Stubart Investments Ltd. v. Minister of National Revenue, (1984) 53 N.R. 241 (SCC)

• Judge: Ritchie, Beetz, Estey, McIntyre and Wilson, JJ.
• Court: Supreme Court (Canada)
• Case Date: June 07, 1984
• Jurisdiction: Canada (Federal)
• Citations: (1984), 53 N.R. 241 (SCC);[1984] 1 SCR 536;JE 84-479;[1984] CTC 294;26 ACWS (2d) 53;[1984] ACS no 25;AZ-84111027;[1984] SCJ No 25 (QL);1984 CanLII 141 (SCC);[1984] CarswellNat 690;1984 CanLII 20 (SCC);84 DTC 6305;53 NR 241;10 DLR (4th) 1;[1984] 1 SCR 582

Stubart Inv. Ltd. v. MNR (1984), 53 N.R. 241 (SCC)

MLB headnote and full text

Stubart Investments Limited v. Minister of National Revenue

Indexed As: Stubart Investments Ltd. v. Minister of National Revenue

Supreme Court of Canada

Ritchie, Beetz, Estey, McIntyre and Wilson, JJ.

June 7, 1984.

Summary:

Grover Cast Stone Co. Ltd. was the subsidiary of a parent holding company and it manufactured and sold concrete products. Another subsidiary, Stubart Investments Ltd., manufactured and sold food flavorings and related products. By 1965 Grover had incurred substantial losses, which qualified as losses under the carry-forward provisions of the Income Tax Act. To take advantage of the loss carry-forward of Grover the parent company conceived a scheme whereby the assets of Stubart were sold to Grover and Grover appointed Stubart as its agent to carry on the Stubart business and to turn over the net income to Grover. The sale of Stubart's assets to Grover was completely and legally done and all necessary public registrations of transfers and security documents were made. However, the Minister of National Revenue assessed Stubart for the net income turned over to Grover and refused to recognize the transfer of income to Grover. Stubart appealed.

The Tax Appeal Board and the Federal Court of Canada, Trial Division, dismissed the appeal and called the transaction between Stubart and Grover a sham.

The Federal Court of Appeal in a judgment reported at 36 N.R. 409 (erroneously under the name Stuart Investment Limited) also dismissed the appeal, but avoided calling the transaction a sham. Stubart appealed.

The Supreme Court of Canada allowed the appeal and set aside the assessment of income to Stubart. The court held that the transaction was not incomplete, because the Stubart assets and business were completely and validly transferred to Grover. The court noted that Stubart's assets were subsequently sold to an independent third party, which obviously relied on the validity of the sale to Grover. The court held further that the transaction was not a sham, because it was exactly what it appeared to be and accomplished what was intended and was not a deceitful illusion designed to mislead the tax collector or to conceal its true nature. The court held that the transaction was not invalid merely because its sole purpose was to save tax and rejected the bona fide business purpose test for the validity of such transactions adopted in some other jurisdictions.

Income Tax - Topic 5

Income Tax Act - Nature of - The Supreme Court of Canada stated that the Income Tax Act was more than a mere tool for the carving of the cost of Government out of the community and was also an instrument of economic and fiscal policy for the regulation of commerce and industry through Government fiscal intervention - The court noted that the economic policy element of the Act sometimes induces taxpayers to undertake or redirect a specific activity, which without the inducement would have no bona fide business purpose - The court stressed that the economic policy element of the Act must be recognized by the courts in construing the Act, a factor which has caused a modification of the strict construction rule - See paragraphs 55 to 67.

Income Tax - Topic 3906

Interpretation - In favour of taxpayer - Strict construction - The Supreme Court of Canada noted that the Income Tax Act was no longer a device to raise revenue to meet the cost of Government but was also an instrument of economic and fiscal policy for the regulation of commerce and industry through Government fiscal intervention - The court noted that the strict construction rule has been modified accordingly, so that now the Act is to be construed according to its plain meaning, but in a substantive sense so that if the taxpayer is within the spirit of a taxing provision, he may be held liable - See paragraphs 55 to 67.

