Canada: GARR Case Comment: Collins & Aikman (TCC) A More Stringent Test for Abusive Tax Avoidance

Introduction

In Collins & Aikman Products Co. v. R.,1 the appellant, a U.S. resident corporation ("USCO"), realized a tax-exempt capital gain on the exchange of its shares in its wholly-owned subsidiary, Collins & Aikman Holdings Ltd. ("CAHL"), for a single share of a new Canadian holding company ("CanHoldco"). Through a series of transactions, this exchange indirectly resulted in an increase in the adjusted cost base ("ACB") and paid up capital ("PUC") in USCO's CAHL shares equal to the amount of the tax-exempt capital gain. USCO was then able to extract such amounts from its subsidiaries without paying any tax.

Summary of Facts

USCO was the sole shareholder of CAHL, which was incorporated in Canada in 1929. CAHL was in the business of manufacturing auto parts until 1961, when this business was transferred to a wholly owned subsidiary ("CanOpco") and CAHL ceased to be resident in Canada. At the time of this transfer in 1961, USCO's ACB and PUC in respect of its CAHL shares was approximately $475,000.

In 1993 and 1994 a reorganization took place. USCO incorporated CanHoldco and transferred its CAHL shares to CanHoldco in exchange for the one and only share of CanHoldco. The fair market value of the CAHL shares at this time was $167 Million. This amount was added to the PUC and ACB of USCO's single CanHoldco share. No Canadian tax was triggered on this exchange because the CAHL shares were not considered "taxable Canadian property" under the Income Tax Act (Canada) (the "ITA").

Subsequently, CAHL was continued into Ontario under the Business Corporations Act (Ontario) and then amalgamated with CanOpco and a wholly-owned subsidiary of CanOpco to form Collins & Aikman Canada Inc. ("C&A"). As a result, USCO owned all of the shares of CanHoldco, which owned all the shares of C&A. C&A then paid a tax-free inter-corporate dividend of $104 million to CanHoldco, which then paid $104 million to USCO as a tax-free return of capital, reducing USCO's PUC and ACB from $167 million to $63 million.

The Minister of National Revenue ("Minister") reassessed C&A, CanHoldco and USCO on the basis that only $475,000 of the $104 million paid from CanHoldco to USCO could be a return of capital. The Minister determined that the General Anti-Avoidance Rule ("GAAR"), contained in section 245 of the ITA, applied to the series of transactions to recharacterize that portion of the return of capital in excess of $475,000 as a deemed dividend subject to Part XIII non-resident withholding tax. The Minister determined that C&A had acted as agent for CanHoldco in paying the $104 Million to USCO, and as such C&A was included in the reassessment for failing to withhold. All three corporations appealed the reassessments.

Summary of GAAR

GAAR applies to deny a taxpayer a particular tax benefit or result where three conditions are satisfied: (1) the taxpayer enjoyed a "tax benefit"; (2) the taxpayer entered into an "avoidance transaction"; and (3) the taxpayer engaged in "abusive tax avoidance".

A "tax benefit" includes any reduction, avoidance or deferral of tax under the ITA. An "avoidance transaction" is a transaction undertaken primarily for tax reasons and not for a bona fide commercial, family or charitable purpose where any tax savings are ancillary in the overall plan. Lastly, "abusive tax avoidance" exists where the transaction in question frustrates or defeats the object, spirit or purpose of the provisions relied on to realize the tax benefit.

Summary of Decision

At trial, the taxpayers conceded the first two conditions of GAAR: i) that the series of transactions resulted in a "tax benefit", and ii) that these transactions were "avoidance transactions". With respect to the last condition, that the transactions resulted in "abusive tax avoidance", the Minister argued that the series of avoidance transactions resulted in an abuse of subsection 84(4) of the ITA.

