Kaulius et al. v. Minister of National Revenue, (2005) 339 N.R. 323 (SCC)

• Judge: McLachlin, C.J.C., Major, Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron, JJ.
• Court: Supreme Court (Canada)
• Case Date: October 19, 2005
• Jurisdiction: Canada (Federal)
• Citations: (2005), 339 N.R. 323 (SCC);2005 SCC 55;[2005] 2 SCR 643;[2005] 5 CTC 244;339 NR 323;[2005] SCJ No 55 (QL);[2005] ACS no 55;[2005] CarswellNat 3215;259 DLR (4th) 225;59 DTC 5538

Kaulius v. MNR (2005), 339 N.R. 323 (SCC)

MLB headnote and full text

[French language version follows English language version]

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

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Temp. Cite: [2005] N.R. TBEd. OC.021

Eugene Kaulius, Steven M. Cook, Charles E. Beil, Craig C. Sturrock, Amalio De Cotiis, John N. Gregory, 347059 B.C. Ltd., Frank Mayer, John R. Owen, Verlaan Investments Inc., William John Millar, NSFC Holdings Ltd., TFTI Holdings Limited, Douglas H. Mathew, Ian H. Pitfield, Estate of the late Lorne A. Green and Innocenzo De Cotiis (appellants) v. Her Majesty the Queen (respondent)

(30067; 2005 SCC 55; 2005 CSC 55)

Indexed As: Kaulius et al. v. Minister of National Revenue

Supreme Court of Canada

McLachlin, C.J.C., Major, Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron, JJ.

October 19, 2005.

Summary:

A mortgage lender used s. 18(13) of the In­come Tax Act (Can.) to transfer its unreal­ized losses to a non-arm's length partnership. An arm's length party acquired a 99% inter­est in the non-arm's length partnership. That 99% interest was then sold to a second part­ner­ship. The losses were allocated to the second partnership's partners under s. 96 of the Act. The partners deducted their respect­ive share of the losses from their own in­comes. The Minister of National Revenue in­voked the general anti-avoidance rule found in s. 245 of the Act, reassessed the partners and disallowed their deduction claim. The part­ners appealed.

The Tax Court of Canada, in a decision re­ported [2002] D.T.C. 1637; [2003] 1 C.T.C. 2045, dismissed the appeal. The partners ap­pealed.

The Federal Court of Appeal, in a decision reported 311 N.R. 172, dismissed the appeal. The partners appealed.

The Supreme Court of Canada dismissed the appeal.

Income Tax - Topic 1151

Income from a business or property - De­duc­tions - Noncapital losses - General - [See Income Tax - Topic 9517 ].

Income Tax - Topic 3901

Interpretation - General - [See Statutes - Topic 502 ].

Income Tax - Topic 5061

Partnerships - Losses - General - [See Income Tax - Topic 9517 ].

Income Tax - Topic 9517

Tax evasion and tax avoidance - General prin­ciples - General anti-avoidance rule - A mortgage lender used s. 18(13) of the In­come Tax Act (Can.) to transfer its unrealized losses to a non-arm's length partnership - An arm's length party acquired a 99% interest in the non-arm's length partnership - That 99% interest was then sold to a second partnership - The losses were allocated to the second partner­ship's partners under s. 96 - The partners deducted their respective share of the losses from their own incomes - The Min­ister of National Revenue invoked the gen­eral anti-avoidance rule found in s. 245 and disallowed the deduction - The Su­preme Court of Canada upheld the Minis­ter's decision, holding as follows: "Section 18(13) preserves and transfers a loss under the assumption that it will be realized by a taxpayer who does not deal at arm's length with the transfer­or. Parlia­ment could not have intended that the combined effect of the partnership rules and s. 18(13) would preserve and transfer a loss to be realized by a taxpayer who deals at arm's length with the trans­feror. To use these provisions to preserve and sell an unrealized loss to an arm's length party results in abusive tax avoid­ance under s. 245(4). Such transac­tions do not fall within the spirit and pur­pose of s. 18(13) and s. 96, properly con­strued."

Statutes - Topic 502

Interpretation - General principles - Inten­tion of legislature - The Supreme Court of Canada discussed the proper interpretative approach respecting ss. 18(3) and 96 of the Income Tax Act - The court held: "There is an abiding principle of interpretation: to determine the intention of the legislator by consider­ing the text, context and purpose of the pro­visions at issue" - The court said that this applied to the Income Tax Act and the general anti-avoidance rule under s. 245 as much as to any other legislation -See para­graphs 40 to 43.

Cases Noticed:

Minister of National Revenue v. Canada Trustco Mortgage Co. (2005), 340 N.R. 1; 2005 SCC 54, folld. [para. 1].

OSFC Holdings Ltd. v. Minister of Nation­al Revenue, [2002] 2 F.C. 288; 275 N.R. 238; 2001 FCA 260, not folld. [para. 29].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 18(13), sect. 96(1)(g), sect. 245(1), sect. 245(2), sect. 245(3), sect. 245(4) [para. 28].

Counsel:

Kim Hansen, for the appellants;

Graham Garton, Q.C., Anne-Marie Léves­que and Alexandra K. Brown, for the respondent.

Solicitors of Record:

Kim Hansen, Vancouver, British Colum­bia, for the appellants;

John H. Simms, Q.C., Deputy Attorney General of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard on March 8, 2005, by McLachlin, C.J.C., Major, Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron, JJ., of the Supreme Court of Canada.

The judgment of the Supreme Court was delivered in both official languages on Octo­ber 19, 2005, by McLachlin, C.J.C., and Major, J.