MNR v. Can. Trustco (2005), 340 N.R. 1 (SCC)
MLB headnote and full text
[French language version follows English language version]
[La version française vient à la suite de la version anglaise]
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Temp. Cite: [2005] N.R. TBEd. OC.022
Her Majesty The Queen (appellant) v. Canada Trustco Mortgage Co. (respondent)
(30290; 2005 SCC 54; 2005 CSC 54)
Indexed As: Minister of National Revenue v. Canada Trustco Mortgage Co.
Supreme Court of Canada
McLachlin, C.J.C., Major, Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron, JJ.
October 19, 2005.
Summary:
A sale-leaseback arrangement was accompanied by a combination of rental prepayments and banking and security arrangements that virtually ensured that the original purchaser would get paid the sums owed to it. The purchaser claimed a capital cost allowance deduction against its rental income.
The Minister of National Revenue invoked, among others, the general anti-avoidance provision in s. 245 of the Income Tax Act (Can.) and disallowed the deduction. The purchaser appealed.
The Tax Court of Canada, in a decision reported [2003] 4 C.T.C. 2006; [2003] D.T.C. 587; 2003 TCC 215, allowed the appeal. The Minister appealed.
The Federal Court of Appeal, in a decision reported [2004] N.R. Uned. 30; [2004] 2 C.T.C. 276; [2004] D.T.C. 6119; 2004 FCA 67, dismissed the appeal. The Minister appealed.
The Supreme Court of Canada dismissed the appeal.
Income Tax – Topic 1178
Income from a business or property – Deductions – Capital cost allowance – What constitutes a “capital cost” – [See sixth
Income Tax – Topic 9517
].
Income Tax – Topic 3901
Interpretation – General – The Supreme Court of Canada discussed the interpretation principles applicable to the Income Tax Act (Can.) as a whole and to specific provisions in particular – The court said that there was but one principle of interpretation: to determine the intent of the legislator having regard to the text, its context and other indicators of legislative purpose – The court added that courts could not search for an overriding policy of the Act that was not based on a unified, textual, contextual and purposive interpretation of the specific provisions in issue – To effect such a search would run counter to the overall policy of Parliament that tax law be certain, predictable and fair so that taxpayers could intelligently order their affairs – See paragraphs 10 to 17, 38 to 43.
Income Tax – Topic 9517
Tax evasion and tax avoidance – General principles – General anti-avoidance rule – The Supreme Court of Canada held that three requirements must be established to permit the application of the general anti-avoidance (GAAR) rule found in s. 245 of the Income Tax Act: (1) a tax benefit resulting from a transaction or part of a series of transactions (ss. 245(1) and 245(2)); (2) the transaction was an avoidance transaction under s. 245(3) in the sense of not having been “arranged primarily for bona fide purposes other than to obtain the tax benefit”; and (3) there was abusive tax avoidance within the meaning of s. 245(4) in the sense that it could not be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer – The burden was on the taxpayer to refute (1) and (2), and on the Minister to establish (3) – If the existence of abusive tax avoidance was unclear, the benefit of the doubt went to the taxpayer – See paragraphs 14 to 17, 63 to 66.
Income Tax – Topic 9517
Tax evasion and tax avoidance – General principles – General anti-avoidance rule – Abusive tax avoidance – Section 245(4) of the Income Tax Act (Can.) prohibited abusive tax avoidance by stating that the general anti-avoidance rule did “not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse … or an abuse” – The Supreme Court of Canada held that the determinations of “misuse” and “abuse” under s. 245(4) were not separate inquiries – Section 245(4) required a single, unified approach to the textual, contextual and purposive interpretation of the specific provisions of the Act that were relied upon by the taxpayer in order to determine whether there was abusive tax avoidance – See paragraphs 38 to 43.
Income Tax – Topic 9517
Tax evasion and tax avoidance – General principles – General anti-avoidance rule – Abusive tax avoidance – The Supreme Court of Canada ruled that there was abusive tax avoidance when: (1) a taxpayer relied on specific provisions of the Income Tax Act (Can.) to achieve an outcome that those provisions sought to prevent; (2) a transaction defeated the underlying rationale of the provisions that were relied upon; or (3) an arrangement circumvented the application of certain provisions, such as specific anti-avoidance rules, in a manner that frustrated or defeated the object, spirit or purpose of those provisions – By contrast, abuse was not established where it was reasonable to conclude that an avoidance transaction under s. 245(3) was within the object, spirit or purpose of the provisions that conferred the tax benefit – See paragraphs 36 to 62, 66.
Income Tax – Topic 9517
Tax evasion and tax avoidance – General principles – General anti-avoidance rule – Abusive tax avoidance – The Supreme Court of Canada held that once the provisions of the Income Tax Act (Can.) were properly interpreted, it was a question of fact for the Tax Court judge whether the Minister, in denying the tax benefit, had established abusive tax avoidance under s. 245(4) – Provided the Tax Court judge proceeded on a proper construction of the provisions of the Act and on findings supported by the evidence, appellate tribunals should not interfere, absent a palpable and overriding error – See paragraphs 44 to 46.
