The courts have made clear that carefully drafted income tax provisions should be interpreted in their real life context: i.e., taxpayers study closely – and are entitled to rely on – the text of these provisions in order to manage and plan their affairs intelligently: see Lehigh Cement Limited v. The Queen, 2014 FCA 103, at paragraph 41. Such provisions should be interpreted without creating unexpressed exceptions or resorting to tendentious reasoning. Otherwise, intolerable uncertainty would be injected into the Income Tax Act (ITA), undermining the principles of consistency, predictability and fairness: see Lehigh Cement, at paragraph 42; 65302 British Columbia Ltd. v. Canada,  3 S.C.R. 804, at paragraph 51; Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, at paragraph 12; and Shell Canada Ltd. v. Canada,  3 S.C.R. 622, at paragraphs 40 and 45. These important principles of statutory interpretation were front and center in CIT Group Securities (Canada) Inc. v. The Queen, 2016 TCC 163. Here are some interesting points from the case:
- The Tax Court of Canada (TCC) held that a Barbados-resident controlled foreign affiliate (CFA) of the corporate taxpayer did not earn foreign accrual property income (FAPI) in respect of the CFA’s substantial arm’s length lending business. Accordingly, the interest income earned by the CFA was not taxed on a current basis in Canada under s. 91(1).
- Specifically, the CFA met the detailed definition of a “foreign bank” (see paragraph 157), and its activities as a foreign bank were clearly “regulated” in Barbados (see paragraph 166). Therefore the rule in s. 95(2)(l) – which can deem interest income to be FAPI – did not apply.
- The CRA did not raise the general anti-avoidance rule s. 245 or the transfer pricing rule in s. 247(2)(b). Instead, the CRA relied on the text of a specific provision. In this latter context, “…the Supreme Court of Canada has long since put to rest the notion that the sophistication of the tax planning alters the manner in which one should interpret specific provisions in the ITA” (see paragraph 170).
- The courts’ role in this context is to interpret and apply the specific provisions of the ITA as they were written by Parliament. It is not the courts’ role to prevent taxpayers from relying on the sophisticated structure of their transactions, arranged in such a way that the specific provisions are met: see Shell Canada, at paragraph 45.