Desmarais v. The Queen

Desmarais v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2006-02-16
Neutral citation
2006 TCC 44
File numbers
2003-2952(IT)G
Judges and Taxing Officers
Pierre Archambault
Subjects
Income Tax Act
Decision Content
Docket: 2003-2952(IT)G
BETWEEN:
CLAUDE DESMARAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
__________________________________________________________________
Appeals heard on September 7, 2005, at Montreal (Quebec).
Before: The Honourable Judge Pierre Archambault
Appearances:
Counsel for the Appellant:
Serge Fournier
Counsel for the Respondent:
Richard Gobeil
Justine Malone
______________________________________________________________________________
JUDGMENT
The appeals from the assessments issued under the Income Tax Act for the 1997 and 1998 taxation years are dismissed, with costs to the Respondent, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 16th day of February 2006.
__________ "Pierre Archambault" __________
Archambault J
Translation certified true
On this 22nd day of March, 2006.
Garth McLeod, Translator
Citation: 2006TCC44
Date: 20060216
Docket: 2003-2952(IT)G
BETWEEN:
CLAUDE DESMARAIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
__________________________________________________________________
REASONS FOR JUDGMENT
Archambault J
[1] Claude Desmarais is appealing from income tax assessments issued by the Minister of National Revenue (the Minister) in respect of the 1997 and 1998 taxation years.[1] The Minister included in Mr. Desmarais' income for these taxation years taxable dividends of $112,463 and $41,236 respectively, in accordance with section 245 of the Income Tax Act (the Act).[2]
[2] According to the Minister, the taxation of these amounts as dividends was a tax consequence determined as reasonable in order to deny the tax benefit resulting from a series of avoidance transactions including the redemption of shares by 6311. The following is the statement made by counsel for the Respondents in paragraph 1 of his written submissions:
[TRANSLATION]
As of June 30, 1996, the Appellant was a shareholder of two companies[3] including one that he controlled with his brother that held substantial surpluses. Following a series of transactions that did not have a genuine commercial purpose, the Appellant withdrew $123,000 free of tax from this company. By creating high paid-up capital and by converting what would otherwise have been a taxable dividend of the company into a return of capital, the Appellant appropriated these surpluses free of tax.
Factual background
[3] The great majority of the facts do not pose problems in these appeals. In fact, counsel for Mr. Desmarais admitted all the following facts that were assumed by the Minister in issuing the assessment and stated in paragraph 17 of the reply to the notice of appeal, except for those in paragraph (j) and paragraphs (u) to (y):
[TRANSLATION]
(a) Comsercom is a taxable Canadian corporation whose share capital consisted until December 10, 1996 of 42 common shares divided among seven shareholders who were not related, including the Appellant;
(b) the paid-up capital of the 42 common shares of Comsercom was $420;
(c) until December 13, 1996, the Appellant held 14.28% of the common shares of Comsercom, namely 6 common shares;
(d) on December 11, 1996, Comsercom amended its share capital at the request of the Appellant or his representatives in order to subdivide the 42 common shares into 420 common shares;
9044-6311 Québec Inc
(e) on December 11, 1996, [6311] was incorporated;
(f) the share capital of [6311] consisted of 100 common shares with a total paid-up capital of $100;
(g) at all times relevant to the dispute, the Appellant held all the shares issued and outstanding of [6311];
(h) on December 13, 1996, the Appellant transferred 41 of his 60 common shares of Comsercom, namely 9.76 % of the common shares of Comsercom, to [6311] by means of a rollover under subsection 85(1) of the Income Tax Act ("the Act");
0 the agreed amount in respect of the 41 shares was $123,000 and the adjusted cost base was $41;
0 in consideration of the transfer described above, the Appellant received 123,000 class D preferred shares of [6311];
0 the cash surrender value, cost and paid-up capital of the 123,000 class D preferred shares was $123,000, or $1 per share;
(i) the Appellant reported a taxable capital gain of $92,219[4] for the 1996 taxation year and claimed a deduction under section 110.6 of the Act;
(j) the transfer of the common shares of Comsercom was limited to 9.76%[5] in order to circumvent the application of the provisions of section 84.1 of the Act;
(k) starting on December 13, 1996 and at all subsequent times relevant to the dispute, the Appellant held 19 common shares of Comsercom, or 4.52% of its shares;
Gestion A.C.D. Inc.