Income Tax – Topic 9517
Tax evasion and tax avoidance – General principles – General anti-avoidance rule – Abusive tax avoidance – Section 245(4) of the Income Tax Act (Can.) prohibited abusive tax avoidance by stating that the general anti-avoidance rule (GAAR) did “not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in … an abuse” – The Supreme Court of Canada held that the starting point for the analysis was the assumption that a tax benefit that would be conferred by the plain words of the Act was not abusive – This meant that a finding of abuse was only warranted where the opposite conclusion — that the avoidance transaction was consistent with the object, spirit or purpose of the provisions of the Act that were relied on by the taxpayer — could not be reasonably entertained – In other words, the abusive nature of the transaction had to be clear – The GAAR would not apply to deny a tax benefit where it could reasonably be considered that the transactions were carried out in a manner consistent with the object, spirit or purpose of the provisions of the Act, as interpreted textually, contextually and purposively – See paragraphs 36 to 62.
Income Tax – Topic 9517
Tax evasion and tax avoidance – General principles – General anti-avoidance rule – Abusive tax avoidance – The purchaser in a sale-leaseback arrangement used its own money and a $100 million loan to buy trailers and then leased them back to the seller through an intermediary – That arrangement was accompanied by a combination of rental prepayments and banking and security arrangements that virtually ensured that the purchaser would get paid the sums owed to it – The purchaser claimed a capital cost allowance (CCA) deduction against its rental income – The Minister of National Revenue invoked the general anti-avoidance rule (GAAR) in s. 245 of the Income Tax Act (Act) and denied the claim – The purchaser appealed – The Minister replied that the usual result of the CCA provisions of the Act should be overridden in the absence of real financial risk or “economic cost” in the transaction – The Tax Court of Canada rejected the Minister’s argument and allowed the appeal – The Tax Court held that there was a “cost” to the purchaser for the purpose of the CCA provisions and that a tax benefit was consistent with the object, spirit and purpose of the CCA provisions – The GAAR could not apply to disallow the tax benefit – The Supreme Court of Canada upheld the decision where the Tax Court’s conclusions were based on the correct view of the law and were grounded in the evidence – See paragraphs 67 to 80.
Words and Phrases
Tax benefit
– The Supreme Court of Canada discussed what constituted a “tax benefit” as meant under subsection (1) of s. 245 of the Income Tax Act (Can.), the general anti-avoidance rule – See paragraphs 18 to 20.
Words and Phrases
Series of transactions
– The Supreme Court of Canada discussed what constituted a “series of transactions” as meant under subsections (2) and (3) of s. 245 of the Income Tax Act (Can.), the general anti-avoidance rule, and under s. 248(10) – See paragraphs 23 to 26.
Words and Phrases
Primarily for bona fide purposes other than to obtain the tax benefit
– The Supreme Court of Canada discussed what constituted a transaction undertaken or arranged “primarily for bona fide purposes other than to obtain the tax benefit” as meant under subsection (3) of s. 245 of the Income Tax Act (Can.), the general anti-avoidance rule – See paragraphs 27 to 35.
Cases Noticed:
Kaulius et al. v. Minister of National Revenue (2005), 339 N.R. 323; 2005 SCC 55, refd to. [para. 1].
Mathew v. Canada – see Kaulius et al. v. Minister of National Revenue.
OSFC Holdings Ltd. v. Minister of National Revenue, [2002] 2 F.C. 288; 275 N.R. 238; 2001 FCA 260, refd to. [para. 9].
65302 British Columbia Ltd. v. Minister of National Revenue, [1999] 3 S.C.R. 804; 248 N.R. 216, refd to. [para. 10].
Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.), refd to. [para. 11].
Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622;, 247 N.R. 19, consd. [para. 12].
Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241, refd to. [para. 14].
Inspector of Taxes (U.K.) v. White, [1989] A.C. 398; 103 N.R. 35 (H.L.), consd. [para. 25].
Craven v. White – see Inspector of Taxes (U.K.) v. White.
Ramsay (W.T.) Ltd. v. Inland Revenue Commissioners, [1981] 1 All E.R. 865 (H.L.), refd to. [para. 25].
Hickman Motors Ltd. v. Minister of National Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 63].
Water’s Edge Village Estates (Phase II) Ltd. v. Minister of National Revenue, [2003] 2 F.C. 25; 292 N.R. 98; 2002 FCA 291, refd to. [para. 70].
Statutes Noticed:
Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 245(1), sect. 245(2), sect. 245(3), sect. 245(4), sect. 245(5), sect. 248(10) [para. 6].
Authors and Works Noticed:
Canada, Department of Finance, Explanatory Notes to Legislation Relating to Income Tax (1988), pp. 461 [para. 15]; 464 [paras. 30, 31, 48]; 465 [para. 48].
Duff, David G., Judicial Application of the General Anti-Avoidance Rule in Canada: OSFC Holdings Ltd. v. The Queen (2003), 57 I.B.F.D. Bulletin 278, p. 287 [para. 26].
Hogg, Peter W., Magee, Joanne E., and Jinyan, Li, Principles of Canadian Income Tax Law (2nd Ed. 1997), pp. 475, 476 [para. 12].
Hogg, Peter W., Magee, Joanne E., and Jinyan, Li, Principles of Canadian Income Tax Law (4th Ed. 2002), p. 563 [para. 47].
Counsel:
Graham Garton, Q.C., Anne-Marie Lévesque and Alexandra K. Brown, for the appellant;
Al Meghji, Monica Biringer and Gerald Grenon, for the respondent.
Solicitors of Record:
Deputy Attorney General of Canada, Ottawa, Ontario, for the appellant;
Osler, Hoskin & Harcourt, Toronto, Ontario, for the respondent.
This appeal was heard on March 8, 2005, by McLachlin, C.J.C., Major, Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron, JJ., of the Supreme Court of Canada.
The judgment of the Supreme Court was delivered in both official languages on October 19, 2005, by McLachlin, C.J.C., and Major, J.
