In The Queen v. Global Equity Fund Ltd., the Federal Court of Appeal (FCA) applied Canada’s general anti-avoidance rule (GAAR) to deny a business loss on the basis that it had no “air of economic or business reality”.  The loss was generated by a simple “value-shift transaction”.  The taxpayer (a private company) subscribed for common shares of a subsidiary for cash and, shortly thereafter, the subsidiary declared a preferred share stock dividend having a redemption value equal to that cash subscription.  The effect was to shift the subscription value onto the preferred shares, and leave the taxpayer with common shares having a tax cost equal to the subscription price.  The taxpayer then sold the common shares to a trust, thereby realizing a loss on the common shares equal to the subscription price.  The loss was claimed as a business loss on the basis that the taxpayer was in the business of trading securities.  The FCA said that an underlying rationale of the business loss provisions is that there must, at the very least, be an “air of economic or business reality” associated with the loss.  The FCA concluded that the loss here was a vacuous, artificial, paper loss, pulled out of thin air.  From there it was no stretch to say that the loss had no air of economic or business reality, and accordingly, could be denied under the GAAR.  (Readers will be aware that a similar result occurred in respect of a capital loss generated by a value-shift transaction: see