Federal Appeal


Income tax

Tax avoidance

Section 97(2) not frustrated when deferred recapture untaxed so long as holding period met

Taxpayer engaged in series of transactions involving rolling three real estate properties through tiered partnership structure, increasing adjusted cost base and selling interests to tax-exempt entities without tax being paid on latent recapture and accrued gains. Minister’s reassessment applied s. 100(1) of Income Tax Act on resulting capital gain giving rise to taxable capital gain of $148,187,562.00 reflecting recapture of $116,591,744.00 and taxable capital gain of $32,203,408.00; $21,285,500.00 being attributable to depreciable property and $10,917,908.00 attributable to non-depreciable property. Tax Court judge held that transaction did not to amount to abusive tax avoidance. Minister appealed. Appeal allowed in part. Inquiry as to whether abuse was question of mixed fact and law and subject to standard of palpable and overriding error. Tax Court judge focused attention on three year holding period in s. 69(11) of Act, and concluded that s. 97(2) not frustrated when deferred recapture went untaxed, so long as holding period met. No basis for Tax Court judge’s conclusion that certainty, predictability and fairness in tax law required that three year limitation found in s. 69(11) be applied to s. 97(2). Allowing property taxed at 50 per cent rate to augment value of property taxed at 100 per cent would result in obvious revenue loss which is why depreciable property that gave rise to 100 per cent rate cannot be bumped. Bump pertaining to depreciable property on which CCA has been claimed would increase UCC and decrease latent recapture which is subject to 100 per cent rate of inclusion. Practical effect was that GAAR need no longer be resorted to prevent result achieved. Result which allowed taxpayer to avoid paying tax on latent recapture in the amount of $116,591,744.00 frustrated s. 100(1)(b). Minister could not reassess taxpayer on basis that overall result achieved by circumscribed use of bump provisions was abusive. Amounts included under s. 100(1)(a) and 100(1)(b) did not reflect reasonable consequences as no abuse resulted from avoidance of taxable capital gain in of $10,917,900.00 under former and only abuse of latter pertained to avoidance of tax on recapture, agreed to be $116,591,744.00. Re-assessment referred back to Minister for reassessment on basis that s. 100(1) gave rise to taxable capital gain of $116,591,744.00 rather than $148,187,562.00.

Canada v. Oxford Properties Group Inc. (2018), 2018 CarswellNat 173, 2018 FCA 30, Marc Noël C.J., Eleanor R. Dawson J.A., and Donald J. Rennie J.A. (F.C.A.); reversed (2016), 2016 CarswellNat 4541, 2016 TCC 204, Steven K. D’Arcy J. (T.C.C. [General Procedure]).

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