Canada: Univar Holdco Canada Ulc V. Canada - The Relevance Of Alternative Transactions, Subsequent Amendments And Finance Commentary To The Gaar Analysis

 On October 13, 2017, the Federal Court of Appeal released its decision in Univar Holdco Canada ULC v. Canada, 2017 FCA 207. The Federal Court of Appeal overturned the decision of the Tax Court of Canada, 2016 TCC 159, and held that GAAR did not apply to the transactions at issue.

Facts

In 2007, CVC Capital Properties ("CVC"), an arm's length UK corporation, acquired the shares of Univar NV, a Netherlands public corporation. Univar NV owned the shares of Univar North American Corporation ("UNAC"), a US corporation. UNAC, in turn, owned the shares of Univar Canada Ltd., a Canadian corporation.

After the acquisition by CVC of Univar NV, Univar Holdco Canada ULC ("Univar ULC"), a Canadian corporation, was formed. The American parent corporation of Univar ULC lent $589,262,400 to Univar ULC and contributed $302,436,000 by way of equity. Univar ULC used the funds to acquire the shares of Univar Canada Ltd. from UNAC at a price equal to their fair market value of $891,698,400.

Prior to the transactions, the amount that could be extracted tax-free from Univar Canada Ltd. by UNAC was limited to the paid-up capital for income tax purposes of the shares, being $911,729).

Following the transactions, the amount that could be extracted tax-free from Univar Canada Ltd. to Univar ULC, and then from Univar ULC to its American parent corporation was increased to $891,698,400.

Section 212.1 of the Income Tax Act (Canada) (the "ITA") is a specific anti-avoidance provision that prevents a non-resident person (which includes a corporation) from indirectly extracting the accumulated surplus of a Canadian corporation in a non-arm's length disposition to another Canadian corporation. Generally speaking, section 212.1 operates by converting a capital gain (which could be exempt from taxation in Canada as a result of a tax treaty) into a deemed dividend (which is subject to withholding tax pursuant to subsection 212(2) of the ITA) to the extent that the amount paid for the shares acquired exceeds the paid up capital of the shares. At the time of the transactions at issue, subsection 212.1(4) provided an exception where the non-resident corporation (i.e., the vendor) was controlled by the purchaser corporation immediately before the disposition.

The tax result of the transactions was to increase the amount of retained earnings/surplus that could be taken out of Canada without incurring withholding tax. The parties relied on the exception in subsection 212.1(4) of the ITA to avoid the deemed dividend that would otherwise have arisen pursuant to subsection 212.1(1.1) of the ITA on the transfer by UNAC to Univar ULC of the shares of Univar Canada Ltd. The exception in subsection 212.1(4) of the ITA applied because Univar ULC controlled UNAC. immediately prior to the acquisition of the shares of Univar Canada Ltd.

Nine years after the transactions, subsection 212.1(4) of the ITA was amended so that if the transactions had been carried out after the amendment, a deemed dividend under subsection 212.1(1.1) of the ITA would have arisen. The Budget Supplementary Information accompanying the amendment described the amendment as a clarification of the existing provision.

Had CVC used the standard Canadian tax planning structure and formed a Canadian corporation (capitalized by debt and equity) to directly acquire the shares of Univar Canada Ltd., section 212.1, which was at issue in this case, would not have applied. In this situation, the standard Canadian planning structure was not practical from a commercial perspective. Therefore, CVC first acquired the shares of Univar NV and then carried out the series of transactions (described above relying on the exception in subsection 212.1(4) of the ITA) that replicated the result that could have been achieved by the standard Canadian tax planning structure.

Issue

The issue in the Univar appeal was whether the transactions were subject to GAAR as "abusive" tax avoidance.

Conclusion

The Federal Court of Appeal held that GAAR did not apply.

Analysis

Univar ULC, the taxpayer, conceded that there was a tax benefit as defined in subsection 245(1) of the ITA and an avoidance transaction as defined in subsection 245(3) of the ITA. The only issue was whether the avoidance transaction was abusive under subsection 254(4) of the ITA. The Federal Court of Appeal held that there was no abuse.

The Federal Court of Appeal confirmed, as the Supreme Court of Canada stated in Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, that the Minister bears the burden of establishing clear abuse of the ITA.

The Federal Court of Appeal held that alternative transactions are a relevant factor in determining whether there has been an abuse of the ITA. In particular, alternative transactions that achieve the same result as the transactions at issue without triggering any tax are suggestive that the GAAR should not apply. In this case, CVC could have used the standard Canadian tax planning structure, and section 212.1 would not have applied.

The Federal Court of Appeal stated that section 212.1 of the ITA does not prevent an arm's length purchaser of a Canadian corporation from removing surplus that the Canadian corporation had accumulated prior to its acquisition of control. The Court, in its analysis, further stated that the overall effect of the transactions in this case was to allow CVC to remove from Canada the surplus that had accumulated in Univar Canada Ltd prior to its acquisition of control. The Federal Court of Appeal observed that the transactions were completed very shortly after the closing of the purchase of the shares of Univar NV. The shares of Univar NV were acquired in an arm's length transaction and, at the time that such shares were acquired, the avoidance transactions were contemplated. Therefore, the avoidance transactions were part of the series of transactions by which control of Univar Canada Ltd. was indirectly acquired in an arm's length transaction. In the Court's view, whether the surplus of Univar Canada Ltd. was removed by the standard Canadian tax planning structure or the reorganization carried out in this case, the same surplus would be removed from Canada. Accordingly, the Court concluded that the transactions carried out in this case did not frustrate the purpose of section 212.1 of the ITA.

The Federal Court of Appeal also stated that subsequent amendments to the ITA and commentary drafted by the Department of Finance in relation to such amendments do not necessarily reinforce or confirm that transactions caught by the subsequent amendments are abusive before the amendments are enacted. Subsection 212.1(4) of the ITA was amended nine years after the transactions in this case were completed.

Lessons learned

Although the planning at issue in this case is no longer available to taxpayers, the Federal Court of Appeal's consideration of the relevance of alternative transactions, subsequent amendments and Finance commentary to the GAAR analysis should be useful in the GAAR analysis and application in future cases. The Court also re-confirmed that the Minister bears the burden of establishing clear abuse of the ITA.

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