3295940 Canada Inc. v. The King

3295940 Canada Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2022-06-30
Neutral citation
2022 TCC 68
File numbers
2017-4685(IT)G
Judges and Taxing Officers
Réal Favreau
Subjects
Income Tax Act
Decision Content
Docket: 2017-4685(IT)G
BETWEEN:
3295940 CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on September 8, 2020, at Ottawa, Canada.
Before: The Honourable Justice Réal Favreau
Appearances:
Counsel for the appellant:
Roger Taylor
Marie‑Claude Marcil
Stéphanie Valois
Counsel for the respondent:
Yanick Houle
Sara Jahanbakhsh
Dominic Bédard‑Lapointe
JUDGMENT
The appeal from the reassessment dated November 21, 2008, for the appellant’s taxation year ending March 31, 2005, is dismissed, with costs to the respondent, in accordance with the attached reasons for judgment.
Signed at Montreal, Quebec, this 30th day of June 2022.
“Réal Favreau”
Favreau J.
Translation certified true
on this 24th day of August 2022.
François Brunet, Revisor
Citation: 2022CCI68
Date: 20220630
Docket: 2017-4685(IT)G
BETWEEN:
3295940 CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1] This is an appeal from a reassessment made under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), as amended (the “Act”) by the Minister of National Revenue (the “Minister”), dated November 21, 2008 regarding the appellant’s taxation year ending March 31, 2005.
[2] According to this reassessment, the Minister added a $31,500,000 capital gain in calculating the appellant’s income after applying the general anti-avoidance rule (the “GAAR”), provided for in section 245 of the Act.
[3] The facts in this case are not being contested and were the subject of a partial agreed statement of facts that has been reproduced in its entirety at the end of this judgment.
[4] The background is appropriate to explain this litigation.
[5] At the core of this litigation is a company specialized in developing, producing and distributing generic injectable drugs, notably morphine.
[6] This company, known as Sabex Inc. (“Sabex”) was incorporated in 1973 under the Canada Business Corporations Act.
[7] In 1980, Sabex was acquired by Michel Saucier (“Saucier”) and Gilles R. Dupuis (“Dupuis”), who each held 50% of the company’s shares at the time.
[8] In 1996, Dupuis sold his stake in Sabex to Saucier, who financed the transaction with the assistance of the Caisse de dépôt et placement du Québec (“CDPQ”), which in turn received 25% of the company’s shares.
[9] In 2001, Saucier wanted to divest himself of all his shares in Sabex, but if necessary would agree to remain involved in Sabex for a certain period of time to facilitate the transaction.
[10] The tax attributes of the blocks of shares held by Sabex shareholders at that time were as follows:
Shareholders
Adjusted cost base (ACB)
Fair market value (FMV)
Safe income
Michel Saucier
$2,000
$172,500,000
$23,000,000
CDPQ/ Sofinov
$7,500,000
$57,500,000
N/A
[11] On January 25, 2002, the investment fund known as RoundTable Healthcare Partners, L.P. and RoundTable Investors L.P. (collectively, “RoundTable”) offered Saucier the opportunity to purchase 80% of Sabex. Saucier accepted RoundTable’s proposal. RoundTable Healthcare Partners L.P. Is an American investment fund (based in the state of Illinois).
