'Abuse' Under The GAAR Examined In Recent Federal Court Of Appeal Decision

On February 1, 2018, the Federal Court of Appeal ("FCA") released its decision in Canada v. Oxford Properties Group Inc.,1 a case dealing with the General Anti-Avoidance Rule ("GAAR") found in subsection 245(2) of the Income Tax Act (Canada) ("Act"). The FCA allowed the Crown's appeal, holding that the series of transactions undertaken were abusive of various partnership rollover and bump provisions.

Tax Court of Canada Decision

The Tax Court of Canada ("TCC")2 held that while the taxpayer obtained a tax benefit and that there was one or more avoidance transactions, the series of transactions were not abusive under any of the relevant provisions.

Issue on Appeal

The only issue on appeal involved the last branch of the GAAR analysis; in particular, whether there was an abuse of ss. 97(2), 98(3), 88(1)(d), and 100(1) as a result of the sale of the partnership interests to the tax-exempt entity, given that the bumps resulted in minimal capital gains, and the tax-exempt entity would never be taxed on the deferred gains and recapture inherent in the underlying properties held by the partnerships.

The Transaction

Subsection 97(2) — first step in the series

The taxpayer engaged in a series of restructuring transactions involving the movement real estate assets into several limited partnerships ("First Tier Partnerships") on a tax-free rollover basis using section 97 of the Act, deferring the capital gains and recapture.

Paragraph 88(1)(d) and subsection 98(3) — next steps in the series

Subsequent restructuring resulted in a vertical amalgamation which formed the taxpayer. The taxpayer utilized the paragraph 88(1)(d) bump provisions to increase its adjusted cost base ("ACB") of the partnership interests it held in the First Tier Partnerships (which had a high fair market value).

A second tier of partnerships ("Second Tier Partnerships") was then created, the real properties were rolled into them using subsection 97(2) and the First Tier Partnerships were wound-up. The taxpayer used a similar bump provision found in subsection 98(3) to bump its new interests in the Second Tier Partnerships.

Throughout all of these transactions, the underlying real property held by the partnerships retained their low ACB and undepreciated capital cost (and high fair market value).

Subsection 100(1) — sale to the tax exempt

Subsection 97(2) allows for the deferral of recapture and capital gains of depreciable capital property when it is transferred to a partnership...