Inter-Leasing Inc. v. Ontario (Minister of Revenue), 2014 ONCA 575

• Judge: Weiler, Hourigan and Pardu, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: May 13, 2014
• Jurisdiction: Ontario
• Citations: 2014 ONCA 575;(2014), 322 O.A.C. 293 (CA)

Inter-Leasing Inc. v. Ont. (2014), 322 O.A.C. 293 (CA)

MLB headnote and full text

Temp. Cite: [2014] O.A.C. TBEd. AU.005

In The Matter Of the Corporations Tax Act, R.S.O. 1990, c. 40, as amended

Inter-Leasing, Inc. (appellant/appellant) v. Ontario (The Minister of Revenue) (respondent/respondent)

(C57387; 2014 ONCA 575)

Indexed As: Inter-Leasing Inc. v. Ontario (Minister of Revenue)

Ontario Court of Appeal

Weiler, Hourigan and Pardu, JJ.A.

August 7, 2014.

Summary:

Inter-Leasing Inc. appealed a series of tax reassessments issued to it by the Minister of Revenue pursuant to s. 2(2) of Ontario's Corporations Tax Act. Under the tax reassessments, Inter-Leasing was obliged to pay tax on interest payments it received on specialty debt instruments during its 2001 to 2004 taxation years. Inter-Leasing contended that its interest income was income from property, not from business, and therefore not subject to corporate income tax.

The Ontario Superior Court, in a decision reported at [2013] O.T.C. Uned. 2917, held that the Minister's reassessment was correct. The interest income was "income from a business carried on in Canada". Inter-Leasing appealed. The Minister raised two subsidiary issues: (1) whether Inter-Leasing was liable to pay corporate income tax in any event pursuant to the General Anti-Avoidance Rule (GAAR); and (2) whether Inter-Leasing was liable for the corporate minimum tax (CMT) on the income from property.

The Ontario Court of Appeal allowed Inter-Leasing's appeal. The appeal judge erred in his application of the Ensite test (R. v. Ensite Ltd. (1986) (S.C.C.)), which focussed on whether property was "employed or risked in" business. The Court also concluded that Inter-Leasing was not liable for corporate income tax pursuant to the GAAR or liable for paying the CMT on its interest income.

Common Law - Topic 3221

Variation - Judicial variation - General - [See Conflict of Laws - Topic 4928 ].

Conflict of Laws - Topic 4928

Property - Situs of personalty - Debts - The Minister of Revenue (Ont.) argued that even if the appellant company, a member of the Precision Group companies, was not subject to corporate income tax, it was liable to pay the corporate minimum tax (CMT) - At issue was whether income from specialty debt instruments was subject to the CMT as "property situated in Canada" - The specialty debt instruments were physically stored in the British Virgin Islands - It had already been determined that the interest on the specialty debt instruments was not income from business - The Minister argued that instead of the common law situs rule for specialty debt instruments, the court should apply a case by case analysis of the connecting factors linking the appellant and the debt instruments to Ontario - The Ontario Court of Appeal was not persuaded that a change in the application of the common law principle of situs of specialty debt instruments was necessary or appropriate - "Here, the Precision Group companies restructured their affairs in reliance on a long-standing common law principle. Ontario amended its basis for corporate taxation in 2005 so that the gaps in provincial taxation illustrated by this case no longer are relevant but declined to make the amendments retroactive. To change the situs of specialty debts for corporate tax purposes may have unforeseeable consequences, such as double taxation in both the place where the instruments are located and in the place of residence of the corporation. Clear rules to determine the situs of specialty debts promote certainty in their application. A case by case analysis of connecting factors in each case would have the reverse effect." - See paragraphs 67 to 87.

Income Tax - Topic 1005

Income from business or property - Business income vs. property income - The Ontario Court of Appeal stated that "Canadian income tax legislation has long distinguished between income from business and income from property. Business income is generated by use of capital, management and labour. Income from property results from the use of capital and some degree of management." - The Court discussed the two approaches, developed by the jurisprudence, to drawing the line between those two sources of income - One approach was the "level of activity"' test embodied in Canadian Marconi Co. v. Minister of National Revenue (1986) (SCC) - A second approach to distinguishing between income from business and income from property was developed in R. v. Ensite Ltd. (1986) (SCC) - The focus in Ensite was on whether the property was "employed and risked" in the company's business - See paragraphs 21 to 29.

