http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/145671/index.do
Univar Holdco Canada ULC v. The Queen (June 22, 2016 – 2016 TCC 159, V. Miller J.).
Précis: The nub of this decision is set out succinctly in the first few paragraphs:
[2] In 2007, CVC Capital Properties (“CVC”), a United Kingdom private equity firm, acquired Univar NV, a Netherlands public corporation. With the acquisition, CVC indirectly acquired a Canadian operating subsidiary with surplus in excess of $889,000,000. CVC carried out a series of transactions so that it could indirectly strip the surplus out of the Canadian subsidiary without paying withholding tax. The Appellant was the holding company used to accomplish the outcome in that series of transactions.
[3] The transactions were arranged to circumvent the application of the anti-avoidance rule in section 212.1 and to take advantage of the relieving exemption found in subsection 212.1(4) of the Act.
[4] The Minister of National Revenue (the “Minister”) relied on the general anti-avoidance rule (the “GAAR”) in section 245 of the Act to assess the Appellant for its 2007 taxation year. Counsel for the Appellant acknowledged that the transactions in issue resulted in a “tax benefit” for the purposes of subsection 245(1) and there was an “avoidance transaction” as that term is defined in subsection 245(3) of the Act. The sole issue before the Court was whether the transactions resulted in “abusive tax avoidance” within the meaning of subsection 245(4) of the Act.
[5] I have concluded that the transactions undertaken in this case circumvented the application of the anti-avoidance rule in section 212.1 in a manner that “frustrated or defeated the object, spirit or purpose” of section 212.1 in general and subsection 212.1(4) in particular: Canada Trustco Mortgage Company v Canada, 2005 SCC 54 at paragraph 45.
The difficulty of this decision stems from the relatively slim reasoning that allowed the Tax Court to conclude that the transaction was, as a matter of law, abusive.
Decision: The precise details of the transaction involved are quite convoluted and I will not bother setting them out since I do not think they shed much light on the question of “abuse”. The appellant’s position was that nothing in the transactions offended the well known policy of section 212.1 and therefore could not be said to be an abuse of the relieving provision of subsection 212.1(4):
[50] In his Trial Brief, counsel for the Appellant wrote that the legislative purpose underlying section 212.1 is to prevent “incestuous” reorganizations which extract surplus without a change in constructive ownership. The section is not concerned with the manner in which a true purchaser structures an arm’s length acquisition.
[51] According to the Appellant, the reorganization of the Univar group occurred in the context of an arm’s length acquisition. This was not a situation where a corporate group decided to reorganize itself to access its accumulated surplus in Canada. The purpose of the reorganization was to allow CVC, the arm’s length purchaser, access to the acquired Canadian surplus.
[52] Counsel for the Appellant stated that the ideal acquisition structure would have been to have CVC acquire Univar Canada the target corporation through a Canadian holding company that was fully-capitalized to effect the purchase. This would have allowed a tax-free intercorporate dividend to be paid by Univar Canada to the holding company, which, in turn, could return capital, tax free, to CVC, the non-resident purchaser.
[53] According to the Appellant, in the circumstances of this case, it was not practical to use a Canadian acquisition company and a different route was needed to obtain the same result.
[54] It was in the context of the arm’s-length sale of Univar NV to CVC that the relieving rule in subsection 212.1(4) was relied on. This subsection was considered at the planning stage of the acquisition of Univar NV as a relief against the application of subsection 212.1(1).
[55] Subsection 212.1(4) required that the purchaser corporation (the Appellant) be a Canadian resident and it had to control the non-resident vendor immediately before the disposition. This occurred in this case. It was the Appellant’s position that the rule contemplates that non-arm’s length transactions which meet the criteria in subsection 212.1(4) are excluded from the application of subsection 212.1(1).
The Crown did not seem to address this policy argument, basically arguing that section 212.1 was an avoidance provision, full stop:
[59] The Respondent provided a textual, contextual and purposive analysis of sections 212.1 and 89. She concluded that the object, spirit and purpose of section 212.1 is to prevent the tax free distribution of a corporation’s retained earnings to a non-resident corporation through transactions designed to distribute funds in excess of the initial investment.
[60] The Respondent concluded her written submissions with the following:
94. At the commencement of the series, the amount that could be repatriated tax-free from Canada was nominal. At the end of the series, corporate surpluses of approximately $899,000,000 were available for distribution to a non-resident with no Canadian tax consequences.
95. The non-resident taxpayer was able to access corporate surpluses with no Canadian tax consequences through a non-arm’s length transfer of a Canadian corporation to, as the corporate structure suggests at the end of the series of transactions, another Canadian corporation. Clearly, the reorganization was put in place to circumvent the application of section 212.1 and defeated its purpose and the PUC scheme of the Act as established by the Supreme Court in Copthorne. As such, the series of transactions results in an abuse of the relevant provisions of the Act having regard to those provisions read as a whole.
The Court goes through a detailed analysis of historic GAAR materials and the legislative history of section 212.1 but the discussion of the appellant’s submission that it does not offend the policy of the statute to permit surplus transfers to true arm’s length purchasers, as was the case here, is extremely limited:
[102] Before I conclude, I want to address two arguments made by Appellant’s counsel at the hearing of the appeal. The Appellant agreed in the Statement of Partially Agreed Facts that the corporations participating in the series of transactions were not dealing at arm’s length. However, at the hearing of the appeal, counsel argued that the transactions did not frustrate section 212.1 because they arose in the circumstances of an arm’s length purchase of Univar NV by CVC.
[103] CVC and Univar NV may have been operating at arm’s length when the planning and discussions for these transactions occurred. However, they were not at arm’s length by October 4, 2007 and all of these transactions took place between October 12 and October 19, 2007.
[104] The second argument made by the Appellant concerned the relevance of a Canada Revenue Agency Memorandum (“the Memo”) which I admitted into evidence under advisement. This Memo was from the GAAR Committee which addressed the application of the GAAR to the facts in the present appeal. Counsel on behalf of the Appellant submitted to the committee that the result obtained by CVC in this appeal could have been realized by fully capitalizing a Canadian acquisition corporation.
[105] Counsel for the Appellant wrote to the GAAR Committee that this alternative structure “would have ensured that cross border tax attributes (in the form of tax cost and PUC) would accurately reflect the economic cost to the purchaser of making its investment in a Canadian operating entity”.
[106] However, the Appellant did not implement this alternative structure and in tax law, form matters: Friedberg v The Queen, [1992] 1 CTC 1 at paragraph 5.
As a result the appeal was dismissed with costs.
Comment: Form obviously does matter in tax cases but one would think that form does not necessarily dictate the underlying policy of the statute where one is attempting to determine whether there is an “abuse” for GAAR purposes. This is a decision that will clearly benefit from observations from the Federal Court of Appeal on the means and methods applicable for determining the interactions of policy and form in GAAR assessments.