Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
that in certain circumstances. In those circumstances, and only in those circumstances, should
the subject transactions be recharacterized. Put another way, where GAAR would not apply to
re-characterize the legal effect of a series of transactions, other provisions of the Act should not
be too readily stretched to give that result where a strict reading of them does not invite such a
result. (emphasis added)
Before moving on to a discussion of whether GAAR applied, Mr. Justice Hershfield addressed
the CRA’s position in respect of pipeline planning. While the reader is referred to the text of the
decision for the complete discussion which spans nearly a dozen paragraphs, it suffices to note
for purposes of this paper that Mr. Justice Hershfield stated, in part, as follows (at paragraphs
77 through 80):
[…] The post-mortem pipeline, like the case at bar, attempts to avoid dividend treatment by
employing steps that ensure that the tax planner receives the liquidating dividend qua creditor.
The choice is made to accept capital gains treatment on death as opposed to dividend treatment
on the estate's receipt of corporate assets.
The CRA has issued advance income tax rulings that such post-mortem pipeline transactions
will not be subject to subsection 84(2) if the liquidating distribution does not take place within
one year and the deceased's company continues to carry on its pre-death activities during that
period.
This post-mortem plan clearly parallels the Appellant’s tax plan in the case at bar. Both plans
provide access to a corporation’s earnings in a manner that avoids dividend treatment. As well,
both situations deal with a time of reconciliation – death and departure from Canada. The
conditions imposed on the post-mortem transactions, if imposed in the case at bar, would show
that the CRA’s assessing practice was consistent in trying to apply subsection 84(2). The
message seems to be: do the strip slowly enough to pass a contrived smell test and you will be
fine.
This is not a satisfactory state of affairs in my view. The clearly arbitrary conditions imposed are
not invited by the express language in subsection 84(2). I suggest that they are conditions
imposed by the administrative need not to let go of, indeed the need to respect, the assessing
practice seemingly dictated by RRM. Make it “look” less artificial and the threat of subsection
84(2) disappears. This unsatisfactory state of affairs more properly disappears once it is
accepted that subsection 84(2) must be read more literally in all cases and GAAR applied in
cases of abuse. (emphasis added; footnotes omitted)
While these comments were not necessary to Mr. Justice Hershfield’s conclusion that
subsection 84(2) did not apply in the context of the case at bar and, strictly speaking, are obiter,
they should nonetheless be pleasing to post-mortem planners.
The Decision – GAAR
It is trite law that three requirements must be established to permit the application of the GAAR:
• there must be a “tax benefit”;
• the transaction giving rise to the tax benefit must be an “avoidance transaction”; and
• the avoidance transaction must be “abusive”.
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