Income Tax - Topic 9543

Tax evasion - Artificial transaction - What constitutes - Grover, a subsidiary of a parent company, incurred substantial losses, which qualified as losses under the carry-forward provisions of the Income Tax Act - To take advantage of the loss carry-forward the assets of another subsidiary, Stubart, were sold to Grover and Grover appointed Stubart as its agent to carry on Stubart's business and to turn over the net income to Grover - The Supreme Court of Canada held that the income was properly transferred to Grover and the transaction was neither incomplete nor a sham - The court held that the transaction was not invalid merely because its sole purpose was to save tax, rejecting the bona fide business purpose test.

Income Tax - Topic 9543

Tax evasion - Artificial transaction - What constitutes - Guidelines - The Supreme Court of Canada set out the guidelines for determining whether a transaction is artificial for tax purposes - See paragraph 67.

Income Tax - Topic 9545

Tax evasion - Artificial transaction - Sham - Defined - The Supreme Court of Canada held that a sham transaction was one conducted with an element of deceit to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction or was a simple deception whereby the taxpayer creates a facade of reality different from the disguised reality - The court held that the sale of the assets of one subsidiary to another, which was complete in every legal and practical aspect, and which was exactly what it appeared and was intended to be, was not a sham and was not invalid merely because its sole purpose was to save tax - See paragraphs 14, 52 to 54, 71 to 74.

Income Tax - Topic 9546

Tax evasion - Artificial transaction - Bona fide business purpose test - The Supreme Court of Canada rejected the application of the bona fide business purpose test in determining whether a transaction was valid or effective for income tax purposes - The court noted that the Income Tax Act was partly an instrument of economic and fiscal policy for the regulation of commerce and industry through government fiscal intervention, which sometimes induces taxpayers to undertake or redirect specific activities solely for tax purposes and no bona fide business purpose - See paragraphs 55 to 67.

Cases Noticed:

Atinco Paper Products Ltd. v. R., [1978] C.T.C. 566, refd to. [para. 8].

Rose v. Minister of National Revenue, [1973] F.C. 65 (F.C.A.) refd to. [para. 10].

Bradford Corporation v. Pickles, [1895] A.C. 587, appld. [para. 26].

I.R.C. v. Duke of Westminster, [1936] A.C. 1, appld. [para. 26].

Gregory v. Helvering, Commissioner of Internal Revenue (1934), 293 U.S. 465, dist. [para. 27].

Knetsch v. United States, 364 U.S. 361, dist. [para. 28].

Vide Kocin v. United States (1951), 187 F. 2d 707, consd. [para. 28].

Goldstein v. Commissioner of Internal Revenue (1966), 364 F. 2d 734, consd. [para. 28].

Berkey v. Third Avenue Railway Co. (1926), 244 N.Y. 84, consd. [para. 28].

Singer v. Magnavox Co., 380 A. 2d 969 (1977), consd. [para. 28].

Cridland v. Commissioner of Taxation (CTH) (1978), 52 A.L.J.R. 96, consd. [para. 29].

W.T. Ramsay Ltd. v. I.R.C., [1981] 2 W.L.R. 449, dist. [para. 32].

C.I.R. v. Burmah Oil Co. Ltd. (1981), 42 T.R. 535, dist. [para. 33].

Greenberg v. I.R.C. (1971), 47 T.C. 240, consd. [para. 35].

Lagracé v. M.N.R., [1968] 2 Ex. C.R. 98, dist. [para. 39].

Richardson Terminals Ltd. v. M.N.R. (1971), 71 D.T.C. 5028, affd. 72 D.T.C. 6431, dist. [para. 39].

Dominion Bridge Co. Ltd. v. R. (1975), 75 D.T.C. 5150, affd. 77 D.T.C. 5367, dist. [para. 39].

FA & AB Ltd. v. Lupton (Inspector of Taxes), [1971] 3 All E.R. 948, refd to. [para. 39].

M.N.R. v. Leon (1976), 13 N.R. 420; 76 D.T.C. 6299, consd. [paras. 40, 74].

Massey-Ferguson Ltd. v. R. (1977), 14 N.R. 316; 77 D.T.C. 5013, consd. [para. 43].