I. Partial sale of 80% of Sabex in 2002
[12] To implement the 80% purchase of Sabex, the following transactions, including CDPQ’s sale of its 25% stake in Sabex, were put in place:
a) On March 19, 2022, Sabex 2002 Inc. (“Sabex 2002”) and Sabex 2002 Holdings Inc. (“Sabex 2002 Holdings”) were incorporated under the Canada Business Corporations Act, and Sabex purchased a Class B common share in Sabex 2002 and Sabex 2002 Holdings for a nominal amount;
b) On April 10, 2002, Gestion Micsau inc. (“Micsau”) was incorporated under the Canada Business Corporations Act;
c) On April 17, 2002, Saucier transferred all his Sabex shares to Micsau, specifically 13,5000,000 common shares, 8,000,000 Class A preferred shares and 500,000 Class C preferred shares, in exchange for 120 common shares of Micsau. This transaction was subject to a joint election under subsection 85(1) of the Act, and the amount agreed upon by the parties was a nominal amount;
d) On April 18, 2002, Sabex sold all its shares to Sabex 2002 for $256,562,000. In exchange, Sabex received the assumption of $26,562,000 of its debts, a note payable in the amount of $176,000,000 and 1,999,999 Class B common shares, representing 20% of the common shares of Sabex 2002. The payment also included a $10,000,000 contingent consideration based on future performance. This transaction was also subject to a joint election under subsection 85(1) of the Act;
e) On April 18, 2002, CDPQ sold all its Sabex shares to Micsau in exchange for two notes payable totalling $47,460,000;
f) On April 18, 2002, Sabex transferred all its Sabex 2002 shares (2,000,000 Class B common shares) to Sabex 2002 Holdings in exchange for 1,999,999 Class B common shares of Sabex 2002 Holdings. This transaction was subject to a joint election under subsection 85(1) of the Act, and the amount agreed upon by the parties was a nominal amount;
g) On April 18, 2002, RoundTable purchased 8,000,000 Class A common shares of Sabex 2002 Holdings for $69,115,784;
h) On April 18, 2002, Sabex 2002 Holdings purchased 8,000,000 Class A common shares of Sabex 2002 Holdings for $69,115,784;
i) On April 18, 2002, Sabex 2002 borrowed $110,000,000 from a financial institution;
j) On April 18, 2002, Sabex 2002 paid off the $176,000,000 note payable to Sabex;
k) On April 18, 2002, Sabex paid a $47,460,000 dividend to Micsau;
l) On April 18, 2002, Micsau paid off the two notes payable totalling $47,460,000 to CDPQ.
[13] After RoundTable purchased 80% of Sabex’s shares, the situation was as follows:
a) Saucier held 100% of shares in Micsau;
b) Micsau held 100% of shares in Sabex, whose corporate name had been changed to 3295940 Canada inc. (“3295940”) pursuant to a certificate of amendment dated April 25, 2002;
c) 3295940 held 2,000,000 Class B shares, representing 20% of shares in Sabex 2002 Holdings, whose corporate name had been changed to Sabex Holdings Ltd. (“Holdings”) pursuant to a certificate of amendment dated April 1, 2004. These shares involved a nominal amount in terms of paid-up capital (PUC) and ACB.
d) RoundTable held 80% of shares in Holdings, i.e., 8,000,000 Class A shares;
e) Holdings held 100% of shares in Sabex 2002;
f) Sabex 2002 was operating the pharmaceutical company.
[14] At all relevant times, 3295940 and Micsau were Canadian-controlled private corporations within the meaning of subsections 125(7) and 248(1) of the Act.
[15] The ACB for all shares that Micsau held in 3295940 was $48,100,000 pursuant to section 54 and subsection 248(1) of the Act.
[16] Pursuant to the agreement concluded in 2002, in 2004 Holdings and RoundTable each had the option to buy or redeem, as applicable, 500,000 of the 2,000,000 Class B shares held by 3295940 for $13,310,000, and 3295940 could equally force Holdings to redeem said shares from them at the same price in 2004.
II. Sale of 100% of Sabex 2002 shares to Novartis Pharmaceuticals Canada Inc. (“Novartis”)
[17] On June 25, 2004, pursuant to the agreement entered into with RoundTable in 2002, which is described in paragraph 16 below, RoundTable exercised its option to force the redemption of 500,000 Class B shares in Holdings held by 3295940 for $13,310,000.
[18] The “safe income” for those 500,000 Class B shares in Holdings was $1,700,000 within the meaning of subsection 55(5) of the Act.
[19] Given that the fees related to this transaction were $60,000 and that the PUC and ACB for those shares were a nominal amount, 3295940 realized a capital gain of $11,550,000 (i.e., $13,310,000 - $1,700,000 - $60,000) under subsection 55(2) of the Act.
[20] As a result of this redemption, 3295940 realized a taxable capital gain of $5,780,000, and that amount was credited to the capital dividend account (“CDA”) of 3295940 pursuant to paragraph 38(1)(a) and subsection 89(1) of the Act, respectively.
A. The reorganization carried out in 2004 before proceeding with the sale of Sabex 2002
(1) Extraction of “safe income”
[21] On January 29, 2004, Holdings increased the PUC of 1,500,000 Class B shares by $4,000,000, which resulted in increasing the “safe income” of those shares to $4,000,000 within the meaning of subsection 55(5) of the Act.
