Canada: Supreme Court Applies GAAR In Copthorne

In a unanimous decision, released on December 16, 2011, the Supreme Court of Canada ruled in Copthorne Holdings Ltd. v Canada,1 that the general anti-avoidance rule (GAAR) applied to deny the taxpayer the benefits arising from a paid-up capital (PUC) preservation transaction. Copthorne is the fourth GAAR case heard by the Supreme Court.2 While the decision, delivered by Justice Rothstein, follows the approach to GAAR established in its prior decisions, particularly Canada Trustco (see our Osler Update dated October 27, 2005), the decision will be scrutinized for further insight into the approach of the Supreme Court to the application of GAAR.

At issue in Copthorne was the redemption for $142 million of shares of a Canadian corporation wholly owned by a non-resident. The redemption of shares held by the non-resident would give rise to a deemed dividend subject to Canadian withholding tax, to the extent the redemption price exceeded the PUC of the shares redeemed. The Canadian corporation arose from the amalgamation of two predecessor corporations which were originally parent and wholly-owned subsidiary. $96 million had been paid-in as share capital of the parent and, of that, $67 million was invested in and formed the PUC of the shares of the subsidiary. Prior to the amalgamation the shares of the subsidiary had been transferred to make the corporations sisters and their amalgamation a "horizontal" rather than "vertical" amalgamation.

Under the governing corporate law and subsection 87(3) of the Income Tax Act (the Act), the stated capital and PUC, respectively, of the shares of the former subsidiary, which would have been cancelled upon a vertical amalgamation, were preserved upon the resulting horizontal amalgamation. Subject to GAAR, upon the horizontal amalgamation the PUC of the shares of the parent and former subsidiary would be aggregated and no deemed dividend would arise on redemption of shares for $142 million, enabling a tax-free return of capital in excess of the $96 million original investment.

The Canada Revenue Agency reassessed the taxpayer for failure to withhold tax on the share redemption, invoking GAAR to deny the increase in PUC in respect of the shares of the former subsidiary otherwise resulting from the horizontal amalgamation. Both the Tax Court3 and Federal Court of Appeal4 upheld the reassessment.

Statutory Interpretation

The Supreme Court adopted in Canada Trustco a unified "textual, contextual and purposive" approach to all questions of interpretation of the Act. In Copthorne, Justice Rothstein expressly distinguishes the application of this approach in the context of a technical interpretation of the Act and under GAAR. In the former case, a textual, contextual and purposive approach is applied in order to interpret the text of specific provisions of the Act. It appears that only when an avoidance transaction gives rise to a tax benefit is a textual, contextual and purposive interpretation to be applied to search for the rationale that underlies the words that may not be captured by the bare meaning of the words themselves. These comments are likely to form part of the ongoing tension as to the relative importance of text, context and purpose in interpreting provisions of the Act where GAAR is not invoked.


There are three requirements for GAAR to apply: "tax benefit", "avoidance transaction" and misuse or abuse of the Act. While the Supreme Court has addressed each of these requirements, in each of the three GAAR cases to reach the Court before Copthorne, the taxpayer conceded the presence of both a tax benefit and an avoidance transaction. Copthorne is the first case in which all three requirements were put in issue before the Court.

Tax Benefit

The Supreme Court upheld the finding of the Tax Court that the presence of a tax benefit was established by comparison to the vertical amalgamation which would have been undertaken but for the resulting cancellation of PUC of the shares of the subsidiary.

Avoidance Transaction and "Series"

The Crown alleged that the tax benefit arose from a series of transactions. The parties agreed that the transactions resulting in the horizontal amalgamation formed a series of transactions under the "common law" test. However, the parties disagreed as to whether the statutory expansion of the common law test under subsection 248(10) to include transactions completed in contemplation of a series of transactions, included in the series the subsequent redemption of shares. The taxpayer argued that the passage of a year's time and the intervening introduction of tax amendments which prompted the redemption of shares held by the non-resident precluded the redemption from forming part of the preceding series of transactions which included the horizontal amalgamation. One of the primary bases for the taxpayer's application to the Supreme Court for leave to appeal was that the lower court decisions reflected confusion over the proper application of the subsection 248(10) "series" test laid down by the Supreme Court in Canada Trustco.

