Canadian GAAR Update

On December 16, 2011, the Supreme Court of Canada released the long-awaited decision in the Copthorne Holdings Ltd case.  For the benefit of our colleagues, we posted the headnote to the case. The whole decision can be read at the Supreme Court of Canada’s website here.

The case dealt with the applciation of the General Anit–Avoidance Rule (known as the GAAR) to a cross-border reorganization. The Supreme Court of Canada dismissed the taxpayer’s appeal.

TaxChambers LLP will provide a detailed analysis of the decision in one of our upcoming webinars.  Please check your email or visit our website later for announcement.






Citation: Copthorne Holdings Ltd. v. Canada, 2011 SCC 63 Date: 20111216Docket: 33283



Copthorne Holdings Ltd.



Her Majesty The Queen




Coram: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ.


Reasons for Judgment:(paras. 1 to 128) Rothstein J. (McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron and Cromwell JJ. concurring)


Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports.






copthorne holdings ltd. v. canada

Copthorne Holdings Ltd.                                                                                 Appellant


Her Majesty The Queen                                                                              Respondent

Indexed as:  Copthorne Holdings Ltd. v. Canada

2011 SCC 63

File No.:  33283.

2011:  January 21; 2011:  December 16.

Present:  McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ.

on appeal from the federal court of appeal

Taxation ― Income tax ― Tax avoidance ― Interpretation and application of general anti‑avoidance rule ― Series of transactions involving paid‑up capital of a corporation ― Treatment of paid‑up capital upon amalgamation – Withholding tax on deemed dividend ― Whether these transactions resulted in a tax benefit ― Was the transaction giving rise to tax benefit an avoidance transaction ― Interpretation of “contemplation” in the test for a statutory series ― Whether transaction or series of transactions results in abuse and misuse of Income Tax Act ― Whether general anti‑avoidance rule applicable to deny tax benefit ― Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 84(3), 87(3), 89(1), 245(1) to (5), 248(10).

By a series of transactions, two Canadian corporations within the same corporate group (referred to in reasons as Copthorne I and VHHC Holdings Ltd.) that had been parent and subsidiary became “sister” corporations — that is, corporations owned directly by the same non‑resident shareholder, Big City B.V.  The sister corporations were then amalgamated — a “horizontal” amalgamation — and the paid‑up capital (“PUC”) of their respective shares was aggregated to form the PUC of the shares of the amalgamated corporation.  Had they remained as parent and subsidiary, the PUC of the shares of the subsidiary would have been cancelled on amalgamation.  The amalgamated corporation then redeemed a large portion of its shares and paid out the aggregate PUC attributable to the redeemed shares to its non‑resident shareholder.  That payment was not treated as taxable income to the shareholder but instead as a return of capital.

No provision of the Income Tax Act (“Act”) expressly required the return of PUC in this case to be treated as a taxable payment.  Nonetheless, the Minister of National Revenue considered the transactions by which the parent and subsidiary became sister corporations to have circumvented certain provisions of the Act in an abusive manner and thus to have contravened s. 245 of the Act, the general anti‑avoidance rule, or the “GAAR”.  Applying the GAAR, the Minister concluded that the PUC of the shares of the former subsidiary should have been cancelled upon amalgamation with its former parent corporation, as required by s. 87(3).  If the PUC of the shares of the amalgamated corporation was reduced, the amount paid to the shareholder in excess of the reduced PUC would have constituted a deemed dividend subject to tax.  The Minister reassessed the amalgamated corporation for unpaid withholding tax on the deemed dividend portion of the amount paid to the non‑resident shareholder upon redemption.  The Tax Court of Canada and Federal Court of Appeal upheld the reassessments.

Held:  The appeal should be dismissed.

The general anti‑avoidance rule (“GAAR”) scheme is set out in ss. 245(1) to (5) of the Act and requires that three questions be decided:  (1) was there a tax benefit; (2) was the transaction giving rise to the tax benefit an avoidance transaction; and (3) was the avoidance transaction giving rise to the tax benefit abusive.  The burden is on the taxpayer to refute the Minister’s assumption of the existence of a tax benefit.  Where, as here, the Tax Court judge has made a finding of fact on the existence of a tax benefit, it is only appropriate for a reviewing court to overturn such a finding where an appellant can show a palpable and overriding error.  The existence of a tax benefit can be established by comparing the taxpayer’s situation with an alternative arrangement that could reasonably have been carried out but for the existence of the tax benefit.  In this case, the vertical amalgamation comparison used by the Minister was appropriate, and the finding of the Tax Court that there was a tax benefit should be affirmed.