(l) Gestion is a taxable Canadian corporation whose share capital until June 30, 1996consisted of 1,000 class A shares and 1,000 class B shares;
(m) until January 6, 1997, the Appellant and his brother, André Desmarais, held equally all the shares of Gestion that were issued and outstanding;[6]
(n) between June 30, 1996 and January 6, 1997,[7] the shareholders of Gestion exchanged their 2,000 class A and Class B shares for 557 class A shares, 557 class B shares, 443 class C shares and 443 class D shares;
(o) on January 6, 1997, the Appellant transferred 557 class B shares of Gestion to [6311] by means of a rollover in accordance with subsection 85(1) of the Act;
0 the agreed amount for the 557 shares was $557 and the adjusted cost base was $557;
0 in consideration of the transfer of 557 class B shares of Gestion, the Appellant received 520,795 class F preferred shares of [6311] with a redemption value of $520,795 and paid-up capital of $557;[8]
(p) on March 31, 1997, the Appellant transferred 443 class D shares of Gestion to [6311] by means of a rollover in accordance with subsection 85(1) of the Act;
0 the agreed amount for the 443 shares was $208,019 and the adjusted cost base was $443;
0 the Appellant claimed a capital gains deduction in accordance with section 110.6 of the Act in respect of the capital gain resulting from the transfer described above;
0 in consideration of the transfer of 443 class D shares of Gestion, the Appellant received 414,205 class E preferred shares of [6311] with a redemption value of $414,205 and paid-up capital of $443;[9]
Redemptions by [6311]
(q) on January 6, 1997, [6311] redeemed 90,000 class D preferred shares held by the Appellant for consideration of $90,000 in cash;[10]
(r) on January 5, 1998, [6311] redeemed 33,000 of the remaining class D preferred shares held by the Appellant for consideration of $33,000 in cash;[11]
(s) the Appellant dealt with the redemptions on January 6, 1997 and January 5, 1998 as follows for tax purposes:
1997
1998
Amount paid on redemption
$90,000
$33,000
Minus paid-up capital
($90,000)
($33,000)
Deemed dividend
$-
$-
Proceeds of disposition
$90,000
$33,000
Minus deemed dividend
($-)
($-)
Revised proceeds of disposition under s. 54
$90,000
$33,000
Minus adjusted cost base
$90,000
$33,000
Capital gain
$-
$-
(t) during the financial years ending May 31, 1997 and May 31, 1998, [6311] received dividends from Gestion in the amounts of $306,497 and $171,906 respectively;
(u) the dividends received from Gestion financed the redemption of the preferred shares of [6311];
(v) the following transactions were part of a series of avoidance operations from which a tax benefit arose, directly or indirectly:
§ the incorporation of [6311];
§ the reorganization of capital carried out by Comsercom;
§ the transfer of 9.76% of the shares of Comsercom held by the Appellant to [6311];
§ the reorganization of capital carried out by Gestion;
§ the transfer of the shares of Gestion to [6311];
§ the dividends paid to [6311] by Gestion; and
§ the redemption of the shares by [6311];
(w) the tax benefit resulting from these transactions was the tax saving on the Appellant's appropriation of funds of Gestion;
(x) the transactions described in paragraph (v) above were not concluded primarily for genuine purposes;
(y) the transactions involved directly or indirectly an abuse in the application of the provisions of the Act read as a whole by permitting the Appellant to appropriate funds free of tax from the companies of which he was a shareholder.
[4] Only Mr. Desmarais and his tax expert in the accounting firm of Samson Bélair testified at the hearing. Mr. Desmarais described the circumstances surrounding the creation of 6311, to which he transferred his shares of Gestion and Comsercom. Gestion held a substantial share of a partnership that operated an insurance brokerage. The arrival of new partners in this partnership generated substantial liquid assets for Gestion. According to Mr. Desmarais, he and his brother, who held all the shares of Gestion, did not have the same investment objectives for these liquid assets. Furthermore, his brother did not appreciate the investment advisors of whom Mr. Desmarais made use. Consequently, it was decided that it would be in the interests of both brothers to separate their share of the liquid assets of Gestion and, on the advice of Samson Bélair and, in particular, the tax experts in that firm, it was decided that Claude Desmarais would transfer the shares of Gestion that he held to another holding company, 6311, and that his brother André would transfer his to another new holding company, 9044-6295 Québec Inc.
