http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/71098/index.do 
Canada v. Lehigh Cement Limited et al. (April 23, 2014 – 2014 FCA 103) was an appeal by the Crown from a decision of the Tax Court which was blogged earlier on this site:
http://decision.tcc-cci.gc.ca/en/2013/2013tcc176/2013tcc176.html
Lehigh Cement involved an attack by CRA on a foreign affiliate structure created by a Canadian taxpayer (Lehigh Cement Limited – referred to in the Tax Court judgment as “CBR Canada”). While the precise details of the underlying transactions are quite complex, in a nutshell Lehigh provided financing to an American sister corporation (“CBR US”). The financing was accomplished by incorporating a new American corporation (“NAM LLC”) that was owned by CBR Canada (99%) and a wholly-owned Canadian subsidiary corporation of CBR Canada (“CBR Alberta”) (1%). CBR Canada borrowed funds, 99% of which was used to provide additional capital to NAM LLC, 1% of which was used to provide additional capital to CBR Alberta (which in turn used those funds to provide additional capital to NAM LLC). NAM LLC then loaned those funds to CBR US. CBR US paid interest to NAM LLC which was deductible for US tax purposes. NAM LLC was treated as a flow-through entity for US tax purposes and the interest paid by CBR US was treated as having been paid directly to CBR Canada and CBR Alberta and subject to a 10% US withholding tax. NAM LLC then distributed the funds to CBR Canada and CBR Alberta as dividends. The interest expense on the funds borrowed by CBR Canada was deductible in Canada by CBR Canada. The dividends paid by NAM LLC were taxable in Canada in the hands of CBR Canada and CBR Alberta but because they were paid out of the “exempt surplus” of a foreign affiliate, i.e., NAM LLC, they were deductible by CBR Canada and CBR Alberta under paragraph 113(1)(a) of the Income Tax Act (Canada). CRA initially considered attacking the structure under GAAR but then abandoned that line of attack. Instead they pleaded a specific anti-avoidance rule applicable to foreign affiliates: paragraph 95(6)(b):
For the purposes of this subdivision (other than section 90),
…
(b) where a person or partnership acquires or disposes of shares of the capital stock of a corporation or interests in a partnership, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition is to permit a person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, that acquisition or disposition is deemed not to have taken place, and where the shares or partnership interests were unissued by the corporation or partnership immediately before the acquisition, those shares or partnership interests, as the case may be, are deemed not to have been issued.
CRA’s argument was that the shares of NAM LLC were acquired for the principal purpose of avoiding, reducing or deferring the payment of tax otherwise payable on the interest payments made by CBR US. Both CBR Canada and CBR Alberta were accordingly reassessed to deny the deductions under paragraph 113(1)(a). Their appeals were heard together in the Tax Court and the Crown’s appeals were heard together in the Federal Court of Appeal.
In a nutshell, the Tax Court decided that the reason for the structure was to avoid US tax, not Canadian tax and therefore paragraph 95(6)(b) did not apply:
[32] Following this methodology, the Tax Court found that the taxpayers had shown that there is no tax that would have otherwise been payable. It accepted the taxpayers’ position that the reasonable alternative arrangement in this case is one in which Lehigh subscribes for shares directly in CBR US with borrowed funds. This was in substance the arrangement that existed after 1997 when NAM LLC was dissolved. In this post-1997 scenario, the Canadian tax results are the same as those that were achieved in the transactions at issue here. For good measure, the Tax Court noted that since the tax savings in issue could have been obtained without acquiring the shares, it accepted that the acquisition’s principal purpose was to avoid U.S. tax, not Canadian tax.
[33] The Tax Court concluded that paragraph 95(6)(b) did not apply to the taxpayers’ acquisition of the shares of the non-resident corporation, NAM LLC. Therefore, they could rely on paragraph 113(1)(a) to deduct the dividends received from NAM LLC.
The Federal Court of Appeal summarized the position of the parties as follows:
[35] The taxpayers submit that paragraph 95(6)(b) focuses upon the principal purpose of the particular acquisition or disposition of the shares, not the principal purpose of the series of transactions of which the acquisition or disposition forms a part. It is meant to remedy a situation where a taxpayer attempts to manipulate the ownership status of a non-resident corporation for the principal purpose of gaining a tax advantage from that ownership status. It is not meant to remedy a situation where a taxpayer engages in a series of transactions that achieve any other favourable tax result.
[36] The Crown disagrees and submits that paragraph 95(6)(b) has a broader anti-avoidance purpose. The Crown argues that in discerning the principal purpose of an acquisition of shares of a non-resident corporation, one may look to the entire series of transactions of which the acquisition or disposition forms a part in order to determine whether there is any tax avoidance purpose at all.
