On October 13 2017 the Federal Court of Appeal released its decision in Univar Holdco Canada ULC v HMQ (2017 FCA 207), overturning the Tax Court's trial decision on the matter (2016 TCC 159). The judgment contains several important points concerning the analysis and application of the General Anti-avoidance Rule (GAAR) and will undoubtedly be relied on by taxpayers in future.
A number of transactions were undertaken by the Univar corporate group following the arm's-length acquisition of the group's Dutch parent. The tax result of these transactions was to increase the amount of retained earnings that could be taken out of Canada without incurring Part XIII tax. The taxpayer relied on the exception under Sub-section 212.1(4) of the Income Tax Act to avoid the deemed dividend that would otherwise have arisen pursuant to Sub-section 212.1(1) of the act. The issue that arose was whether the transactions constituted abusive tax avoidance under the GAAR.
In deciding that there was no abusive tax avoidance, the Federal Court of Appeal reiterated that in Copthorne Holdings Ltd v Canada (2011 SCC 63), the minister of national revenue had been required to demonstrate clearly that a transaction was an abuse of the act and noted that, in this case, such burden was not met. The Federal Court of Appeal also made the following observations in its GAAR analysis:
- Alternative transactions are a relevant factor in determining whether there has been an abuse of the act.
- Alternative transactions that achieve the same result without triggering any tax suggest that the GAAR should not apply.
- Subsequent amendments to the act and commentary drafted by the Department of Finance do not necessarily reinforce or confirm that transactions caught by the subsequent amendments are abusive before the amendments have been enacted.
With respect to the last bullet point above, this decision arguably comes as a welcome limitation on the impact of future legislative amendments in a GAAR analysis. Given that the amendments at issue in Univar were introduced decades after Section 212.1 came into force, a finding that these amendments were relevant to the GAAR analysis in this case (as originally held by the Tax Court trial judge) would have created considerable uncertainty going forward.
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