In The Queen v. Spruce Credit Union, 2014 FCA 143, the Federal Court of Appeal (FCA) upheld the trial judge’s key findings of fact (a) that certain dividends were paid by a deposit insurance corporation (DIC) to credit unions in proportion to their respective shareholdings rather than in proportion to assessments the DIC had previously received from the credit unions (paragraph 50), and (b) that these dividends were paid primarily forbona fide non-tax purposes (paragraph 64). The finding in (a) meant that s. 137.1(10)(a) did not apply to include the dividends in the credit unions’ income; the finding in (b) meant that the receipt of the dividends – and the resulting deduction under s. 112 – was not an “avoidance transaction” under the general anti-avoidance rule in s. 245(3) (GAAR). Of interest are the FCA’s statements that underscore important principles previously set out by the Supreme Court of Canada in relation to an avoidance transaction under the GAAR, namely:
- The fact that a tax benefit plays an important role in the choice of a transaction does not automatically mean that the primary purpose of the transaction is to obtain the tax benefit (paragraph 61).
- The mere existence of an alternate transaction which could result in greater tax is not sufficient to establish an avoidance transaction; to the contrary, taxpayers are permitted to order their affairs to minimize their tax liability (paragraph 63).