Canada Safeway Ltd. v. Alberta, 2012 ABCA 232

• Judge: Hunt, Berger and Bielby, JJ.A.
• Court: Court of Appeal (Alberta)
• Case Date: May 08, 2012
• Citations: 2012 ABCA 232;(2012), 536 A.R. 6

Can. Safeway Ltd. v. Alta. (2012), 536 A.R. 6; 559 W.A.C. 6 (CA)

MLB headnote and full text

Temp. Cite: [2012] A.R. TBEd. JL.119

Canada Safeway Limited (respondent/appellant) v. Her Majesty the Queen in Right of Alberta (appellant/respondent)

(1101-0160-AC; 2012 ABCA 232)

Indexed As: Canada Safeway Ltd. v. Alberta

Alberta Court of Appeal

Hunt, Berger and Bielby, JJ.A.

July 30, 2012.

Summary:

Two taxpayers, members of the Safeway group of companies, appealed re-assessments by the Alberta Minister of Finance and Enterprise. The issue was whether certain transactions that were part of a sophisticated tax plan were part of a legitimate tax minimization scheme or abusive tax avoidance.

The Alberta Court of Queen's Bench, in a decision reported at 518 A.R. 344, allowed the appeals and vacated the assessments. There was no abusive tax avoidance under Alberta's general anti-avoidance rule (Alberta Corporate Tax Act, s. 72.1). Alberta appealed.

