A trio of recent decisions from the Tax Court of Canada could create more uncertainty about the general anti-avoidance rule. All three cases involve a series of similar, highly artificial transactions that eliminated millions in taxable amounts.
In the case involving 1207192 Ontario Ltd., decided in Septem-ber, life insurance broker Dan Cross had undertaken a series of transactions that led to eliminating a $3-million capital gain, realized after selling shares in his managing general agency to Hub Financial Inc. In simple terms, the transactions used sole-shareholder corporations and family trusts to create a $3 million capital loss: the loss was generated by issuing a stock dividend in preferred shares that was equal to the gain.
The Canada Revenue Agency referred to the series of transactions, which involved several classes of common and preferred shares, as a “value shift.”
Cross had declared bankruptcy earlier in his career, and had embarked on a new MGA venture after the sale to Hub. He argued at trial that the series of transactions under attack was designed only to creditorproof his new business in light of his previous experience; it was not intended as an abusive tax-avoidance scheme, he argued, and did not violate the GAAR provisions.
The court disagreed. In holding for the CRA and disallow-ing the capital loss, the judgment found the series of transactions “served no purpose other than to manufacture a capital loss for tax purposes. These transactions did not reduce [Cross’s company’s] economic power in the manner contemplated by Parliament in allowing for the deduction of capital losses.”
This case, and another, involving Triad Gestco Ltd., which was won by the CRA in July, are part of a CRA project to attack these types of planning structures. Many taxpayers in similar situations have settled with the CRA.
But another case, decided at the end of October, came to a different conclusion, despite the similarity in the transactions. In that decision, which involves Calgary-based private-equity firm Global Equity Fund Ltd., run by Riaz Mamdani, the company/taxpayer deducted a business loss of $5.6 million that had been incurred in a fashion similar to the 1207192 Ontario (Cross’s) case. A stock dividend had been issued, creating a business loss that eliminated taxable gains.
As in 1207192 Ontario, Global Equity argued the transactions were designed only to creditorproof assets. The court disagreed, calling the transactions “highly artificial” and a “shuffle of paper.”
However, Justice Judith Woods concluded that the Crown had not made out its case that the transactions were abusive under the GAAR. It appears key that the losses in this case were business losses and not capital losses, and that the CRA failed to show that such losses must be “real.” Wrote Woods: “The Crown has failed to establish that the object and spirit of the provisions relied upon for the tax benefit is to restrict business losses to ‘real losses realized outside the economic unit’.”
Woods also noted that: “Notwithstanding the result in this appeal, readers should be cautious before concluding that the GAAR does not apply to transactions of this type. If different arguments had been raised by the Crown, perhaps the result would have been similar to that reached in Triad Gestco and 1207192 Ontario.”
Both Triad Gestco and 1207192 Ontario have been appealed. It seems likely the Global Equity decision will also be appealed. IE