Collins & Aikman Products Co. v. The Queen

Collins & Aikman Products Co. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-06-03
Neutral citation
2009 TCC 299
File numbers
2006-722(IT)G, 2006-723(IT)G, 2006-724(IT)G
Judges and Taxing Officers
Patrick J. Boyle
Subjects
Income Tax Act
Decision Content
Docket: 2006-722(IT)G
BETWEEN:
COLLINS & AIKMAN PRODUCTS CO.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Collins & Aikman Canada Inc. (2006-723(IT)G) and Collins & Aikman Holdings Canada Inc. (2006-724(IT)G) on October 7 and 8, 2008,
at Toronto, Ontario.
Before: The Honourable Justice Patrick Boyle
Appearances:
Counsel for the appellant:
Clifford L. Rand
Susan Thomson
Counsel for the respondent:
Franco Calabrese
Jenny Mboutsiadis
Sandra K.S. Tsui
____________________________________________________________________
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years and the determination for the taxation year ending January 31, 1994, is allowed in full, with costs, and the assessments and determination are referred back to the Minister of National Revenue for reconsideration, reassessment and redetermination in accordance with the reasons herein.
Signed at Ottawa, Canada, this 3rd day of June 2009.
"Patrick Boyle"
Boyle J.
Docket: 2006-723(IT)G
BETWEEN:
COLLINS & AIKMAN CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Collins & Aikman Products Co. (2006-722(IT)G) and Collins & Aikman Holdings Canada Inc. (2006-724(IT)G) on October 7 and 8, 2008,
at Toronto, Ontario.
Before: The Honourable Justice Patrick Boyle
Appearances:
Counsel for the appellant:
Clifford L. Rand
Susan Thomson
Counsel for the respondent:
Franco Calabrese
Jenny Mboutsiadis
Sandra K.S. Tsui
____________________________________________________________________
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years is allowed in full, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the reasons herein.
Signed at Ottawa, Canada, this 3rd day of June 2009.
"Patrick Boyle"
Boyle J.
Docket: 2006-724(IT)G
BETWEEN:
COLLINS & AIKMAN HOLDINGS CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Collins & Aikman Products Co. (2006-722(IT)G) and Collins & Aikman Canada Inc. (2006-723(IT)G) on October 7 and 8, 2008,
at Toronto, Ontario.
Before: The Honourable Justice Patrick Boyle
Appearances:
Counsel for the appellant:
Clifford L. Rand
Susan Thomson
Counsel for the respondent:
Franco Calabrese
Jenny Mboutsiadis
Sandra K.S. Tsui
____________________________________________________________________
JUDGMENT
The appeal from the assessments made under the Income Tax Act for the 1994 and 1995 taxation years and the determination for the taxation year ending January 28, 1995, is allowed in full, with costs, and the assessments and determination are referred back to the Minister of National Revenue for reconsideration, reassessment and determination in accordance with the reasons herein.
Signed at Ottawa, Canada, this 3rd day of June 2009.
"Patrick Boyle"
Boyle J.
Citation: 2009 TCC 299
Date: 20090603
Dockets: 2006-722(IT)G
2006-723(IT)G
2006-724(IT)G
BETWEEN:
COLLINS & AIKMAN PRODUCTS CO.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
COLLINS & AIKMAN CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
COLLINS & AIKMAN HOLDINGS CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1] The sole issue in these cases is whether the general anti-avoidance rule (“GAAR”) applies to a reorganization of the corporate structure of the Canadian holdings of the Collins & Aikman group described below, followed by dividends from the Canadian operating companies through to the top Canadian holding company and returns of capital from the top Canadian holding company to its non‑resident shareholder. Implicitly, this means the impugned transactions were otherwise accounted for in accordance with the requirements of the Income Tax Act (the “Act”) read without section 245 and the GAAR.
