Copthorne Holdings Ltd. v. Minister of National Revenue, [2011] N.R. TBEd. DE.026

• Judge: McLachlin, C.J.C., Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell, JJ.
• Court: Supreme Court (Canada)
• Case Date: January 21, 2011
• Jurisdiction: Canada (Federal)
• Citations: [2011] N.R. TBEd. DE.026;2011 SCC 63

Copthorne Holdings Ltd. v. MNR (SCC) - Income tax - Tax avoidance

MLB being edited

Currently being edited for N.R. - judgment temporarily in rough form.

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

Temp. Cite: [2011] N.R. TBEd. DE.026

Copthorne Holdings Ltd. (appellant) v. Her Majesty the Queen (respondent)

(33283; 2011 SCC 63; 2011 CSC 63)

Indexed As: Copthorne Holdings Ltd. v. Minister of National Revenue

Supreme Court of Canada

McLachlin, C.J.C., Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell, JJ.

December 16, 2011.

Summary:

By a series of transactions, two corporations, a parent and subsidiary, became "sister" corporations owned directly by the same shareholder. The sister corporations were amalgamated (i.e., a "horizontal" amalgamation) such that the paid-up capital (PUC) of their respective shares was aggregated to form the PUC of the shares of the amalgamated corporation (Copthorne). Had they remained as parent and subsidiary (a "vertical" amalgamation), the PUC of the shares of both corporations would not have been aggregated. Rather the PUC of the shares of the subsidiary corporation which were owned by the parent would have been cancelled. The amalgamated corporation redeemed a large portion of its shares and paid out the aggregate PUC attributable to the redeemed shares to its non-resident shareholder. That payment was not treated as taxable income to the shareholder but instead as a return of capital; therefore no income tax was withheld. No provision of the Income Tax Act (ITA) expressly required the return of PUC in this case to be treated as a taxable payment . However, the Minister of National Revenue considered that the transactions which created the sister corporations circumvented certain provisions of the ITA in an abusive manner contrary to the general anti-avoidance rule (GAAR) (s. 245). Applying the GAAR, the Minister concluded that the PUC of the shares of the former subsidiary should have been cancelled upon amalgamation with its former parent corporation (ITA, s. 87(3)). If the PUC of the shares of the amalgamated corporation was reduced, the amount paid to the shareholder in excess of the reduced PUC would have constituted a deemed dividend subject to tax. The Minister reassessed the amalgamated corporation for unpaid withholding tax on the deemed dividend portion of the amount paid to the non-resident shareholder upon redemption and imposed a 10% penalty. Copthorne appealed.

The Tax Court of Canada, in case with neutral citation 2007 TCC 481, allowed the appeal in part. The Court upheld the application of the GAAR and the resulting tax assessment, but set aside the penalty. Copthorne appealed. The Minister did not appeal the setting aside of the penalty.

The Federal Court of Appeal, in a decision reported 382 N.R. 29, dismissed the appeal. The Tax Court's largely factual determination was not based on any palpable and overriding error. Copthorne appealed again.

The Supreme Court of Canada dismissed the appeal, holding that the transactions that took place in this case were properly assessed under the GAAR.

Income Tax - Topic 8710

Special taxes - Nonresident withholding tax - Dividends paid to nonresidents (incl. deemed dividends) - [See first Income Tax - Topic 9517 ].

Income Tax - Topic 9516

Tax evasion and tax avoidance - General principles - Avoidance - What constitutes - [See first Income Tax - Topic 9517 ].

