Recent GAAR developments Prepared for: Canadian Petroleum tax society Fall Lecture Series November 10, 2016 Anthony Strawson Felesky Flynn LLP

Select GAAR developments Relevance of subsequent legislative amendments to abuse analysis Specific transaction updates: 55(2) and basis creation/shifting Surplus strips

GAAR framework Few significant recent developments Framework originally established in Canada Trustco continues to be followed Tax benefit Avoidance transaction Abuse Reasonable tax consequences

Relevance of amendments Abuse must be grounded in the relevant provisions of the Act. Based upon a determination of the object, spirit and purpose of the provisions. Textual, contextual and purposive analysis is required. What is the relevance of an amendment?

Legislative Amendments Cont’d CRA often asserts that an amendment reflects the policy prior to the amendment, and is evidence of that policy. Finance often supports that CRA assertion (e.g., by describing amendments as “clarifying” in technical notes). How have the Courts reacted to the CRA/Finance approach?

Oxford properties (TCC, 2016) Involved a bump of partnership interests. Bump no longer available due to prospective 88(1)(d) amendments. Finance technical notes state that the amendment “is meant to ensure” that bump is not available. Court confirms the amendments are relevant.

Oxford properties (TCC, 2016) Court finds that old 88(1)(d) clearly based bump on FMV of non-depreciable capital properties. New 88(1)(d) restricts bump to extent partnership owns depreciable property, resource property or inventory with accrued gain. Amendment was a substantial change and not a clarification. Therefore the amendment does not reflect the object, spirit and purpose of the applicable rules. Under appeal.

Univar (TCC, 2016) Involved a cross-border surplus strip. Technique no longer available due to prospective amendments to 212.1(4). Finance technical notes state that some taxpayers “have misused this exception” and amendment is to “ensure that it applies as intended”.

Univar (TCC, 2016) Court first articulates what it believes the purpose of 212.1(4) to be. Concludes that result sought by the taxpayer could not have been intended. Court confirms that the amendment is relevant. Amendment embodies the underlying rationale of the provision prior to the amendment.

Univar (TCC, 2016) Court states that it believes the amendment demonstrates that Parliament moved as quickly as it could to close a loophole. Apparently Court considered technical notes on its own and counsel was not afforded an opportunity to argue. Under appeal.

Conclusions re: amendments A prospective amendment should not retroactively change the object, spirit and purpose of the relevant provisions. Task is always to discern object, spirit and purpose of the enacted provisions, based upon a textual, contextual and purposive analysis of those provisions. Courts will not simply accept statements by Finance purporting to described the policy prior to an amendment.

Conclusions cont’d A subsequent amendment neither confirms that the GAAR applies, nor confirms that it does not apply. Instead, it is just one of the items to be considered in trying to ascertain the object, spirit and purpose of the relevant existing provisions. If Parliament “had to be aware” of the issue before, but did not fix it until later, amendment is a factor against GAAR applying. But, if “closing a blatant loophole”, as quickly as possible, amendment is a factor for GAAR applying.

Superior Plus (TCC, 2016) Procedural motion. Taxpayer seeking information about Finance’s internal deliberations about whether to retroactively introduce 256(7)(c.1). Court finds that the deliberations are “not relevant to ascertaining Parliamentary intent for the purposes of the GAAR analysis at trial”. Court seems to distinguish between Parliament’s intent, and Finance’s beliefs about intent. Motion not under appeal.

55(3)(a) and GAAR: 2015-0604521e5 Two methods to split up assets. One method results in additional ACB being created and the other does not. Both involve a dividend that is exempt from 55(2) because of the exception in 55(3)(a), provided that no “unrelated person” transactions occur as part of the series. CRA “would consider the application of GAAR”.

55(3)(a) and GAAR cont’d CRA: The scheme of 55(2), as amended, is to prevent the creation or multiplication of ACB with the use of tax-free intercorporate dividends. Is the CRA right? Every ordinary dividend results in additional ACB 55(2) clearly does not purport to apply to every dividend “something else” (e.g., a sale to unrelated person) beyond mere ACB creation seems to be necessary

55(3)(a) and GAAR Cont’d CRA: 55(3)(a) permits 84(3) deemed dividends only to facilitate bona fide internal reorganizations, not to create or multiply ACB. Seems to suggest that GAAR requires a taxpayer to choose the least tax-efficient alternative. Is the CRA right, bearing in mind that: in most cases a redemption of shares that results in a deemed dividend also results in an increase in ACB; and 55(3)(a) is only available if there are no “unrelated person” transactions as part of the series?

surplus stripping The CRA has consistently asserted that there is a scheme in the Act against surplus stripping. Courts have consistently rejected this theory; need to follow GAAR framework. CRA seems to be refining its theory. More recently, see: TI2016-0625001e5 – converting a taxable dividend to a capital distribution from a trust “defeats the integration principle” TI2015-0610701C6 – invoking 55(2) “circumvented the integration principle”

Finance response In response to the CRA concern over deliberately invoking 55(2), Finance amended 55(5)(f). New rule: Cannot invoke 55(2) to the extent of safe income on hand. Consistent with CRA comments that invoking 55(2) to the extent of safe income on hand violates the integration principle. Abusive in other contexts?

Questions?