax planning done for that purpose must comply with the provisions found in section 212.1 of the Act: Descarries v R, 2014 TCC 75 at paragraph 43. The question is whether the Appellant’s reliance on the exemption in subsection 212.1(4) is within the object, spirit and purpose of that subsection and section 212.1.
A The Text [67] The text of the provisions at issue is a consideration because it may shed light on the rationale for the sections: Copthorne (SCC) (supra) at paragraph 88.
(1) PUC [68] The definition of PUC in subsection 89(1) of the Act provides:
“paid-up capital”
at any particular time means,
(a) in respect of a share of any class of the capital stock of a corporation, an amount equal to the paid-up capital at that time, in respect of the class of shares of the capital stock of the corporation to which that share belongs, divided by the number of issued shares of that class outstanding at that time,
(b) in respect of a class of shares of the capital stock of a corporation,
…
(iii) where the particular time is after March 31, 1977, an amount equal to the paid-up capital in respect of that class of shares at the particular time, computed without reference to the provisions of this Act except subsections 51(3) and 66.3(2) and (4), sections 84.1 and 84.2, subsections 85(2.1), 85.1(2.1) and (8), 86(2.1), 87(3) and (9), paragraph 128.1(1)(c.3), subsections 128.1(2) and (3), 138(11.7), 139.1(6) and (7), 192(4.1) and 194(4.1) and sections 212.1 and 212.3, (emphasis added)
[69] The Act does not expressly define PUC. Instead, it relies on the corporate law concept of stated capital. Professor Krishna refers to PUC as the amount of capital that a corporation can return to shareholders on a tax-free basis: “The Fundamentals of Canadian Income Tax”, (9th ed. 2006) p. 719. In Copthorne (SCC), Rothstein J. discussed the definition of PUC and its reliance on the concept of stated capital. At paragraphs 76 and 78, he made the following observations:
76 Stated capital is “the full amount that [a corporation] receives in respect of any shares it issues” (K. P. McGuinness, Canadian Business Corporations Law (2nd ed. 2007), at §7.231). Where an investment is made in a corporation in consideration for shares, the stated capital of the corporation increases. Professor Krishna refers to stated capital as “the amount of money a shareholder ‘commits’ to the corporation” (p. 610). The calculation of stated capital is set out at s. 26 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”) and at s. 28 of the Alberta Business Corporations Act, R.S.A. 2000, c. B-9 (“ABCA”).
…
78 Where the PUC of a corporation diverges from the stated capital it is “because of subsequent adjustments for tax purposes” (Krishna, at p. 621). The adjustments made to compute PUC are those enumerated in subparagraph (b)(iii) of the definition of PUC in s. 89(1). Thus, while stated capital and PUC may be the same in some cases, the two may differ substantially. The adjustment relevant in this case is found in s. 87(3).
[70] In the present case, the adjustment to PUC for tax purposes is found in section 212.1 of the Act.
(2) Section 212.1 [71] The application of subsection 212.1(1) prevents a non-resident person from avoiding Part XIII tax on dividends through a non-arm’s length sale of shares when the following conditions are met:
a) There is a sale of shares of a corporation resident in Canada (called the subject cor