Digests

Income Tax

Income Calculation

Dividends

Appeal from T.C.C. decision (2007 TCC 481) partially allowing appeal from M.N.R. assessment against appellant’s predecessor as result of application of general anti-avoidance rule (GAAR) under Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 245(2)—Assessment arising out of 1995 redemption of preferred shares in capital of appellant held by non-resident corporation—Appellant under impression that because paid-up capital (PUC) of redeemed shares equal to proceeds paid to non‑resident corporation, not necessary to withhold any income tax in respect of redemption proceeds—Minister determining PUC of redeemed shares less than amount of proceeds, redemption thus giving rise to deemed dividend—T.C.C. upholding application of GAAR, but not assessment of penalty—Act, s. 245(2) specifying tax benefit may only be denied under GAAR if resulting from avoidance transaction or series of transactions including avoidance transaction—Minister relying on 1993 share sale, part of first series of transactions, as avoidance transaction but acknowledging alleged tax benefit herein not arising until 1995 redemption—Issue whether first series deemed to include 1995 redemption by virtue of Act, s. 248(10)—Debate between parties focussing on degree of closeness of connection having to be shown between series of transactions, related transaction for purposes of Act, s. 248(1)— If a series is a motivating factor with respect to completion of subsequent transaction, transaction can be said to have been completed “in contemplation of the series” and direct causal relationship between series, transaction, need not be established—This standard reconcilable with test stated in OSFC Holdings Ltd. v. Canada, [2002] 2 F.C. 288 (C.A.), broadened in Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601—Fact (1) use of preserved PUC as means of reducing or eliminating withholding tax on distribution of funds or property by Canadian corporation to non‑resident shareholders elementary form of income tax planning, (2) tax loss utilization transactions undertaken in first series complex, belying any suggestion preserved PUC in those transactions not contemplated by appellant when 1995 redemption undertaken—As such, conclusion PUC preservation occurring in first series motivating factor in relation to completion of 1995 redemption unassailable—Relatively close temporal connection between transactions also militating against assertion extreme degree of remoteness 1995 redemption would be undertaken—T.C.C. properly interpreting s. 248(10), not erring in concluding 1995 redemption forming part of first series—T.C.C. finding 1993 share sale avoidance transaction not palpable, overriding error—As to whether this avoidance transaction constituting abuse, misuse of provisions of Act, Court finding principles respecting calculation of PUC offended, Act, s. 89(1)(b)(iii) abused—While s. 89(1)(b)(iii) not technically provision of Act since incorporating by reference statutory provisions from other Acts, GAAR may apply by virtue of s. 245(4)(a)(v)—T.C.C. determining that purpose of requirement to eliminate PUC of intercorporate shareholdings on amalgamation is to avoid duplicative additions to PUC of amalgamated corporation—T.C.C. thus finding that elimination of intercorporate shareholdings by virtue of 1993 share sale resulting in circumvention of that requirement in abusive manner—These determinations open to T.C.C—Appeal dismissed.

Copthorne Holdings Ltd. v. Canada (A-416-07, 2009 FCA 163, Ryer J.A., judgment dated May 21, 2009, 37 pp.)