Canada: It’s High Time – Provisions Should Be Read Narrowly: Lehigh

Last Updated: May 6 2014
Article by Kenneth Keung and Lisa Handfield

Short summary

On April 23, 2014, the Federal Court of Appeal (the "FCA") released its decision in The Queen v Lehigh Cement Limited ("Lehigh"). The Lehigh case involved a double-dip structure which the Canada Revenue Agency (the "CRA") attacked using an anti-avoidance rule in paragraph 95(6)(b) of the Income Tax Act (Canada) (the "Act"). Although the Tax Court of Canada ("TCC") ruled in favour of the taxpayer in 2013, its broad interpretation of that anti-avoidance rule surprised many practitioners and may have had wider implication to the interpretation of other specific anti-avoidance rules in the Act. On the appeal, the FCA revisited the issue and found that a narrow reading of the provision at issue was more appropriate. A textual focus in interpreting anti-avoidance provisions will give certainty to tax planners as they design their plans around these specific rules. However, a narrow interpretation of specific anti-avoidance provisions could increase the CRA's reliance on the GAAR resulting in more GAAR reassessments for taxpayers.


Before diving into the facts of Lehigh, here is a quick refresher on how Canada taxes foreign subsidiaries. Under Canadian rules, a non-resident corporation is a "foreign affiliate" of a Canadian taxpayer if the Canadian taxpayer holds at least one percent of any class of shares in the non-resident and the taxpayer's holdings, when combined with the holdings of any related person, total ten percent or more. A foreign affiliate may also be a "controlled foreign affiliate" if it is controlled by the Canadian taxpayer.

The Act requires that dividends received from a non-resident corporation be included in the recipient taxpayer's income. However, dividends received from a foreign affiliate that are paid out of the affiliate's "exempt surplus" are exempt from Canadian tax by virtue of paragraph 113(1)(a) of the Act. Generally speaking, exempt surplus is active business income earned by the foreign affiliate in a country with which Canada has a tax treaty or a tax information exchange agreement. If the foreign affiliate is also a controlled foreign affiliate, certain passive income is imputed to the Canadian taxpayer even if it has not been received by the Canadian taxpayer – such imputation is known as foreign accrual property income or "FAPI".

Investment income such as interest is normally not active business income. However, in order to assist Canadian multi-nationals with financing their foreign subsidiaries, the Canadian tax rules (at the time of the Lehigh transactions) provided for re-characterization of interest received by a foreign affiliate from a related non-resident corporation as active business income, to the extent the interest related to the non-resident payor's own active business. Such re-characterized income would form part of the foreign affiliate's exempt surplus and would not trigger FAPI imputation.


Lehigh Cement Limited ("LCL") was a member of a multi-national organization headed by a Belgian company. Its sister companies in the US (CBR ICA and its subsidiary CBR US) were financed partially by a sale of preferred shares to LCL in 1991 and partially by borrowings from other entities within the organization. In 1995, a series of re-financing transactions were undertaken which may be summarized as follows:

  • LCL and a Canadian subsidiary set up a Delaware limited liability company (NAM LLC);
  • LCL borrowed funds at interest (one tranche at 6.7% and the other at 6.84%) and contributed them to NAM LLC;
  • NAM LLC lent the funds to CBR US at an interest rate of 8.25%;
  • CBR US used the funds to repay outstanding debts and paid a dividend to CBR ICA so that CBR ICA could redeem its preferred shares previously issued to LCL.

For Canadian tax purposes, NAM LLC met the definition of both "foreign affiliate" and "controlled foreign affiliate" since it was wholly owned by LCL and its Canadian subsidiary. The interest income received by NAM LLC was re-characterized as active business income because the payor, CBR US, was a related party and the interest expense was in respect of the payor's active business. Therefore, the interest income formed exempt surplus allowing NAM LLC to pay dividends to LCL that LCL could treat as tax-free dividends under paragraph 113(1)(a) of the Act. At the same time, LCL was able to deduct the interest on the borrowings.

For US tax purposes, NAM LLC was treated as a pass-through entity and not subject to tax. The interest paid by CBR US to NAM LLC was considered to be the income of LCL and subject to U.S. withholding tax of 10% only (that was the withholding rate during 1995). Meanwhile, CBR US was able to increase its net operating losses carry forward by claiming the interest expense. Additionally, the structure provided for Belgian tax benefits.