[2] The hearing of this case was very straightforward. Neither side called any witnesses. The parties had agreed on a Partial Agreed Statement of Facts, a copy of which is appended to these reasons. The parties filed a Joint Book of Documents comprising some 134 documents, however I was only referred to a handful of documents. The Crown also read in excerpts from the transcripts of the examinations for discovery of the taxpayers’ representative.
[3] The taxpayers conceded that the impugned transactions resulted in a “tax benefit” for purposes of subsection 245(1). The taxpayers further conceded that, given the decision of the Federal Court of Appeal in The Queen v. MacKay et al., 2008 FCA 105, 2008 DTC 6238, the impugned transactions were all part of a series of transactions which satisfied the definition of “avoidance transaction” in subsection 245(3).
[4] Thus, the only issue in this appeal is whether the corporate reorganization and subsequent recapitalization of the Collins & Aikman companies result directly or indirectly in a misuse or abuse of the provisions of the Act for purposes of subsection 245(4).
I. Facts
[5] The Collins & Aikman group is a foreign multinational car parts manufacturer with significant Canadian operations. The recapitalization of the Collins & Aikman group which followed the reorganization of the Canadian interests of the group provided distributions in the form of returns of capital from the Canadian members of the group through to its non-resident shareholders.
A. Prior to the Reorganization
[6] Prior to the reorganization the group’s Canadian corporations were WCA Canada Inc. (“WCA”) and Borg Textiles Inc. (“Borg”). WCA was owned by Collins & Aikman Holdings Ltd. (“CAHL”). CAHL was a corporation incorporated in Canada in 1929 which had been a Canadian operating company until 1961. In 1961 CAHL ceased to be a Canadian resident and the Canadian operations were transferred to WCA. Borg was acquired somewhat later and was wholly owned by WCA. All of the shares of CAHL were owned by Collins & Aikman Products Co. (“Products”), a U.S. corporation.
[7] The relevant parts of the corporate organisational chart showed Products, a U.S. corporation, as the sole shareholder of CAHL, a corporation incorporated in Canada but not resident in Canada nor in the United States. CAHL in turn owned all of the shares of WCA, a Canadian corporation, which in turn owned all of the shares of Borg, another Canadian corporation.
[8] Prior to the reorganization the stated capital and paid-up capital (or PUC) of the CAHL shares, and their adjusted cost base to Products, was approximately $475,000.
B. The Reorganization
[9] In late 1993 and early 1994, the following corporate reorganization was undertaken.
[10] A new Canadian corporation, Collins & Aikman Holdings Canada Inc. (“Holdings”) was incorporated. About a month later, Products transferred its CAHL shares to Holdings and received the one and only common share of Holdings as consideration therefor. The fair market value of the CAHL shares at that time was $167 million. This amount was added to the stated capital account maintained for the Holdings share. This same amount, $167 million, also represented the cost of the Holdings share to Products and the cost of the CAHL shares to Holdings. This was not a rollover or other non-recognition transaction, however, Products was not taxed in Canada on the gain it realized because the CAHL shares were not taxable Canadian property as CAHL was not a Canadian resident corporation.
[11] The following month CAHL, which had originally been incorporated under the Canada Companies Act and continued in 1980 under the Canada Business Corporations Act (“CBCA”), was continued under the Business Corporations Act (Ontario) (“OBCA”). Several days later CAHL, WCA and Borg were all amalgamated together under the name Collins & Aikman Canada Inc. (“C&A”).
[12] Following this reorganization, Products, the U.S. parent[1], owned all of the shares of Holdings, the new Canadian holding company, which in turn owned all of the shares of C&A, the amalgamated Canadian operating company.
[13] I do not know what the U.S. tax consequences were to Products of its transfer of the CAHL shares to Holdings nor do I know if there were any tax consequences to CAHL or to Products resulting from this reorganization imposed by the country of residence of CAHL. However, neither of these foreign tax consequences would be directly relevant to an analysis of whether there has been a misuse or an abuse of the provisions of the Canadian Act in this case.