The Alberta Court of Appeal dismissed the appeal.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - In 2001, Canada Safeway Ltd. (CSL) and related companies (the Safeway Group) put into place a plan that would allow them to minimize tax payable by CSL - The plan called for CSL to replace retained earnings with monies borrowed from another Safeway Group corporation, enabling CSL to claim a deduction for the interest expense on the borrowed funds - To bring the plan into effect, the Safeway Group incorporated Canada Safeway Holdings Ltd. (CSHL) - Between November 20, 2001 and December 20, 2001, CSL distributed an aggregate of $600 million in dividends to CSHL - On the same day, CSL borrowed an aggregate of $600 million from CSHL under deeds of specialty debt (the deeds) (collectively, the borrowings) - The borrowings created a legal obligation for CSL to pay interest to CSHL - The money from the borrowings was used to repay commercial paper that CSL had used for the purpose of earning income from its business - In December 2001, Safeway Ontario Finance Corporation (SOFC) was incorporated under the laws of the British Virgin Islands - However, SOFC had a permanent establishment in Ontario and was resident in Canada - Effective December 2001, CSHL acquired shares in SOFC, and in consideration assigned the deeds to SOFC - SOFC thus became the legal beneficial owner of the deeds, and interest on the deeds became payable to SOFC - As a corporation incorporated under the laws of a jurisdiction outside Canada but with a permanent establishment in Ontario, SOFC was not required to pay tax on interest income by virtue of s. 37(1) of the Ontario Corporations Tax Act - From the time CSL borrowed the $600 million in 2001 to the time the borrowings were repaid in 2005, CSL incurred an interest expense on the principal amounts borrowed totalling approximately $173,000,000 - All of the interest required to be paid on the deeds was paid by CSL, initially to CSHL and later to SOFC - The Alberta Minister of Finance and Enterprise re-assessed the taxation years 2002, 2004 and 2005 (the appeal years) - The total interest paid to SOFC and deducted by CSL for the appeal years was $132,812,876 - CSL appealed - The Safeway Group conceded that, insofar as CSL was concerned, the transaction in issue resulted in a tax benefit and was an avoidance transaction - The sole issue was therefore whether there was abusive tax avoidance - The Queen's Bench judge allowed the appeal and vacated the assessments - There was no abusive tax avoidance under Alberta's general anti-avoidance rule (Alberta Corporate Tax Act, s. 72.1) - Alberta appealed, asserting that the judge erred in failing to determine that the Plan was an avoidance transaction, as was each step in the series of transactions - Alberta based this claim on three main arguments: (1) the judge conflated her analysis by linking the analysis of tax benefit to the determination of whether there was an avoidance transaction; (2) the judge failed to determine that each step in the series was an avoidance transaction because the series itself was tax-motivated; and (3) the evidence showed that each step in the series was to give effect to the Plan - The Alberta Court of Appeal dismissed the appeal - There was no merit to Alberta's arguments - See paragraphs 24 to 30.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - In 2001, Canada Safeway Ltd. (CSL) and related companies (the Safeway Group) put into place a plan that would allow them to minimize tax payable by CSL - The plan called for CSL to replace retained earnings with monies borrowed from another Safeway Group corporation, enabling CSL to claim a deduction for the interest expense on the borrowed funds - To bring the plan into effect, the Safeway Group incorporated Canada Safeway Holdings Ltd. (CSHL) - Between November 20, 2001 and December 20, 2001, CSL distributed an aggregate of $600 million in dividends to CSHL - On the same day, CSL borrowed an aggregate of $600 million from CSHL under deeds of specialty debt (the deeds) (collectively, the borrowings) - The borrowings created a legal obligation for CSL to pay interest to CSHL - The money from the borrowings was used to repay commercial paper that CSL had used for the purpose of earning income from its business - In December 2001, Safeway Ontario Finance Corporation (SOFC) was incorporated under the laws of the British Virgin Islands - However, SOFC had a permanent establishment in Ontario and was resident in Canada - Effective December 2001, CSHL acquired shares in SOFC, and in consideration assigned the deeds to SOFC - SOFC thus became the legal beneficial owner of the deeds, and interest on the deeds became payable to SOFC - As a corporation incorporated under the laws of a jurisdiction outside Canada but with a permanent establishment in Ontario, SOFC was not required to pay tax on interest income by virtue of s. 37(1) of the Ontario Corporations Tax Act - From the time CSL borrowed the $600 million in 2001 to the time the borrowings were repaid in 2005, CSL incurred an interest expense on the principal amounts borrowed totalling approximately $173,000,000 - All of the interest required to be paid on the deeds was paid by CSL, initially to CSHL and later to SOFC - The Alberta Minister of Finance and Enterprise re-assessed the taxation years 2002, 2004 and 2005 (the appeal years) - The total interest paid to SOFC and deducted by CSL for the appeal years was $132,812,876 - CSL appealed - The Safeway Group conceded that, insofar as CSL was concerned, the transaction in issue resulted in a tax benefit and was an avoidance transaction - The sole issue was therefore whether there was abusive tax avoidance - The Queen's Bench judge allowed the appeal and vacated the assessments - There was no abusive tax avoidance under Alberta's general anti-avoidance rule (Alberta Corporate Tax Act, s. 72.1) - Alberta appealed, asserting that the judge applied the wrong test and as a result wrongly concluded that there was no abusive tax avoidance - The Alberta Court of Appeal dismissed the appeal - The judge's reasons amply demonstrated her understanding that she had to look at the series of transactions in determining whether there was abuse - See paragraphs 31 to 36.