Canada: Corporate Reorganization Not GAARable

Last Updated: July 8 2009
Article by BLG's National Tax Group

Most Read Contributor in Canada, September 2016

On June 3rd, 2009, the Tax Court found in favour of the taxpayer in Collins & Aikman Products Co. et al v. The Queen.

The taxpayer, Collins & Aikman Products Co. (Products), was a U.S. multinational car parts manufacturer with significant Canadian operations. Products appeal was heard on common evidence with the appeals of its Canadian affiliates, Collins & Aikman Canada Inc. (Canada) and Collins & Aikman Holdings Canada Inc. (Holdings).

In late 1993 and early 1994, Products reorganized, through a series of transactions, its Canadian business operations. Following the reorganization, Products owned all of the shares of Holdings which in turn owned all of the shares of Canada. Thereafter, Canada paid dividends to Holdings and Holdings reduced its stated capital and repaid capital to Products. As Holdings did not have a bank account, funds were, in each case, distributed electronically from Canada, as agent for Holdings, directly to Products bank account.

In issuing its assessments, the Minister did not directly recharacterize the tax consequences of the impugned transactions, but instead reduced the paid-up capital and the adjusted cost base of Products in its shares in Holdings and also made similar reductions in the paid-up capital and adjusted cost basis of Holdings in Canada in determinations made under subsection 152(1.11) of the Income Tax Act (Act). The Minister, then, assessed Products for Canadian non-resident withholding tax on deemed dividends from Holdings. Holdings and Canada were assessed for not withholding and remitting Part XIII tax.

The issue before the Tax Court was whether the general anti-avoidance rule (GAAR) applied to the reorganization of the corporate structure of the Collins & Aikman group. The taxpayers conceded that the transactions resulted in a tax benefit and further conceded that the transactions were part of a series of transactions which amounted to tax avoidance. The only issue which the Tax Court was asked to address was whether the corporate reorganization and subsequent recapitalization resulted directly or indirectly in a misuse or abuse of the provisions of the Canadian taxing legislation as described in subsection 245(4) of the Act.

The Tax Court rejected the Crown's premise that all corporate distributions are to be taxed as income under the Act unless an exception is available as "not anchored in the Act but in an unstated and unsupported premise". The result of the transactions carried out by the taxpayers was to create paid up capital and adjusted cost base in the shares held by Products in Holdings of $167 million (a significant increase over the $425,000 which Products had in the non-resident holding company for its Canadian operations before the reorganization). The taxpayers acknowledged that the reorganization was done to permit tax-free returns of capital in future. The Tax Court found that the preconditions for a determination of abusive tax avoidance require the Crown to demonstrate misuse or abuse by a taxpayer in its series of transactions which frustrates or defeats the object, spirit or purpose of provisions of the Act. Applying a textual, contextual and purposive approach to subsection 84(4) of the Act, the Tax Court was unable to find that any of the results of the reorganization were inappropriate or abusive. "Each of the steps of the reorganization was appropriate and I do not find any of the steps to be abusive". In finding for the taxpayers, the Tax Court adopted the approach of the Canadian courts in previous decisions, in cautioning that "determining the purpose of... provisions or portions of the Act is not to be confused with abstract views of what is right and what is wrong nor with arbitrary theories about what the law ought to be or ought to do". The GAAR is not to be used to fill in "what [the Minister] perceives to be a possible gap left by Parliament".

The Collins & Aikman case affords an interesting counterpoint to the recent decision in Capthorne Holdings Ltd. v. The Queen where the taxpayer was less fortunate in successfully increasing capital on an amalgamation of two Canadian corporations and later returning that capital to its non-resident shareholder.

To view the full text of the decision, click here.

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