Federal Court Of Appeal Reaffirms That Tax Efficiency Alone Does Not Equate To Abuse Under GAAR: Canada v. Quebecor Inc., 2025 FCA 207

Introduction: GAAR is not a licence to infer limits Parliament did not enact — Federal Court of Appeal in Quebecor.

In Canada v. Quebecor Inc., the Federal Court of Appeal (FCA) affirmed the Tax Court of Canada's decision that a complex series of intra-group transactions undertaken by Quebecor Inc. did not constitute abusive tax avoidance under the General Anti-Avoidance Rule (GAAR) in section 245 of the Income Tax Act (ITA). The case addresses a recurring tension in Canadian tax law: the boundary between legitimate tax planning—particularly loss consolidation within corporate groups—and abusive manipulation of statutory schemes. By rejecting the appeal by the Canadian tax litigation lawyers of CRA, the FCA reinforced a restrained, textually grounded approach to GAAR and clarified that courts should not infer anti-duplication or "matching" principles absent clear legislative intent.

Facts and Procedural History in Canada v. Quebecor Inc.

Quebecor Inc. indirectly controlled 3662527 Canada Inc. ("366"). Quebecor held shares in Abitibi Consolidated Inc. with a very low adjusted cost base (ACB) and high fair market value, meaning their disposition would trigger a substantial capital gain. Conversely, 366 held shares in Videotron Telecom Ltd. with a high ACB but depressed value, creating a large unrealized capital loss.

Through a carefully structured series of transactions—including a section 85 rollover, share redemptions, intercorporate dividends, and a taxable winding-up of 366—Quebecor effectively increased the ACB of its Abitibi shares while 366 realized and used its capital loss to offset a capital gain arising within its final taxation year. When Quebecor later disposed of the Abitibi shares, it claimed significant capital losses.

The CRA reassessed under GAAR, reducing the ACB of the Abitibi shares back to nominal value and denying the losses. The Tax Court allowed Quebecor's appeal, finding that although the transactions produced a tax benefit and involved avoidance transactions, the CRA had failed to establish abusive tax avoidance. The CRA appealed to the FCA.

Issue and Standard of Review in Canada v. Quebecor Inc.

Because Quebecor conceded the existence of a tax benefit and avoidance transactions, the sole issue before the FCA was whether the series of transactions constituted abusive tax avoidance. Consistent with Canada Trustco and Deans Knight, the FCA applied a correctness standard to the identification of the object, spirit, and purpose of the relevant provisions, and a palpable and overriding error standard to the application of those purposes to the facts.

Decision of the Federal Court of Appeal in Canada v. Quebecor Inc.

The FCA dismissed the CRA'sappeal. Justice Goyette, writing for a unanimous panel, held that the CRA had not discharged its burden of demonstrating that the transactions frustrated the object, spirit, or purpose of either (1) the capital gains and losses regime or (2) the statutory scheme governing corporate windings-up. Accordingly, GAAR did not apply.

Analysis of the Federal Court of Appeal's Decision in Canada v. Quebecor Inc.

(1) No Abuse of the Winding-Up Scheme

The CRA's primary argument was that the ITA implicitly recognizes only a single economic loss on a winding-up, and that Quebecor's transactions improperly generated "two losses" in respect of the same underlying economic decline—one at the subsidiary level and another at the shareholder level. The FCA firmly rejected this premise.

Relying on Produits Forestiers Donohue Inc., the Court emphasized that Canadian tax law respects the separate legal personality of corporations. Gains or losses realized by a corporation on its assets are distinct from gains or losses realized by shareholders on their shares. Unless Parliament expressly legislates otherwise, courts cannot collapse these layers through an implied matching principle.

The Court further noted that the CRA's own examples conceded that a subsidiary may, in certain circumstances, realize and use a loss during its final taxation year on a taxable winding-up. That was precisely what occurred here. Section 69(5)(d) expressly excludes taxable windings-up from the stop-loss rule in subsection 40(3.4), allowing losses to be realized even when property remains within the affiliated group. The FCA declined to treat this outcome as abusive merely because it was tax-efficient.

(2) No Abuse of the Capital Gains and Losses Regime

The Crown also argued that Quebecor artificially inflated the ACB of its Abitibi shares using untaxed amounts, thereby undermining the integrity of the capital gains system. The FCA rejected this characterization. The increase in ACB arose from transactions expressly contemplated by the Act, including a taxable dividend (albeit deductible as an intercorporate dividend) and a fair-market-value exchange of a demand note for shares.

