Alberta Court of Appeal finds inter-provincial tax planning not abusive under GAAR

Recently, the Alberta Court of Appeal released their decisions in Husky Energy Inc. v Alberta and Canada Safeway Limited v Alberta. The appeals addressed the application of the general anti-avoidance rule (GAAR) found in the Alberta Corporate Tax Act in situations where a taxpayer takes advantage of another province’s tax regime. The GAAR found in the Alberta Corporate Tax Act is identical to the federal GAAR in section 245 of the Income Tax Act (the “Act”).


The facts of these cases are complex and involve a series of financing transactions known as the “Ontario Shuffle.”  Generally, the “Ontario Shuffle” consisted of the following transactions:

  • ParentCo invests in OntCo, an Ontario resident subsidiary incorporated outside of Canada;
  • OntCo loans money to LoanCo. LoanCo can be either be ParentCo or a related company. This loan creates a legal obligation to pay interest to OntCo;
  • LoanCo makes interest payments to OntCo. LoanCo deducts the interest it paid from income under paragraph 20(1)(c) of the Act;
  • OntCo receives interest income from LoanCo; and
  • OntCo declares dividends to ParentCo, or another related company, which includes these dividends in income, and subsequently claims a deduction for these inter-corporate dividends.

The purpose of the “Ontario Shuffle” was to take advantage of the Ontario Corporate Tax Act (OCTA), which allowed certain corporations to not include certain interest income to be taxable for provincial tax purposes.  As a result, OntCo would have no taxable income, while LoanCo would have a deduction for interest paid to OntCo.

In Husky Energy and Canada Safeway, the Alberta companies paid interest to a Corporation resident in Ontario and deducted these payments from income. Pursuant to the OCTA, the Ontario resident company received the interest payments but did not include them in taxable income on their Ontario corporate tax return. The result was that the Alberta companies deducted interest paid on loans from their income, and the Ontario companies deducted these received interest payments from their income on their provincial returns.

Alberta reassessed the taxpayers and denied the Alberta provincial interest expense deduction. The Queen’s Bench judges in both cases found that Alberta failed to meet its burden to prove that the transactions were abusive.

GAAR Analysis

The Court applied the GAAR jurisprudence developed in the Supreme Court of Canada. According to this case law, there are three questions to be decided in a GAAR analysis:

  1. Was there a tax benefit?
  2. Was the transaction (or series of transactions) giving rise to the tax benefit an avoidance transaction?
  3. Was the avoidance transaction giving rise to the tax benefit abusive?

In both cases, there was a clear tax benefit as the taxpayers deducted interest payments on their Alberta corporate tax returns.  The taxpayers conceded that the transactions giving rise to the tax benefits were avoidance transactions.  Therefore, the primary issue before the Alberta Court of Appeal was whether the avoidance transactions were abusive.

The Court conducted an analysis of the interest deduction provision in the Alberta Corporate Tax Act which, for the Court’s purposes, was identical to paragraph 20(1)(c) of the Act. They confirmed that the purpose of the provision is to ensure that the deductible amount is reasonable. The Court found that its object is drafted to review the amount from the borrower’s perspective and not the lenders.  Ultimately, the Court found that the transactions were not abusive because the interest payments by the borrower/taxpayer were reasonable.  Further, the Court decided that the circumstances of the Ontario lender were not part of the provision’s purview.

Exploiting the Lack of Alignment between Federal and Provincial Tax Acts

The Crown asked the Court to determine whether exploiting the lack of alignment between federal and provincial legislation could be abusive avoidance. Having found that the transactions were not abusive, the Court did not need to address this question. However, Hunt J.A. wrote:

“The constitutional reality of Canada is that each level of government has taxation authority. Provinces are free to fully adopt the federal system, and some have done so. Alberta and Ontario have not. Each case of alleged abuse must be carefully assessed in the context of Supreme Court law.”

This statement casts doubt over whether exploiting the lack of alignment between tax statutes is, in and of itself, abusive. As with any GAAR matter, the tax authority has the burden to prove that a specific provision in its own taxation statute was circumvented in a manner that frustrates or defeats the object, spirit or purpose of that provision.  In this case, the Alberta Court of Appeal found that they had not met their burden.

Despite these decisions, these cases should not be taken as precedents for the proposition that inter-provincial tax planning is not “GAARable”.   The exploitation of the lack of alignment between federal and provincial tax statutes could still be challenged using the GAAR if it is within the tax authority’s jurisdiction.  However it should be noted that this specific type of planning is no longer available as Ontario has eliminated this favourable treatment of certain interest income.

Finally, it should be noted that the exploitation of any lack of alignment between federal and provincial tax acts is becoming less of an issue. Provinces, including Ontario, are increasingly harmonizing their corporate tax regimes with the federal government as they enter into collections agreements with the federal government. As these provinces would use the same tax base for income tax purposes, there would be no room for certain type of planning.  However, certain provinces will continue to resist this harmonization and, as such, differences between federal and provincial tax acts will continue to exist.  Finally, even with the increased prevalence of collection agreements, each province will still control their corporate tax rates and the difference in these tax rates will continue to drive taxpayers to undertake inter-provincial tax planning.

It should be noted that leave to appeal to the Supreme Court of Canada has been filed.  We shall monitor this and update this matter accordingly.