Subsection 84(4) of the ITA provides that amounts that a corporation pays to a shareholder on a return of capital exceeding the PUC of the shares are deemed to be dividends paid to that shareholder for the purposes of the ITA, including Part XIII non-resident withholding tax. The Minister argued that there is an evident scheme in the ITA with respect to corporate distributions of which subsection 84(4) forms part which begins from the premise that distributions from corporations to shareholders are to be included in income in the case of residents or subject to withholding tax in the case of non-residents. The Minister referred to numerous provisions of the ITA as evidence of this scheme that corporate distributions are to be taxed except where provisions specifically provide otherwise and argued that although subsection 84(4) does provide otherwise for returns of capital, this should not extend to inappropriate or artificial increases of PUC. The Minister's position was that the taxpayers' circumvention of s. 84(4) amounted to abusive dividend stripping. The Minister did not submit any extrinsic aids in support of their view of the intended scheme of the ITA.

Justice Boyle for the Tax Court replied: "I do not accept the Crown's view. When considering the statutory provisions dealing with corporate distributions there is no clear need to step back from the Act altogether, begin from an unstated premise, and then treat the Act as only setting out the exceptions."2 Justice Boyle determined that the purpose of subsection 84(4) is "to tax distributions, other than dividends, paid by a particular corporation to its shareholders to the extent the distribution exceeds the amount of capital invested in that corporation by that corporation's shareholders."3 In response to the Minister's argument that the ITA contains a scheme whereby distributions from corporations to shareholders are to be included in income subject to specific exceptions, Justice Boyle stated:

72 Determining the purpose of the relevant provisions or portions of the Act is not to be confused with abstract views of what is right and what is wrong nor with arbitrary theories about what the law ought to be or ought to do. These latter views and theories are unhelpful in purposive and contextual statutory analysis and may even create mischief unless they are grounded in the realities of the codified legislation. [...] One's sense of right and wrong or what good tax policy should provide for or should not allow for is not, for these purposes, a permissible extrinsic aid."

Justice Boyle also cited Campbell J. in Copthorne Holdings Ltd. v. R.,4 who held that "reliance on a general policy against surplus striping is inappropriate to establish abusive tax avoidance", and Lamarre J. in McMullen v. R.,5 who determined that the Minister had "not presented any evidence establishing [...] that the policy of the Act read as a whole is designed so as to necessarily tax corporate distributions as dividends in the hands of shareholders. In any event, the Supreme Court of Canada has said, '[i]f the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer'".

The Tax Court determined that the series of transactions did not defeat or frustrate the object, spirit or purposes of subsection 84(4) but that the Collins & Aikman group took professional advice on how to accomplish their reorganization in a tax effective manner. The taxpayers acknowledged that the primary purpose of transferring the CAHL shares from USCO to Holdings was to obtain the benefit of the high cross-border PUC that could then be used to pay funds to USCO as tax-free returns of capital.

Justice Boyle determined that each step in the reorganization was appropriate and none were abusive. Unlike Copthorne, there was no double-counting of PUC upon the amalgamation, and the transfer of CAHL shares from USCO to Holdings was not done to avoid a provision that would deny PUC recognition.

The last argument of the Minister was that no new money had been invested in the Collins & Aikman group's Canadian companies that would justify the cross-border PUC being increased from $475,000 to $167 million. Boyle J. dismissed this argument explaining that the ITA is not limited to money transactions. "Consistently and throughout, the Act considers money's worth or value the equivalent to money whether in the context of employee and shareholder benefits, shareholder appropriations, share-for-share exchange or the rollover of assets into corporations." Justice Boyle also pointed out that there were real Canadian tax consequences to the reorganization as CAHL became a Canadian taxpayer and was now subject to income tax under the ITA. Boyle J. affirmed that "[t]he most important considerations of consistency, fairness and predictability would be significantly eroded if GAAR were to be lightly applied and upheld relying on the fact that there was no new money in circumstances where it is clear there was real value and money's worth."6

Justice Boyle concluded with a quote from Justice Paris in Landrus v. R.,7 that "the Minister has tried to use the GAAR to fill in what he perceives to be a possible gap left by Parliament; that would be an inappropriate use of the GAAR."

Lessons Learned

Despite some pre-Canada Trustco8 decisions to the contrary, the Tax Court has affirmed in Evans, Copthorne, McMullen, and now Collins & Aikman, that the Minister cannot rely on a general policy against surplus stripping in order to establish abusive tax avoidance under GAAR.

