Successful Québec Shuffle - Inter-Provincial Tax Planning Is Alive And Well

The British Columbia Court of Appeal recently released its judgment in Veracity Capital Corporation v. Canada (National Revenue), 2017 BCCA 3, holding that a tax planning structure commonly referred to as the Québec year-end shuffle did not constitute an avoidance transaction for purposes of the British Columbia general anti-avoidance rule (the “BC GAAR”). This is the first appellate level case addressing a provincial general anti-avoidance rule in Canada.

The Court followed the spirit of the jurisprudence surrounding the application of the federal general anti-avoidance rule: (1) not all loopholes or plans to avoid tax are ipso facto abusive, and (2) our taxation regime is not a harmonious scheme, rather it is a patchwork where provinces have the power to legislate as they please. The Court concluded that taking advantage of the differences between provincial rules to avoid taxation is not on its face abusive tax planning.

Background

In July 2002, in an attempt to avoid most of the B.C. tax on a capital gain that would otherwise apply to a share sale, the shareholders of a company transferred their shares on a rollover basis to a new company (“Veracity”) under s. 85(1) of the Income Tax Act, RSC 1985, c.1 (5th Supp.) (the “federal Act”). In Québec, Veracity had a taxation year ending on August 31, 2002, whereas in B.C. and federally, Veracity had a taxation year ending on June 30, 2003. In order to allocate 100% of the taxable capital gain resulting from the sale of the shares to B.C. for the purposes of the first year-end in Québec, small directors' fees were paid to the B.C. resident directors in July 2002. After the Québec year-end passed, Veracity purchased units of a listed limited partnership in Québec with a September 30 year end, so that as at September 30, 2002 a pro rata portion of the gross revenues and salary expense of the limited partnership would be allocated to Veracity in its capacity as unit-holder. The result under the inter-provincial allocation rules was that approximately 90% of the taxable capital gain from the sale of the shares was allocated to Québec in respect of the second year-end in B.C. This allocation resulted in the avoidance of $1,175,249 of tax on the taxable capital gain that would otherwise have been taxed in B.C.

The Minister of National Revenue reassessed Veracity for BC provincial tax on its taxable capital gain on the basis that the transactions Veracity undertook to lower its tax liability...