Tax reduction was important reason for use of holding companies

Tire business established by F was carried on by number of companies and subsidiaries which were all owned by partnership, and F’s interest in partnership was held indirectly through KT Ltd.. In 2007, significant reorganization took place which included creation of one holding company for each of F’s five children, including J Ltd.. After reorganization, each holding company was associated with KT Ltd. which meant that pursuant to s. 256(2) of Income Tax Act, each holding company was deemed to be associated with each other holding company for purposes of Act. Under s. 125 of Act, associated corporations are generally required to share one $500,000 business limit among themselves. KT Ltd. made election under s. 256(2) and result was that each holding company was able to maintain its own $500,000 business limit. Election did not apply for other purposes of Act and as result KT Ltd. and each holding company were deemed to be associated for purposes of s. 129(6)(b) and interest income that each holding company received from KT Ltd. was deemed to be active business income. J Ltd. claimed small business deduction of approximately $84,000 each year. Minister of National Revenue reassessed J Ltd.’s taxation years ending February 29, 2012, February 28, 2013 and February 28, 2014 to deny small business deduction relying on specific anti-avoidance rule in s. 256(2.1). J Ltd. appealed. Appeal of taxation year ending February 29, 2012 allowed and appeals of taxation years ending February 28, 2013 and February 28, 2014 dismissed. At commencement of trial, it was conceded that taxation year ending February 29, 2012 should be reassessed to characterize interest income that J Ltd. received from KT Ltd. as active business income. If J Ltd. did not exist, tax reduction would not have occurred. Burden was on J Ltd. to show that reducing tax was not one of main reasons for its separate existence, and it had not done so. There was no direct evidence of main reasons for J Ltd.’s separation existence or for separate existence of other holding companies. Indirect evidence of main reasons for separate existence of holding companies was not reliable, documentary evidence indicated that tax reduction was important reason for use of holding companies and most of alternative explanations offered for separate existence of holding companies were not convincing. Section 256(2.1) applied to deem J Ltd. to be associated with KT Ltd. in years in question and s. 125(5.1) applied to reduce small business limit available to J Ltd. to nil.

Jencal Holdings Ltd. v. The Queen (2019), 2019 CarswellNat 136, 2019 TCC 16, David E. Graham J. (T.C.C. [General Procedure]).

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