In 594710 British Columbia Ltd. v. The Queen, 2016 TCC 288, the Tax Court of Canada (TCC) said that the loss restriction rules in s. 111(5) and the related jurisprudence on the general anti-avoidance rule in s. 245 (the GAAR) in the context of “loss trading” transactions could not be extended to apply to a “profit trading” transaction (see paragraphs 87, 92, and 101). Accordingly, the GAAR did not apply to alter the tax results of a profit trading transaction in which:
- the Appellant numbered company (Canco) extracted cash profit from a captive real estate development partnership (by way of a loan from the partnership to the wholly-owned corporate partner, and subsequent share redemption by the corporate partner to Canco), and
- Canco sold the corporate partner to an arm’s length loss company (Lossco), which immediately wound up Canco to thereafter shelter the partnership’s taxable profit allocated to Lossco at the end of the partnership’s fiscal period.
The TCC noted that it was open to the Crown to argue that the combination of the partnership income allocation rules in s. 96(1.01)(a) and s. 103 demonstrated a general policy against profit trading between new and former members of a partnership. However, with the Crown having failed to do so, it was not open to the TCC to expand the lis (litigation) of the parties (see paragraph 101). The TCC also found that the sale of the corporate partner – combined with the resulting deemed year end of the corporate partner before the end of the partnership’s fiscal period – was abusive of s. 160 because the transactions permitted the transfer of cash profit from the partnership to Canco while at the same time footing Lossco or the corporate partner with any tax liability associated with the partnership’s taxable profit (see paragraph 168). However, the abusive nature of this part of the transaction was not enough to support the Crown’s reassessment of Canco – because there was no underlying tax debt owing by the corporate partner as a result of the transactions (see paragraph 169).