Collins & Aikman has also made it clear that in establishing the purpose of a provision of the ITA the Minister may not rely on "abstract views of what is right and what is wrong" or "arbitrary theories about what the law ought to be or ought to do." As Justice Boyle explains: "[o]ne's sense of right and wrong or what good tax policy should provide for or should not allow for is not, for these purposes, a permissible extrinsic aid." This is an important ruling for taxpayers as the courts have placed the burden of establishing the purpose of the relevant ITA provision and whether that purpose was abused on the Crown. Where no extrinsic aids are available, the Crown may have difficulty establishing the purpose of a particular provision, and thus whether that purpose was abused.

Collins & Aikman also followed the standard of proof established by the Supreme Court of Canada in Canada Trustco, that when conducting a GAAR analysis "the abuse of the Act must be clear, with the result that doubts must be resolved in favour of the taxpayer",9 and not the standard alluded to by the majority of the Supreme Court in Lipson, that proof on a balance of probabilities is the standard required of the Minister to establish abusive tax avoidance.10

Conclusion

Collins & Aikman upheld a series of transactions that allowed shares of a non-resident corporation to be exchanged for the only share of a resident holding company. As a result, such share was deemed to have an ACB and PUC of $167 million, allowing the holding company to pay $104 million to its sole US shareholder on a tax-free basis.

This case confirms that the Minister cannot rely on a general policy against surplus striping in order to establish abusive tax avoidance under GAAR. The Tax Court has made clear that the Minister will generally have to reference permissible extrinsic aids in order to properly establish the purpose of a provision alleged to have been abused under GAAR. Finally, the Supreme Court of Canada's holding in Canada Trustco that alleged abuse under GAAR must be clear, with any doubts to be resolved in the taxpayer's favour, has been reaffirmed.

Footnotes

1. 2009 TCC 299, 2009 D.T.C. 958 (Eng.) (Tax Court of Canada [General Procedure]) ("Collins & Aikman"). Note that a notice of appeal with respect to this case has been filed with the Federal Court of Appeal.

2. Collins & Aikman, at para. 62.

3. Ibid., at para. 71.

4. 2007 D.T.C. 1230 (Eng.) (T.C.C. [General Procedure]).

5. 2007 D.T.C. 286 (Eng.) (T.C.C. [General Procedure]).

6. Collins & Aikman, at para. 103.

7. 2008 T.C.C. 274, 2008 D.T.C. 3583 (Eng.) (T.C.C. [General Procedure]).

8. Canada Trustco Mortgage Co. v. R., 2005 SCC 54, 2 S.C.R. 601 (S.C.C.).

9. Canada Trustco, at para. 69. See paragraphs 36, 78, and 79 of Collins & Aikman.

10. Lipson v. Canada, 2009 SCC 1, at para 21. For a comprehensive analysis of the Lipson decision, please see: http://www.gowlings.com/resources/enewsletters/taxationlaw/Htmfiles/V9N02_20090112.en.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
17 Dec 2016, Other, Ontario, Canada

Podcast summary

In the inaugural episode of Diversonomics, co-hosts Roberto Aburto and Sarah Willis introduce listeners to the podcast and discuss their experiences with diversity and inclusion in the legal industry. They also outline some of the obstacles the profession faces with respect to adopting new strategies and overhauling old practices.

22 Dec 2016, Other, Toronto, Canada

Podcast summary

For episode two of Diversonomics, co-hosts Roberto Aberto and Sarah Willis interview Mark Greenburgh, a partner in Gowling WLG's London office. They discuss the exciting new diversity and inclusion opportunities that have arisen since the combination of Gowlings and Wragge Lawrence Graham, as well at Gowling WLG UK's LGBT OpenHouse initiative.

28 Dec 2016, Webinar, Toronto, Canada

Podcast summary

In episode three of Diversonomics, co-hosts Roberto Aburto and Sarah Willis interview Lorna Gavin, Gowling WLG U.K.’s head of diversity, inclusion and corporate responsibility. In their discussion, they explore the challenges and opportunities of implementing diversity and inclusion strategies across a global firm, while also detailing Gowling WLG U.K.’s various diversity networks.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.