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - By a series of transactions, two corporations, a parent and subsidiary, became "sister" corporations owned directly by the same shareholder - The sister corporations were amalgamated (i.e., a "horizontal" amalgamation) such that the paid-up capital (PUC) of their respective shares was aggregated to form the PUC of the shares of the amalgamated corporation - Had they remained as parent and subsidiary, the PUC of the shares of the subsidiary would have been cancelled on amalgamation - The amalgamated corporation thereafter redeemed a large portion of its shares and paid out the aggregate PUC attributable to the redeemed shares to its non-resident shareholder - That payment was not treated as taxable income to the shareholder but instead as a return of capital; therefore no income tax was withheld - No provision of the Income Tax Act (ITA) expressly required the return of PUC in this case to be treated as a taxable payment - However, the Minister of National Revenue considered that the transactions which created the sister corporations circumvented certain provisions of the ITA in an abusive manner contrary to the general anti-avoidance rule (GAAR) (s. 245) - Applying the GAAR, the Minister concluded that the PUC of the shares of the former subsidiary should have been cancelled upon amalgamation with its former parent corporation (ITA, s. 87(3)) - If the PUC of the shares of the amalgamated corporation was reduced, the amount paid to the shareholder in excess of the reduced PUC would have constituted a deemed dividend subject to tax - The Minister reassessed the amalgamated corporation for unpaid withholding tax on the deemed dividend portion of the amount paid to the non-resident shareholder upon redemption - The Supreme Court of Canada held that upon a textual, contextual and purposive interpretation of the relevant provisions of the ITA, the transactions that took place in this case were properly reassessed under the GAAR - See paragraphs 32 to 129.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - The Supreme Court of Canada stated that "It is relatively straightforward to set out the GAAR scheme. It is much more difficult to apply it. Where a transaction is an avoidance transaction (a transaction that would result in a tax benefit and whose primary purpose was to obtain the tax benefit), the tax benefit resulting from the transaction will be denied. However, the tax benefit will not be denied if the avoidance transaction would not result in an abuse or misuse of the Income Tax Act. The scheme is set out in ss. 245(1) to (5) of the Act." - See paragraph 32.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - The Supreme Court of Canada noted that per MNR v. Canada Trustco Mortgage Co. (SCC 2005) there were three questions to be decided in a GAAR analysis: 1. Was there a tax benefit?; 2. Was the transaction giving rise to the tax benefit an avoidance transaction? and 3. Was the avoidance transaction giving rise to the tax benefit abusive? - See paragraph 33.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - The Supreme Court of Canada noted that per MNR v. Canada Trustco Mortgage Co. (SCC 2005) the first question to be asked in a GAAR analysis was whether there was a tax benefit - The court stated that "As found in Trustco, the existence of a tax benefit can be established by comparison of the taxpayer's situation with an alternative arrangement (para. 20). If a comparison approach is used, the alternative arrangement must be one that 'might reasonably have been carried out but for the existence of the tax benefit' ... By considering what a corporation would have done if it did not stand to gain from the tax benefit, this test attempts to isolate the effect of the tax benefit from the non-tax purpose of the taxpayer" - See paragraph 35.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - The Supreme Court of Canada noted that per MNR v. Canada Trustco Mortgage Co. (SCC 2005) the second question to be asked in a GAAR analysis was whether the transaction giving rise to the tax benefit was an avoidance transaction - The court stated that "According to s. 245(3) of the [Income Tax] Act, a transaction will be an avoidance transaction if it results in a tax benefit, and is not undertaken primarily for a bona fide non-tax purpose. An avoidance transaction may operate alone to produce a tax benefit, or may operate as part of a series of transactions which produces a tax benefit. Where, as here, the Minister assumes that the tax benefit resulted from a series of transactions rather than a single transaction, it is necessary to determine if there was a series, which transactions make up the series, and whether the tax benefit resulted from the series. If there is a series that results, directly or indirectly, in a tax benefit, it will be caught by s. 245(3) unless each transaction within the series could 'reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain [a] tax benefit'. If any transaction within the series is not undertaken primarily for a bona fide non-tax purpose that transaction will be an avoidance transaction" - See paragraphs 39 and 40.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - The Supreme Court of Canada noted that per MNR v. Canada Trustco Mortgage Co. (SCC 2005) the second question to be asked in a GAAR analysis was whether the transaction giving rise to the tax benefit was an avoidance transaction - The court stated that an avoidance transaction may operate alone to produce a tax benefit, or may operate as part of a series of transactions which produces a tax benefit - The court stated that in applying this aspect of the GAAR rule, "The first consideration is whether there was a series that resulted in a tax benefit ... it will be necessary to consider when a transaction which is related to a common law series of transactions is part of a series of transactions as defined in s. 248(10) of the Income Tax Act. The second consideration is whether any of the transactions within the purported series is an avoidance transaction" - See paragraph 41 - The court elaborated on each of these considerations, including an interpretation of s. 248(10) - See paragraphs 42 to 64.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - Section 248(10) of the Income Tax Act provided that "For the purposes of this Act, where there is a reference to a series of transactions or events, the series shall be deemed to include any related transactions or events completed in contemplation of the series" - The Supreme Court of Canada interpreted this provision - The court rejected an argument that the s. 248(10) analysis was prospective only (i.e., s. 248(10) required the question of whether a transaction was related to be decided by determining whether a prior related transaction was completed in contemplation of a subsequent series, without considering, with the benefit of hindsight, whether the series had been contemplated when a subsequent transaction was completed - The court stated that "The text and context of s. 248(10) leave open when the contemplation of the series must take place. Nothing in the text specifies when the related transaction must be completed in relation to the series. Specifically, nothing suggests that the related transaction must be completed in contemplation of a subsequent series. The context of the provision is to expand the definition of a series which is an indication against a narrow interpretation" - The court noted that in MNR v. Canada Trustco Mortgage Co. (SCC 2005) it was explained that it is likely more consonant with the Parliamentary intention, to read s. 248(10) both prospectively and retrospectively (i.e., the language of s. 248(10) allowed either prospective or retrospective connection of a related transaction to a common law series) - See paragraphs 42 to 58.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - The Supreme Court of Canada noted that per MNR v. Canada Trustco Mortgage Co. (SCC 2005) the third question to be decided in a GAAR analysis, once it was found that there was a tax benefit and that the transaction giving rise to the tax benefit was an avoidance transaction, was whether the avoidance transaction giving rise to the tax benefit was abusive - The court discussed the procedure for determining whether a transaction was an abuse or misuse of the Income Tax Act - See paragraphs 65 to 73.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule (GAAR) - The Supreme Court of Canada stated that "The GAAR is a legal mechanism whereby Parliament has conferred on the court the unusual duty of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer. While the taxpayer's transactions will be in strict compliance with the text of the relevant provisions relied upon, they may not necessarily be in accord with their object, spirit or purpose. In such cases, the GAAR may be invoked by the Minister. The GAAR does create some uncertainty for taxpayers. Courts, however, must remember that s. 245 was enacted 'as a provision of last resort' ..." - See paragraph 66.