Income Tax - Topic 1005

Income from business or property - Business income vs. property income - The Ontario Court of Appeal stated that the rebuttable presumption articulated in Canadian Marconi Co. v. Minister of National Revenue (1986) (SCC), namely that income earned by corporations acting consistently with their objects was income from a business, was not helpful in determining whether the appellant corporation's interest income paid on four specialty debt instruments was from business or property - "Ontario's corporate taxation regime [Corporations Tax Act] envisages that s. 2(2) corporations will be taxed on income from business but not on income from property. Presumably corporations will act within their objects. The legislative scheme expressly contemplates a corporation earning income from property and does not subject such a corporation to tax on that income. In any event, [the appellant's] objects specifically prohibit it from carrying on a business in Canada, except through a limited partnership. I also note that the presumption described in Marconi may have little application where the corporation has the 'capacity and the rights, powers and privileges of a natural person' ... As to the 'level of activity' test from Marconi, I agree with the appeal judge's implicit suggestion that the level of activity associated with the once annual payment of interest on each of the four specialty debt instruments does not make this interest income from business." - Rather, the factors set out in the appeal judge's reasons supported a conclusion that the interest income paid was income from property - See paragraphs 30 to 35.

Income Tax - Topic 1005

Income from business or property - Business income vs. property income - Inter-Leasing Inc. was a member of the Precision Group companies - The appeal judge held that the Inter-Leasing's interest income generated from its refinancing activities (four specialty debt instruments) was "income from a business carried on in Canada", and that the reassessment of corporate income tax was correct - The Ontario Court of Appeal held that the appeal judge erred in his application of the test in R. v. Ensite Ltd. (1986) (SCC), which focused on whether property was "employed or risked in" business - "First, he erred in finding that Inter-Leasing was in the business of reducing the Precision Group's after-tax cost of capital and then reasoning that since the specialty debt instruments were essential to, and employed in, achieving that goal, interest on that income was income from business. Taxpayers may structure their affairs so as to reduce taxes payable. ... Further ... taxpayers may engage in transactions that have no other purpose than to reduce tax ... Ontario's legislative regime treats corporate property income differently than corporate business income. To characterize Inter-Leasing's efforts to structure its affairs to take advantage of this difference as engaging in a business is to undercut the well-established jurisprudence that taxpayers may arrange their dealings and structures to reduce taxes. Second, while the appeal judge lists 13 different factors in support of his conclusion ... many of the factors listed are irrelevant to that conclusion."- See paragraphs 36 to 41.