[22] Consequently, Holdings is deemed to have spent, and 3295940 is deemed to have received, a $4,000,000 dividend pursuant to subsection 84(1) of the Act.
[23] Given that this entire dividend came from “safe income” credited to 1,500,000 Class B shares, subsection 55(2) of the Act did not apply in terms of deeming this dividend a capital gain.
[24] Furthermore, the ACB for 1,500,000 Class B shares in Holdings held by 3295940 increased by $4,000,000 pursuant to paragraph 53(1)(b) of the Act.
(2) Reorganization of the capital of 3295940 and incorporation of 4244851 Canada Inc. (“4244”)
[25] On June 29, 2004, 3295940 amended its articles of incorporation to make it possible to create a new class of shares, Class D preferred shares, which are non-voting shares that are redeemable by the corporation or the shareholder at $1 per share.
[26] On June 30, 2004, 3295940 redeemed all shares of its capital stock held by Micsau, which at the time had an ACB of $48,100,000 and a FMV of $101,800,000. In exchange, Micsau received 31,500,000 Class B preferred shares and 100 common shares from 3295940.
[27] This transaction was subject to a joint election under subsection 85(1) of the Act, and the amount agreed upon by the parties was established at $48,100,000. The ACB and FMV of the 31,500,000 Class B preferred shares in 3295940 held by Micsau were established at $31,500,000 pursuant to paragraph 85(1)(g) of the Act, while the ACB of the 100 common shares in 3295940 held by Micsau were established at $16,600,000 pursuant to paragraph 85(1)(h) of the Act.
[28] The PUC of the 31,500,000 Class D preferred shares and the 100 common shares in 3295940 were established at a nominal amount (see table at paragraph 41 of the partial agreed statement of facts).
[29] On June 21, 2004, 4244851 Canada Inc. (“4244”) was incorporated, and Micsau purchased a common share for a nominal amount when it was incorporated.
[30] On June 30, 2004, Micsau gave 4244 the 31,500,000 Class D preferred shares in 3295940 in exchange for 31,500,000 Class D preferred shares of the capital stock of 4244.
[31] The Class D preferred shares in 4244 were non-voting shares that are redeemable by the corporation or the shareholder at $1 per share. The PUC for these shares was nominal, while the ACB and FMV were $31,500,000, respectively.
[32] No gains were made as a result of this transaction since the FMV of the 31,500,000 Class D preferred shares in 3295940 that Micsau disposed of was equal to their ACB (see table at paragraph 47 of the partial agreed statement of facts).
(3) The sale of Holdings shares to 4244
[33] On June 30, 2004, 3295940 disposed of the 1,500,000 Class B shares in Holdings (worth $88,500,000) to 4244 in exchange for 57,000,000 Class D preferred shares and 31,500,000 common shares of the capital stock of 4244.
[34] This transaction was subject to an agreement under subsection 85(1) of the Act, and the amount agreed upon by the parties was established at $57,000,000. In accordance with paragraph 85(1)(g) of the Act, the ACB of the 57,000,000 Class D preferred shares in 4244 held by 3295940 was established at $57,000,000. Pursuant to paragraph 85(1)(h) of the Act, the ACB of the 31,500,000 common shares in 4244 held by 3295940 was established at a nominal amount. The PUC of the 57,000,000 Class D preferred shares and the 31,500,000 common shares in 4244 held by 3295940 was established at a nominal amount.
[35] Given that the ACB for the 1,500,000 Class B shares in Holdings was $4,000,001 and that the amount agreed upon by the parties was $57,000,000, 3295940 made a $52,999,999 capital gain, $26,500,000 of which is taxable. In accordance with subsection 89(1) of the Act, the CDA of 3295940 increased by $26,500,000 to reach $32,280,000 (see table at paragraph 56 of the partial agreed statement of facts).
(4) Cross redemption of shares
[36] On August 11, 2004, 3295940 redeemed the 31,500,000 Class D preferred shares in its capital stock held by 4244 in exchange for a $31,500,000 note payable.
[37] In accordance with subsection 84(3) of the Act, 3295940 is deemed to have paid to 4244, and 4244 is deemed to have received a $31,499,999 dividend. This dividend is deemed a capital dividend as result of 3295940 so electing under subsection 83(2) of the Act. This dividend was not supposed to be included in calculating the income of 4244. It must be transferred from the CDA of 3295940 to the CDA of 4244 pursuant to the definition of “capital dividend account” found in subsection 89(1) of the Act.
