Read publication - Baker & McKenzie

Canada
availability of paper losses to reduce capital gains realised on the disposition of property.
In particular, the Court determined that the taxpayer’s literal reliance on a particular set of
statutory provisions constituted abusive tax avoidance since the provisions were intended
to provide relief only where a disposition resulted in a real economic loss. 78 A separate
three-judge panel came to a similar conclusion in the third case, which concerned the
deduction of paper losses to offset business income. 79 The Court of Appeal explained that
its conclusions were specific to each set of provisions, and that it was not the Court’s role
to search for an overriding tax policy against the tax use of paper losses. However, these
cases may indicate a jurisprudential shift that places greater emphasis on the ‘economic
substance’ of tax-motivated transactions.
iii Trust residency
A further example of the Canadian tax authorities’ continuing efforts to combat tax
avoidance recently led to a significant change in the law of trust residency. The Fundy
Settlement v. Canada case 80 concerned tax arrangements by which two trusts (intended
to be resident in Barbados for tax reasons) were controlled by the trusts’ beneficiaries
rather than by their trustees. The Supreme Court of Canada redefined the rule suggested
in prior case law – that a trust resides where the majority of its trustees are resident – by
explaining that a trust is instead resident where its ‘central management and control’
actually takes place. 81 Since the beneficiaries actually controlled the trusts in question,
and since the trustees merely executed documents and provided incidental services further
to the beneficiaries’ decisions, the trusts were resident in the beneficiaries’ jurisdiction
(i.e., Canada). The Court’s decision effectively replaces the certainty that flowed from the
trustee residence test with the inherent flexibility of the control test. While this provides
a new way for tax authorities to challenge tax plans involving trusts, it leaves numerous
questions pertaining to the application of the control test to be decided in future cases. 82
iv Penalties
The Tax Court’s decision in Guindon v. Canada 83 has the potential to significantly change
civil and criminal tax penalties in Canada. The case concerned a C$546,747 ‘preparer
penalty’ assessed against a Canadian lawyer in respect of the making of false statements
that could be used by third parties in their tax filings. The statements in question were tax
receipts prepared for the purposes of third parties’ participation in a purported charitable
78 See especially Triad Gestco, note 76.
79 See Global, note 76.
80 2012 SCC 14, [2012] 1 S.C.R. 520.
81 The central management and control test has historically applied to determine the residence of
corporations in the absence of a statutory deeming rule (e.g., relating to a company’s place of
incorporation).
82 For example, how the central management and control test would apply in situations where
the trustee has complete control over the trust but the trust has very little activity during a
particular tax period.
83 See note 13.
37