Window Dressing as Something Other than Sham

• Author: Arnold Bornstein
• Pages: 139-170

139

[five ]

Window Dressing as Something

Other than Sham

arnold bornstein*

A. INTRODUCTION

In Ludcoand Singleton, by listing w indow dressing alongside sha m, and

as something sim ilar to sham, the Supreme Court of Canada seem s to have

transformed window dre ssing into an anti-avoidance doctr ine. To date,

however, it has given us only one example of window dressing —in Back-

man. It has also given us no def‌inition of w indow dressing and a lmost no

clear guidance as to when it will make a f‌inding of window dressing. e

purpose of this pap er is to f‌igure out what window dressi ng means, why it

is needed, and when it wil l be applied.

In Backman,Ludco,and Singleton, the Supreme Court tur ned window

dressing into a tool that is at times useful and at times necessary. is tool

can be applied where sham ca nnot be. In these cas es, the Supreme Court

had to determine the ta xpayers’ intention either to make a prof‌it or to earn

gross income. It looked at the trans actions into which the taxpayers had en-

tered. ese tran sactions were legally v alid: the Supreme Cour t could not

make a f‌inding of sham. I n Backman, it decided to f‌ind that the legally val id

* Tax Law Services Se ction of the Ontario Region al Of‌f‌ice of the Canada Depa rtment of

Justice. e views e xpressed in this chapt er are those of the author and are not t o be

attributed to t he Department of Justice or t he Canada Revenue Agency.

Ludco Enterpr ises Ltd v. Canada, []  SCR ,  SCC  [Ludco].

Singleton v. Canad a, []  SCR ,  SCC  [Singleton].

Backman v. Canada, []  SCR ,  SCC  [Backman].

140 Arnold Bornstein

transaction w as window dressing and to ig nore it. In Ludco and Singleton,

it took the legally valid transactions at face value, concluding that the tax-

payer had the requisite intention to earn g ross income. However, it raised

the possibilit y that window dressing could arise i n dif‌ferent circumstances

where such an intention was at issue.

In this paper, I will ex plore the meaning of window dressing. First, I w ill

examine the us e made of this phras e by the Supreme Court in Backman,

Ludco, and Singleton. Second, I w ill look at the ordin ary meani ngs of the

phrase and at how the phra se has been applied in t ax, (un)employment-

insurance, and Canada Pension Plan jurisprudence both before and after

Backman,Ludco,and Singleton. Finally, I will tr y to set out why the Su-

preme Court needed window dre ssing and when we can expec t the courts

to make a meaning ful application of window dressing.

B. SUPREME COURT’S APPLICATION OF WINDOW DRESSING IN

TAX CASES

In the income-tax context , the Supreme Court has cal led a transaction w indow

dressing on ly once, in Backman. It has told us, however, that window dressing

applies in at least two context s: partnership and interest deductibil ity.

1) Partnership

In Backman, the Supreme Court invoked window dressing in the part-

nership context. In order for a partnership to ex ist, the alleged pa rtners

must carry on business in common with a view to a prof‌it. In determin-

ing whether the tax payer has a view to a prof‌it, the Supreme Court ex-

plained that it would look at t he taxpayer’s intention. By the time Backman

came before it, the Supreme Court had a lready decided that the making of

a prof‌it need not be the taxp ayer’s “overriding intention.” If all the other

requirements of a par tnership relationsh ip were met, the taxpayer’s anci l-

lary intention to ma ke a prof‌it would also justif y calli ng a relationship a

partnership.

 See, for example, Partner ships Act, RSO , c. P., section ; Backman, above note 

at para. ; and Cont inental Bank Leasin g Corp. v. Canada, []  SCR  [Continen-

tal Bank Leas ing] at para. .

Backman, above note  at para. .

Continental Bank Leasing, above not e  at para. ; and Backman, above note  at para. .

Continental Bank Leasing, ibid. at pa ra. ; Backman, above note  at para. ; and Spire

Freezers Ltd v. R., []  SCR ,  SCC  at para.  [Spire Freezers].

Window Dressing as Something Other than Sham 141

In Backman, the taxpayer’s sole purpose was to acqu ire a potential tax

loss. However, the taxpayer pointed to the alleged pa rtnership’s acquisi-

tion of an interes t in an oil a nd gas property as evidence of hi s ancill ary

prof‌it-making intent ion. e Supreme Court acc epted the f‌indi ng of the

Tax Court judge that this acquisit ion was window dressing. It found that

the taxpayer had no anci llary prof‌it-making intention.

2) Interest Deductibility

a) Purpose of Use of Borrowed Money

Under subparagraph ()(c)(i) of the Income Tax Act, in computing income, the

taxpayer may deduct interest pa id on borrowed money if, among other things,

the taxpayer’s purpose in u sing the borrowed money was to gain or produce in-

come from busines s or property. In Ludco, the Supreme Court decide d that, in

order for a taxpayer to show that he or she has this pu rpose, the taxpayer must

show that he or she has a reasonable expect ation of gross income.

In that case and in Singleton, the Supreme Court invoked window dress-

ing in two ways. First, it u sed window dressing in determining the t axpay-

er’s purpose in using borrowed money. e tax payer’s income-producing

purpose does not need to be the t axpayer’s primary or domi nant purpose.

Normally, an a ncillar y purpos e to gain or produce i ncome will do. In

Ludco, Iacobucci J. stated that, under subpa ragraph ()(c)(i):

Absent a sham or window dre ssing or other vitiating ci rcumstances, a tax-

payer’s ancillar y purpose may be nonethele ss a bona f‌ide, actual, rea l and

true objective of h is or her investment, equ ally capable of provid ing the

requisite purp ose for interest deductibi lity in compa rison with any more

important or sign if‌icant primary pur pose.

Similarl y, in Singleton, Major J. decided that , in order to deduct interest

on borrowed money, the taxpayer did not have to prove that he had a bona

f‌ide purpose in usin g the funds to earn income. He explained t hat:

the appellant’s overrid ing concern for determining the respondent ’s bona

f‌ide purpose in usin g the funds is not consistent wit h the express wording

 Backman, abovenote  at pa ra. .

 Ibid. at paras. –.

 RSC  (th Supp.), c. .

 Ludco, above note  at par a. .

 Ibid. at para. .

 Ibid. at para. .