The Supreme Court of Canada and the General Anti-Avoidance Rule: Canada Trustco and Mathew November 18, 2005 David G. Duff Faculty of Law, University of Toronto

Canada Trustco - Transactions Canada Trustco Transamerica Leasing Inc. Maple Assets Investments Ltd. Royal Bank $97.35M loan $120 M trailers trailers leased with purchase option trailers sub-leased $116.4M (prepaid rent) $97.35M (deposit) lease payments assigned l ease payments applied against loan payments (non-recourse) $19.05M bond

Mathew - Transactions STIL II Standard Sub SRMP OSFC taxpayers mortgages $ 99% p/s $ 24% 76% 99% 1% 99% losses

Canada Trustco - Disposition Transactions did not contradict object, spirit and purpose of CCA regime, including leasing property and specified leasing property rules No general policy that cost means real economic cost or amounts economically at risk No general economic substance requirement

Mathew - Disposition Transactions contradict general policy of ITA to prohibit transfer of losses between taxpayers, subject to specific exceptions Transactions contradict object, spirit and purpose of subsections 18(13) and 96(1)  18(13) – to disallow superficial losses on transfers of property that remain in the transferor’s control  96(1) – to promote an organizational structure that allows partners to carry on a business in common, in a non-arm’s length relationship”

Statutory Interpretation Textual, contextual and purposive interpretation (Driedger) Goals of “consistency, predictability and fairness” suggest emphasis on text where explicit provisions dictate specific consequences (Hogg and Magee, Principles, 1 st ed.) Context and purpose may reveal ambiguities (Hogg, Magee, and Li, Principles, 4 th ed.) No reference to “plain meaning rule”

Tax Avoidance and the GAAR Taxpayers may manage their affairs to minimize tax (Duke of Westminster, Shell Canada) GAAR is a “provision to the contrary” that is “superimposed” onto this traditional approach, designed to “draw … a line between legitimate tax minimization and abusive tax avoidance” Court’s task to unite both approaches, reflecting Parliament’s intent to preserve predictability, consistency and fairness in Canadian tax law

Application of the GAAR Tax Benefit – subsection 245(1) Avoidance Transaction – subsection 245(3)  Series of transactions – subsection 248(10)  Non-tax purpose test Misuse or Abuse – subsection 245(4)  amended retroactively in 2005

Tax Benefit Factual determination  true but governed by law May be determined by comparison with alternative arrangement Deductions are tax benefits because they result in a reduction of tax  conclusion contradicts structure and purpose of GAAR to prevent abusive tax avoidance  tax benefit should be assessed “in the context of whether there is an avoidance transaction” (Miller TCJ in Canada Trustco)

Series of Transactions Ordinary meaning  “preordained in order to produce a given result” (UK step transactions doctrine) Extended meaning  “related” transactions can occur before or after ordinary series  transactions completed “in contemplation of” series do not require “actual knowledge” (OSFC Holdings) but occur “because of” or “in relation to” the series  likely consistent with legislative intent, but not consistent with text of subsection 248(10)

Non-Tax Purpose Test Factual determination Objective and relative determination Threshold neither high nor low  threshold should be low since taxpayer must only establish reasonable argument transactions carried out primarily for non- tax purpose Not sufficient to show that alternative transaction would have resulted in higher taxes  higher taxed alternative may be relevant where lower taxed alternative undertaken primarily to obtain tax benefit  this does not involve “recharacterization”

Misuse or Abuse – Part 1 Two-step inquiry: (1) legal inquiry requires “single, unified approach” to interpret object, spirit and purpose of provisions giving rise to tax benefit; (2) factual inquiry to determine if transaction frustrates these purposes  contradicts text of subsection 245(4), which refers to a misuse of provisions of the ITA and other enactments and an abuse having regard to these provisions, other than the GAAR, read as a whole  emphasis on “specific provisions” precludes broader abuse analysis Lack of economic substance not sufficient to establish abuse  transactions lacking real economic substance might reasonably be regarded as an abuse having regard to provisions of the ITA read as a whole

Misuse or Abuse – Part 2 Abusive nature of transaction must be clear, with doubts resolved in favour of taxpayer  consistent with former language in subsection 245(4)  amended language says GAAR applies where transaction can reasonably be considered to result in misuse or abuse  doubts should now resolved in favour of the Crown Burden of proof on Minister to establish abuse  not clear under former subsection 245(4)  explicit under amended version

Disposition Canada Trust  lack of economic substance could have been regarded as abuse having regard to provisions of the ITA read as a whole  arguable that tax shelter rules and partnership at-risk rules suggest general policy that cost means real economic cost or amounts economically at risk Mathew  Given general policy against transfer of losses, misuse of subsection 18(13) sufficient  assumed purpose of subsection 96(1) questionable