In 2002, a corporation could establish a fiscal year end for Quebec tax purposes that differed from its year end for British Columbia and federal tax purposes – referred to as a Quebec year end shuffle.  In Veracity Capital Corporation v. Canada, 2015 BCSC 2278 (copy attached), taxpayers transferred shares in a private company (the Shares) to a new holding company (Holdco) on a rollover basis under s. 85(1).  Holdco then utilized the Quebec year end shuffle to avoid paying British Columbia tax on 90% of a capital gain realized on a sale of the Shares.  No provincial tax was paid on this portion of the gain.  The Court held that the general anti-avoidance rule (GAAR) in s. 68.1 of the Income Tax Act (British Columbia) applied to deny this tax benefit.  The transactions resulted in abusive tax avoidance in part because:

  • the rollover rule under s. 85(1) was intended to facilitate a deferral of tax, not an avoidance of tax (see paragraph 54); and
  • the rules for allocating income between provinces were not designed to allow a corporation to escape provincial taxation on that income (see paragraph 56).