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December 16, 2011 No. 2011-37
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Supreme Court Rules GAAR Applies to Copthorne PUC Transaction The Supreme Court of Canada today released its unanimous decision in Copthorne Holdings Ltd. v. The Queen in which it found that the general anti-avoidance rule (GAAR) applied to eliminate $67 million of paid-up capital (PUC) that the taxpayer had preserved as part of a series of transactions involving the taxpayer and members of its corporate group. The taxpayer had accessed the PUC to repatriate capital to its non-resident shareholder, which allowed the taxpayer to avoid $9 million of Canadian withholding tax that would otherwise have been payable in respect of the repatriated funds. As a result of the decision, the taxpayer is now liable for that $9 million of tax. Background GAAR can apply to override tax-planning transactions that otherwise comply with the Income Tax Act (the Act), if it is determined that such transactions result in a misuse of a provision of the Act or an abuse of the Act read as a whole.
GAAR provides that, when a taxpayer realizes a tax benefit from a transaction (or series of transactions), the tax benefit may be disallowed if:
· the transaction is an “avoidance transaction”, meaning that it was undertaken primarily to obtain the tax benefit, and · the tax benefit constitutes “abusive tax avoidance”, meaning that it is not consistent with the object and spirit of the provision in question or the scheme of the Act as a whole.
In this case, the taxpayer undertook a series of transactions, including corporate amalgamations that, among other things, preserved the PUC of some of the amalgamated corporations’ shares. PUC is a valuable tax attribute because it can often be returned tax-free to shareholders.
At the time the PUC was preserved, the taxpayer had no plans in place to return the PUC to its non-resident shareholder; it simply chose to preserve what it knew to be a tax attribute that might or might not be of value to it at some later time. A year or so later, it did in fact make use of that PUC when it paid out some of its funds to its non-resident shareholder as a tax-free return of capital. KPMG
observations · While the Court did speak to the four key elements of the now well-accepted approach to the application of GAAR, including “tax benefit” and “tax purpose”, the most interesting aspects of the decision were the Court’s comments regarding “series of transactions” and “abuse”.
· With respect to the meaning of “series of transactions”, the Court was invited by counsel for the taxpayer to expand upon its previous views as to transactions undertaken “in contemplation of” a series. Unfortunately, the few minor comments made by the Court did not really provide any additional insight in this regard. As such, taxpayers will remain uncertain as to the degree of connection that will be required for some transactions to be included in a series.
· With respect to “abuse”, the Court focused not on the creation of the PUC in issue, but on its preservation through a series of transactions culminating in an amalgamation. In the view of the Court, the series of transactions resulted in the PUC of the shares of the amalgamated corporation exceeding the amount originally invested in the relevant predecessor corporations, which result the Court found to be abusive. In the Court’s view, the underlying statutory scheme of the Act required the elimination of intercorporate PUC on a vertical amalgamation; the Court held that such scheme applied to the amalgamation undertaken by the taxpayer, notwithstanding that the transactions involved a horizontal rather than a vertical amalgamation.
· While the Court made some comments that may appear directed at allaying concerns with respect to the application of its findings to third-party transactions, the words of the Court in this context leave it quite unclear as to how far its comments in this regard may extend in subsequent cases involving, for example, more complex corporate structures. Watch for a future edition of TaxNewsFlash-Canada for more detailed analysis of this decision and join us at our upcoming webcast on January 5, 2012. We can
help
For more information, contact Evy Moskowitz (Toronto) at (416) 861-1800, Mark Meredith (Vancouver) at (604) 257-4241 or Denis Lacroix (Montreal) at (514) 940-3871.
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Information is current to December 16, 2011. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500. KPMG LLP, the audit, tax and advisory firm (kpmg.ca), a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such. KPMG's Canadian Web site is located at http://www.kpmg.ca/ © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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