Current Tax Cases

1
Current Tax Cases

• Joseph Monaco, Simpson Wigle LLP
• June 1, 2006

2
Current Cases

• Univar Canada Ltd. v. Her Majesty the Queen 2005
  TCC 723 (TCC-Bell)
• Overs v. Her Majesty the Queen 2006 TCC 26
  (TCC-Bowman)
• Evans v. Her Majesty the Queen 2005 TCC 684
  (TCC-Little)
• Lipson v. Her Majesty the Queen 2006 TCC
  (TCC-Bowman)
• Desmaris v. Her Majesty the Queen 2006 TCC 44
  (Archambault)
• Stapley v. Her Majesty the Queen 2006 DTC 6075
  (FCA)

3
Univar Canada v. Her Majesty the Queen

• TCC Justice Bell
• GAAR Post SCC decision in Canada Trustco
• Background

Univar U.S.
U.S. Loan
Univar Europe
Univar Canada
Loan
Loan
Sweden
U.K.
4
Univar Canada v. Her Majesty the Queen

• U.S. Loan to Univar Europe with interest
• Reduce the tax cost on the interest earned from
  U.S. Loan
• Interest taxable to Univar U.S.

5
Univar Canada v. Her Majesty the Queen

Univar U.S.
Univar Canada 12M
25M
Bank Loan
37 M
Barbados Co IBC

• 37 M capitalise Barbados Co.
• IBC corporate tax rate 2.5

6
Univar Canada v. Her Majesty the Queen

Univar U.S,
Univar Canada
37 M
US Loan
Univar Barbados
Univar Europe

• 37M used by Univar Barbados to purchase the US
  Loan owed by
• Univar Europe
• Interest Income on U.S. Loan taxed at 2.5
• U.S. Loan Interest deemed to be active business
  income
• 95(2)(a)(ii) of ITA not FAPI

7
Univar Canada v. Her Majesty the Queen

• After tax income from Univar Barbados dividend to
  Univar Canada
• Univar Canada s. 113 dividend deduction not
  FAPI paid out of exempt surplus pools of Univar
  Barbados
• CRA GAAR Reassessment
• Recharacterized dividend income as interest
  income to Univar Canada

8
Univar Canada v. Her Majesty the Queen

• TCC SCC Canada Trustco requirements to permit
  the application of GAAR
• A tax benefit resulting from a transaction or
  part of a series of transaction (ss. 245(1) and
  (2))
• That the transaction is an avoidance transaction
  in the sense that it cannot be said to have been
  reasonable undertaken or arranged primarily for a
  bona fide purpose other than to obtain a tax
  benefit and
• That there was abusive tax avoidance in the sense
  that it cannot be reasonably concluded that a tax
  benefit would be consistent with the object,
  spirit or purpose of the provisions relied upon
  by the taxpayer.
• The burden is on the taxpayer to refute (1) and
  (2), and on the Minister to establish (3).
• If the existence of abusive tax avoidance is
  unclear, the benefit of the doubt goes to the
  taxpayer.

9
Univar v. Her Majesty the Queen

• Was there a tax benefit?
• CRA Univar companies had entered into a series
  of transactions which resulted in tax benefits to
  Univar Canada 25M borrowing, utilization of
  Barbados Co. payment of dividends
• T utilization of world assets, reduced U.S. tax
• CRA Univar Canada should have brought the U.S.
  loan directly accordingly taxed Univar Canada as
  if Univar Canada acquired the U.S. Loan
• TCC no tax benefit alternative approach was
  not an approach considered by the T
• GAAR does not apply

10
Overs v. Her Majesty the Queen

• O

100
Overs Inc.

• Overs Inc. loaned O 2,267,233 (Shareholders
  Loan)
• 15(2) of ITA otherwise applied
• O completed the following transactions before
  15(2)
• would otherwise apply

11
Overs v. Her Majesty the Queen

• O agreed to sell _at_15 of Overs Inc. to Os
  spouse (OS) for 2.3M
• OS borrowed from bank 2.3M
• Overs Inc. provided guarantee to bank
• Overs Inc. charged a guarantee fee to OS
• Overs Inc. pledged the 2.3M to the bank
• OS paid the 2.3M to O
• O repaid the Shareholder Loan owed to Overs Inc.
• Overs Inc. deposited the 2.3M in the bank
  pursuant to guarantee.