[38] On August 11, 2004, 4244 redeemed the 31,500,000 common shares and 110,000 of the 57,000,000 Class D preferred shares in its capital stock held by 3295940 in exchange for a $31,500,000 promissory note.
[39] Pursuant to subsection 84(3) of the Act, 4244 is deemed to have paid, and 3295940 is deemed to have received, a $31,389,999 dividend on the common shares and a $110,000 dividend on the Class D preferred shares. These dividends are deemed capital dividends as a result of 4244’s so electing under subsection 83(2) of the Act. These dividends were not supposed to be included in calculating the income of 3295940. They must be transferred from the CDA of 4244 to the CDA of 3295940 pursuant to the definition of “capital dividend account” found in subsection 89(1) of the Act.
[40] On August 11, 2004, the $31,500,000 notes payable that 3295940 and 4244 owe each other balance each other out (see table at paragraph 67 of the partial agreed statement of facts).
(5) The sale of shares in 4244 to 3295940
[41] On August 12, 2004, Micsau transferred its common share and its 31,500,000 Class D preferred shares in 4244 to 3295940 in exchange for 31,500,000 Class D preferred shares of the capital stock of 4244.
[42] This transaction was subject to a joint election under subsection 85(1) of the Act; The amount agreed upon by the parties was established at $31,500,000. In accordance with paragraph 85(1)(g) of the Act, the ACB of the 31,500,000 Class D preferred shares in 3295940 held by Micsau was established at $31,500,000. No gain was made as a result of this transaction because the FMV of the common share and the 31,500,000 Class D preferred shares in 4244 that Micsau disposed of was equal to the respective ACB of those shares.
[43] Following this transaction, 3295940 held a common share and 88,390,000 Class D preferred shares with an ACB of $88,390,000 (see table at paragraph 73 of the partial agreed statement of facts).
[44] On August 13, 2004, 3295940 sold its common share and 88,390,000 Class D preferred shares in 4244 to Novartis in exchange for $88,390,000. The fees for this transaction were $170,000. Given the $88,390,000 ACB for the common share and 88,390,000 Class D preferred shares in 4244 held by 3295940 and the $170,000 fees for the transaction, 3295940 incurred a $170,000 capital loss (see table at paragraph 76 of the partial agreed statement of facts).
(6) The redemption of Micsau’s shares in 3295940
[45] On August 16, 2004, 3295940 redeemed the 31,500,000 Class D preferred shares in its capital stock held by Micsau in exchange for $31,500,000.
[46] In accordance with subsection 84(3) of the Act, 3295940 is deemed to have paid to Micsau, and Micsau is deemed to have received, a $31,500,000 dividend. Pursuant to paragraph (j) of the definition of “proceeds of disposition” set out in section 54 of the Act, Micsau is deemed to have disposed of 31,500,000 Class D preferred shares in 3295940 for proceeds equal to nil and consequently incurred a capital loss of $31,500,000 since the ACB of these shares was $31,500,000. In accordance with subsection 112(3) of the Act, this loss is deemed to be equal to nil.
[47] Following these transactions, the ACB of the 100 common shares in 3295940 held by Micsau increased to $16,600,000.
[48] Following various transactions carried out by 3295940, the capital gains realized and capital losses incurred by 3295940 are as follows:
Redemption of 500,000 Class B preferred shares in Holdings
$11,500,000 (gain)
Sale of 1,500,000 Class B preferred shares in Holdings
$53,000,000 (gain)
Sale of a common share and 88,500,000 Class D preferred shares in 4244
$170,000 (loss)
Total:
$64,380,000 (net gain)
III. Concession by 3295940
[49] For the purposes of its appeal only, 3295940 concedes that the transactions put in place and described in paragraphs 30 to 74 in the partial agreed statement of facts, which culminated in the sale of 3295940’s indirect holdings in the pharmaceutical company known as Sabex 2002 through a sale of the shares it held in 4244 to Novartis, allowed 3295940 to reduce the capital gain amount by $31,500,000 that it would have otherwise realized if 3295940 had sold directly to Novartis, following 4244’s redemption of its 500,000 Class B shares held by 3295940 and its 1,500,000 Class B shares in Holdings. Consequently, 3295940 concedes that the transactions concerned constitute a series of transactions for the purposes of subsection 245(3) of the Act that resulted in a tax benefit, within the meaning of the definition of that expression found in subsection 245(1) of the Act, in the amount of $31,500,000. For this reason, the transactions concerned constitute avoidance transactions within the meaning of subsection 245(3) of the Act.