[5] During his testimony, the tax expert from Samson Bélair described some of the tax aspects of this reorganization. In particular, he spoke about the interest of the Desmarais brothers in "crystallizing" their right to what is commonly called the capital gain "exemption",[12] which they could enjoy with respect to their shares of Gestion and, in the case of Claude Desmarais, with respect to his shares of Comsercom. The latter corporation, established in 1977, operated a residence for seniors. It was a corporation that carried on business actively and whose shares might benefit from the advantageous system of the capital gain exemption. According to Mr. Desmarais, the creation of 6311 allowed him to achieve his objective of placing all his investments in his holding company.
[6] However, this objective could not be achieved in respect of all his Comsercom shares since the tax expert had seen an opportunity to convert into cash the latent capital gain exemption on the Comsercom shares held by Mr. Desmarais, that is to [TRANSLATION] "act as though they were selling these shares to third parties". On his cross-examination, the tax expert acknowledged that he knew that if 10% or less of the Comsercom shares were transferred to 6311, it would be possible to avoid being required, as under the rule in section 84.1 of the Act, to limit the paid-up capital of the shares issued by 6311 to the amount of the paid-up capital of the shares of Comsercom that Mr. Desmarais transferred to 6311. By acting in this way, Mr. Desmarais could withdraw $123,000 from 6311 free of tax. This was why Mr. Desmarais transferred only 41 common shares of Comsercom, that is 9.76% of all the common shares of the corporation, which, following the transfer, was not connected with 6311 because 6311 held less than 10% of the voting shares, which accounted for less than 10% of the fair market value of all the shares of Comsercom. The tax expert asserted that he could not provide information concerning the redemption of the 123,000 class D shares by 6311 because it was his partner auditor, and not he, who was responsible for this transaction. However, he knew that the redemption price of these shares was equal to their paid-up capital and their adjusted cost base.
[7] As far as Mr. Desmarais was concerned, he acknowledged that the redemption of the 123,000 class D shares was part of the plan to reorganize his investments and that this had been suggested to him by Samson Bélair. He believed that this redemption was in accordance with the provisions of the Act. He also acknowledged that the transfer of the Comsercom shares to 6311 had been completed "while they were at it". According to him, this transfer would enable him to better manage the dividends that Comsercom might distribute to him. However, he stated that the policy of this corporation was first to repay its debts. Its financial statements indicated that a substantial expansion occurred during the financial year ending June 30, 1996. The cost of the work done and the acquisitions made by Comsercom for this expansion amounted to $1,698,600 in 1996 and to more than $219,000 in 1997. Long-term debt increased by $1,044,259 in 1996 and by $242,164 in 1997 and totalled $2,902,643 at the end of the 1997 financial year.[13] Finally, an analysis of the financial statements of Comsercom for the financial years from 1995 to 1999 indicates that no dividend was paid for the financial years from 1996 to 1998.[14] A capital dividend of $128,058 was paid during the 1995 financial year and a regular dividend of $35,000 was paid in the 1999 financial year. The share of this dividend paid to 6311 accordingly amounted to $3,416 ($35,000 x 9.76%).[15]
[8] During the 1999 financial year, 6311 redeemed 80,000 class F shares for the sum of $80,000.
[9] An analysis of the income tax returns[16] of 6311 for the years from 1997 to 2001 (except for 2000, which was not filed) provides us with the following information concerning the dividends it received:
Dividends received by 6311
Source of dividends
1997
1998
1999
2000
2001
TOTAL
Gestion
306,497
171,906
122,000
600,403
Comsercom
0
0
0
3,416[17]
3,416
Lévesque Beaubien
1,461
1,488
2,949
V.M. Desjardins
405
1,228
1,633
219
219
TOTAL
306,497
173,772
124,935
n/a
15,847[18]
621,051
[10] Although counsel for Mr. Desmarais denied paragraph (u) of the reply to the notice of appeal, which states that the dividends received from Gestion by 6311 financed its redemptions in 1997 and 1998 of the 123,000 class D shares held by Mr. Desmarais, he did not adduce evidence to contradict this fact. On the contrary, the joint books of documents fully establish this.
[11] First of all, an analysis of the dividends received by 6311 and shown in the table above create a strong inference that it was the dividends paid by Gestion that enabled 6311 to redeem its 123,000 class D shares. One thing is clear: it was not the dividends paid by Comsercom that made possible the redemption of the 90,000 class D shares on January 6, 1997 and the remaining 33,000 class D shares on January 5, 1998. There is more, however. An analysis of the accounting records of 6311, including the adjusting entries made by the accountants, clearly shows that it was the dividends paid by Gestion that enabled 6311 to pay the cost of redeeming these 123,000 class D shares.
