FCA Applying GAAR: Has a Tax Benefit Been Realized?
Two FCA decisions on GAAR released within months of each other both
dealt with the issue of whether a "tax benefit" (defined in section 245)
was realized. This is a point that is usually conceded by the taxpayer
and not litigated, so judicial decisions on the topic are rare. In both
cases, the final step or steps of the transaction had not occurred,
which was probably why the taxpayer argued that no benefit had been
received. In Fiducie financière Satoma v. Canada (2018 FCA 74), the FCA found that there was a benefit; in Wild v. Canada (Attorney General) (2018 FCA 114),
it found that there was not. Both cases make the judgment by reference
to the degree of benefit received by the taxpayer that was before the
court (in each decision, an interposed entity), not those who might
ultimately benefit from the tax plan.
In Wild, the PUC averaging provision in subsection 89(1) was
used to circumvent the PUC grind prescribed in section 84.1. The effect
of the transactions was to step up the PUC and ACB of shares in the
taxpayer from nominal amounts to $600,000 and $750,000, respectively,
all of which was completed tax-free to the taxpayer's owner (an
individual) because of that individual's LCGE.
The TCC (1245989 Alberta Ltd. v. The Queen, 2017 TCC 51)
found that there was a tax benefit and that the series of transactions
violated the spirit and purpose of section 84.1. The FCA overturned the
TCC's decision. Although the corporate reorganization changed the tax
attributes of the relevant shares and created the potential for a
tax-free distribution of the Newcos' retained earnings, such a
distribution had not occurred. Consequently, section 84.1 had not been
misused or abused, and GAAR did not apply.
In Satoma, an Opco was able to engineer the payment of a
dividend to a family trust by using two holding companies. Through the
combined effect of subsection 112(1) and subsection 75(2), the trust
received a number of dividends tax-free. These tax-free funds in the
Satoma Trust could ultimately be capitalized and eventually distributed
tax-free to the individual beneficiaries (not the corporate
beneficiaries). This step had not taken place at the time of
The TCC (Fiducie Financière Satoma v. The Queen, 2017 TCC 84)
held that the use of subsection 75(2) as a surplus-stripping tool was
an abuse. Lamarre J said that the provision was intended to prevent
income splitting, not to assist in surplus stripping. The FCA upheld the
TCC's decision. The FCA gave great weight to the fact that the
appellant in the case was the family trust, not the trust beneficiaries
themselves, and that the combination of two otherwise unrelated sections
of the Act became abusive when they functioned together to circumvent
the purpose of each provision.
One common element of the FCA's decisions in Wild and Satoma is that the appellant in each case was the interposed entity (in Wild, the Newcos; in Satoma, the trust), and not the persons who would ultimately benefit from each avoidance scheme. In Satoma,
the FCA made it clear that this was a central element in upholding the
TCC's decision to dismiss the taxpayer's appeal, indicating (at
paragraph 46) that the question was whether the trust, not its
beneficiary, had received a "benefit."
The taxpayer in Satoma, the family trust, was able to avoid the
payment of tax on taxable dividends received from the Opco, which the
trust could then invest or distribute to its beneficiaries tax-free. The
tax impact on the trust would have been substantial if the same
transactions had occurred without the abusive combination of
subsection 112(1) and subsection 75(2).
In contrast, the Newcos in Wild had not actually gained any tax
benefit at the time of the reassessment. The PUC and ACB of the Newco
shares had been stepped up, but the corporations would have been able to
receive tax-free intercorporate dividends from the original corporation
regardless of the abusive transactions. The tax benefit is received,
and therefore GAAR is potentially triggered, only when the Newcos
distribute their retained earnings to the shareholder as a tax-free
return of capital.
Buschke Law, Toronto