IV. Testimony
[50] Jacques Gauthier, an accountant for Ernst & Young until 2009 and Michel Saucier’s advisor, and Pierre Fréchette, President and Chief Operating Officer of the pharmaceutical company operated by Sabex 2002 from 2002 to 2004 and currently associate at RoundTable, both testified at the hearing. They confirmed the facts presented in the partial agreed statement of facts as well as their respective roles in the transactions described therein.
[51] Tax planning for the transactions described in the partial agreed statement of facts was carried out by Ernst & Young in 2004. The documents explaining the different planning options considered, including three (3) alternative reorganization projects, were entered into evidence.
V. Issue
[52] The only issue consists of determining whether the series of transactions resulted in abusively defeating the object, purpose and spirit of the provisions pertaining to calculating capital gains set out in sections 38, 39 and 40 of the Act and to calculating capital dividend and CDA set out in subsections 83(2), 89(1) and 55(2) of the Act.
VI. Statutory provisions
[53] The relevant statutory provisions of the Act enabling the Court to dispose of this appeal are subsections 55(2), 83(2), 89(1) and 245(1) to (5). A copy of these provisions, from the version applying to the 2005 tax year, are attached to this judgment.
VII. Positions of the parties
Position of the appellant
[54] According to counsel for the appellant, the planning done by Ernst & Young is both legitimate and non-abusive because it is part of the bona fide sale of the Holdings subsidiary to a corporation at arm’s length from the corporate group (Novartis).
[55] Since some of the transactions were carried out in years preceding the year at issue in this case, the parent company (Micsau) held a stake with a high ACB in the appellant. Consequently, Michel Saucier did everything in his power to sell the 3295940 shares, but RoundTable and Novartis refused given their lack of interest and out of fear of inheriting certain liabilities from 3295940. The purpose of the 2004 reorganization was therefore to account for the acquisition cost in calculating the capital gain during the sale of shares in Holdings.
[56] The appellant submits that using the ACB of the shares held by the parent corporation for selling its stake in Holdings does not result in an abuse or misuse of the Act. Based on comments from the Finance Minister of Canada, counsel for the appellant conclude that transferring deductions, credits or losses within the same corporate group cannot result in an abuse or misuse of the provisions regarding calculating capital gain. The acknowledged capital gain from selling the shares in Holdings simply reflects the reality of accounting for the acquisition cost and should not be double-taxed. Lastly, the overall result of such a sale should not result in taxation except in terms of net capital gain. Counsel mainly based their arguments on a comment of Mr. Justice Noël in Triad Gestco Ltd. v. Canada, 2012 FCA 258 [Triad Gestco].
[57] Based on the holding of Oxford Properties Group Inc. v. The Queen, 2016 TCC 204, overturned on appeal, 2018 FCA 30, [Oxford], the appellant explained that the GAAR cannot apply to a purpose not specifically set out in a provision. For example, in Oxford, supra, even though subsection 100(1) of the Act prevents the avoidance of a latent recapture, the GAAR cannot apply when the taxpayer bumps the tax base. Indeed, there can be no abuse or misuse of the provision if that is not what the provision was intended to prevent. Similarly, the GAAR cannot apply to the series of transactions concerned, given the fact that the purpose of the CDA scheme and subsection 55(2) of the Act is not to prevent using the tax base through implicit bumping.
[58] Counsel for the appellant do not see that this is clearly an abuse or misuse of the provisions regarding capital dividend. The capital dividend mechanism, which is interrelated with the CDA mechanism, supports the principle of fairness of the Act by ensuring that an amount can be imposed once only. The provisions in issue instead ensured that half of the capital gain remained non-taxable and was transferred into the hands of its real shareholder, once again without taxation.
[59] The election to designate a capital dividend, when permitted by the CDA, is not an abuse or misuse in and of itself of subsection 55(2) of the Act. Indeed, this anti-avoidance provision applies only to taxable dividends, meaning capital dividends are consequently not included.