[12] Contrary to what is stated in the written resolutions of the sole director of 6311 dated January 6, 1997 (tab 25), the $90,000 for the redemption of the 90,000 class D shares held by Claude Desmarais was not paid [TRANSLATION] "by the issuance of a cheque by the Company to Claude Desmarais". With respect to this redemption, we find among the accounting documents of 6311 an analysis of the transactions of 6311 at the Caisse populaire St-Thomas d'Aquin (tab 34) as well as the adjusting entries carried forward (tab 35). This analysis shows that, of the total redemption price of $90,000, the sum of $89,137 was paid to Mr. Desmarais in two manual transfers and by a withdrawal at the counter, and not by cheque. The unpaid balance of the redemption price is found in the shareholder loans account.
[13] The following table contains information concerning the dates on which the dividends received by 6311 from Gestion were deposited and concerning payment of the redemption price by 6311 to Mr. Desmarais:
Correlation between dividends received from Gestion
and payment for redemption by 6311[19]
Dates
of deposits or
withdrawals
Method or source
of payment
Dividends
received from Gestion
Redemption price paid to Claude D
Feb. 28, 1997
Gestion
12,000
Feb. 28, 1997
Manual transfer
12,000
April 3, 1997
Gestion
55,000
April 4, 1997
Manual transfer
50,000
April 15, 1997
Gestion
26,200
April 25, 1997
Withdrawal at counter
27,137
TOTAL
93,200
89,137
[14] Concerning the redemption of the remaining 33,000 class D shares by 6311 on January 5, 1998, a similar finding must be made. In fact, contrary to what is stated in the resolution dated January 5, 1998 concerning the redemption of these shares (tab 36), not only was payment not made by cheque but the payment of the redemption price was made prior to the date of the resolution of the board of directors. An analysis of the accounting documents, including the "Caisse populaire St-Thomas d'Aquin Transaction" document (tab 37) and the adjusting entries carried forward (tab 38) provide the following information:
Correlation between dividends received from Gestion
and payment for redemption by 6311[20]
Date
Dividends
received from Gestion
Redemption price*
paid to Claude D
June 1997
3,500
August 1997
56,275
35,000
10,000
October 1997
10,000
February 1998
7,500
7,500
April 1998
108,130
12,000
TOTAL
171,905
78,000
* of the 33,000 class D shares and the 45,000 class F shares
Analysis
[15] The Minister's assessments were based on section 245 of the Act, which provides:
245(1) [General anti-avoidance rule - GAAR] - 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;
"tax consequences" to a person means the amount of income, taxable income, or taxable income earned in Canada of the person, 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;
"transaction" includes an arrangement or event.
245(2) General anti-avoidance provision - [GAAR] - 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.
245(3) Avoidance transaction - An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
245(4) Where s. (2) does not apply - 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.[21]
245(5) Determination of tax consequences - Without restricting the generality of subsection (2), and notwithstanding any other enactment,
(a) any deduction, exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, exemption or exclusion, any income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be recharacterized, and
(d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,
in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.
[Emphasis added.]
[16] The enactment of this section in 1988 led to the flow of a great deal of ink in writings concerning its scope and its interpretation. This Court and the Federal Court of Appeal have on several occasions had to express an opinion on the application of this section. Only recently, on October 19, 2005, the Supreme Court of Canada rendered two important decisions clarifying the approach to be taken by this Court in applying section 245. The decisions were Canada Trustco Mortgage Co. v. Canada, [2005] S.C.J. No. 56 (QL), 2005 CarswellNat 3213, 2005 SCC 54 (Trustco), and Mathew v. Canada, [2005] S.C.J. No. 55 (QL), 2005 CarswellNat 3215, 2005 SCC 55. In paragraph 66 of Trustco, the Supreme Court briefly summarized this approach:
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).[22]
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.
[Emphasis added.]
[17] Here, counsel for Mr. Desmarais attempted to establish that the first two conditions did not exist. He maintained that there was no tax benefit because, according to him, Mr. Desmarais had "taxed himself" by including in computing his income the amount of the taxable capital gain resulting from the transfer of the 41 shares of Comsercom to 6311. Counsel did not go into very much detail on the question of the benefit constituted by the right to deduct, under section 110.6 of the Act, an amount equivalent to that of the taxable capital gain that Mr. Desmarais included in his income following the transfer of his shares. In my judgment, this assertion of counsel that his client taxed himself does not reflect reality. It is more accurate to say that, by claiming the deduction granted by section 110.6 of the Act, Mr. Desmarais enjoyed an exemption in respect of the capital gain rather than being subject to tax. It is true, however, that the taxable capital gain was included in his income but he then deducted it in computing his taxable income.