The Copthorne decision reiterates the Canada Trustco test for the "in contemplation of" requirement in essentially the same words. The Court rejects the necessity of a "strong nexus" between transactions or series offered by the Tax Court in Copthorne, endorses the insufficiency of a "mere possibility" or "extreme degree of remoteness" from MIL (Investments) S.A.,5 does not refer to the "motivating factor" test suggested by the Federal Court of Appeal in Copthorne, and clarifies that the "in relation to" or "because of" tests from Canada Trustco are the tests and not an expansion of "in contemplation of".

The Court expressly revisited and confirmed that "in contemplation of" may be applied retrospectively in respect of a preceding series of transactions as well as prospectively in respect of a subsequent series. The Court noted that length of time between transactions and intervening events may be relevant considerations in some cases.

The decision in Copthorne leaves ample room for ongoing uncertainty and debate as to the relationship necessary to include a transaction in a preceding or subsequent series of transactions. The Court notes that the context of subsection 248(10) provides an indication against a narrow interpretation of a "series" of transactions.

Misuse or Abuse

The Tax Court found the double-counting of PUC by undertaking a horizontal rather than a vertical amalgamation to be abusive and applied GAAR. The Federal Court of Appeal applied GAAR to deny what that Court appeared to view as a misuse or abuse of the Alberta Business Corporations Act. The Supreme Court upholds the application of GAAR; however, Justice Rothstein is very careful to tie the scheme of the PUC regime and purpose of the provisions to the specific wording of subsection 87(3) and particularly the parenthetical exclusion in respect of capital of subsidiary shares upon vertical amalgamations.

The difference in how the misuse or abuse analysis is expressed by the Supreme Court and the lower courts in Copthorne emphasizes the approach following Canada Trustco. While GAAR is a provision of last resort applicable only where transactions "work" under the technical rules of the Act, a misuse or abuse supporting the application of GAAR cannot be based only upon broad statements of tax policy, such as a general policy against surplus stripping or even against double-counting of PUC, but must ultimately be derived from the wording of the sections of the Act alleged to have been abused. Justice Rothstein expressly considers and rejects the argument that subsection 87(3) is simply adopting the corporate law's approach to stated capital and finds in the text and context of subsection 87(3) specific intention to limit the preservation of PUC upon amalgamation to the aggregate tax-paid investment in shares of the amalgamating corporations. On this basis, Justice Rothstein finds the series of transactions, but for GAAR, would frustrate and defeat the purpose of subsection 87(3), circumvent the parenthetical limitation on PUC in subsection 87(3) and achieve a result subsection 87(3) was intended to prevent and thus defeat its underlying rationale.

Victory in Copthorne may embolden the Crown. The Supreme Court has confirmed the breadth of the "series of transactions" test under GAAR and other provisions of the Act (which are not expressly limited to a common law series) and accepted a degree of uncertainty in the potential application of GAAR to redetermine common tax attributes (in obiter, including arm's length transactions). However, Justice Rothstein, speaking for the Court, makes clear that a finding of misuse or abuse of the Act supporting the application of GAAR must be grounded in a unified textual, contextual and purposive interpretation of the provisions of the Act alleged to have been abused. The Supreme Court's decision in Copthorne reaffirms the onus on the Minister to demonstrate clearly an alleged abuse and that the benefit of doubt is given to the taxpayer.


1 2011 SCC 63 (Copthorne)

2 Following Canada Trustco Mortgage Corporation v Canada (Canada Trustco), 2005 DTC 5523, Mathew v Canada, 2005 DTC 5538 and Lipson v Canada, 2009 DTC 5015 (see our Osler Update).

3 2007 DTC 1230

4 2009 DTC 5101

5 2006 DTC 3307 (TCC), aff'd 2007 DTC 5437 (FCA)

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

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

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
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 you may opt out by clicking here

    Terms & Conditions and Privacy Statement (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

    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’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.


    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.


    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.

    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 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.


    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.


    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.


    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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

    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

    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

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

    By clicking Register you state you have read and agree to our Terms and Conditions