Supreme Court Of Canada Issues Much-anticipated Decision On GAAR

• Published date: 02 June 2023
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax
• Law Firm: Borden Ladner Gervais LLP
• Author: Ms Laurie A. Goldbach, Elizabeth Egberts and Steve Suarez

On Friday, May 26, 2023, the Supreme Court of Canada (SCC or the Supreme Court) dismissed the taxpayer's appeal in Deans Knight Income Corp. v Canada, 2023 SCC 16 (Deans Knight). This much-anticipated decision deals with the general anti-avoidance rule (GAAR) in section 245 of the Income Tax Act¹ (Act). The GAAR, where applicable, allows the Canada Revenue Agency (CRA) to redetermine the tax consequences of a transaction. For GAAR to apply, the taxpayer must have engaged in a transaction or series of transactions with the primary purpose of obtaining a tax benefit, in such a manner as to result in an abuse or misuse of one or more provisions of the Act. To date, relevant jurisprudence has established that a two-stage GAAR analysis be employed to determine whether a transaction is abusive. First, the court determines the object, spirit, and purpose of the relevant provisions of the Act. Second, the court decides whether a particular transaction has frustrated that object, spirit, and purpose.

Deans Knight represented an opportunity for the Supreme Court to provide taxpayers with much needed certainty regarding the role and application of GAAR in the Canadian tax regime, and more specifically, the process by which courts ought to determine the object, spirit, and purpose of provisions under the Act, positions which BLG advanced before the Supreme Court as counsel to the intervener, the Canadian Chamber of Commerce.

Overview

The specific context of Deans Knight was the potential application of the GAAR to transactions designed to avoid triggering restrictive provisions, specifically s.111(5) of the Act, which prohibit or restrict the ability of a corporation, having undergone an "acquisition of control" (AOC), to use its pre-AOC accumulated business losses in post-AOC taxation years.² The taxpayer in Deans Knight had been a public corporation that accumulated $90 million of business losses, which it sought to monetize via a series of transactions designed to avoid creating an AOC, thus preserving its ability to utilize those losses.

The relevant restricting provisions define "control" as de jure control: the ownership or control over the voting rights of such a number of the corporation's shares as would entitle the owner/controller to elect a majority of the corporation's board of directors. Several other provisions within the Act rely on a broader standard known as de facto control, which considers any ability (whether via voting control of shares or...