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - In 2001, Canada Safeway Ltd. (CSL) and related companies (the Safeway Group) put into place a plan that would allow them to minimize tax payable by CSL - The plan called for CSL to replace retained earnings with monies borrowed from another Safeway Group corporation, enabling CSL to claim a deduction for the interest expense on the borrowed funds - To bring the plan into effect, the Safeway Group incorporated Canada Safeway Holdings Ltd. (CSHL) - Between November 20, 2001 and December 20, 2001, CSL distributed an aggregate of $600 million in dividends to CSHL - On the same day, CSL borrowed an aggregate of $600 million from CSHL under deeds of specialty debt (the deeds) (collectively, the borrowings) - The borrowings created a legal obligation for CSL to pay interest to CSHL - The money from the borrowings was used to repay commercial paper that CSL had used for the purpose of earning income from its business - In December 2001, Safeway Ontario Finance Corporation (SOFC) was incorporated under the laws of the British Virgin Islands - However, SOFC had a permanent establishment in Ontario and was resident in Canada - Effective December 2001, CSHL acquired shares in SOFC, and in consideration assigned the deeds to SOFC - SOFC thus became the legal beneficial owner of the deeds, and interest on the deeds became payable to SOFC - As a corporation incorporated under the laws of a jurisdiction outside Canada but with a permanent establishment in Ontario, SOFC was not required to pay tax on interest income by virtue of s. 37(1) of the Ontario Corporations Tax Act - From the time CSL borrowed the $600 million in 2001 to the time the borrowings were repaid in 2005, CSL incurred an interest expense on the principal amounts borrowed totalling approximately $173,000,000 - All of the interest required to be paid on the deeds was paid by CSL, initially to CSHL and later to SOFC - The Alberta Minister of Finance and Enterprise re-assessed the taxation years 2002, 2004 and 2005 (the appeal years) - The total interest paid to SOFC and deducted by CSL for the appeal years was $132,812,876 - CSL appealed - The Safeway Group conceded that, insofar as CSL was concerned, the transaction in issue resulted in a tax benefit and was an avoidance transaction - The sole issue was therefore whether there was abusive tax avoidance - The Queen's Bench judge allowed the appeal and vacated the assessments - There was no abusive tax avoidance under Alberta's general anti-avoidance rule (Alberta Corporate Tax Act, s. 72.1) - Alberta appealed, asserting that the judge misunderstood the purpose of s. 20(1)(c) of the Income Tax Act - Section 20(1)(c)'s purpose "is to 'create an incentive to accumulate capital with the potential to produce income'... or to 'encourage the accumulation of capital which would produce taxable income' ..." - The Alberta Court of Appeal dismissed the appeal - Alberta's attack was on the judge's application of that purpose to the facts she found - There was no palpable and overriding error - See paragraphs 37 to 42.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - In 2001, Canada Safeway Ltd. (CSL) and related companies (the Safeway Group) put into place a plan that would allow them to minimize tax payable by CSL - The plan called for CSL to replace retained earnings with monies borrowed from another Safeway Group corporation, enabling CSL to claim a deduction for the interest expense on the borrowed funds - To bring the plan into effect, the Safeway Group incorporated Canada Safeway Holdings Ltd. (CSHL) - Between November 20, 2001 and December 20, 2001, CSL distributed an aggregate of $600 million in dividends to CSHL - On the same day, CSL borrowed an aggregate of $600 million from CSHL under deeds of specialty debt (the deeds) (collectively, the borrowings) - The borrowings created a legal obligation for CSL to pay interest to CSHL - The money from the borrowings was used to repay commercial paper that CSL had used for the purpose of earning income from its business - In December 2001, Safeway Ontario Finance Corporation (SOFC) was incorporated under the laws of the British Virgin Islands - However, SOFC had a permanent establishment in Ontario and was resident in Canada - Effective December 2001, CSHL acquired shares in SOFC, and in consideration assigned the deeds to SOFC - SOFC thus became the legal beneficial owner of the deeds, and interest on the deeds became payable to SOFC - As a corporation incorporated under the laws of a jurisdiction outside Canada but with a permanent establishment in Ontario, SOFC was not required to pay tax on interest income by virtue of s. 37(1) of the Ontario Corporations Tax Act - From the time CSL borrowed the $600 million in 2001 to the time the borrowings were repaid in 2005, CSL incurred an interest expense on the principal amounts borrowed totalling approximately $173,000,000 - All of the interest required to be paid on the deeds was paid by CSL, initially to CSHL and later to SOFC - The Alberta Minister of Finance and Enterprise re-assessed the taxation years 2002, 2004 and 2005 (the appeal years) - The total interest paid to SOFC and deducted by CSL for the appeal years was $132,812,876 - CSL appealed - The Safeway Group conceded that, insofar as CSL was concerned, the transaction in issue resulted in a tax benefit and was an avoidance transaction - The sole issue was therefore whether there was abusive tax avoidance - The Queen's Bench judge allowed the appeal and vacated the assessments - There was no abusive tax avoidance under Alberta's general anti-avoidance rule (Alberta Corporate Tax Act, s. 72.1) - Alberta appealed, asserting that the judge mis-stated the purpose of s. 112(2) of the Income Tax Act - Alberta argued it was abusive to claim the inter-corporate dividend deduction because there was no double taxation if the "payer of the dividend was statutorily exempt from provincial income taxation on the underlying income from which the dividend was paid" - Since there was no Ontario tax payable on the underlying income, said Alberta, there could be no double taxation so claiming the dividend deduction frustrated the purpose of s. 112(1) - The Alberta Court of Appeal dismissed the appeal - See paragraphs 43 to 51.