Income Tax - Topic 1005

Income from business or property - Business income vs. property income - Inter-Leasing Inc., incorporated in the British Virgin Islands (BVI), was a member of the Precision Group companies, some of which were incorporated in Alberta - Following a corporate reorganization aimed at eliminating tax then payable to Alberta, the Precision Group's inter-corporate debts were converted into interest-bearing deeds of specialty debt, payable to Inter-Leasing - The deeds were physically located in the BVI - The Alberta corporations deducted the interest as an expense from their income - As a corporation incorporated outside Canada but with a permanent establishment in Ontario, Inter-Leasing was obliged to pay tax imposed by the Corporations Tax Act pursuant to s. 2(2), i.e., taxed on income from business, not from property - The Minister contended, and the appeal judge held, that the interest income was income from a business - The Ontario Court of Appeal allowed the appeal - The interest received on the specialty debt instruments was not income from business - "The level of activity associated with receipt of interest income is highly suggestive of income from property rather than business. There was no other business in which income from the specialty debt instruments was employed or risked. And, ... other factors relied on by the appeal judge do not support his conclusion that the interest income was income from business." - See paragraph 42.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - The Ontario Court of Appeal stated that for the General Anti-Avoidance Rule to apply, "there must be: (1) a tax benefit resulting from a transaction or part of a series of transactions; (2) an avoidance transaction in the sense that the transaction cannot be said to have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit and (3) 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 on by the taxpayer. The onus is on the government to establish that the tax avoidance was abusive. If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer. ... [C]ourts must apply a purposive approach in interpreting the provisions giving rise to the tax benefit ... After the object, spirit or purpose of a section is determined, a transaction may be found to be abusive in one of three ways ...: 'where the result of the avoidance transaction (a) is an outcome that the provisions relied on seek to prevent; (b) defeats the underlying rationale of the provisions relied on; or (c) circumvents certain provisions in a manner that frustrates the object, spirit or purpose of those provisions.'" - See paragraphs 43 to 52.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - The appellant, as a corporation incorporated outside Canada but with a permanent establishment in Ontario, was obliged to pay tax imposed by Ontario's Corporations Tax Act (OCTA) pursuant to s. 2(2) - Prior to 2005, s. 2(2) corporations were not subject to corporate income tax on income from property, only on income from business - Under the tax reassessments at issue, the appellant was obliged to pay tax on certain interest payments it received during its 2001 to 2004 taxation years - An issue on this appeal was, if the appellant's interest income was income from property rather than from business, whether it should be subject to corporate income tax by virtue of the General Anti-Avoidance Rule - The Ontario Court of Appeal examined the history of corporate taxation in Ontario in order to assess the object, spirit or purpose of s. 2(2) as it read before 2005 - The court concluded that "Here, the purpose of s. 2(2) of the OCTA was to tax corporations incorporated outside Canada with a permanent establishment in Ontario on income from business but not on from income from property. Where such a corporation structures its affairs to earn income from property rather than income from business, it has not produced a result the provision sought to prevent, defeated the underlying rationale of the provision or frustrated the object, spirit or purpose of the measure." - See paragraphs 53 to 62.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - Inter-Leasing Inc. was a member of the Precision Group companies, some of which were incorporated in Alberta - Following a corporate reorganization aimed at eliminating tax then payable to Alberta, the Precision Group's inter-corporate debts were converted into interest-bearing deeds of specialty debt, payable to Inter-Leasing - As a corporation incorporated outside Canada but with a permanent establishment in Ontario, Inter-Leasing was obliged to pay tax imposed by Ontario's Corporations Tax Act (OCTA) pursuant to s. 2(2), i.e., taxed on income from business, not from property - The Minister contended, and the appeal judge held, that the interest income was income from a business - The Ontario Court of Appeal allowed the appeal, and also concluded that Inter-Leasing was not subject to corporate income tax by virtue of the General Anti-Avoidance Rule - "The approach taken by the appeal judge - to define the purpose of the provision [s. 2(2) of the OCTA] as to raise revenue and to define the tax base as broadly as possible - renders 'abusive' any transaction that has the effect of reducing tax. I do not accept this approach." - The Alberta corporations could deduct the interest paid to Inter-Leasing for tax purposes - Inter-Leasing must include the interest in its income for the purposes of federal income tax - Assuming Precision Group's transactions created a benefit or were an avoidance transaction, they were not abusive - There was no suggestion that the documents evidencing the transactions were a sham - Nor was there any suggestion that there was a failure to pay interest on the terms of the executed documents - See paragraphs 63 to 66.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - Inter-Leasing Inc. was a member of the Precision Group companies, some of which were incorporated in Alberta - Following a corporate reorganization aimed at eliminating tax then payable to Alberta, the Precision Group's inter-corporate debts were converted into interest-bearing deeds of specialty debt, payable to Inter-Leasing - The specialty debt instruments were physically stored in the British Virgin Islands (BVI) - As a corporation incorporated outside Canada but with a permanent establishment in Ontario, Inter-Leasing was obliged to pay tax imposed by Ontario's Corporations Tax Act pursuant to s. 2(2), i.e., taxed on income from business, not from property - The Minister contended, and the appeal judge held, that the interest income was income from a business - Inter-Leasing appealed - The Minister argued that, in any event, the location of the specialty debts in the BVI constituted corporate minimum tax (CMT) avoidance for purposes of the General Anti-Avoidance Rule - The Ontario Court of Appeal allowed the appeal, and also held that CMT was not payable - "I am not satisfied that the mere location of the specialty debt instruments in the British Virgin Islands, violates the object, spirit or purpose of the CMT regime. ... [A] number of factors are significant. First, the rule governing the situs of specialty debts instruments is a long-standing and well-established rule. Second, the situs for the instruments was not arbitrary, but was a place to which the corporation had some link, namely, its place of incorporation. Third, the level of Inter-Leasing's activity in Ontario to generate the income from property was minimal." - See paragraphs 88 to 98.