Inland Rev. Commissioners v. Brebner, [1967] 1 All E.R. 779, consd. [para. 44].

Produits LDG Products Inc. v. R. (1976), 13 N.R. 438; 76 D.T.C. 6344 (F.C.A.), consd. [para. 47].

R. v. Esskay Farms Ltd. (1975), 76 D.T.C. 6010, consd. [para. 46].

R. v. Alberta and Southern Gas Co. Ltd. (1977), 16 N.R. 220; 77 D.T.C. 5244, consd. [para. 47].

Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518, appld. [para. 53].

M.N.R. v. Cameron, [1974] S.C.R. 1062, appld. [para. 53].

Foreign Power Securities Ltd. v. M.N.R., 66 D.T.C. 5012, consd. [para. 56].

Inland Revenue Commissioners v. Levene, [1928] A.C. 217, consd. [para. 61].

Partington v. Attorney General (1869), L.R. 4 H.L. 100, consd. [para. 61].

R. v. Crabbs, [1934] S.C.R. 523, consd. [para. 62].

Lumbers v. M.N.R. (1943), 2 D.T.C. 631 (Ex. Ct.), affd. [1944] S.C.R. 167, consd. [para. 62].

W.A. Sheaffer Pen Co. Ltd. v. M.N.R., [1953] Ex. C.R. 251, consd. [para. 62].

Ransom v. Higg (1974), 50 Tax Cas. 1, consd. [para. 65].

Susan Hosiery Ltd. v. Minister of National Revenue, [1969] 2 Ex. C.R. 408, consd. [para. 72].

Minister of National Revenue v. Shields, [1963] Ex. C.R. 91, consd. [para. 72].

Minister of National Revenue v. Cameron, [1974] S.C.R. 1062, consd. [para. 72].

I.R.C. v. Duke of Westminster, [1936] A.C. 1, consd. [para. 73].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 245.

Authors and Works Noticed:

Baker and Killingsworth, A U.S. View Through the Corporate Veil, [1978] Tax Management International Journals 3, 7 [para. 28].

Dreidger, E.A., The Construction of Statutes (2nd Ed. 1983), p. 87 [para. 64].

Grover and Iacobucci, Materials on Canadian Income Tax (5th Ed. 1981), pp. 62-65 [para. 60].

Hellerstein, Jerome R., Judicial Approaches to Tax Avoidance, 1964 Conference Report, p. 66 [para. 67].

Krishna, Vern, Step Transactions: An Emerging Doctrine or An Extension of the Business Purpose Test? (1984), 1 Canadian Current Tax, c. 15, 19 [para. 37].

Merten, Law of Federal Income Tax, vol. 7, c. 38, pp. 181-184, 208 et seq. [para. 38].

McDonnell, T.E., Canadian Tax Federation: 29th Tax Conference (1977), p. 90 [para. 41].

O'Keefe, The Business Purpose Text - Who Needs It? (1977), 25 Canadian Tax Journal 139 [para. 41].

Surrey, Federal Income Taxation: Cases and Materials (1973), p. 644 [para. 56].

Ward and Cullity, Abuse of Rights and the Business Purpose Test (1981), 29 Canadian Tax Journal 451, 463 [para. 38]; 465-466 [para. 37]; 473-474 [para. 57].

Whiteman, P., and Milne, D., Whiteman and Wheatcroft on Income Tax (2nd Ed. 1976), pp. 11 [para. 38]; 37 [para. 63]; 804 [para. 38].

Counsel:

P.B.C. Pepper, Q.C., and M.J. Penman, for the appellant;

William Hobson, Q.C., Jagg Gill, and Susan Van der Hout, for the respondent.

This case was heard on November 23 - 24, 1983, at Ottawa, Ontario, before Ritchie, Beetz, Estey, McIntyre and Wilson, JJ., of the Supreme Court of Canada.

On June 7, 1984, the judgment of the Supreme Court of Canada was delivered and the following opinions were filed:

Estey, J. - See paragraphs 1 to 70;

Wilson, J. - See paragraphs 71 to 75.

Beetz and McIntyre, JJ., concurred with Estey, J.

Ritchie, J., concurred with Wilson, J.