The court outlined its view of the interpretative process with taxation statutes:
[41] When interpreting provisions in taxation statutes, we must keep front of mind their real life context: many taxpayers study closely the text of the Act to manage and plan their affairs intelligently. Accordingly, we must interpret “clear and unambiguous” text in the Act in a way that promotes “consistency, predictability and fairness,” with due weight placed upon the particular wording of the provision: Canada Trustco, at paragraph 12, citing Shell Canada Ltd., supra at paragraph 45.
[42] We must not supplant or qualify the words of paragraph 95(6)(b) by creating “unexpressed exceptions derived from [our] view of the object and purpose of the provision,” or by resorting to tendentious reasoning. Otherwise, we would inject “intolerable uncertainty” into the Act, undermining “consistency, predictability and fairness”:
65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at paragraph 51, citing P. W. Hogg and J. E. Magee,
Principles of Canadian Income Tax Law (2nd ed. 1997) at pp. 475-76; see also
Canada Trustco, at paragraph 12.
[43] In the course of applying these principles, legislative history and explanatory documents such as technical notes, budget papers and committee minutes can offer assistance.
[44] Overall, though, our task is to discern the meaning of the provision’s text using all of the objective clues available to us.
Based on this approach the court concluded that the tax avoidance at issue was the manipulation of share ownership for the purposes of subdivision i of Division B of Part I of the Act,
Shareholders of Corporations Not Resident in Canada:
[55] On the facts of this case, the tax advantage is created by section 113 and depends on whether the non-resident corporation has the status of “foreign affiliate” under subsection 95(1). Taxpayers can easily manipulate this status by acquiring or disposing of shares. Paragraph 95(6)(b) creates a fix by requiring in appropriate cases that the acquisition or disposition of shares be ignored. Under this interpretation, the fix fits the problem. It would take clearer wording to lead to the conclusion that the fix in paragraph 95(6)(b) is aimed at a broader problem.
[56] From the foregoing analysis then, it seems to me that the species of tax avoidance addressed by paragraph 95(6)(b) is the manipulation of share ownership of the non-resident corporation to meet or fail the relevant tests for foreign affiliate, controlled foreign affiliate or related-corporation status in subdivision i of Division B of Part I of the Act.
The court rejected the Crown’s attempt to impose a much broader anti-avoidance construction on the provision:
[62] In this case, the Crown’s oral and written submissions suggest that paragraph 95(6)(b) is capable of being applied in a variety of circumstances where a taxpayer has engaged in what the Minister considers to be abusive tax planning involving foreign corporations. Indeed, the Crown seems to believe that the paragraph can be used even if the non-resident corporation has obtained foreign affiliate status without any artificial manipulation of share ownership.
[63] At the same time, however, the Crown does not take the view that whenever paragraph 95(6)(b) can be applied, it will. Rather, the Crown says that paragraph 95(6)(b) will be applied only where the tax avoidance is unacceptable.
[64] Unacceptability is in the eye of the beholder. It can shift depending on one’s subjective judgment and mood at the time. Using it, as the Crown suggests, to restrain the indiscriminate use of paragraph 95(6)(b) creates the spectre of similarly-situated taxpayers being treated differently for no objective reason. This would violate the principle that, absent clear legislative wording, the same legal principles should apply to all taxpayers:
Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32 at page 46.
The court concluded that the Tax Court had not erred in rejecting the Minister’s assertion that the transactions in question were designed to manipulate share ownership to meet the test for “foreign affiliate” and derive a Canadian tax benefit:
[71] In this case, the Tax Court found that the principal purpose behind the acquisition of shares in the non-resident corporation, NAM LLC, viewed in light of the entire series of transactions, was to achieve overall U.S. tax savings. Further, the Tax Court found that the Canadian tax savings could have been obtained without acquiring the shares in the non-resident corporation.
[72] On the basis of these considerations and the record of evidence before it, the Tax Court concluded that the taxpayers’ acquisition of shares in the non-resident corporation did not result in an avoidance of Canadian tax. In substance, the Tax Court rejected the submission that the taxpayers’ principal purpose was to manipulate share ownership of the non-resident corporation to meet the test for “foreign affiliate” in subdivision i of Division B of Part I of the Act and gain a Canadian tax benefit.
[73] In reaching these conclusions, the Tax Court did not err in principle. Further, these conclusions were open on the record before it. This Court has no ground to intervene.
[74] It follows that paragraph 95(6)(b) does not apply in this case. Therefore, I agree with the result reached by the Tax Court – the Minister’s reassessments for the 1996 and 1997 taxation years cannot stand.
In the result, the appeal was dismissed with costs.