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)
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
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
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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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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