[14] At some point in the reorganization, CAHL became a Canadian resident. This may have occurred upon Products transferring the CAHL shares to Holdings since it appears the unanimous shareholder agreement, which precluded the majority Canadian directors of CAHL from exercising control, terminated. If not then, CAHL became a Canadian resident corporation upon its amalgamation into C&A the following month.
[15] As I mentioned above, long before the reorganization, in 1961, CAHL had sold its Canadian operating assets to WCA. WCA paid the purchase price, at least in part, by way of an interest-bearing promissory note. While the note was outstanding, WCA deducted the interest payments thereon when computing its income for Canadian tax purposes and CAHL paid Canadian non-resident withholding tax under Part XIII on that interest at the statutory rate of 25% without any entitlement to treaty reduction. Thus, the WCA interest payments to CAHL reduced WCA’s Canadian tax bill at its effective rate and subjected CAHL to Canadian non-resident withholding tax at the lesser rate of 25% thereon. Assuming any tax payable by CAHL to its country of residence on the interest income, net of any expenses associated therewith, was less than the difference between WCA’s effective Canadian rate and the 25% Canadian withholding rate on the gross amount of interest, the continued interposition of CAHL as shareholder of the Canadian operating companies was tax effective to the Collins & Aikman group.
[16] In September 1991 CAHL had reorganized its capital, part of which involved it paying a dividend to Products satisfied in part by assigning the WCA note to Products. This 1991 CAHL reorganization of capital was neither assumed nor pleaded to be part of the series of transactions. Once the WCA note ceased to be held by CAHL and became held by Products, the tax effectiveness of having WCA owned by a non-treaty country resident such as CAHL lost its tax effectiveness but left a significant tax cost. This is because dividends payable by a Canadian corporation to a non‑resident non-treaty country shareholder would be subject to a 25% Canadian non-resident withholding tax on the dividends whereas, if the Canadian companies of the Collins & Aikman group of companies were owned by a U.S. resident such as Products directly, that rate would be reduced to 5% under the Canada-U.S. tax treaty.
[17] Only after the WCA note became owing to Products instead of CAHL, did the Collins & Aikman group ask its outside professional advisors to consider ways in which its corporate structure as it related to the group’s Canadian holdings could be reorganized. The removal of the remaining tax costs of having WCA owned by a company not resident in a treaty country was at least one of the objectives of the reorganization.
C. The Recapitalization Distributions
[18] The recapitalization distributions occurred as follows.
[19] There was a significant overall refinancing of the Collins & Aikman group’s U.S. and Canadian operations. The Canadian component basically had C&A pay $104 million of dividends to Holdings and had Holdings reduce its paid-up capital from $167 million to $63 million when it distributed $104 million to its parent, Products, as a return of capital. This occurred in two tranches. Approximately six months after the reorganization, C&A declared a $58 million dividend to Holdings and Holdings reduced the corporate stated capital and the tax paid-up capital of the Holdings share owned by Products by $58 million. C&A had borrowed the money to pay this dividend under a new Collins & Aikman group bank facility. Another six months later, C&A paid a $46 million dividend to Holdings which Holdings promptly used to again reduce the stated capital and paid‑up capital of the Holdings share owned by Products by a like amount. C&A had funded this dividend from the repayments by Products and a Products subsidiary of amounts owing to C&A.
[20] It was the taxpayers’ position that while the reorganization was done to permit tax-free returns of capital in the future, at the time of the reorganization there was no present intention to make distributions of particular amounts or at specific times in the future. The evidence I was referred to is consistent with this and I so find. I note that the January 1993 one-page internal memo from Treasury Department regarding the Canadian reorganization evidences an intention to pay a dividend, asks what is the maximum amount of dividend or loan that could be paid on February 1, 1993, and raises the possibility of an intercorporate loan in the event the Canadian reorganization is not completed by February 1.