The overall result: interest deductions and no corresponding taxable income for both Canadian and US purposes, with Belgian tax benefits on top.

When the Minister stumbled across this structure, it disallowed the tax-free treatment of the exempt surplus dividend LCL received from NAM LLC, and it based its reassessment on paragraph 95(6)(b) of the Act which is a specific anti-avoidance provision. This provision states that, for purpose of subdivision i (which deals with income from a non-resident corporation), where a person acquires or disposes of shares and it can reasonably be considered that the principal purpose for the acquisition or disposition is to permit a person to avoid, reduce or defer tax payable under the Act, that acquisition or disposition is deemed not to have taken place. The Minister also relied on the General Anti-Avoidance Rule ("GAAR") in section 245 of the Act in its reassessment, but had abandoned that position at trial.

The Tax Court of Canada decision

Counsel for LCL 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. Based on this reading, LCL argued that paragraph 95(6)(b) of the Act applies specifically to situations where shares are acquired or disposed of in order to manipulate foreign affiliate status. The Minister noted the similarity of the wording between paragraph 95(6)(b) of the Act and the GAAR stressing that a GAAR-like analysis should be used to objectively assess the broader purpose of the transactions. Using this approach, the Minister argued that the principal purpose of LCL acquiring shares in NAM LLC was to earn tax-free dividends while obtaining an interest deduction and hence paragraph 95(6)(b) of the Act applied.

The TCC agreed with the Minister concerning the breadth of paragraph 95(6)(b) of the Act. However, the TCC found that LCL's principal purpose for the acquisition was to avoid U.S. tax rather than Canadian tax, because the same Canadian tax result would arise under an alternative structure – i.e. if LCL borrowed and used the funds to purchase shares of CBR US. Since no Canadian tax was avoided as a result of the share acquisition, paragraph 95(6)(b) of the Act was not applicable.

The FCA decision

The same two issues heard at the TCC were put before the FCA: what was the taxpayers' principal purpose in acquiring the shares and what is the proper interpretation of paragraph 95(6)(b) of the Act? The key issue is whether one can look to the principal purpose of a series of transactions, which include an acquisition or disposition of shares, when considering paragraph 95(6)(b) of the Act. The FCA noted the broad principles of statutory interpretation, text, context and purpose, as per Canada Trustco, but noted that this case also invites "a largely textual interpretation" of the Act. Quoting from Shell Canada Ltd., the Court reiterated that where the provision is "clear and unambiguous the words must be simply applied". The FCA held that the wording of paragraph 95(6)(b) of the Act is clear and adopted the taxpayer's position that the principal purpose for the acquisition or disposition, not for the series of transactions, is the focus of the analysis. The Court noted that where more than one transaction is to be considered the phrase "part of a series of transactions or events" is used in the Act.

The Court buttresses their analysis by noting recent amendments to other provisions in the Act, such as the "foreign affiliate dumping" provisions, would have been unnecessary if paragraph 95(6)(b) was to be interpreted as a broad anti-avoidance provision, as suggested by the Minister. The placement of paragraph 95(6)(b) within the Act is also of importance as it is located in subdivision i of Division B of Part I, which focuses on the computation of income and if the provision was intended to be an anti-avoidance provision, it would likely be located in a more general part of the Act, such as Part XVI which focuses on tax avoidance.

Our Take

It is interesting to compare the FCA's analysis in Lehigh with the Court's analysis in MacDonald. While the Court in MacDonald notes the textual phrase "in any manner whatever" of the provision, the Court appears to take a broader approach by looking to who initiated the transaction, who received the funds or property from the transaction and the circumstances surrounding the transaction. In MacDonald, the Court criticized the trial judge for not focusing on statutory phrase "in any manner whatever" and this conclusion appears consistent with the Court's textual focus in Lehigh.

Overall, the Lehigh case reinforces the emphasis on a textual interpretation of taxing provisions. A textual focus in interpreting anti-avoidance provisions will give certainty to tax planners as they design their plans around these specific rules. However, a narrow interpretation of specific anti-avoidance provisions could increase the CRA's reliance on the GAAR resulting in more GAAR reassessments for taxpayers. We will continue to watch the FCA's decisions to see if this trend develops.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

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.

Kenneth Keung
Lisa Handfield
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
Check to state you have read and
agree to our Terms and Conditions

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.

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 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.


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.