Series of Transactions and GAAR

Transactions aimed at avoiding the rules on debt forgiveness were held to be abusive under the Act in Pièces Automobiles Lecavalier inc. (2013 CCI 310), thereby causing GAAR to be applied.

Ford US held 13,050,001 common shares of Greenleaf, its Canadian subsidiary, and a debt of $24,369,439 owing by Greenleaf. Ford US agreed to sell all of its shares and the debt to 3929761 Canada Inc. (3929), a corporation with which it was dealing at arm’s length (which was to become Pièces Automobiles Lecavalier Inc. [PAL]).

However, Ford US and Greenleaf carried out two debt-cleaning transactions prior to the sale. Ford US subscribed for 1 million common shares in Greenleaf for $14,843,586, and Greenleaf repaid part of its debt. After the repayment, the balance of the debt was $9,465,163. Ford US then sold all of its shares and debt to 3929 for $1 and $9,742,007, respectively.

Without the debt-cleaning transactions, 3929 would have acquired from Ford US a debt of $24.5 million for $9.5 million. Greenleaf would have realized a gain of $15 million (partially as an income inclusion and partially as a loss of tax attributes) on the forgiveness of a debt due to the debt-parking rules.

The CRA relied on GAAR and argued that PAL had realized a gain on the debt forgiveness of $14,944,275 to which section 80 should have applied.

PAL acknowledged that it had obtained a tax benefit, and the TCC had to decide whether this benefit resulted from an avoidance transaction or series of transactions and whether the transaction or series was abusive. PAL argued (1) that the debt-cleaning transactions between Ford US and Greenleaf, as well as its purchase of the shares and the debt, were not part of the same series of transactions giving rise to a tax benefit, and (2) that the debt cleaning had been imposed on it by Ford US. The evidence adduced by PAL was considered insufficient, particularly because Ford US had not testified. The judge held that the debt-cleaning transactions were part of the same series of transactions, and that they had not been imposed by Ford US.

PAL also claimed that the debt-cleaning transactions were not avoidance transactions. It alleged that US tax considerations had motivated Ford US to enter into the transactions. On the evidence, the TCC concluded that the debt-cleaning transactions were avoidance transactions. The court also held that the series of avoidance transactions was an abuse of the debt-forgiveness rules. According to the TCC, the series of transactions had clearly circumvented sections 80 and 80.01 (and, to a lesser degree, paragraph 80(2)(g)) in order to thwart both the spirit and the purpose of the Act. GAAR was therefore applied.

In obiter, the judge mentioned that the same series of transactions would have been present even if Ford US had imposed the debt-cleaning transactions (in order to realize a capital loss when it disposed of the shares). Thus, transactions entered into for the seller’s own reasons may be included in a purchaser’s series of transactions for the purposes of the Act.

Louis-Pierre Morin
Raymond Chabot Grant Thornton SENCRL
Quebec City

Canadian Tax Focus
Volume 4, Number 1, February 2014
©2014, Canadian Tax Foundation