Critically, the Court rejected the notion that deductibility equates to non-taxation. The Act's treatment of intercorporate dividends reflects a deliberate policy choice to defer tax within corporate groups, not to prohibit downstream tax planning. Absent evidence that Parliament intended to prevent such ACB adjustments, the CRA's argument failed at the purposive stage of GAAR analysis.

(3) Loss Consolidation and GAAR Restraint

Perhaps the most significant aspect of the decision is the FCA's explicit recognition that loss consolidation among related corporations is generally not abusive. Drawing on Department of Finance explanatory notes and the Supreme Court's reasoning in Deans Knight, the Court observed that Parliament has repeatedly tolerated, and sometimes facilitated, intra-group loss transfers. GAAR is not a general anti-loss-consolidation rule.

Importantly, the FCA also highlighted a strategic weakness in the Crown's case: although the transactions clearly avoided the application of the stop-loss rule, the Crown expressly disclaimed any argument that this avoidance was abusive. Having failed to identify a specific statutory purpose that was frustrated, the Crown could not rely on a generalized sense of unfairness to invoke GAAR.

Significance of the Decision of the Federal Court of Appeal in Canada v. Quebecor Inc.

Quebecor reinforces a disciplined approach to GAAR that resists outcome-based reasoning. The decision confirms that courts will not infer overarching anti-avoidance principles—such as loss matching or economic equivalence—without clear textual or purposive grounding. For taxpayers, the case provides renewed certainty that sophisticated but technically compliant loss-consolidation strategies will not be struck down absent demonstrable abuse. For the CRA, it underscores the evidentiary and analytical burden required to succeed under GAAR, particularly in complex corporate reorganizations.

Conclusion: Legislative fidelity, not judicial discomfort, governs GAAR.

The FCA's decision in Canada v. Quebecor Inc. is a strong affirmation of GAAR as a targeted, exceptional rule rather than a broad licence for courts to police aggressive tax planning. By insisting on careful identification of legislative purpose and rejecting implied anti-duplication principles, the Court preserved both statutory coherence and taxpayer certainty. While the result may be viewed as generous to corporate planners, it ultimately reflects fidelity to Parliament's chosen legislative framework rather than judicial tolerance of abuse.

Pro Tax Tips: Structuring transactions to align with each relied-upon provision limits GAAR risk.

Before undertaking complex tax planning, taxpayers should consult with a knowledgeable Canadian tax lawyer to analyze potential GAAR exposure provision-by-provision, rather than assuming that an overall "aggressive" result will attract GAAR. Canada v. Quebecor Inc. demonstrates that the CRA must precisely identify which provisions are misused or abused and why. If no clear object, spirit, or purpose is frustrated, GAAR will fail. Taxpayers should therefore structure transactions so that each relied-upon provision operates exactly as intended, leaving the CRA without a coherent abuse narrative to advance.

Frequently Asked Questions (FAQs):

When are corporations considered 'affiliated' under the Income Tax Act?

Under section 251.1 of the Income Tax Act, corporations are considered affiliated where one controls the other, or where both are controlled by the same person, group of persons, or by persons who are themselves affiliated. Control for these purposes includes direct or indirect control in any manner whatever, and affiliation may arise through individual, group, or spousal relationships, not solely through direct voting ownership.

When are corporations considered 'related' under the Income Tax Act?

Corporations are related under subsection 251(2)(b) of the Income Tax Act where any of the following applies:

All affiliated corporations are related; however, not all related corporations are affiliated.

What is Intercorporate Dividend Deduction?

The rule is found in Section 112(1) of the Income Tax Act. It provides that a taxable Canadian corporation may deduct from its income a taxable dividend received from another taxable Canadian corporation. In practical terms, the dividend is included in income, and it is then fully deducted under s. 112(1). This results in no corporate-level tax on that dividend. The intercorporate dividend deduction exists to prevent multiple layers of corporate taxation on the same underlying corporate earnings. Corporate tax is meant to be single-level within a corporate group, with final tax imposed when profits reach individuals or non-residents.

What are the conditions for the general anti-avoidance rule to apply?

The general anti-avoidance rule (GAAR) applies only if all of the following conditions are satisfied:

1. A tax benefit arises from the transaction (or series of transactions);
2. The transaction is an avoidance transaction (tax benefit is a main purpose);
3. The transaction results in a misuse or abuse of the Act (or related instruments);
4. Lack of economic substance strongly indicates misuse or abuse; and
5. The denial of the benefit is reasonable in the circumstances.

If any of these conditions fail, the GAAR does not apply.

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.