Federal Appeal


Income tax

Tax avoidance

Tax Court erred by misapprehending appellant’s concession about tax benefit

PW was sole shareholder in P Ltd. and as of 2004, owned 110 Class A common shares which had fair market value (FMV) of $2,337,500, adjusted cost base (ACB) of $110 and paid-up capital (PUC) of $110. In 2006, PW and spouse implemented corporate reorganization with end result that PW owned 2337.5 Class E preferred shares of 124 Ltd. with FMV of $2,337,500, ACB of $750,000 and PUC of $595,264. Because PW used his lifetime capital gains exemption, no tax was paid on any of transactions. Minister of National Revenue issued notices of determination pursuant to ss. 245 and 152(1.11) of Income Tax Act regarding 2007 taxation year of PW and 2008 taxation year of 124 Ltd.. Minister applied general anti-avoidance rule (GAAR) contained in s. 245 of Act to reduce PUC of Class E preferred shares to $110. Taxpayers appealed determination to Tax Court of Canada which concluded that Minister had properly applied GAAR and dismissed appeal. Taxpayers appealed. Appeal allowed. Transactions increased PUC of Class E preferred shares however there was no evidence before Tax Court that there had been any distribution of 124 Ltd.’s retained earnings. Because tax-free distribution of retained earnings s. 84.1 was intended to prevent had not occurred s. 84.1 had not, to date, been misused or abused. Tax Court erred in law and in fact by misapprehending appellant’s concession about tax benefit and Minister had erred in applying GAAR. As there was no misuse or abuse to justify application of GAAR, it followed that notices of determination should be vacated.

1245989 Alberta Ltd. v. Canada (Attorney General) (2018), 2018 CarswellNat 2778, 2018 FCA 114, M. Nadon J.A., Eleanor R. Dawson J.A., and Mary J.L. Gleason J.A. (F.C.A.); reversed (2017), 2017 CarswellNat 10238, 2017 CarswellNat 1034, 2017 TCC 51, 2017 CCI 51, K. Lyons J. (T.C.C. [General Procedure]).

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