On March 26, 2009, I was in the Federal Court of Appeal arguing the Taxpayer's case R. v. Gary Landrus. The case dealt with the question of the general anti-avoidance rule ("GAAR") and particularly whether or not the triggering of a terminal loss constituted a misuse or abuse of the terminal loss and CCA provisions of the Income Tax Act (Canada) (the "Act").
In Landrus, the Taxpayer was part of a larger group who were limited partners in two partnerships which acquired and owned separate residential condominium buildings in London, Ontario in the late 1980s. Not long after the buildings were acquired, there was a general downturn in the real estate market, and the value of the individual condominium units dropped substantially. In 1994 the partnerships were restructured. Each of the partnerships transferred its assets to a new limited partnership. The former partners became partners in the new limited partnership and were entitled to the benefits of the partnership which owned both buildings, not just one. Terminal losses were triggered in the partnerships, and the losses were allocated out to the investors. The CRA initially said that there was no change in beneficial ownership on the part of the investors, that subsection 85(5.1) of the Act should apply, and, alternatively, that the GAAR should apply. Following the filing of a notice of objection, the CRA proceeded only on the basis of the GAAR.
We were successful in the Tax Court of Canada on the basis that there was no misuse or abuse of the terminal loss provisions of the Act. The Tax Court said that the object, spirit and purpose of the terminal loss provisions and the provisions of the Act as a whole were to allow the deduction of losses. Further, the existence of a series of specific provisions which would deny the deduction of losses underscored the fact that Parliament intended to allow losses to be deducted in general.
The CRA appealed to the Federal Court of Appeal. In rendering its Judgment today, the Federal Court of Appeal endorsed the Judgment of the Tax Court. Of note is the following statement:
I agree with the appellant that the fact that specific anti-avoidance provisions can be demonstrated not to be applicable to a particular situation does not, in and of itself, indicate that the result was condoned by Parliament... However, where it can be shown that an anti-avoidance provision has been carefully crafted to include some situations and exclude others, it is reasonable to infer that Parliament chose to limit their scope accordingly.
As a consequence, the FCA held that the Tax Court Judge had properly determined the object, spirit and purpose of the terminal loss rules within the context of the capital cost allowance regime and the provisions of the Act as a whole.
The FCA went on to consider whether the Tax Court Judge properly held that the transactions were not a misuse or abuse of the terminal loss rules. The FCA rejected the Appellant's argument, which essentially said that the limited partners continued to have partnership property available to them after the disposition and thus should not be entitled to claim the terminal loss. As the FCA noted, the difficulty with the Appellant's position is that it sought to ignore the actual events, i.e. the fact that a real disposition occurred. Furthermore, the FCA held that if one looked to the overall result of the transactions, there was no frustration of the object, spirit and purpose of the terminal loss rules. The FCA stated as follows:
...When the respondent made his investment in Roseland II, it was in the expectation that the real estate market would improve over time. A significant downturn occurred resulting in an important decrease in the value of the two Roseland Buildings. At that juncture, it became clear that the buildings were under depreciated.
The amount of the terminal loss which resulted in the disposition of the buildings at fair market value reflects a real economic loss and the cost at which RPM acquired these assets (again fair market value) reflects their true economic value. It follows that any CCA claimed thereafter had to be computed by reference to that cost and any subsequent sale beyond this cost would be recaptured. I can detect no misuse or abuse in that result.
In our view, the Federal Court of Appeal was absolutely correct in this Judgment. We have said this very thing from the time that the matter was first audited.
It is hoped that the CRA will accept the loss and not take this case any further. It has 60 days to file an application for leave to appeal to the Supreme Court of Canada.
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