[21] Since Holdings did not have a bank account, in each case the amount of Holdings’ return of capital to Products was distributed electronically from C&A’s bank account directly to Products’ bank account. There was no dispute that C&A was acting as Holdings’ agent in this regard with satisfactory directions and financial reporting. Thus, this is only relevant to the issue of whether C&A will be liable under the paying agent liability provisions of subsection 215(6) for failure to withhold in the event GAAR applies to recharacterize the returns of capital as dividends.
II. The GAAR Assessments
[22] In this case, the Minister of National Revenue (the “Minister”) did not directly recharacterize the tax consequences of the impugned transactions in reliance upon subsection 245(2) of the GAAR. Instead of recharacterization, the Minister made determinations under subsection 152(1.11), and reduced the paid-up capital of the Holdings share owned by Products, and Products’ adjusted cost base (or ACB) in that share, from $167 million to approximately $475,000, being the PUC and the ACB to Products prior to the reorganization of the CAHL shares owned by it. A similar determination under subsection 152(1.11) was issued by the Minister to Holdings which reduced the PUC of the Holdings share and reduced the cost to Holdings of its C&A shares from $167 million to approximately $475,000. About ten days later, the Minister assessed Products for Canadian non-resident withholding tax under Part XIII on deemed dividends aggregating the difference between the $104 million distributed to it and the $475,000 determined to be the paid-up capital of its CAHL share. At the same time the Minister assessed Holdings under subsections 215(1) and 215(6) for not withholding and remitting Part XIII tax in respect of the deemed dividends together with penalties for failing to withhold. Similarly, the Minister also assessed C&A for its failure to withhold under subsections 215(2) and 215(6) from the deemed dividends when it acted as Holdings’ paying agent in making the payment, together with penalties for failing to withhold.
[23] Prior to the hearing of these appeals the Minister agreed to vacate the penalties assessed against Holdings and C&A for their failure to withhold and remit Part XIII tax.
[24] I do not understand why the Minister proceeded with subsection 152(1.11) GAAR determinations in this case, followed by ordinary Part XIII assessments of Products, Holdings and C&A relying upon the retroactive effect of the Minister’s determinations. It appears the Minister could have proceeded in the straightforward manner of assessing Products for non-resident withholding tax in reliance upon a section 245 GAAR recharacterization of the distributions as being primarily dividends without first making such a determination. Thereafter the liabilities of Holdings and C&A for Products’ Part XIII tax would flow from subsections 215(1), 215(2) and 215(6). If GAAR applies to recharacterize the amount paid to a non-resident as something which gives rise to a Part XIII tax payable by the non-resident, a Canadian payor and paying agent can be assessed under section 215 seemingly without the need to rely on the GAAR.
[25] The Minister’s decision to proceed with the determinations under 152(1.11) has given rise to some uncertainty. This is because there are express restrictions in section 152 upon determinations having a retroactive effect. Specifically, subsection 152(1.12) provides that a determination under subsection (1.11) cannot be made if the determined amount is relevant only for the purposes of computing the income, tax or other amount payable by the taxpayer under the Act for an earlier taxation year. This section clearly provides that amounts cannot be determined if they are only relevant to retroactively impose a tax consequence upon the taxpayer. In those circumstances ordinary assessments relying upon section 245 can be made directly by the Minister.
[26] It is the Minister’s position in this case that its determination of the paid-up capital amount of the Holdings share is not relevant only for purposes of computing taxes payable in years prior to that determination. The Minister’s position is that the $475,000 amount it determined to be the PUC of the Holdings share is not only relevant to the 1994 capital distributions since, prior to the determination of the PUC amount, the PUC of the Holdings share was $167 million following the reorganization and was only reduced to $63 million upon payment of the $104 million returns of capital. Immediately prior to these determinations the PUC was therefore $63 million which, absent the determinations, could have been returned otherwise than as a dividend on the Holdings share to Products. The Minister’s position is that by determining the PUC amount to be $475,000 that PUC determination was also relevant on a going forward basis prospectively because its effect was to preclude the return of capital of another $62.5 million of PUC.
