Nathan Boidman, of Davies Ward Phillips & Vineberg, said the Supreme Court’s decision has already sparked controversy among tax advisers.
Canada’s GAAR states it is legitimate for a taxpayer to reduce tax by undertaking a plan of action which has no business purpose, provided it does not misuse a provision of the law or abuse the law read as a whole.
In cases such as Copthorne, where the taxpayer has relied upon a particular tax rule in its planning, the onus is on the government to show the clear object, spirit or purpose (collectively referred to in Copthorne as the rationale) the rule was intended to achieve.
The government must then prove that this rationale has been defeated, frustrated or circumvented by the taxpayer.
Boidman said the ruling has provided at least four significant outcomes.
“Firstly, the basic approach of the court is confirmed, although the decision may be seen to expand the scope of GAAR.
“It appears (notwithstanding an assertion to the contrary in paragraph 118 of the judgement) that the court added an element in the approach to determining rationale that had been specifically rejected in its prior decisions [Canada Trustco, Mathew and Lipson] on GAAR, principally the search for an overarching policy, in this case a policy against surplus stripping,” said Boidman.
Another outcome is the Supreme Court’s acknowledgement of the difficulty in applying the principle of rationale; this makes planning unpredictable for taxpayers, as there may be no way of knowing how the rationale will apply in any given situation.
The third point Boidman raises is that the thrust of the government’s argument was based upon the taxpayer’s need to use an amalgamation to utilise certain corporate level losses.
Boidman said this entire argument would have been wiped out had there been no such need and, instead, Copthorne had merely sold the second tier (VHHC Holdings) to the Barbados grandparent corporation (owned by the Li family) and then redeemed shares in both standalone (non-amalgamated) Canadian subsidiaries.
In such a case, the taxpayer would still have achieved use of the paid up capital but the government would have had to develop a different argument to try to apply the GAAR.
“The fourth point is that the court confirmed, in considering whether a particular transaction is part of a series that includes the avoidance transaction, reference can be made to prior transactions as being the reason the later one has been consummated – that is backward contemplation.
“The court also favoured the Federal Court of Appeal view over that of the Tax Court that there need not be a strong nexus to be part of a series but there must be something more than a mere or remote possibility,” said Boidman.
