Minister of National Revenue v. Central Supply Co. (1972) Ltd., (1997) 215 N.R. 46 (FCA)

• Judge: Strayer, Linden and McDonald, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: June 02, 1997
• Jurisdiction: Canada (Federal)
• Citations: (1997), 215 N.R. 46 (FCA)

MNR v. Central Supply Co. (1997), 215 N.R. 46 (FCA)

MLB headnote and full text

Temp. Cite: [1997] N.R. TBEd. JN.018

Her Majesty The Queen (appellant/respondent) v. Central Supply Company (1972) Limited (respondent/appellant)

(A-411-95)

Her Majesty The Queen (appellant/respondent) v. Carousel Travel 1982 Inc. (respondent/appellant)

(A-412-95)

Indexed As: Minister of National Revenue v. Central Supply Co. (1972) Ltd.

Federal Court of Appeal

Strayer, Linden and McDonald, JJ.A.

June 2, 1997.

Summary:

Section 66.1 of the Income Tax Act was intended to promote Canadian mining and exploration by permitting junior mining companies engaged in exploration (no reve­nue to charge expenses off against) to pass on tax deductible losses in exchange for capital to fund further exploration. In 1987, two corporate taxpayers (Central and Carousel) became members of a limited partnership on the final day of the partner­ships' fiscal years and sold their interests 24 hours later. It was a purely tax-motivated transaction designed to take advantage of the literal wording of s. 66.1. In effect, Central purchased a $10,000,000 cumulative Ca­nadian exploration expense deduction for $1,800,000 and Carousel purchased a $6,000,000 deduction for $1,080,000. The Minister disallowed the deductions. The taxpayers appealed.

The Tax Court of Canada allowed the appeals and permitted the deductions. The Minister appealed.

The Federal Court of Appeal, McDonald, J.A., dissenting, allowed the appeals and restored the decision disallowing the deduc­tions. The court held that the partial tax avoidance provisions of s. 245(1) applied to disallow the deductions, where the deduc­tions would "unduly or artificially reduce" the taxpayers' income. The court rejected the submission that a deduction technically permitted under the Act could not be disal­lowed under s. 245(1). McDonald, J.A., dissenting, stated that s. 245(1) did not apply to deductions permitted under express provisions of the Act, where the deductions were not inconsistent with the object and spirit of the deduction provisions.

Income Tax - Topic 9541

Tax evasion and tax avoidance - Artificial transactions - General - Section 245(1) of the Income Tax Act provided for the disallowance of claimed deductions if the expense "would unduly or artificially reduce the income" - The Federal Court of Appeal stated that there were three factors relevant to the determination of whether a taxpayer had unduly or arti­ficially reduced its income: "first, whether the deduction sought is contrary to the object and spirit of the provision in the Act, second, whether the deduction is based on a '... transaction or arrangement which is not in accordance with normal business practice', and third, whether there was a bona fide business purpose for the transaction." - See paragraph 15.

Income Tax - Topic 9543

Tax evasion and tax avoidance - Artificial transaction - What constitutes - Section 66.1 of the Income Tax Act was intended to promote Canadian mining and explor­ation by permitting junior mining com­panies engaged in exploration (no revenue to charge expenses off against) to pass on tax deductible losses in exchange for capi­tal to fund further exploration - In 1987, two corporate taxpayers (Central and Carousel) became members of a limited partnership on the final day of the part­nerships' fiscal years and sold their in­terests 24 hours later - It was a purely tax-motivated transaction designed to take advantage of the literal wording of s. 66.1 - In effect, Central purchased a $10,000,000 cumulative Canadian ex­ploration expense deduction for $1,800,000 and Carousel purchased a $6,000,000 deduction for $1,080,000 - The Federal Court of Appeal held that the partial tax avoidance provisions of s. 245(1) applied to disallow the deductions, where the deductions would "unduly or artificially reduce" the taxpayers' income - The court held that a deduction technically permitted under the Act could be disal­lowed under s. 245(1) - McDonald, J.A., dissenting, stated that s. 245(1) did not apply to deductions permitted under express provisions of the Act, where the deductions were not inconsistent with the object and spirit of the deduction pro­visions.

