“Taxpayers jockey to get on the right side of the
distinctions to take advantage of the rules.”
- Professor Vern Krishna as quoted in Lehigh Cement
Limited v. R. -
The Tax Court of Canada recently released their decision in
Lehigh Cement Limited v. R. and CBR
AlbertaLimited v. R., 2013 TCC 176, which
deals with whether a cross-border financing structure ran afoul of
a specific anti-avoidance provision in the Income Tax Act
(the "Act"). The Court closely examined the wording
of the provision and held in favour of the Taxpayers (collectively,
Lehigh Cement Limited and CBR Alberta Limited).
Briefly, the Taxpayers undertook a reorganization and invested
in the capital of a United States limited liability corporation
(the "LLC") which loaned money to a related corporation
undertaking operations in the United States who then accordingly
paid interest to the LLC who in turn paid dividends to the
Taxpayers. A taxpayer's foreign affiliate status is
determined under the Act on the basis of shareholdings in a
non-resident corporation. In order for a taxpayer to be able
to deduct dividends received under paragraph 113(1)(a) of the Act
the dividends must be paid out of exempt surplus of a non-resident
corporation and the non-resident corporation must meet the
definition of "foreign affiliate" in the Act.
However, if the shares in the non-resident corporation are acquired
for the purpose of avoiding tax, then paragraph 95(6)(b) of the Act
applies to deem the shares not to have been acquired. The
Minister of National Revenue (the "Minister") reassessed
the Taxpayers under paragraph 95(6)(b) of the Act which resulted in
a denial of the deduction of dividends received under paragraph
113(1)(a) of the Act.
The reorganization involved the Taxpayers obtaining an interest
bearing bank loan and using these funds to invest in the capital of
the non-resident corporation. The reorganization, amongst
other benefits, intended to produce a tax savings of US$1.92
million per year in Canada for the Taxpayers as the Taxpayers would
receive tax exempt dividends from the non-resident corporation
while being able to deduct the interest expense related to the bank
The appellants advocated for a largely textual interpretation of
paragraph 95(6)(b) of the Act focusing on the purpose of the share
acquisition itself rather than the purpose of the series of
reorganization transactions. The appellants'
interpretation focused on the plain meaning of the words in the
provision as opposed to undertaking a contextual or purposive
interpretation. The Minister noted the similarity of the
wording between paragraph 95(6)(b) of the Act and the general
anti-avoidance rule (the "GAAR") found in section 245 of
the Act and stressed that a GAAR like analysis should be used to
objectively assess the broader purpose of the transactions.
The Court looked to the history of the provision and concluded that
paragraph 95(6)(b) of the Act will apply to any acquisition or
disposition of shares that is principally tax-motivated, not just
those where the shareholdings in the non-resident corporation are
manipulated in a manner that masks the true economic ownership.
The Tax Court of Canada stated that there are three stages to an
inquiry under paragraph 95(6)(b) of the Act: the first being to
identify the tax otherwise payable under the Act that the taxpayer
intended to avoid, next to determine whether the acquisition or
disposition of the shares permitted this avoidance, and lastly to
assess the taxpayer's purpose in acquiring the shares.
The Court noted the difference in wording between paragraph
95(6)(b) of the Act which uses the phrase "tax.....that would
otherwise be payable" and the definition of "tax
benefit" under the GAAR. The phrase "tax otherwise
payable" necessitates a comparison with an alternative
situation and the Tax Court of Canada held that no additional tax
would have been payable if an alternative transaction been
undertaken, thus there can be no tax avoided as a result of the
share acquisition and paragraph 95(6)(b) of the Act is not
As an aside, at trial the Minister abandoned their argument
based on the general anti-avoidance rule (the "GAAR") to
support the reassessment of the Taxpayers. Based on Justice
Rothstein's comments in Lipson v. R., 2012
SCC 1, in It is unlikely the Minister would have been successful on
the GAAR argument given that a more specific anti-avoidance rule
applied to the situation at hand.
As with all tax transactions, the devil is in the detail and
taxpayers need to turn their attention to the details if they want
to "get on the right side of the
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