[60] Counsel for the appellant argued that the reorganization, as it was carried out, was not the most beneficial alternative for the appellant. Indeed, three proposals were submitted to RoundTable to minimize the fiscal impact on the appellant from selling their stake in Holdings. These three proposals were all rejected due to lack of time and interest from both the buyer and RoundTable. That being the case, the corporate group that the appellant is a part of proceeded with a reorganization that allowed for a capital gain that was lower but still higher than would have been possible through the previous proposals. Counsel for the appellant highlighted the scope of the alternative transactions for establishing the wrongful nature of the transactions based on the decision of Mr. Justice Webb of the Federal Court of Appeal in Univar Holdco Canada ULC v. The Queen, 2016 TCC 159, 2017 FCA 207 [Univar].
[61] According to that case, the alternative transactions are a relevant factor in deciding whether there was abuse or misuse in applying the provisions of the Act. If the taxpayer is able to demonstrate that they could have achieved the same result without triggering any tax, this would tip the scale towards not applying the GAAR. According to counsel for the appellant, the alternative transactions would have resulted in an honest outcome, where the acquisition cost for a stake in the company corresponded with the product received at the time of the final sale of that same stake in the company.
[62] Lastly, the appellant stated indicated that in their opinion, the relevance of the alternative transactions should not be determined based on the possibility that they could have been carried out, but rather based on whether they would have produced the same result. In this way, the alternative transactions that the appellant proposed to RoundTable and Novartis would have resulted in relatively lower taxes, that is to say a more significant tax benefit.
Position of the respondent
[63] The GAAR allows the minister, and ultimately the Court, to “deny the tax benefits of certain arrangements that comply with a literal interpretation of the provisions of the Act, but amount to an abuse of the provisions of the Act.”
[64] Although the transactions comply with the letter of the provisions in issue, it must be determined whether these transactions comply with the object, purpose and spirit of these provisions. It is up to the respondent to describe the object and purpose of these statutory provisions and to prove abuse of those provisions in accordance with one of the following circumstances:
It achieves an outcome the statutory provision was intended to prevent;
The transaction defeats the underlying rationale of the provision; or
The transaction circumvents the provision in a manner that frustrates or defeats its object, spirit or purpose.
[65] According to the respondent, the series of transactions put in place by 3295940 made it possible to circumvent the application of subsection 55(2) of the Act through the inappropriate use of the CDA scheme to reduce the capital gain realized by 3295940 from disposing of shares in Holdings by $31,500,000.
[66] Through various transactions, the appellant shifted the tax base held by its parent corporation (Micsau) to thereby achieve this tax base in the unrealized capital gain of shares in Holdings. Indeed. the CDA amount for 3295940 from the realization of a portion of the gain on the shares in Holdings was transferred to 4244 then returned to 3295940 through the cross redemption of shares. The CDA from this partial realization of the gain was used to erase the remaining portion of 3295940’s gain from shares in Holdings.
[67] Consequently, the transactions at issue achieved an outcome that subsection 55(2) of the Act was intended to prevent, namely surplus stripping by declaring inter-corporate dividends that are taxable but also deductible within the meaning of Part I of the Act. The Crown is partially relying on D & D Livestock Ltd. v. The Queen, 2013 TCC 318 [D&D Livestock] to support its arguments concerning the abuse of subsection 55(2) of the Act by drawing a parallel between the double use of safe income in D&D Livestock and the circular and double use of a capital dividend in this case.
[68] The series of transactions was therefore not carried out for a bona fide purpose. Indeed, according to the respondent, the appellant was seeking only to reduce the capital gain attributed to the sale of their block of shares and consequently the tax payable on the sale. In this way, if one of the transactions in the series was not performed primarily for a bona fide non-tax purpose, it is an avoidance transaction and the GAAR then removes the tax benefit resulting from the series of transactions.
[69] Since there was abusive tax avoidance under subsection 55(2) of the Act and the sections relating to capital dividend, and given the fact that a portion of the appreciation of 3295940’s stake in Holdings will never be taxed, the Minister was justified in applying section 245 of the Act to include $31,500,000 in capital gain in calculating their income for the 2005 tax year. The assessment was therefore designed to eliminate the tax benefit obtained by the appellant.
[70] According to the respondent, the overall outcome of the series of operations does not account for the separate legal entities of the corporation, the shareholder or the capital gains tax regime. In this way, the inappropriate use of the CDA scheme did not comply with the principle of integration set out in the Act.