Income Tax - Topic 9545

Tax evasion and tax avoidance - Artificial transactions - Sham defined - The Federal Court of Appeal defined a "sham" trans­action for the purposes of tax avoidance or evasion - See paragraph 5.

Income Tax - Topic 9546

Tax evasion and tax avoidance - Artificial transactions - Business purpose test - [See Income Tax - Topic 9541 ].

Cases Noticed:

Inland Revenue Commissioners v. West­minster (Duke), [1936] A.C. 1 (H.L.), refd to. [para. 3].

Furniss v. Dawson, [1984] A.C. 474 (H.L.), refd to. [para. 3, footnote 1].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241, refd to. [para. 3].

Daly v. Revenue Canada (1981), 38 N.R. 494; 81 D.T.C. 5197 (F.C.A.), refd to. [para. 4].

Snook v. London and West Riding Invest­ments Ltd., [1967] 1 All E.R. 518 (C.A.), refd to. [para. 5].

Susan Hosiery Ltd. v. Minister of National Revenue, [1969] 2 Ex. C.R. 408, refd to. [para. 5].

Dominion Bridge Co. v. R., [1975] C.T.C. 263 (F.C.T.D.), refd to. [para. 5].

Front & Simcoe Ltd. v. Minister of National Revenue, [1960] C.T.C. 123 (Ex. Ct.), refd to. [para. 6, footnote 3].

Naiberg v. Minister of National Revenue, [1969] C.T.C. 492 (T.A.B.), refd to. [para. 6, footnote 3].

Continental Bank Leasing Corp. v. Minis­ter of National Revenue, [1996] 3 F.C. 713; 199 N.R. 9 (F.C.A.), refd to. [para. 6, footnote 3].

Dominion Taxicab Association v. Minister of National Revenue, [1954] S.C.R. 82, refd to. [para. 6, footnote 3].

Bronfman (Phyllis Barbara) Trust v. Minister of National Revenue, [1987] 1 S.C.R. 32; 71 N.R. 134, refd to. [para. 6].

Lagacé v. Minister of National Revenue, [1968] 2 Ex. C.R. 98, refd to. [para. 7].

Gregory v. Commissioner of Internal Revenue (1934), 293 U.S. 465 (U.S. Sup. Ct.), refd to. [para. 7, footnote 4].

Inland Revenue Commissioners v. Burmah Oil Co., [1982] S.T.C. 30 (H.L.), refd to. [para. 7].

Ramsay (W.T.) Ltd. v. Inland Revenue Commissioners, [1981] 2 W.L.R. 449 (H.L.), refd to. [para. 7].

Leon v. Minister of National Revenue, [1977] 1 F.C. 249; 13 N.R. 420 (F.C.A.), refd to. [para. 8].

R. v. Esskay Farms Ltd., [1976] C.T.C. 24 (F.C.T.D.), refd to. [para. 11].

McKee v. R., [1977] C.T.C. 491 (F.C.T.D.), refd to. [para. 11].

Weston's Settlements, Re, [1969] 1 Ch. 223, refd to. [para. 11].

Antosko v. Minister of National Revenue, [1994] 2 S.C.R. 312; 168 N.R. 16, refd to. [para. 14, footnote 5].

Minister of National Revenue v. Mara Properties Ltd., [1995] 2 F.C. 433; 179 N.R. 363 (F.C.A.), refd to. [para. 14, footnote 6].

Minister of National Revenue v. Mara Properties Ltd., [1996] 2 S.C.R. 161; 197 N.R. 308; [1996] 2 C.T.C. 54, reving. [1995] 2 F.C. 433; 179 N.R. 363 (F.C.A.), refd to. [para. 14].

Minister of National Revenue v. Fording Coal Ltd., [1996] 1 F.C. 518; 190 N.R. 186 (F.C.A.), refd to. [para. 15].

Shulman v. Minister of National Revenue, [1961] Ex. C.R. 410, refd to. [para. 15, footnote 7].

Fell (Don) Ltd. et al. v. R. (1981), 81 D.T.C. 5282 (F.C.T.D.), refd to. [para. 15, footnote 7].

Consolidated-Bathurst Ltd. v. Minister of National Revenue, [1987] 2 F.C. 3; 72 N.R. 147 (F.C.A.), refd to. [para. 15, footnote 7].

