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Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP • did not consider the use of related party transactions on substantially arm’s length terms or the use of Canco funds to repay the Brother Note to be relevant factors in his determination that the impugned transactions were not abusive; and • noted that the GAAR framework should achieve a fair result. 51 The Crown has appealed the decision in respect of both subsection 84(2) and the GAAR. Relevance of the Decision As noted above, Mr. Justice Hershfield’s obiter comments in respect of pipeline planning should be pleasing to post-mortem planners. However, the real significance of Mr. Justice Hershfield’s decision is likely his conclusion that “subsection 84(2) must be read more literally in all cases and GAAR applied in cases of abuse”. 52 If this conclusion – which the authors think is correct – is confirmed by the Federal Court of Appeal, it should be a significant victory for post-mortem planners regardless of the Federal Court of Appeal’s decision on GAAR since the arguments against the application of the GAAR in the context of post-mortem planning are – in the view of the authors – significantly stronger than those in MacDonald. 53 Practical Advice Regarding Pipelines in Light of CRA’s Position While the authors are of the view that, in the normal course, the CRA’s position that subsection 84(2) may apply to deem the estate to have received a dividend in a typical pipeline transaction is not well-founded, they note as follows: • In many cases, where the deceased did not wholly-own the corporation (e.g., where a prior estate freeze had been undertaken), it may be possible to implement a pipeline without it being necessary to wind up, discontinue or reorganize any business carried on by the corporation. • To avoid the audit risk, where viable in implementing a pipeline, it is preferable to fall within the circumstances in which the CRA has ruled favourably. 54 • Where this is not viable, it may be helpful to structure pipeline transactions such that they include a subsection 88(1) wind-up so that subsection 84(2) is expressly stated not to apply on the wind-up. 55 51 52 53 54 See, for example, paragraph 139 of the decision where Mr. Justice Hershfield stated as follows: In closing, I add that in not applying GAAR to the share sale I am mindful of what was enunciated on more than one occasion in Canada Trustco; namely, the analysis of GAAR requires consideration of fairness. Indeed in the opening paragraph of Canada Trustco, the Supreme Court of Canada said the GAAR framework should achieve fair results. The allowance of this appeal ensures a fair result. A tax plan that ensures the reconciliation of genuine capital losses should not be the subject of a GAAR assessment, at least in these circumstances, unless the Act expressly denies it. Supra, note 5, at para. 80. See supra, note 36. E.g., keeping the corporation in existence as a separate entity for at least a year and having it continue its business, and only thereafter repaying the promissory note progressively over time. 560600/422632 MT DOCS 11864055v1G 18
Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP • Recent commentary suggests that in appropriate cases it may be helpful to complete the transactions within the estate’s first taxation year so that subsection 164(6) capital loss carry-back planning may be available as a “fallback” option. 56 SUBSECTION 164(6) CAPITAL LOSS CARRY-BACK PLANNING Background As discussed above, subsection 164(6) capital loss carry-back planning is another technique employed by tax practitioners to relieve against the double taxation that can arise under the Act as a result of the deemed disposition on death. Subsection 164(6) is an exceptional provision in that it allows, in some circumstances, a capital loss sustained by the estate to be carried back to the deceased’s terminal return and applied against the capital gain that arose as a consequence of the deemed disposition on death. The provision requires that the loss be sustained in the estate’s first taxation year, 57 and is subject to numerous stop-loss rules. In a 2006 Tax for the Owner-Manager article, 58 Nick Moraitis and Manu Kakkar discussed a potential circularity problem with estate loss carry-backs owing to the drafting of subsections 40(3.6), 40(3.61) and 164(6). This summer at the 2012 STEP Round Table, the CRA was asked to comment on the interaction of these provisions and, in so doing, expressed a view that could render subsection 164(6) capital loss carry-back planning unavailable for many estates. The authors comment below on the issue raised at the 2012 STEP Round Table and the CRA’s response. In summary, it is the authors’ view that: • given the text, context and purpose of subsections 40(3.6), 40(3.61) and 164(6), the provisions should be interpreted in a manner which does not give rise to the circularity issue identified in the Moraitis/Kakkar Article and addressed in the CRA’s recent response; • if, however, contrary to what in the authors’ view is the better interpretation, the provisions are to be interpreted so as to give rise to the circularity issue due to a technical flaw in the drafting of subsection 40(3.61), a legislative fix is required so as not to frustrate the underlying purpose and policy of the provisions; and 55 56 57 58 Paragraph 88(1)(d.1). In this case, the issue should then focus on GAAR; whether there has been a misuse or abuse for purposes of section 245 notwithstanding: (i) the deemed disposition on death; (ii) the provisions of section 84.1; and (iii) that the estate should not normally be regarded as an “accommodation party” in facilitating a surplus strip. Stuart Bellefer, “Summary of the CRA Round Table Held at the 13th National STEP Canada Conference” (August 2011) 199 CCH Estate Planner Newsletter, 4-6 (which notes that it would generally be necessary to latefile the subsection 164(6) designation, which would require that a fairness request be brought by the taxpayer pursuant to subsection 220(3.2) and Income Tax Regulation 600(b)). The provision does not refer to the first calendar year following the death of the deceased. Planners should be careful not to inadvertently trigger an early taxation year by, for example, running afoul of the “anti-stuffing” rules in the proposed amendments to the definition of “testamentary trust” in subsection 108(1). Nick Moraitis and Manu Kakkar, “Potential Circularity Problem with Estate Loss Carryback”, (July 2006) 6:3 Tax for the Owner-Manager (ctf.ca) (the “Moraits/Kakkar Article”). 560600/422632 MT DOCS 11864055v1G 19
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