On April 16, 2009, the Federal Court of Appeal affirmed the decision of the Tax Court of Canada in The Queen v. Gary Landrus, holding that the general antiavoidance rule (“GAAR”) did not deny the deduction of a “terminal loss” under subsection 20(16) of the Income Tax Act (Canada) (“ITA”). Landrus involved a reorganization in which two partnerships transferred buildings that had declined substantially in value to a new partnership comprising the same partners. The transfer triggered a terminal loss which the Minister disallowed by invoking GAAR, on the basis that the transactions were abusive since the partners continued to own an interest in the property through the new partnership, and so did not realize a “true” loss.

The Court took into account the object, spirit and purpose of subsection 20(16), and the scheme of the “stop loss” rules in the ITA, as well as the “overall” result of the transactions, to conclude that the object, spirit and purpose of subsection 20(16), was not frustrated, and therefore that the transactions were not abusive transactions for purposes of GAAR, even though they were avoidance transactions.

The case is notable in the use of an “overall results” analysis for purposes of applying GAAR, relying on the Supreme Court of Canada’s decision in Lipson v. The Queen, [2009] SCC 1. This case also provides guidance on the application of the GAAR in circumstances where the taxpayer, although engaged in an avoidance transaction, will not be considered to have misused or abused the provisions relied upon to claim the tax benefit. In particular, the existence of detailed and carefully crafted specific anti-avoidance provisions in the ITA may preclude the application of the GAAR to a transaction which falls outside the scope of these rules.

The full text of the Federal Court of Appeal’s judgement is available at: http://decisions.fca-caf.gc.ca/en/2009/2009fca113/2009fca113.pdf