Alberta and Southern Gas Co. v. Minister of National Revenue, [1978] 1 F.C. 454; 16 N.R. 220 (F.C.A.), affd. [1979] 1 S.C.R. 36; 23 N.R. 622; 78 D.T.C. 6566, dist. [para. 16, footnote 8].

Spur Oil Ltd. v. Minister of National Revenue, [1982] 2 F.C. 113; 42 N.R. 131 (F.C.A.), refd to. [para. 19].

Irving Oil Ltd. v. Minister of National Revenue (1991), 126 N.R. 47; 91 D.T.C. 5106 (F.C.A.), refd to. [paras. 19, 60].

Howard de Walden (Lord) v. Inland Revenue Commissioners, [1942] 1 K.B. 389 (C.A.), refd to. [para. 26].

Edmonton Liquid Gas Ltd. v. Minister of National Revenue (1984), 56 N.R. 321; 84 D.T.C. 6526 (F.C.A.), dist. [para. 49].

Minister of National Revenue v. Nova Corp. of Alberta (1997), 212 N.R. 321 (F.C.A.), refd to. [para. 64].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 66.1(6)(a) [para. 28]; sect. 66.1(6)(b) [para. 46]; sect. 245(1) [paras. 2, 59].

Authors and Works Noticed:

Arnold, Brian J., and Wilson, James R., The General Anti-Avoidance Rule-Part 1 (1988), 36 Can. Tax J. 829 (Part 1), pp. 842, 848 [para. 10]; 852 [para. 4]; 872 to 887 [para. 3]; 887 [para. 25].

Brussa, John A., The New Environment for Investment in the Oil and Gas In­dustry: Income Tax Aspects of Invest­ment, 37th Tax Conference (1985), pp. 37:19 et seq. [para. 69, footnote 23].

Carter, Michael A., Flow-Through Share Financing, 1986 Corporate Management Tax Conference, Canadian Tax Foun­dation, generally [para. 69, footnote 23].

Canada, Department of Finance - Release, 94-106 (November 10, 1994), generally [para. 45].

Canada, Department of Finance, Evalu­ation of Flow-Through Shares (No­vember 10, 1994), generally [para. 69, footnote 23].

Canada, Energy Mines and Resources, The National Energy Program (1980), pp. 47 to 50 [para. 73].

Canadian Tax Foundation, 1987 Con­ference Report, Report of Proceedings of the Thirty-Ninth Tax Conference (1988), p. 7:14 [para. 26].

Driedger, Elmer A., Construction of Stat­utes (2nd Ed. 1983), generally [para. 3, footnote 2].

Gideon, Kenneth, and Kent, Ruth, Mrs. Gregory's Northern Tour: Canadian Proposals To Adopt the Business Pur­pose Rule and the Step Transaction Doctrine, generally [para. 26].

Hogg, Peter W., and Magee, Joanne E., Principles of Canadian Income Tax Law (1995), pp. 455 [para. 6]; 456 [para. 4].

McKee, James G., The Income Tax Impli­cations of Flow-Through Shares, [1988] Canadian Petroleum Tax J. 107, gen­erally [para. 69, footnote 23].

Meghji and Grenon, An Analysis of Recent Avoidance Cases, p. 23 [para. 14, footnote 6].

Timbrell, D.Y., Of Shams and Simulacra (1973), 21 Can. Tax J. 529, p. 530 [para. 4].

Ziegel, Jacob S., et al., Cases and Materials on Partnerships and Canadian Business Corporations (3rd Ed. 1994), vol. 1, pp. 85, 86 [para. 44, footnote 21].

Counsel:

Jag Gill, Patricia Lee and Margaret Nott, for the appellant;

Paul Schnier and Robert Jason, for the respondents.

Solicitors of Record:

George Thomson, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the appellant;

Fogler, Rubinoff, Toronto, Ontario, for the respondents.

These appeals were heard on February 5-7, 1997, at Toronto, Ontario, before Strayer, Linden and McDonald, JJ.A., of the Federal Court of Appeal.

On June 2, 1997, the judgment of the Federal Court of Appeal was delivered and the following opinions were filed:

Linden, J.A. (Strayer, J.A., concurring) - see paragraphs 1 to 54;

McDonald, J.A., dissenting - see para­graphs 55 to 83.