[27] The contrary argument is that the determined amount, being $475,000, was relevant only for the prior years since the entire $475,000 determined PUC amount had been fully returned in prior years.
[28] I have my doubts as to the correctness of the Minister’s position. If the Minister’s position is not correct, the subsection 152(1.11) GAAR determinations are invalid as a result of subsection 152(1.12). Since the assessments themselves do not rely upon GAAR, but rely upon the subsection 152(1.11) determinations made days prior to the assessments, it appears the assessments would have to be vacated in this appeal. However, since I find in this case, as detailed below, that the reorganization and capital distributions do not result in a misuse or abuse of the provisions of the Act, I do not need to decide this preliminary but vexing subsection 152(1.11) question. Instinctively, it seems that retroactive determinations, like retroactive tax legislation, should be avoided except in cases where the legislator has clearly and unambiguously set out its intent to impose or permit the tax to be imposed retroactively.
III. The Pleadings
[29] Very shortly before the hearing of this appeal, the Crown moved to file amended replies. That motion was heard at the opening of trial. The taxpayers ended up consenting to the filing of the amended replies.
[30] Among other things, the amended replies (i) expanded the transactions forming part of the series of transactions, (ii) changed the provision of the Act which was alleged to have been misused, and (iii) added a large number of provisions relating to corporate distributions that it alleged formed part of the scheme of the Act read as a whole.
[31] The Minister’s initial assumption, which rightly remained unamended, was that subsection 128.2(1) dealing with cross-border amalgamations had been misused as a result of the transactions and that the transactions constituted abuse having regard to the provisions of the Act read as a whole. At the hearing, the Minister acknowledged that subsection 128.2(1) was entirely the wrong provision and would not or should not have applied in any event regardless of how the corporate reorganization had been structured or undertaken. The amended pleadings take the position that subsection 84(4) is the provision which the transactions misused. Further, the amended replies plead that the transactions are an abuse of the provisions of the Act read as a whole including sections 54 “adjusted cost base”, 84, 84.1, 87, 89 “paid-up capital”, 128.1 and 212.1, subsections 15(1), 39(1), 51(3), 52(8), 85(2.1), 85.1(2.1), 86(2.1), 87(1), 112, 115(1), 215(2), 215(6) and 250(4) as well as paragraphs 3(b) and 38(a).
[32] The transactions occurred in 1994, the determinations and the assessments were made in 2000, the notices of objections were filed in 2001 and the Minister’s confirmation of the assessments and the determinations were done in 2005. The notices of appeal and original replies were filed in 2006. Only in September 2008, and very shortly before the early October trial did the Minister notify the taxpayers that the provision alleged to have been misused until then was entirely the wrong provision and an entirely new provision is the one that had been misused.
[33] The taxpayers’ consent to the Crown’s motion to file the amended replies was granted on the condition that certain documents produced on the motion would also form part of the evidence in the hearing and, provided that the Minister acknowledged that for purposes of the trial record, the Crown did not consult with the Canada Revenue Agency’s GAAR Committee regarding the amended replies’ position that an entirely different provision of the Act had been misused. In these circumstances, I accord little or no weight, relevance or significance to the fact that the Crown did not go back to the GAAR Committee on this most important aspect of the determinations, assessments and appeals. I assume this was put forward by way of adding colour to the facts surrounding the assessment and the strength of the Minister’s position. If that is so, it is perhaps gilding the lily since in any event the Minister finds itself changing horses far past the middle of the stream by filing amended replies. In the circumstances, this fact does not in any way affect my analysis of whether the corporate reorganization and capital distributions constitute a misuse or abuse of any provision of the Act or the Act read as a whole. It is however perhaps fair of taxpayers generally, and taxpayers who have been reassessed under GAAR and their professional advisors, to question how the Government of Canada effectively prepares its case if its counsel is not working together with the GAAR Committee’s members from the Department of Finance, or other members of the Department of Finance’s Tax Policy Branch, which is as a practical matter the group truly responsible for the scheme of the Act. The taxpayers of Canada generally might be concerned that absent such lines of communication being fully open and systematically taken advantage of, the government may be losing GAAR cases it should win. Similarly, taxpayers who are the subject of GAAR assessments and their counsel may be concerned that the government is pursuing GAAR cases to trial and losing in circumstances where the Crown should have folded before trial. These comments are in no way a reflection of the particular Crown counsel in this case. Lawyers must work with the facts and history of the case they are given and are constrained as a practical matter, notwithstanding the Department of Justice Act, to work within their clients’ instructions and operating methods.