Income Tax - Topic 4206

Corporations and shareholders - Computation of paid-up capital on amalgamation - The Supreme Court of Canada discussed the provisions of the Income Tax Act dealing with the computation of paid-up capital (PUC) on amalgamation (especially s. 87(3)) - See paragraphs 85 to 123.

Income Tax - Topic 4206

Corporations and shareholders - Computation of paid-up capital on amalgamation - [See first Income Tax - Topic 9517 ].

Cases Noticed:

Minister of National Revenue v. Canada Trustco Mortgage Co., [2005] 2 S.C.R. 601; 340 N.R. 1; 2005 SCC 54, appld. [para. 22].

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. 43].

Minister of National Revenue v. MIL (Investments) S.A., [2006] 5 C.T.C. 2252; 2006 TCC 460, affd. [2006] N.R. Uned. 75; 2007 D.T.C. 5437; 2007 FCA 236, refd to. [para. 47].

Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1, refd to. [para. 49].

Fraser et al. v. Ontario (Attorney General) (2011), 415 N.R. 200; 275 O.A.C. 205; 2011 SCC 20, refd to. [para. 57].

Lipson v. Minister of National Revenue, [2009] 1 S.C.R. 3; 383 N.R. 47; 2009 SCC 1, refd to. [para. 70].

Minister of National Revenue v. Collins & Aikman Canada Inc., 2009 D.T.C. 1179; 2009 TCC 299, affd. [2011] 1 C.T.C. 250; 2010 FCA 251, refd to. [para. 95].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241; [1984] C.T.C. 294; 84 D.T.C. 6305, refd to. [para. 120].

Statutes Noticed:

Income Tax Act, Interpretation Bulletin IT-463R2, Paid-up Capital (September 8, 1995), para. 2 [para. 75].

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 84(3) [para. 83]; sect. 87(3) [para. 79]; sect. 89(1) [para. 74]; sect. 245 [para. 32, Appendix]; sect. 248(10) [para. 43, Appendix].

Interpretation Bulletin - see Income Tax Act, Interpretation Bulletins.

Authors and Works Noticed:

Cardarelli, Corrado, Transactions Involving Paid-Up Capital, in Report of Proceedings of the Fifty-Sixth Tax Conference (Canadian Tax Foundation, 2005), p. 26:20 [para. 116].

Dickerson, Robert W.V., Howard, John L., and Getz, Leon, Proposals for a New Business Corporations Law for Canada (Dickerson Report) (1971), vol. 1, para. 362 [para. 117].

Dickerson Report - see Dickerson, Robert W.V., Howard, John L., and Getz, Leon, Proposals for a New Business Corporations Law for Canada.

Duff, David G., The Supreme Court of Canada and the General Anti-Avoidance Rule: Canada Trustco and Mathew, in David G. Duff and Harry Erlichman (eds.), Tax Avoidance in Canada After Canada Trustco and Mathew (2007), pp. 26 and 27 [para. 52].

Duff, David, G., and Erlichman, Harry (eds.), Tax Avoidance in Canada After Canada Trustco and Mathew (2007), pp. 26 and 27 [para. 52].

Duff, David G., et al., Canadian Income Tax Law (3rd Ed. 2009), pp. 187 [para. 35]; 1109, 1110 [para. 106].

Hiltz, Michael, Section 245 of the Income Tax Act, in Report of Proceedings of the Fortieth Tax Conference (Canadian Tax Foundation, 1989), p. 7:6 [para. 50].

Krishna, Vern, The Fundamentals of Income Tax Law (2009), pp. 610 [para. 76]; 621 [paras. 75, 78]; 818 [para. 69].

McGuinness, Kevin Patrick, Canadian Business Corporations Law (2nd Ed. 2007), §7.231 [para. 76].

Counsel:

Richard W. Pound, Q.C., and Pierre-Louis Le Saunier, for the appellant;

Wendy Burnham, Deen Olsen and Eric Noble, for the respondent.

Solicitors of Record:

Stikeman Elliott, Montréal, Québec, for the appellant;

Attorney General of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard on January 21, 2011, before McLachlin, C.J.C., Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell, JJ., of the Supreme Court of Canada. The following decision was delivered for the court, in both official languages, by Rothstein, J., on December 16, 2011.