[18] As far as counsel for the Respondent were concerned, the tax benefit to which they referred was the stripping of the surpluses of Gestion which could be distributed to Mr. Desmarais free of tax through 6311, when the 123,000 class D shares were redeemed. In their view, the series of avoidance transactions that made it possible to obtain such a tax benefit included the transfer of the 41 shares of Comsercom, in respect of which the taxable capital gain was exempt by the effect of section 110.6 of the Act. The stripping was achieved by the payment of dividends by Gestion to 6311 - a payment that, thanks to section 112 of the Act, occurred free of tax - and by the use of the surpluses in question to redeem, free of tax - since the redemption price was equal to the paid up capital and the adjusted cost base - the 123,000 class D shares held by Mr. Desmarais.
[19] We should note that a tax benefit is defined as consisting of any avoidance or deferral of tax and it must be noted that the surpluses of Gestion were in fact paid to Mr. Desmarais by 6311 free of tax. This tax benefit resulted from a series of transactions of which the transfer of the 41 Comsercom shares to 6311 by Mr. Desmarais and the redemption of the 123,000 class D shares by 6311 were part. As the Supreme Court of Canada has stated, when it must be determined whether a tax benefit exists, "it may be that the existence of a tax benefit can only be established by comparison with an alternative arrangement" (para. 20 of Trustco). Here, if the surpluses of Gestion received as dividends by 6311 had been used to declare a dividend on the shares of 6311 held by Mr. Desmarais or if they had been used to redeem class F shares,[23] these surpluses of Gestion would have been received by Mr. Desmarais as taxable dividends and included in his income under section 82 of the Act, either as a simple dividend in the case of that which would have been paid on the shares of 6311, or as a deemed dividend under subsection 84(3) on the redemption of the class F shares by 6311. If we compare the three mechanisms that 6311 could have used, we find the obvious benefit obtained by Mr. Desmarais because 6311 elected to redeem the 90,000 class D shares in 1997 and the remaining 30,000 class D shares in 1998.
[20] Furthermore, this tax benefit resulted from a series of transactions that began on December 11, 1996 with the incorporation of 6311 and the splitting of the shares of Comsercom and ended on January 5, 1998, with the redemption of the remaining 33,000 class D shares. According to subsection 248(10) of the Act, a series of transactions includes "any related transactions or events completed in contemplation of the series". Note should also be made of what the Supreme Court of Canada has said: "We would elaborate that 'in contemplation' is read not in the sense of actual knowledge but in the broader sense of 'because of' or 'in relation to' the series. The phrase can be applied to events either before or after the basic avoidance transaction found under s. 245(3)" (para. 26 of Trustco). The fact that 41 of the 60 shares of Comsercom held by Mr. Desmarais were transferred to 6311 two days after the Comsercom shares were split and 6311 was incorporated, on December 13, 1996, and the fact that the redemption of the first group of class D shares occurred three weeks later, on January 6, 1997, the very day on which 557 class B shares of Gestion were transferred by Mr. Desmarais to 6311, clearly indicates that all these transactions were part of a series of transactions concluded for the purpose of obtaining a tax benefit. The remaining 33,000 class D shares were redeemed one year later, on January 5, 1998, to complete this series of transactions, although the redemption price of these shares was paid to Mr. Desmarais in several instalments well before January 5, 1998, starting in June 1997.
[21] The next step is to determine whether at least one transaction in the series is an avoidance transaction referred to in subsection 245(3) in the sense that it was not "undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit" (paragraph 245(3)(b) of the Act). Here, counsel for Mr. Desmarais maintained that there was no avoidance transaction because the taxpayer was motivated primarily by the reorganization of his patrimony, in particular by separating his share in the liquid assets of Gestion. The objective that Mr. Desmarais sought to attain by transferring his shares of Comsercom and Gestion to 6311 was to combine all his assets in one basket.
