Presentation Material - McCarthy TÃ©trault

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Chris Falk Stefanie Morand <strong>McCarthy</strong> 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”. 560600/422632 MT DOCS 11864055v1G 16
Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP If Mr. Justice Hershfield’s GAAR analysis in MacDonald seems less tightly reasoned than his comments on subsection 84(2), this may be attributable to the manner in which the parties framed the arguments in respect of GAAR. As stated by Mr. Justice Hershfield (at paragraph 30): Nowhere in the Reply does the Respondent expressly identify the “tax benefit” that needs to be identified for the purposes of section 245. Implicitly, however, given the assumption in […] the Reply […], the benefit must be taken to be the use of capital losses and loss carry forwards that could not have been used had subsection 84(2) applied. That was certainly the position taken at trial although the general avoidance of dividend treatment sought to be imposed under subsection 84(2), regardless of the particular tax benefit achieved by avoiding it, seems to be an underlying and relevant concern to the Respondent in this case. Mr. Justice Hershfield begins his GAAR analysis by commenting that to look beyond the clear tax benefit identified by the Crown (i.e., the creation of a capital gain enabling the use of capital losses which resulted in a reduction of tax payable) would not be consistent with the analytical approach set out by the Supreme Court of Canada in Canada Trustco and Copthorne. 48 As such, readers may have expected a comment similar to Madam Justice Woods’ admonition in Global Equity 49 to the effect that readers should be cautious before concluding that the GAAR does not apply to transactions of this type since the result may have been different if different arguments had been raised by the Crown. However, Mr. Justice Hershfield instead engaged in a sort of two-track GAAR analysis, considering both the use of the Losses and “the issue of surplus stripping per se”. As stated by Mr. Justice Hershfield (at paragraphs 100 and 101): It was clearly open to the Minister to assess the subject transactions on the basis that the tax benefit was the elimination of Part XIII tax. Reliance could readily have been made on the comparable to the Appellant moving to the United States without engaging in the share sale, using his capital losses, then winding up PC after the move. […] However, that comparable is not the subject of this appeal. […] Still, as I have suggested before, I am not satisfied that my analysis will be complete if all I do is focus on the tax benefit relied upon by the Minister in this case. The GAAR analysis will only be complete, in my view, if I address the Respondent’s underlying concern in this appeal head-on, namely the issue of surplus stripping per se. While the reader is referred to the text of the decision for details of the GAAR analysis and the basis on which the Court concluded that GAAR did not apply in the case at bar, the authors note that Mr. Justice Hershfield: • concluded that it was “doubtful whether in an integrated corporate/shareholder tax system, a surplus strip per se can be said to abuse the spirit and object of the Act read as a whole”; 50 48 49 50 Copthorne Holdings Ltd. v. The Queen, 2012 DTC 5007 (SCC) [“Copthorne”]. Global Equity Fund Ltd. v. The Queen, 2011 DTC 1350 (TCC) [“Global Equity”]. Global Equity was not a surplus stripping case; rather, the decision considered whether GAAR applied to a series of transactions designed to generate a business loss that was applied to eliminate most of the taxpayer’s tax payable for the 1999, 2000 and 2001 taxation years. Supra, note 5, at para. 101. 560600/422632 MT DOCS 11864055v1G 17
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