Cases Noticed:

Minister of National Revenue v. Canada Trustco Mortgage Co., [2005] 2 S.C.R. 601; 340 N.R. 1; 2005 SCC 54, refd to. [para. 10].

Lipson v. Minister of National Revenue (2009), 383 N.R. 47; 2009 SCC 1, refd to. [para. 12].

Ludco Enterprises Ltd. et al. v. Ministre du Revenu national, [2001] 2 S.C.R. 1082; 275 N.R. 90; 2001 SCC 62, refd to. [para. 12].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, refd to. [para. 12].

Singleton v. Minister of National Revenue, [2001] 2 S.C.R. 1046; 275 N.R. 133; 2001 SCC 61, affing. [1999] 4 F.C. 484; 243 N.R. 110 (F.C.A.), refd to. [para. 12].

Copthorne Holdings Ltd. v. Minister of National Revenue, [2011] 3 S.C.R. 721; 424 N.R. 132; 2011 SCC 63, refd to. [para. 22].

Mathew v. Canada - see Kaulius et al. v. Minister of National Revenue.

Kaulius et al. v. Minister of National Revenue, [2005] 2 S.C.R. 643; 339 N.R. 323; 2005 SCC 55, refd to. [para. 23].

OSFC Holdings Ltd. v. Minister of National Revenue, [2002] 2 F.C. 288; 275 N.R. 238; 2001 FCA 260 (F.C.A.), refd to. [para. 29].

Novopharm Ltd. v. Minister of National Revenue (2003), 301 N.R. 275; 57 D.T.C. 5195; 2003 FCA 112, dist. [para. 41].

Lamont Management Ltd. v. Minister of National Revenue, [2000] 3 F.C. 508; 254 N.R. 174 (F.C.A.), refd to. [para. 43].

Minister of National Revenue v. Trans-Canada Investment Corp., [1956] S.C.R. 49; [1955] 5 D.L.R. 576, refd to. [para. 43].

Minister of National Revenue v. MIL (Investments) S.A., [2007] N.R. Uned. 75; 2007 D.T.C. 5437; 2007 FCA 236, refd to. [para. 46].

Canada v. Antosko, [1994] 2 S.C.R. 312; 168 N.R. 16, refd to. [para. 51].

RCI Environnement Inc. v. Minister of National Revenue (2008), 388 N.R. 141; 2008 FCA 419, refd to. [para. 51].

OGT Holdings Ltd. v. Quebec, 2009 D.T.C. 5048; 2009 QCCA 191, refd to. [para. 52].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 20(1), sect. 112(1) [para. 7].

Authors and Works Noticed:

Carvalho, Robert, and Clarke, Tim, Current Cases 2008-2009 (2009 British Columbia Tax Conference), generally [para. 53].

Morris, Ryan L., and Etcovitch, Andrew, Current Cases, (2009), 57:2 Can. Tax. J. 307, generally [para. 53].

Post-Lipson GAAR Cases, Tax Topics No 1944, generally [para. 53].

Takhmizdjian, Joseph H., Quebec Court of Appeal Applies the GAAR (BLG Tax Law Bulletin, February 2009), generally [para. 53].

Counsel:

J. Bernier, J.R. Owen and A.D. Grosse, for the respondent;

M.E. Burns, for the appellant.

This appeal was heard on May 8, 2012, by Hunt, Berger and Bielby, JJ.A., of the Alberta Court of Appeal. The following reasons for judgment reserved of the Court of Appeal were delivered by Hunt, J.A., on July 30, 2012.