Under s. 245(3) of the Act, a transaction will be an avoidance transaction if it results in a tax benefit, and is not undertaken primarily for a bona fide non‑tax purpose.  An avoidance transaction may operate alone to produce a tax benefit, or may operate as part of a series of transactions to produce a tax benefit.  Where, as here, the Minister assumes that the tax benefit resulted from a series of transactions rather than a single transaction, it is necessary to determine if there was a series, which transactions make up the series, and whether the tax benefit resulted from the series.  The starting point is the common law test for a series upon which “each transaction in the series is pre‑ordained to produce a final result”.  Section 248(10) of the Act extends the meaning of “series of transactions” to include any related transactions or events completed in “contemplation” of the series.  The Court must decide whether the series was taken into account when the decision was made to undertake the related transaction in the sense that it was done, on a balance of probabilities, “in relation to” or “because of” the series.  Each case will be decided on its own facts.  The length of time between the series and the related transaction may be a relevant consideration in some cases, as would intervening events taking place between the series and the completion of the related transaction.  Although the “because of” or “in relation to” test does not require a “strong nexus”, it does require more than a mere possibility or a connection with an extreme degree of remoteness.

“Contemplation” in s. 248(10) should be read both prospectively and retrospectively.  The text and context of s. 248(10) leave open when the contemplation of the series must take place.  Nothing in the text specifies when the related transaction must be completed in relation to the series.  Specifically, nothing suggests that the related transaction must be completed in contemplation of a subsequent series.  Here, the Tax Court and the Federal Court of Appeal correctly concluded that the redemption transaction was part of the same series as the prior sale and amalgamation, and that the series, including the redemption transaction, resulted in the tax benefit.

If there is a series that results, directly or indirectly, in a tax benefit, it will be caught by s. 245(3) as an avoidance transaction unless each transaction within the series could reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit.  This determination is to be objectively considered, and must be based on all of the evidence available to the court.  Here, the Tax Court judge was correct to find that the sale of the VHHC Holdings shares to the non‑resident parent corporation was not primarily undertaken for abona fide non‑tax purpose.  Because there was a series of transactions which resulted in a tax benefit, the finding that one transaction in the series was an avoidance transaction satisfies the requirements of s. 245(3).

In order to determine whether a transaction is an abuse or misuse of the Act, a court must first determine the object, spirit or purpose of the provisions that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids.  While an avoidance transaction may operate alone to produce a tax benefit, it may also operate as part of a series of transactions that results in the tax benefit.  While the focus must be on the transaction, where it is part of a series, it must be viewed in the context of the series to enable the court to determine whether abusive tax avoidance has occurred.  In such a case, whether a transaction is abusive will only become apparent when it is considered in the context of the series of which it is a part and the overall result that is achieved.  The analysis will lead to a finding of abusive tax avoidance:  (1) where the transaction achieves an outcome the statutory provision was intended to prevent; (2) where the transaction defeats the underlying rationale of the provision; or (3) where the transaction circumvents the provision in a manner that frustrates or defeats its object, spirit or purpose.  These considerations are not independent of one another and may overlap.

To determine if there was abuse in this case, it is s. 87(3) of the Act, which deals with the PUC of shares of amalgamated corporations, that must be at the centre of the analysis.  The text of s. 87(3) ensures that in a horizontal amalgamation the PUC of the shares of the amalgamated corporation does not exceed the total of the PUC of the shares of the amalgamating corporations.  Section 87(3) also provides, in its parenthetical clause, that the PUC of the shares of an amalgamating corporation held by another amalgamating corporation is cancelled.  Having regard to the text, context and purpose of s. 87(3), the object, spirit and purpose of the parenthetical portion of the section is to preclude preservation of PUC of the shares of a subsidiary corporation upon amalgamation of the parent and subsidiary where such preservation would permit shareholders, on a redemption of shares by the amalgamated corporation, to be paid amounts as a return of capital without liability for tax, in excess of the amounts invested in the amalgamating corporations with tax‑paid funds.

The appellant, Copthorne Holdings Ltd. agrees that s. 87(3) would have led to a cancellation of the applicable PUC of the VHHC Holdings shares if it had been vertically amalgamated with Copthorne I.  Instead of amalgamating the two companies, Copthorne I sold its VHHC Holdings shares to the non‑resident parent corporation in order to avoid the vertical amalgamation and cancellation of the PUC of the shares of VHHC Holdings.  The transaction obviously circumvented application of the parenthetical words of s. 87(3) upon the later amalgamation of Copthorne I and VHHC Holdings, now as sister corporations.

The sale by Copthorne I of its VHHC Holdings shares, which was undertaken to protect $67,401,279 of PUC from cancellation, while not contrary to the text of s. 87(3), does frustrate and defeat its purpose.  The tax‑paid investment here was in total $96,736,845.  To allow the aggregation of an additional $67,401,279 to this amount would enable payment, without liability for tax by the shareholders, of amounts well in excess of the investment of tax‑paid funds, contrary to the object, spirit and purpose or the underlying rationale of s. 87(3).  The sale of VHHC Holdings shares circumvented the parenthetical words of s. 87(3) and in the context of the series of which it was a part, achieved a result the section was intended to prevent and thus defeated its underlying rationale.  The transaction was therefore abusive and the assessment based on application of the GAAR was appropriate.