[71] The alternative transactions presented by the appellant cannot be weighed in the way that the opposing party has done within the meaning of Univar, supra. According to the respondent, the three proposals do not represent comparable scenarios that could have achieved the same outcome since the shares sold would have been 3295940’s shares. Based mainly on Fiducie financière Satoma v. The Queen, 2017 TCC 84, upheld on appeal 2018 FCA 74 [Satoma], the Crown argued that the alternative transactions proposed must at the very least be examples of valid comparison because the very essence of the transactions must be essentially the same in each of the alternatives.
VIII. Analysis
Application of the general anti-avoidance rule (GAAR)
[72] The general conditions of application of the GAAR are set out in paragraphs 30 to 44 of the judgment I rendered in Pomerleau v. The Queen, 2016 TCC 228, upheld on appeal by Noël, J., 2018 FCA 129. Those paragraphs have been reproduced below, unaltered.
[30] The landmark case with respect to the relevant test criteria in applying the GAAR was decided by the Supreme Court of Canada: Canada Trustco Mortgage Co. v. Canada, [2005] 2 SCR 601. That case decided that three conditions must be met for the GAAR to apply, in which case subsection 245(2) of the Act allows the Minister to deny the tax benefit arising from the series of avoidance transactions at issue and to determine what the reasonable tax consequences should be.
[31] In paragraphs 65 and 66 of Canada Trustco Mortgage Co. v. Canada, supra, the Supreme Court of Canada explained the approach that the courts must follow when performing this type of analysis:
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.
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.
[32] The parties acknowledged that the first two criteria to be met for the GAAR to apply—the presence of an avoidance transaction in the series of transactions and a tax benefit—were satisfied. Thus, the only issue to be resolved to dispose of this appeal is whether the avoidance transaction or series of avoidance transactions giving rise to the tax benefit was abusive within the meaning of subsection 245(4) of the Act.
Burden of proof
[33] It is for the Minister to prove that, on the balance of probabilities, abusive tax avoidance has occurred within the meaning of subsection 245(4) of the Act. To do this, the Minister must demonstrate that, considering the text, context and purpose of the provisions at issue, the avoidance transaction or series of avoidance transactions frustrates the object, spirit or purpose of the provisions of the Act.
The GAAR will therefore apply where, according to a literal or strict interpretation of the relevant provisions, their application has been circumvented and the object, spirit or purpose of the provisions in question is thereby frustrated (see paragraph 66 of Canada Trustco Mortgage Co. v. Canada, supra, and paragraph 21 of Lipson v. Canada, [2009] 1 SCR 3).
[35] As the Supreme Court of Canada noted in paragraph 66 of Canada Trustco Mortgage Co. v. Canada, supra, if it is unclear whether the avoidance transaction or series of avoidance transactions constitutes abusive tax avoidance, the benefit of the doubt goes to the taxpayer.
Abusive tax avoidance
[36] As the Supreme Court of Canada stated in Canada Trustco Mortgage Co. v. Canada, supra, section 245(4) of the Act imposes a two-part inquiry to determine whether an avoidance transaction or a series of avoidance transactions frustrates the object, spirit or purpose 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.
[37] Therefore, the first step consists in determining the object, spirit and purpose of the provisions giving rise to the tax benefit by conducting a unified textual, contextual and purposive analysis of those benefits. Indeed, it may happen that “[t]he rationale that underlies the words may not be captured by the bare meaning of the words themselves (see paragraph 70 of Copthorne Holdings Ltd. v. Canada, [2011] 3 SCR 721).
[38] The second step is to determine whether the object, spirit or purpose of the provisions at issue has been frustrated by the avoidance transaction or the series of avoidance transactions (see paragraph 65 of Canada Trustco Mortgage Co. v. Canada, supra). This step “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” (see paragraph 59 of Canada Trustco Mortgage Co. v. Canada, supra).
[39] Due to their importance, it is necessary to reproduce hereinafter paragraphs 44, 45, 46, 49 and 50 of Canada Trustco Mortgage Co. v. Canada, supra:
4 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 avoidance 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.
[…]
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.
[40] In Lipson, supra, a majority of the Supreme Court of Canada described paragraphs 44 and 45 of Canada Trustco Mortgage Co. v. Canada, supra, as capturing the essence of the approach used by the Court when the GAAR is in issue. In paragraph 40, the Court wrote:
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 resu