IV. Law
[34] The GAAR is set out in section 245 of the Act. Since the taxpayers have conceded the tax benefit and avoidance transaction aspects of section 245, the issue in this case is whether the impugned transactions are spared the application of GAAR because they do not constitute a misuse or abuse described in subsection 245(4). Subsection 245(4) reads as follows:
245(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 Application 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.
[35] Only if the impugned transactions are subject to the application of GAAR because they constitute the type of misuse or abuse described in subsection 245(4), would it remain to determine if the Minister’s determination of the appropriate tax consequences and amounts for purposes of subsections 245(2) and (5) and subsection 152(1.11) are appropriate. Given my determination that the impugned transactions are saved by subsection 245(4) because they do not constitute the type of misuse or abuse described therein as that subsection has been interpreted by the Supreme Court of Canada in Canada Trustco Mortgage Company v. Canada, 2005 SCC 54, 2005 DTC 5523, and in Lipson v. Canada, 2009 SCC 1, 2009 DTC 5015, I am not reproducing the recharacterization provisions.
[36] Notwithstanding the wording of subsection 245(4) relating to misuse and abuse, the Supreme Court of Canada has mandated a unified interpretive approach to be applied by the Court in finding whether or not abusive tax avoidance resulted from a series of transactions. This approach was set out in Canada Trustco as follows:
44 The heart of the analysis under s. 245(4) lies in a contextual and purposive interpretation of the provisions of the Act that are relied on by the taxpayer, and the application of the properly interpreted provisions to the facts of a given case. The first task is to interpret the provisions giving rise to the tax benefit to determine their object, spirit and purpose. The next task is to determine whether the transaction falls within or frustrates that purpose. The overall inquiry thus involves a mixed question of fact and law. The textual, contextual and purposive interpretation of specific provisions of the Income Tax Act is essentially a question of law but the application of these provisions to the facts of a case is necessarily fact-intensive.
45 This analysis will lead to a finding of abusive tax avoidance when a taxpayer relies on specific provisions of the Income Tax Act in order to achieve an outcome that those provisions seek to prevent. As well, abusive tax avoidance will occur when a transaction defeats the underlying rationale of the provisions that are relied upon. An abuse may also result from an arrangement that circumvents the application of certain provisions, such as specific anti-avoidance rules, in a manner that frustrates or defeats the object, spirit or purpose of those provisions. By contrast, abuse is not established where it is reasonable to conclude that an avoidance transaction under s. 245(3) was within the object, spirit or purpose of the provisions that confer the tax benefit.
46 Once the provisions of the Income Tax Act are properly interpreted, it is a question of fact for the Tax Court judge whether the Minister, in denying the tax benefit, has established abusive tax avoidance under s. 245(4). Provided the Tax Court judge has proceeded on a proper construction of the provisions of the Act and on findings supported by the evidence, appellate tribunals should not interfere, absent a palpable and overriding error.
