Canada’s general anti-avoidance rule (the GAAR) in s. 245 of the Income Tax Act is, in the final analysis, an anti-abuse rule. Even if a transaction is done primarily to avoid Canadian tax otherwise payable, it is not caught by the GAAR unless the Minister of National Revenue (the Minister) can “clearly demonstrate” that the transaction is an abuse of the Act (see Copthorne Holdings Ltd. v. The Queen, 2011 SCC 63, at para. 72). A recent example of this is the decision in Univar Holdco Canada ULC v. The Queen, 2017 FCA 207. Here are the main points.
- Certain avoidance transactions were completed in 2007 immediately following an arm's length acquisition of a Netherlands public company (Univar NV) that indirectly owned a Canadian subsidiary (Univar Canada). The purpose of these avoidance transactions was, in effect, to allow the non-resident arm's length purchaser of Univar NV to extract surplus in Univar Canada that had accumulated before the acquisition, without triggering dividend tax under s. 212.1. =
- The Federal Court of Appeal (FCA) accepted that there was an alternative means by which the same surplus could have been extracted from Canada. The shares of Univar Canada could have been sold directly to a new Canadian subsidiary of the arm’s length purchaser (see paragraphs 17 and 18). In this alternate transaction s. 212.1 would not apply, and the Minister could not clearly demonstrate that the result would be abusive (see paragraph 20). In particular, the purpose of s. 212.1 is not to prevent the removal from Canada, by an arm's length purchaser of a Canadian corporation, of any surplus that such Canadian corporation had accumulated prior to the acquisition (see paragraph 21). It follows that the actual transactions were likewise not abusive because their overall effect was to remove the same surplus from Canada (see paragraphs 22 and 31).
- Finally, a proposed amendment introduced in 2016 – which eliminated the exception in s. 212.1(4) that was relied on in the actual transactions – could not be used by the Minister to justify the application of the GAAR in 2007. The FCA found no judicial support for proposition that subsequent amendments will necessarily reinforce or confirm that transactions caught by the amendments would be considered abusive before the amendments are enacted (see paragraph 28).