During the week of October 15, 2012, the Federal Court of Appeal (FCA) applied Canada’s general anti-avoidance rule (GAAR) to deny a capital loss that was “a loss on paper only in the sense that no economic loss was suffered” (Triad Gestco Ltd v. The Queen and 1207192 Ontario Limited v. The Queen).  In short, each taxpayer had realized a taxable capital gain and subsequently undertook transactions to generate an offsetting allowable capital loss.  In short, the loss-generating transactions involved the following steps.  First, the taxpayer 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.  This first step was referred to as a value-shift transaction: the effect was to shift the subscription value onto the preferred shares, and leave the taxpayer with worthless common shares having a tax cost equal to the subscription price.  Second, the taxpayer sold the common shares to a non-affiliated trust, thereby realizing a capital loss on the common shares equal to the subscription price.  The FCA said the underlying rationale of Canada’s capital loss provisions (s. 38(b) in particular) is to provide relief as an offset against a capital gain only where a taxpayer has suffered an economic loss on the disposition of property.  Here, the taxpayer “was neither richer nor poorer” after the value-shift transaction and subsequent “paper loss” realized on the common share sale.  This meant that the transactions generating the paper loss were an abuse of the capital loss provisions and could be fully ignored under the GAAR (s. 245).