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GARR Case Comment: Collins & Aikman A More Stringent Test for Abusive Tax Avoidance Reaffirmed
In Collins & Aikman Products the appellant, a US resident corporation ("USCO"), realised a tax-exempt capital gain on the exchange of its shares in its wholly-owned subsidiary, Collins & Aikman Holdings Ltd. ("CAHL"), for a single share of a new Canadian holding company ("CanHoldco"). Through a series of transactions, this exchange indirectly resulted in an increase in the adjusted cost base ("ACB") and paid up capital ("PUC") in USCO's CAHL shares equal to the amount of the tax-exempt capital gain. USCO was then able to extract such amounts from its subsidiaries without paying any tax. Taxand Canada comment on the case and why it's an important ruling.
Collins & Aikman upheld a series of transactions that allowed shares of a non-resident corporation to be exchanged for the only share of a resident holding company. As a result, such share was deemed to have an ACB and PUC of $167 million, allowing the holding company to pay $104 million to its sole US shareholder on a tax-free basis.
This case confirms that the Minister cannot rely on a general policy against surplus striping in order to establish abusive tax avoidance under GAAR. The Tax Court has made clear that the Minister will generally have to reference permissible extrinsic aids in order to properly establish the purpose of a provision alleged to have been abused under GAAR. Finally, the Supreme Court of Canada's holding in Canada Trustco that alleged abuse under GAAR must be clear, with any doubts to be resolved in the taxpayer's favour, has been reaffirmed.
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