12
Overs v. Her Majesty the Queen

• Tax Consequences
• O in completing his return in the year of sale to
  OS did not elect out of the provisions of 73(1)
  of ITA
• OS paid interest to the bank and paid guarantee
  fee
• S.74.1 of the ITA any income or loss on the
  shares is attributable to O
• O deducted interest expense and guarantee fee
• Avoided subsection 15(2)

13
Overs v. Her Majesty the Queen

• CRA denied the loss deduction resulting from the
  application of 74.1
• to 0
• Applied GAAR
• TCC Justice Little
• Recited the SCC requirements set out in Canada
  Trustco
• Concluded that none of the steps involved in the
  series of transaction was an avoidance
  transaction
• CT held that each of the sections of the Act
  relied on in the planning was used for the very
  purpose for which it was included
• in the Act.
• Overs highlights that before a transaction can be
  seen as abusive for GAAR purposes, the CRA must
  establish that an avoidance transaction
  frustrates or defeats the purposes for which the
  Act confers a benefit

14
Evans v. Her Majesty the Queen

Dr. E
100
Dental Hygiene Co. (DHC)

• DHC declares a dividend satisfied by stock of
  Hi/Lo
• shares to Dr. E 487 non-voting Class B Shares
  
• redeemable/retractable for 1,000 a share
• Dr. E owns common shares and Class B Shares with
• a FMV of 487,000

15
Evans v. Her Majesty the Queen

ES
C1
C2
C3
P/N 487,000
LP
Dr. E
487,000 Class B Shares
OHC

• LP is formed with ES, C1, C2 and C3
• LP acquires from Dr. E 487 Class B Shares for
  487,000 LP p/n to
• Dr. E. for 487,000 with interest
• DHC paid dividends to LP funds used to pay
  interest and pay principal
• on P/N
• Pre-kiddie tax structure

16
Evans v. Her Majesty the Queen

• Dr. E on sale claimed 500,000 GGE s.110.6
• Dividends to LP minimal tax paid by ES and no
  tax by C1, C2 and C3
• No attribution 74.5 FMV and interest at the
  prescribed rate
• Converted corporate surplus of DHC to a tax free
  capital gain to Dr. E
• CRA applied GAAR re-characterized the series
  of transactions as a deemed dividend to Dr. E
• Dr. E argued legitimate form of estate planning
  or wealth transfer to his family specifically
  provided by the Act

17
Evans v. Her Majesty the Queen

• TCC
• Recited SCC requirements for GAAR Canada
  Trustco
• There was a tax benefit
• Avoidance transaction
• However Ct held no abuse of the provisions of the
  Act, since each of the sections of the Act was
  used by Dr. E. for the very purpose for which it
  was intended
• Ct held in order to uphold GAAR is to find that
  there is some overreaching principle of Canadian
  Tax Law that requires that corporate
  distributions to shareholders must be taxed as
  dividends this would ignore half a dozen
  specific provisions of the Act.

