Wild v. R. – FCA: GAAR assessment based on corporate reorganization set aside as premature

Wild v. R. – FCA:  GAAR assessment based on corporate reorganization set aside as premature

https://decisia.lexum.com/fca-caf/decisions/en/item/311065/index.do

Wild v. Canada (June 8, 2018 – 2018 FCA 114, Nadon, Dawson (Author), Gleason JJ. A.).

Précis:   Mr. Wild and his wife originally owned all of the shares of P.W. Rentals Ltd. (“PWR”).  Starting in 2003 they went through a complex corporate reorganization the had the effect of substantially increasing both the adjusted cost base (ACB) and paid-up capital (PUC) of Mr. Wild’s holdings beyond their original ACB/PUC of $110.  Mr. Wild used his lifetime capital gains exemption and no tax was paid on any of the transactions.  CRA reassessed Mr. Wild and 1245989 Alberta Ltd. (1245) using GAAR on the basis that “the transactions had been undertaken in a manner that defeated the object, spirit and purpose of section 84.1 and subsection 89(1) of the Act” [para. 3].  The GAAR assessment was sustained in the Tax Court and Mr. Wild appealed to the Federal Court of Appeal.  The Court of Appeal allowed Mr. Wild’s appeal, holding that while the reorganization created the potential for a tax-free distribution of corporate retained earnings, there had been no such distribution so accordingly there had been no misuse or abuse of section 84.1.  Thus the appeal was allowed and the reassessment of Mr. Wild was vacated.  A similar result followed in the appeal of 1245.  Each party was to bear their own costs.  The Court of Appeal specifically provided that the decision was without prejudice to CRA’s right to assess any future attempt to distribute corporate surplus on a tax-free basis.

Decision:   The Court based its analysis on an often overlooked passage from the decision of Rothstein J.A. in the early GAAR case of OSFC Holdings Ltd. v. Canada, 2001 FCA 260, [2002] 2 F.C. 288:

[38]  At paragraph 42 of the reasons, Justice Rothstein concluded that neither the incorporation of the wholly owned subsidiary, nor the formation of the partnership, nor the transfer of the STIL II portfolio to the partnership resulted in any tax benefit. The tax benefit accrued only when OSFC acquired its partnership interest and became entitled to share in the partnership’s loss.

[39]  Returning to the present case, just as the pre-packaging of tax losses in OSFC did not result in a tax benefit, the transactions that resulted in the increased PUC of the Class E preferred shares of 1245 did not result in a tax benefit.

[40]  The Tax Court erred in law and in fact by misapprehending the appellant’s concession about the tax benefit. The parties agreed that the corporate reorganization resulted in an increased PUC, which increase carried the potential for a tax-free distribution of 1245’s retained earnings. The parties did not agree that any benefit had been realized by the increase in the PUC and there was no evidence before the Tax Court that would allow it to conclude that section 84.1 had been mis-used or abused by the tax-free distribution of retained earnings.

[41]  As section 84.1 was not mis-used or abused, the Minister erred in applying the GAAR.

[42]  As for the notices of determination issued by the Minister, subsection 152(1.11) permits the Minister to issue a notice of determination where “the Minister ascertains the tax consequences to a taxpayer by reason of subsection 245(2)”. Put another way, a notice of determination may be issued to correct an abuse where the GAAR applies. As there was no mis-use or abuse to justify the application of the GAAR, it follows that the notices of determination should be vacated.

[43]  I therefore propose to allow the appeal and set aside the judgment of the Tax Court. Pronouncing the judgment that ought to have been pronounced, I would vacate the notices of determination. In the circumstances I think it appropriate that each party bear their own costs.

[44]  Without pronouncing in any way on an eventual outcome, this judgment is without prejudice to the entitlement of the Minister of National Revenue to reassess the appellants in the event that the appellants do move to remove PWR’s taxable corporate surplus as a tax-free return of capital.

[45]  While this is sufficient to dispose of this appeal, I note that the Tax Court’s conclusion that section 84.1 was abused appears to have been influenced by Mr. Wild’s inability to explain the purpose of certain transactions or why the transactions were structured as they were. The purpose of the transaction is relevant when considering whether the transaction giving rise to the taxable benefit was an avoidance transaction (Copthorne, paragraph 40). The purpose of a transaction should not be the focus of the abuse analysis where the question is whether a transaction abused the object, spirit or purpose of the provisions relied on.

Thus the appeal was allowed.  Each party was to bear their own costs.