http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/145027/index.do
Coast Capital Savings Credit Union v. Canada (June 15, 2016 – 2016 FCA 181, Nadon, Rennie, Gleason (Author), JJ. A.).
Précis: The taxpayer was the trustee of RRSPs which allegedly acquired taxable Canadian property from a non-resident in the course of what was alleged to be an RRSP strip. It pleaded that the transaction was a “sham” and also pleaded that the “cost” of the purchased property was not the amount it in fact paid. The Minister moved to strike the paragraphs of the Notice of Appeal containing this pleading and she was successful in the Tax Court. The taxpayer appealed to the Federal Court of Appeal which upheld the Tax Court on both points. Costs were awarded to the Minister.
Decision: The Court of Appeal found it was not necessary to deal with the question whether a taxpayer could ever plead sham, accepting the Tax Court’s third basis for striking the impugned pleading, i.e., relevance:
[23] Coast Capital has misapprehended the nature of the Tax Court Judge’s third reason for refusing the plea of sham. Contrary to what Coast Capital suggests, she ruled that the plea of sham was irrelevant to the issues before the Tax Court and not that the plea was insufficiently particularized. In so ruling, the Tax Court Judge was correct.
[24] The nature of transaction at issue and the basis for the assessment in this proceeding must be kept in mind. Coast Capital, as trustee of the RRSPs and RRIFs in issue, is alleged to have used funds from the RRSPs and RRIFs to purchase shares in Canadian-controlled corporations from a non-resident person. Subsection 116(5) of the ITA provides that a purchaser of taxable Canadian property from a non-resident is liable to pay, as tax on behalf of the non-resident person, 25% of the cost of the taxable Canadian property acquired. As a result, the Minister assessed Coast Capital, as the purchaser of taxable Canadian property, for 25% of the cost of the shares. It is therefore being assessed for its purchase of the shares from a non-resident and not for its mistaken belief as to how much they were worth or for what happened, unbeknownst to it, after the shares were purchased. Thus, Coast Capital’s deception as to the value of the shares or as to the ultimate destination of the funds paid out of the RRSPs and RRIFs is irrelevant to the issues that were before the Tax Court.
[25] It follows that the sham doctrine has no application to the share purchase transaction at issue in this appeal. As the Tax Court Judge noted, Coast Capital and the promoters intended that Coast Capital acquire the shares for the agreed-upon purchase price. They also intended that Coast Capital release the funds from the RRSPs or RRIFs and receive the shares. Thus, the parties intended exactly what occurred.
The Court also agreed with the Tax Court Judge’s conclusion as to the pleading of “cost”:
[30] Coast Capital submits that the Tax Court Judge’s allowance of the addition of section 68 of the ITA to the provisions to be relied upon is inconsistent with her refusal to allow the pleading invoking the cost argument, set out in paragraphs 23(f), 30A and 37A of its proposed Amended Notice of Appeal.
[31] While I agree that it might not have been necessary to allow Coast Capital to add section 68 of the ITA to the list of statutory provisions that it relied on, it does not follow that the Tax Court Judge erred in failing to allow the amendments to raise the cost argument. The Tax Court Judge was correct that there is no ambiguity as to the meaning of “cost” in subsection 116(5) of the ITA. This term has been defined as meaning the amount paid by the purchaser for the capital property. In Stirling, Justice Pratte noted that the term “cost” means “the price that the taxpayer gave up in order to get the asset” and held that it did not include other charges incurred in respect of the asset. While Stirling was decided in the context of interpreting the term “cost” in the context of the ITA provisions on capital gains, it applies equally to the definition of “cost” in subsection 116(5) of the ITA. The cost of the shares to Coast Capital is what it paid for them and, for purposes of discerning their cost to Coast Capital, it matters not what their actual value might have been nor how the promoters might have diverted the funds paid by Coast Capital for the shares after the funds were paid out of the RRSPs or RRIFs.
As a consequence the taxpayer’s appeal was dismissed with costs to the Minister.