47 The first part of the inquiry under s. 245(4) requires the court to look beyond the mere text of the provisions and undertake a contextual and purposive approach to interpretation in order to find meaning that harmonizes the wording, object, spirit and purpose of the provisions of the Income Tax Act. There is nothing novel in this. Even where the meaning of particular provisions may not appear to be ambiguous at first glance, statutory context and purpose may reveal or resolve latent ambiguities. “After all, language can never be interpreted independently of its context, and legislative purpose is part of the context. It would seem to follow that consideration of legislative purpose may not only resolve patent ambiguity, but may, on occasion, reveal ambiguity in apparently plain language.” See P.W. Hogg and J.E. Magee, Principles of Canadian Income Tax Law (4th ed. 2002), at p. 563. In order to reveal and resolve any latent ambiguities in the meaning of provisions of the Income Tax Act, the courts must undertake a unified textual, contextual and purposive approach to statutory interpretation.
. . .
49 In all cases where the applicability of s. 245(4) is at issue, the central question is, having regard to the text, context and purpose of the provisions on which the taxpayer relies, whether the transaction frustrates or defeats the object, spirit or purpose of those provisions. The following points are noteworthy:
(1) While the Explanatory Notes use the phrase “exploit, misuse or frustrate”, we understand these three terms to be synonymous, with their sense most adequately captured by the word “frustrate”.
(2) The Explanatory Notes elaborate that the GAAR is intended to apply where under a literal interpretation of the provisions of the Income Tax Act, the object and purpose of those provisions would be defeated.
(3) The Explanatory Notes specify that the application of the GAAR must be determined by reference to the facts of a particular case in the context of the scheme of the Income Tax Act.
(4) The Explanatory Notes also elaborate that the provisions of the Income Tax Act are intended to apply to transactions with real economic substance.
50 As previously discussed, Parliament sought to address abusive tax avoidance while preserving consistency, predictability and fairness in tax law and the GAAR can only be applied to deny a tax benefit when the abusive nature of the transaction is clear.
51 The interpretation of the provisions giving rise to the tax benefit must, in the words of s. 245(4) of the Act, have regard to the Act “read as a whole”. This means that the specific provisions at issue must be interpreted in their legislative context, together with other related and relevant provisions, in light of the purposes that are promoted by those provisions and their statutory schemes. In this respect, it should not be forgotten that the GAAR itself is part of the Act.
. . .
55 In summary, s. 245(4) imposes a two-part inquiry. The first step is to determine the object, spirit or purpose of the provisions of the Income Tax Act that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids. The second step is to examine the factual context of a case in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purpose of the provisions in issue.
56 The Explanatory Notes elaborate that the provisions of the Income Tax Act are intended to apply to transactions with real economic substance. Although the expression “economic substance” may be open to different interpretations, this statement recognizes that the provisions of the Act were intended to apply to transactions that were executed within the object, spirit and purpose of the provisions that are relied upon for the tax benefit. The courts should not turn a blind eye to the underlying facts of a case, and become fixated on compliance with the literal meaning of the wording of the provisions of the Income Tax Act. Rather, the courts should in all cases interpret the provisions in their proper context in light of the purposes they intend to promote.
57 Courts have to be careful not to conclude too hastily that simply because a non-tax purpose is not evident, the avoidance transaction is the result of abusive tax avoidance. Although the Explanatory Notes make reference to the expression "economic substance", s. 245(4) does not consider a transaction to result in abusive tax avoidance merely because an economic or commercial purpose is not evident. As previously stated, the GAAR was not intended to outlaw all tax benefits; Parliament intended for many to endure. The central inquiry is focussed on whether the transaction was consistent with the purpose of the provisions of the Income Tax Act that are relied upon by the taxpayer, when those provisions are properly interpreted in light of their context. Abusive tax avoidance will be established if the transactions frustrate or defeat those purposes.
. . .
59 Similarly, courts have on occasion discussed transactions in terms of their “lack of substance” or requiring “recharacterization”. However, such terms have no meaning in isolation from the proper interpretation of specific provisions of the Income Tax Act. The analysis under s. 245(4) requires a close examination of the facts in order to determine whether allowing a tax benefit would be within the object, spirit or purpose of the provisions relied upon by the taxpayer, when those provisions are interpreted textually, contextually and purposively. Only after first, properly construing the provisions to determine their scope and second, examining all of the relevant facts, can a proper conclusion regarding abusive tax avoidance under s. 245(4) be reached.
