What's New In Tax Controversy And Litigation?

Courts in the second quarter of 2019 will see significant tax-related decisions and developments. Our team unpacks these developments in case law, as well as current trends in tax controversy and litigation.

Tax in the Supreme Court of Canada

The Supreme Court has agreed to consider the proper test for determining whether a derivative instrument constitutes a hedge of an asset or liability for income tax purposes after the Federal Court of Appeal reversed a Tax Court decision in MacDonald v. The Queen.1 The Tax Court held there was there was no hedge after a taxpayer held shares and a forward contract referencing the same shares. But the Federal Court of Appeal reversed that decision2 and leave to appeal was granted in March 2019.

The Supreme Court has refused leave in virtually all other tax cases recently. One denial stands out. In Canada Life Insurance Company of Canada v. Canada (Attorney General),3 the issue was whether rescission—as opposed to rectification—remained available to taxpayers faced with significant, unanticipated tax liabilities that were wholly attributable to mistakes in the planning or implementation of transactions. The Ontario Court of Appeal relied on principles from the Supreme Court's rectification cases in refusing rescission. The Supreme Court refused leave to appeal Canada Life in March, effectively condoning the Ontario Court of Appeal's approach.

The General Anti-Avoidance Rule

At a General Anti-Avoidance Rule (GAAR) conference in March hosted by the Canadian Tax Foundation (CTF), participants advised of approximately 70 GAAR cases currently in the courts. The issues relate to capital dividend account, foreign exchange losses, loss trading, tax attributes (such as paid up capital), alleged avoidance of section 160,4 qualified investments for registered retirement savings plans, and alleged treaty abuse.

Of these 70 cases, there are four significant GAAR decisions that have been rendered in ongoing cases. In Bank of Montreal v. Canada,5 the Tax Court issued a rare decision holding that no tax benefit was enjoyed. The Crown alleged that a dividend stop-loss rule in subsection 112(3.1) had been circumvented. The Tax Court held the provision had not been circumvented, because the relevant loss was deemed by subsection 39(2) to be from the disposition of foreign currency, such that subsection 112(3.1) was inapplicable. The Crown has appealed.

In Alta Energy Luxembourg S.A.R.L. v. The Queen,6 the taxpayer sold...