Minister of National Revenue v. Canadian Pacific Ltd., 2001 FCA 398

• Judge: Strayer, Sexton and Evans, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: November 07, 2001
• Jurisdiction: Canada (Federal)
• Citations: 2001 FCA 398;(2001), 284 N.R. 216 (FCA)

MNR v. Cdn. Pacific Ltd. (2001), 284 N.R. 216 (FCA)

MLB headnote and full text

Temp. Cite: [2002] N.R. TBEd. JA.025

Her Majesty the Queen (appellant) v. Canadian Pacific Limited (respondent)

(A-701-00; 2001 FCA 398)

Indexed As: Minister of National Revenue v. Canadian Pacific Ltd.

Federal Court of Appeal

Strayer, Sexton and Evans, JJ.A.

December 21, 2001.

Summary:

Canadian Pacific Ltd. (CP) claimed an interest deduction for the 1990 taxation year for amounts required to be paid under certain debentures denominated in foreign currency (New Zealand and Australian dollars). The Minister disallowed part of the deduction on the basis that the disallowed interest reflected payments on account of principal and could not be regarded as a reasonable amount in respect of CP's obligation to pay interest on the money under the debentures. The Minis­ter also assumed that the deduction of the disallowed interest would unduly or artifi­cially reduce CP's income and invoked s. 245 of the Act (the general anti-avoidance rule (GAAR)).

The Tax Court of Canada, in a decision reported 98 D.T.C. 2021, upheld the Minis­ter's reassessment. CP appealed.

The Federal Court of Appeal, in a decision reported 99 D.T.C. 5132, dismissed the appeal. CP appealed.

The Supreme Court of Canada ordered that CP's case be remanded to the Federal Court of Appeal to be dealt with in accordance with the decision of the Supreme Court of Canada in Minister of National Revenue v. Shell Canada Ltd.

The Federal Court of Appeal, in a decision reported [2000] N.R. Uned. 17, allowed CP's appeal from the judgment of the Tax Court of Canada that had upheld the Minis­ter's reassessment with respect to the New Zealand borrowing. It also held that CP would also succeed in its appeal with respect to the Australian dollar borrowing unless the GAAR as amended applied to it. The court therefore remitted the matter of the Austra­lian borrowing to the Tax Court.

The Tax Court of Canada, in a decision reported 2000 D.T.C. 2428, found in CP's favour respecting the Australian borrowing. The Minister appealed.

The Federal Court of Appeal dismissed the appeal.

Income Tax - Topic 9516

Tax evasion and tax avoidance - General principles - Avoidance - What constitutes -The Minister of National Revenue argued that s. 245(3) of the Income Tax Act pro­vided that, if any one transaction or event taken in a series of transactions was not carried out primarily for bona fide non-tax purposes, that transaction or event in itself constituted an avoidance transaction - The Federal Court of Appeal stated that, by the definition in s. 245(2), a transaction included an arrangement or event - Thus the definition of transaction was extended to include circumstances that would not strictly be considered to be a transaction within the normal meaning of that term - However, that extended definition could not be interpreted to justify taking apart a transaction in order to isolate its business and tax purposes - The necessity to deter­mine primary purpose implied that there was more than one purpose and that the transaction was to be considered as a whole - It was not open to the Crown to artificially split off various aspects of the transaction in order to create an avoidance transaction - See paragraphs 24 to 26.

Income Tax - Topic 9516

Tax evasion and tax avoidance - General principles - Avoidance - What constitutes -Canadian Pacific Ltd. (CP) required capi­tal for use in its business - It borrowed the required money in foreign currency (Aus­tralian dollars) because it would obtain greater tax benefits than it would if it had borrowed the money in Canada (i.e., increased interest expenses were offset by capital gains) - The Minister of National Revenue disallowed an interest deduction for the 1990 taxation year on the basis, inter alia, that the deduction would unduly or artificially reduce CP's income and invoked the general anti-avoidance rule (Income Tax Act, s. 245) - A tax court judge held that the primary purpose of the borrowing was to raise capital, not to minimize tax - There was no avoidance transaction - Deducting the excess interest did not result in an abuse of the Act (s. 245(4)) - The Federal Court of Appeal dismissed the Minister's appeal.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - [See second Income Tax - Topic 9516 ].

Cases Noticed:

Minister of National Revenue v. Shell Canada Ltd., [1998] 3 F.C. 64; 223 N.R. 122 (F.C.A.), refd to. [para. 6].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, refd to. [para. 9].

OSFC Holdings Ltd. v. Minister of Nation­al Revenue (2001), 275 N.R. 238 (F.C.A.), refd to. [para. 16].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 245(1), sect. 245(2), sect. 245(3), sect. 245(4), sect. 245(5) [para. 15].

Counsel:

Harry Erlichman and Jenna Clark, for the appellant;

Michael Barrack, for the respondent.

Solicitors of Record:

Morris Rosenberg, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the appellant;

McCarthy Tétrault, Toronto, Ontario, for the respondent.

This appeal was heard at Toronto, Ontario, on November 7, 2001, before Strayer, Sexton and Evans, JJ.A., of the Federal Court of Appeal. Sexton, J.A., delivered the following reasons for judgment for the court on December 21, 2001.