. . .
61 A proper approach to the wording of the provisions of the Income Tax Act together with the relevant factual context of a given case achieve balance between the need to address abusive tax avoidance while preserving certainty, predictability and fairness in tax law so that taxpayers may manage their affairs accordingly. Parliament intends taxpayers to take full advantage of the provisions of the Act that confer tax benefits. Parliament did not intend the GAAR to undermine this basic tenet of tax law.
62 The GAAR may be applied to deny a tax benefit only after it is determined that it was not reasonable to consider the tax benefit to be within the object, spirit or purpose of the provisions relied upon by the taxpayer. The negative language in which s. 245(4) is cast indicates that the starting point for the analysis is the assumption that a tax benefit that would be conferred by the plain words of the Act is not abusive. This means that a finding of abuse is only warranted where the opposite conclusion -- that the avoidance transaction was consistent with the object, spirit or purpose of the provisions of the Act that are relied on by the taxpayer -- cannot be reasonably entertained. In other words, the abusive nature of the transaction must be clear. The GAAR will not apply to deny a tax benefit where it may reasonably be considered that the transactions were carried out in a manner consistent with the object, spirit or purpose of the provisions of the Act, as interpreted textually, contextually and purposively.
[Emphasis added.]
[37] In Lipson, the majority of the Supreme Court describes paragraphs 44 and 45 as the key portion of the Court’s approach to GAAR in Canada Trustco. The majority summarized paragraph 44 as follows:
40 According 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).
[38] In Lipson, at paragraph 27, the majority of the Court adds the word “essential” in front of “object, spirit and purpose” in summarizing paragraph 44 of Canada Trustco.
[39] In this case, the burden to persuade the Court of the correctness of its position is entirely on the Minister. As set out by the Supreme Court in Canada Trustco, a taxpayer in a GAAR appeal will shoulder the initial burden of establishing what the facts are by refuting or challenging the Minister’s factual assumptions, challenging the existence of a tax benefit, or showing that a bona fide non-tax purpose primarily drove the transaction. In this case, the facts have been agreed to and the taxpayers have conceded the tax benefit and avoidance transaction aspects of GAAR. In this case the only issue is whether or not the taxpayers’ tax benefit enjoyed from the avoidance transactions was or was not abusive tax avoidance.
[40] On the topic of burden of proof or persuasion, the Supreme Court of Canada in Canada Trustco first quoted from paragraph 68 of the reasons of the Federal Court of Appeal in OSFC Holdings Ltd. v. Canada, 2001 FCA 260, 2001 DTC 5471, that:
[F]rom a practical perspective, . . . [t]he Minister should set out the policy with reference to the provisions of the Act or extrinsic aids upon which he relies.
The Supreme Court went on in paragraph 65:
For practical purposes, the last statement is the important one. 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.
[41] It is important to note that the test for abusive tax avoidance is not whether in a taxpayer’s particular circumstances a sense of apparent equity or arguable common sense suggests transactions like these should be taxed no differently than some other transaction that would achieve most or all of the same results but for the taxpayer’s further objective of minimizing taxes in completing the transactions. That is not what section 245 provides nor how it has been interpreted. Nor is the test whether the Act should have been drafted to catch particular transactions.
[42] The preconditions for a determination of abusive tax avoidance in subsection 245(4) from paragraph 45 of Canada Trustco and from paragraph 40 of Lipson require the Crown to demonstrate a provision or provisions detailing or forming part of the scheme of the Act with respect to the taxation of amounts or transactions similar to those in question which have been misused by the taxpayers in their series of transactions. Such misuse must be shown to result (i) from the provision or provisions being relied on or applied by the taxpayers