Decision highlights CRA’s overzealous tax litigation policy

Monday, November 13, 2017

Sometimes, litigants get so caught up in zealotry that they lose sight of basic underlying factors.

That, perhaps, is part of the cost of the adversarial system. But when the zealot is the Crown in a country that faces vexing issues of delays in the court system and access to justice in general, some questions should be asked.

There’s no doubt that the Supreme Court of Canada’s practical, commercially oriented approach to the general anti-avoidance rule (GAAR) found in the Income Tax Act (ITA), an approach first enunciated in 2005 in Canada Trustco Mortgage Company v. Canada, has been a thorn in the side of the feds and the Canada Revenue Agency (CRA).

Nowhere has this been more evident than in the recent judgment of the Federal Court of Appeal in Univar Holdco Canada ULC v. Canada, where the relative success taxpayers have had with the GAAR rule in the last 12 years appears to have clouded the judgment of the sovereign’s representatives, if not driven them to distraction.

Why else would the minister argue that a transaction which admittedly did not attract tax had it been structured under a different provision of the ITA attracted GAAR at all? The purpose of GAAR, everyone agrees, is to prevent abuse. How can something that is in substance ratified elsewhere in the ITA be abusive?

Here’s what happened. Simply stated, s. 212.1 of the ITA taxes capital gains arising from the proceeds of non-arm’s length shares sales between non-resident shareholders of a Canadian corporation and another Canadian company.

In 2007, CVC Capital Projects (CVC) acquired Univar NV, a Netherlands public company that controlled Univar Holdco Canada (Univar). Section 212.1 would not have applied had CVC established a Canadian corporation to directly acquire Univar. Although this was a common way of effecting such transactions, it was not commercially viable in this case.

Instead, CVC bought the shares of Univar NV and followed with a series of non-arm’s length transactions designed to take advantage of an exemption found in subsection 212.1(4) at the time of the transaction. In 2016, almost a decade after the transactions took place, legislative amendments eliminated the exemption. Despite the fact that CVC’s strategy produced exactly the same result as if it had established a Canadian corporation, the minister took the position that GAAR applied to the impugned transaction — notwithstanding that it was motivated by valid commercial objectives.

In total disregard of the real world, then, the CRA’s position was that CVC’s strategy was artificial and its legitimacy was unaffected by the fact that the ITA in substance allowed the result that CVC’s alternate process had produced.

“It’s like putting blinders on a horse,” said William Innes, a veteran tax litigator who is counsel at Rueters LLP in Toronto.

Which is the way the FCA saw it. The court accepted the common sense approach of CVC’s counsel, Matthew Williams in the Toronto office of Thorsteinssons LLP. He didn’t fight the Crown’s position that form matters in tax cases, but pointed out that it made no sense applying this principle in GAAR cases, which were intended to prevent the exploitation of form over substance in the first place.

According to the FCA, then, the availability of an alternative path in the ITA that achieved the same result as the impugned transaction militated against the application of GAAR.

As it turns out, the CVC was in the FCA because the Tax Court of Canada had ruled against it. What’s distressing about that judgment is the way Justice Valerie Miller arrived at her conclusion that the Univar transaction fell victim to GAAR.

Miller noted that, at the time of the TCC hearing, the government was proposing that the exemption provision in s. 212.1(4) be amended to preclude the exemption’s use in circumstances akin to the Univar transaction.

The amendments have since been implemented, but have no retroactive effect. Still, Justice Miller took into consideration what was then a proposed amendment that did not propose to have retroactive effect and applied it to a transaction that occurred nine years earlier. Justice Miller reasoned that because the proposed amendment changed the wording so that the exemption would have been inapplicable in the circumstances of the CVC transaction had it occurred after 2016, it reflected on whether on not the transaction was abusive in 2007.

Fortunately, the FCA stomped on that as well.

Good thing. Can you imagine how much more uncertain our already incomprehensible income tax legislation might be if Canadian business had to structure its affairs with an eye to potential non-retroactive legislation 10 years down the road?

You can’t help but wonder how long our government will continue promoting a tax litigation policy that seeks to close down all perceived loopholes — whether they are actually loopholes or not.

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