Statutes - Topic 501

Interpretation - General principles - Purpose of legislation - Duty to promote object of statute - [See second Income Tax - Topic 9517 ].

Statutes - Topic 522

Interpretation - General principles - Taxing statutes - [See first Income Tax - Topic 9517 ].

Statutes - Topic 1449

Interpretation - Construction where meaning is not plain - Aids or methods to determine meaning - Legislative history - [See second Income Tax - Topic 9517 ].

Cases Noticed:

Canadian Marconi Co. v. Minister of National Revenue, [1986] 2 S.C.R. 522; 70 N.R. 174; 33 D.L.R.(4th) 481, consd. [para. 23].

R. v. Ensite Ltd., [1986] 2 S.C.R. 509; 70 N.R. 189; 33 D.L.R.(4th) 491, appld. [para. 27].

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. 38].

Minister of National Revenue v. Duha Printers (Western) Ltd., [1998] 1 S.C.R. 795; 225 N.R. 241; 159 D.L.R.(4th) 457, refd to. [para. 39].

Duha Printers (Western) v. Canada - see Minister of National Revenue v. Duha Printers (Western) Ltd.

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

Copthorne Holdings Ltd. v. Minister of National Revenue, [2011] 3 S.C.R. 721; 424 N.R. 132; 2011 SCC 63, refd to. [para. 47].

Husky Energy Inc. v. Alberta (2012), 533 A.R. 385; 557 W.A.C. 385; 66 Alta. L.R.(5th) 279; 2012 ABCA 231, leave to appeal refused [2012] S.C.C.A. 411; 447 N.R. 400, refd to. [para. 64].

R. v. Williams et al., [1940] O.R. 403; [1941] 1 D.L.R. 22 (C.A.), affd. [1942] 3 D.L.R. 1; [1942] A.C. 541 (P.C.), refd to. [para. 73].

Commissioner of Stamps v. Hope, [1891] A.C. 476; [1891-1894] All E.R. 315 (P.C.), refd to. [para. 74].

Friedmann Equity Developments Inc. v. Final Note Ltd. et al., [2000] 1 S.C.R. 842; 255 N.R. 80; 134 O.A.C. 280; 2000 SCC 34, refd to. [para. 78].

Williams v. Minister of National Revenue, [1992] 1 S.C.R. 877; 136 N.R. 161; 90 D.L.R.(4th) 129, consd. [para. 80].

Statutes Noticed:

Corporations Tax Act, R.S.O. 1990, c. C-40, sect. 2(2) [para. 11]; sect. 5 [para. 46].

Authors and Works Noticed:

Ontario, 1993 Budget, Supplementary Paper: Improving Tax Fairness: A Corporate Minimum Tax for Ontario (1993), pp. ii [para. 68]; 7 [para. 69].

Sheikh, Munir A., and Carreau, Michel, A Federal Perspective on the Role and Operation of the Tax Collection Agreements, p. 13 [para. 58, footnote 1].

Counsel:

Al Meghji, Monica Biringer, Caroline D'Elia and Adam Hirsh, for the appellant;

Anita C. Veiga and Ryan Mak, for the respondent.

This appeal was heard on May 13, 2014, before Weiler, Hourigan and Pardu, JJ.A., of the Ontario Court of Appeal. In reasons written by Pardu, J.A., the Court delivered the following judgment, released on August 7, 2014.