[22] Counsel for the Respondent, for their part, did not have any problem in recognizing as a bona fide purpose the main objective that Mr. Desmarais sought to attain, namely to take his share of the liquid surpluses out of Gestion in order to be able to invest in 6311 in line with his own objectives and differently from his brother.[24] However, they submitted that Mr. Desmarais went further than merely transferring his share of the liquid assets of Gestion to 6311. He succeeded in stripping Gestion of $123,000 without paying any tax, and the redemption of the 123,000 class D shares was not essential to attain his primary purpose. The Supreme Court of Canada noted in paragraph 27 of Trustco that the general anti-avoidance rule does not apply to a transaction that "... may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit". The approach that must be taken to determine whether an avoidance transaction occurred is described in paragraphs 28 and 29 of Trustco:
28 While the inquiry proceeds on the premise that both tax and non-tax purposes can be identified, these can be intertwined in the particular circumstances of the transaction at issue. It is not helpful to speak of the threshold imposed by s. 245(3) as high or low. The words of the section simply contemplate an objective assessment of the relative importance of the driving forces of the transaction.
29 Again, this is a factual inquiry. The taxpayer cannot avoid the application of the GAAR by merely stating that the transaction was undertaken or arranged primarily for a non-tax purpose. The Tax Court judge must weigh the evidence to determine whether it is reasonable to conclude that the transaction was not undertaken or arranged primarily for a non-tax purpose. The determination invokes reasonableness, suggesting that the possibility of different interpretations of the events must be objectively considered.
[Emphasis added.]
[23] Here, I have no hesitation in concluding that several of the transactions concluded by Mr. Desmarais were primarily for non-tax purposes, one of which was to enable him and his brother to invest their share of the surpluses of Gestion as they intended. Thus, the transfer of the Gestion shares that they held to 6311[25] and the payment of substantial dividends by Gestion to 6311, namely, $306,497 in 1997, $171,906 in 1998 and $122,000 in 1999, were necessary to achieve this investment objective. However, the transaction in which Mr. Desmarais transferred only 41 of his shares of Comsercom, amounting to 9.78% of this company's shares, cannot be considered to have been concluded primarily for bona fide purposes, other than non-tax purposes. In my judgment, this transfer was completed primarily to make it possible to obtain a tax benefit, that of distributing to Mr. Desmarais a sum of $123,000 from Gestion free of tax. This finding is all the more necessary since Mr. Desmarais' goal of combining all his shares in one basket was not achieved by this transaction. In fact, it was essential for him personally to retain at least 17 shares of Comsercom; otherwise, this company would have been connected[26] with 6311 and, because of the application of section 84.1 of the Act,27 the paid-up capital of the class D shares of 6311 would have been equal to the paid-up capital of the shares of Comsercom transferred to 6311, namely $1 per share of Comsercom. In any redemption of the class D shares, a dividend would have been deemed to have been paid and Mr. Desmarais would have been required to add the amount to his income under subsections 82(1) and 84(3) of the Act.
[24] Furthermore, unlike Gestion, Comsercom did not have substantial liquid assets. On the contrary, this company had completed a major expansion of its seniors' residence and had incurred substantial costs to complete this expansion. Its long-term debt as of June 30, 1997 amounted to $2,902, 643. Mr. Desmarais admitted that one of the priorities of Comsercom's board of directors was to repay its debt. As we have seen, this company did not pay any dividend to 6311 from 1996 to 1998 and merely paid it a dividend of $3,416 in 1999.[28]It is highly unlikely that Mr. Desmarais would have incurred the costs involved in establishing and managing a holding company merely so that it could hold his Comsercom shares. Moreover, he held them himself from 1977 to 1996, that is for 19 years (tab 70). He stated that he had transferred some of these shares to 6311 in December 1996 "while he was at it". I have no hesitation in finding that the transfer of the 41 Comsercom shares to 6311 was an avoidance transaction and, as indicated in paragraph 245(3)(b) of the Act and as the Supreme Court of Canada noted in Trustco at paragraph 34, "[I]f at least one transaction in a series of transactions is an 'avoidance transaction', then the tax benefit that results from the series may be denied under theGAAR".
[25] However, "Even if an avoidance transaction is established under the s. 245(3) inquiry, the GAAR will not apply to deny the tax benefit if it may be reasonable to consider that it did not result from abusive tax avoidance under s. 245(4)" (para. 35 of Trustco). This brings us to the final step, which is usually the most difficult and which involves determining whether the series of transactions led to abuse in the application of the Act read as a whole. We should reproduce here the statements of the Supreme Court of Canada, especially the following paragraphs:
5.5.2 Abusive Tax Avoidance: A Unified Interpretative Approach
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
...
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