Mac's, an Ontario corporation, was a wholly-owned subsidiary
of Couche-Tard Inc. ("CTI"). In April 2005, Mac's
borrowed $185 million from Sidel Corporation, a related Delaware
In April 2006, Mac's participated in several transactions
with various related entities, including the declaration of a $136
million dividend on the common shares held by CTI. A similar series
of transactions had been undertaken in 2001. However, in 2006,
Mac's professional advisors failed or forgot to take proper
account of the $185 million owed by Mac's to Sidel.
While the $136 million dividend itself was generally without tax
consequences, the dividend had the effect of putting Mac's
offside the (then) 2:1 ratio in the "thin-cap" rules in
the Income Tax Act. This resulted in the reduction of
deductible interest paid by Mac's to Sidel in the years
following the dividend payment (i.e., 2006, 2007 and
After Mac's was reassessed by the CRA to disallow the
interest deduction, Mac's sought rectification of the corporate
resolution declaring the dividend, and additionally sought to
substitute a reduction of its stated capital and the distribution
of cash to CTI. This would have had the same effect of paying an
amount to CTI while maintaining the proper ratio for interest
The Quebec Superior Court dismissed the application on the basis
that the Mac's directors never had any specific discussions
regarding the deductibility of interest on the Sidel loan after the
payment of the dividend. The various steps in the 2006 transactions
reflected the intentions of the parties, and thus there was no
divergence between the parties agreement and the documents carrying
out the transactions.
The taxpayer appealed to the Quebec Court of Appeal. The Court
described the taxpayer's position as not invoking any error in
the lower court judgment but simply alleging that, if the
taxpayer's advisors had made a mistake, then the lower court
decision must be reversed on the basis of the Supreme Court of
Canada's decision in Quebec v. Services
Environnementaux AES Inc. (2013 SCC 65) ("AES")
(see our previous post on AES
The Court of Appeal stated that it understood the Supreme
Court's decision in AES to stand for the
proposition that parties who undertake legitimate corporate
transactions for the purpose of avoiding, deferring or minimizing
tax and who commit an error in carrying out such transactions may
correct the error(s) in order to achieve the tax results as
intended and agreed upon. The Court of Appeal cautioned that
AES does not sanction retroactive tax planning.
In the present case, the Court of Appeal held there was no
common intention regarding the "thin-cap" implications of
the dividend payment, and thus there was no agreement that should
be given effect by the courts.
The Court of Appeal held there was no error by the lower court
and dismissed the taxpayer's appeal.
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