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The Supreme Court Speaks on GAAR
On 16 December 2011, the Supreme Court of Canada released its long anticipated decision in the case of Copthorne Holdings Ltd. v. The Queen. The reason that this decision was long anticipated is that it represents only the third time that the SCC has addressed the application of the so-called "general anti-avoidance rule" or "GAAR", found in section 245 of the Canadian Income Tax Act ("ITA"), since the GAAR was introduced into the ITA in 1988. Taxand Canada considers how the decision in this case may impact multinationals in Canada.
The Copthorne case revolved around the characterisation of a distribution by the taxpayer to its non-resident parent corporation. Briefly, the taxpayer contended that the distribution consisted of a non-taxable return of "paid-up capital", being, in general terms, the amount received by a corporation on the issuance of its shares. The Canada Revenue Agency took the position that the PUC in question had been created or preserved in a manner that constituted a misuse or abuse of the provisions of the ITA and that therefore, the GAAR should apply to re-characterise the distribution as a taxable dividend, not as a non-taxable return of PUC. In short, the SCC agreed with the CRA.
The facts of the case are extraordinarily complex, even for a tax planning case. In very general terms, the case involved two sets of transactions. One aspect of the decision of the SCC, an aspect of some considerable importance, is the determination of whether the two sets of transactions were part of one series of transactions. This was a threshold issue because, in the circumstances, the GAAR could only apply if this were the case.
Taxand Canada provides a full analysis of the case in the full article
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It is probably safe to say that the CRA won in Copthorne because it had really good facts. These facts presented to the Court a fairly clear case of duplication of PUC through the investment of funds down a corporate chain, and also allowed the Court to draw a fairly clear comparison between the elimination of that PUC on a simple transaction (the vertical amalgamation which could have been effected) versus the preservation of it on a more complicated transaction (the horizontal amalgamation that was effected) and the avoidance of subsection 87(3) as a result. However, the importance of Copthorne is not in what it tells us about PUC planning transactions, but what it tells us about the GAAR. As noted above, it is interesting to note the similarities between the reasons in Copthorne and OSFC Holdings. Hopefully those decisions, particularly the portions referred to above, will guide the courts (and the CRA?) in their future considerations of the application of the GAAR.