18
Demaris v. Her Majesty the Queen

6 arms length shareholders
D
A
D
15
85
50
50
B Co
A Co
Cash
No Cash
19
Demaris v. Her Majesty the Queen

D
D
A
Group 6
Holdco
5.2
85
9.8
B Co
A Co

• D incorporates Holdco and transfers 9.8 of Aco
  to Holdco
• Elects pursuant to s. 85 at FMV - 120,000 CGE
  shares of Holdco
• PUC of 120,000 84.1 n/a Holdco and Aco not
  connected lt 10
• D Transfers shares of BCo to Holdco pursuant to
  s85(1) elects at ACB

20
Demaris v. Her Majesty the Queen

• BCo pays a dividend to Holdco of 600,000
• Holdco reduces the 120,000 PUC on the shares D
  received on the transfer of ACo shares
• No taxable dividend to D as PUC 120K
• Capital Gain Strip of ACo value through BCos
  capital surplus
• CRA applied GAAR
• Deemed D to have received a taxable dividend of
  120,000

21
Demaris v. Her Majesty the Queen

• TCC
• Applied the principles of Canada Trustco
• Tax Benefit yes
• Avoidance transaction transfer to Holdco of
  only 9.8 of Aco was an avoidance transaction
  reasonably be considered to have been undertaken
  or arranged primarily for bona fide purposes
  other than to obtain the tax benefit
• Abusive tax avoidance not consistent with the
  object, spirit or purpose of subsection 84.1
• Decision at odds with Evans each section relied
  on was said to have been used for its intended
  purpose and according to its design and therefore
  there was no abuse of the Act.

22
Lipson v. Her Majesty the Queen

• Justice Bowman
• Series of transactions designed to convert
  non-deductible home mortgage interest payments
  into deductible interest payments
• Mr. Mrs. L agreed to purchase a home for 750 K
  in April 1994
• Mr. L

L Co
23
Lipson v. Her Majesty the Queen

• Mrs. L on Auugst 31, 1994 borrows 562,500 from
  bank P/N deemed interest bearing (Demand
  Loan)
• Mrs. L buys from Mr. L 21 of LCo for 562,500
• On September 1, 2004 mortgage (Mortgage Loan)
  the new house in the amount of 562,500 pay off
  Mrs. L Demand Loan
• On sale of LCo shares Mr. L did not elect out
  of 73(1) of ITA
• 74.1(1) and 74.1(2) accordingly applied
• Mortgage Loan repaid the Demand Loan 20(1)(c)
  interest expense
• Mr. L. application of 74.1(1) interest expense
  deduction on Mortgage Loan

24
Lipson v. Her Majesty the Queen

• CRA applied GAAR denied the interest expense
  deduction claimed by Mr. L
• TCC
• T agreed tax benefit
• T agreed avoidance transaction
• The transactions constitute an abuse or misuse of
  the Act?

25
Lipson v. Her Majesty the Queen

• TCC GAAR applies
• Evans Overs sections of the Act were utilized
  for their intended purpose
• Evans and Overs some underpinning of
  commerciality or estate planning
• Held 73(1) and 74.1 were misused the purpose of
  transaction was to deduct interest that was not
  otherwise deductible under the Act
• Abusive tax avoidance requires the exercise of
  judgment not mechanical process nor is it
  either a discretionary or a subjective
  determination

26
Stapley v. Her Majesty the Queen

• TCC informal decision
• T self employed real estate agent
• 2000, 2001 and 2002 taxation years T paid the
  amounts of 20,125, 14,208 and 19,145 for food
  and beverages for human consumption or
  entertainment
• T did not consume any food in question or attend
  any entertainment with the clients
• T provided vouchers or tickets which clients used
  as they saw fit

27
Stapley v. Her Majesty the Queen

• CRA reassess apply s. 67.1(1) (50 rule)
• T argued incurred an expense for the purpose of
  providing income from his business s.9
• Does s.67.1(1) apply?
• TCC held no T did not purchase food for
  entertainment he purchased a form of discount
  for the purpose of earning income
• CT ignored opening words of s. 67.1(1) For the
  purposes of the Act

28
Stapley v. Her Majesty the Queen

• FCA reversed the IP decision of TCC
• FCA held 67.1(1) no requirement that the
  particular taxpayer must consume or enjoy the
  goods in issue for the provision to apply
• FCA held that notwithstanding that meals and
  entertainment expenses are deductible under s.9
  of the ITA still caught by 67.1 of the Act