“Copthorne and the Future of GAAR”: Report from the Conference at the U of T Faculty of Law

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“Copthorne and the Future of GAAR”: Report from the Conference at the U of T Faculty of Law

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On Friday January 6, 2012, the University of Toronto and the University of British Columbia National Centre for Business Law presented a panel discussion on the recent decision of the Supreme Court of Canada in Copthorne Holdings Ltd. v. The Queen.

The discussion, held at Flavelle House at the University of Toronto’s Faculty of Law, was hosted by U of T’s Professor Ben Alarie. The panelists included Professor David Duff (UBC Faculty of Law), Deen Olsen (Department of Justice), Mark Brender (Osler Hoskin and Harcourt LLP), Robert Couzin (Couzin Taylor LLP), Phil Jolie (Canada Revenue Agency), and Professor Tim Edgar (Osgoode Hall Law School).

The general view of the panelists was that the decision was well-written and comprehensive, but does not add much that is new or insightful to the existing GAAR jurisprudence.

Deen Olsen noted that there are six points the Department of Justice believes are important in interpreting the Supreme Court’s reasoning about “series of transactions”:

  1. “Series of transactions” in subsection 248(10) is to be interpreted expansively.
  2. The taxpayer bears the onus of rebutting the Minister’s assumption that particular transactions form part of a series.
  3. Which transactions are included in a series will depend of the facts of each case.
  4. A “strong nexus” is not required for a transaction to be included in a series.
  5. Transactions will not be included in a series where subsequent transactions are only a mere possibility or connected with an extreme degree of remoteness.
  6. The analysis of whether certain transactions form part of a series may be undertaken prospectively or retrospectively.

Phil Jolie stated that it will be “business as usual” for the CRA with respect to its approach to the application of the GAAR. Mr. Jolie noted a few specific points regarding the CRA’s interpretation of the decision:

  1. The decision does not say that a comparison of the difference in tax result between dividend treatment and capital gains treatment is irrelevant to the GAAR analysis.
  2. Though the decision does not say that there is a general anti-surplus stripping policy in the Income Tax Act, the CRA may still be able to argue in “bits and pieces” based on the jurisprudence that such a policy does exist.
  3. Despite the Court’s comment that the GAAR does not include a “smell test”, such a test does likely exist and the CRA’s analysis of a transaction will look at any anomalous result (i.e., the bad smell) but the CRA will ask why the result is anomalous and whether an argument exists that the outcome was the result of an abuse of the Act (in other words, the smell test is part of the process but not the end of the process).
  4. The Court’s statement that it must be “clear” that the taxpayer abused the Act must mean that the Minister must prove the abuse on a “balance of probabilities”.
  5. Paid up capital, as a tax attribute, is likely becoming less valuable because of the reduction of the withholding rate on dividends to 5% in the tax treaties between Canada and its major trading partners.
  6. There is likely no anti-PUC trading scheme in the Act because the Act is not concerned with PUC trading in the same way that it is concerned with, and precludes, loss trading (i.e., the prohibition on loss trading is intended “to keep factories open” whereas an anti-PUC trading regime would not accomplish that goal).

The afternoon concluded with remarks by the former Chief Justice of the Tax Court of Canada, Donald G.H. Bowman, who noted that the unanimous 9-0 decision was a credit to Chief Justice Beverley McLachlin as the Court produced a well-written and sensible decision, which many in the tax community had wished for in Lipson v. The Queen.

The Copthorne decision will continue to provoke analysis and discussion. The conversation will continue with a second conference in Toronto sponsored by the Canadian Tax Foundation on January 26.

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Categories: GAAR, General Anti-Avoidance Rule, Supreme Court of Canada