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FEDERAL INCOME TAX - General anti-avoidance rule - Series of transactions - Tax benefits

Wednesday, November 27, 2019 @ 7:53 AM  


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Appeal by the taxpayer from a Tax Court decision dismissing her appeal from her 2009 reassessment. Cross-appeal by the Crown from the decision allowing the appeal from the 2010 and 2012 reassessments. In 2009, the appellant moved stocks from her trading account to her Tax Free Savings Account to eliminate tax payable on possible future gains. The appellant directed all her investments and trades. She relied on her own research without the advice or the services of a broker. She completed 71 swap transactions in 2009 relating to her Savings Account that increased the proportion of her capital stock held in the Account to a total fair market value of $206,615 in 2009. The appellant then stopped conducting swap transactions and left the stocks held in her Savings Account. As a result, these stocks were subject to market forces for the remaining years at issue. The Minister reassessed the appellant in respect of the 2009, 2010 and 2012 taxation years to assess tax related to the appellant’s Savings Account on the basis that she had received an advantage within the meaning of s. 207.01(1) of the Income Tax Act in each relevant taxation year. The advantage said to have been received in each year equaled the annual increase in the fair market value of the appellant’s Savings Account minus her contribution of $5,000. The Tax Court found that the swap transactions were part of a series of transactions and thus dismissed the 2009 appeal.

HELD: Appeal dismissed. Cross-appeal allowed. The Tax Court did not err in finding that the swap transactions were part of a series of transactions or by finding that the parties to the swap transactions acted in concert without separate interests as directed single-mindedly by the appellant. The main purpose of the series of transactions was so that the appellant could benefit from the Account’s tax exemption. The requirement set out in clause (b)(i)(B) of the definition of “advantage” in s. 207.01(1) of the Income Tax Act was thus met. While almost none of the shares were sold, so that taxable income was not shifted between trading accounts, the result of the appellant’s strategy was to inflate the value of the Savings Account to benefit from a tax-free distribution from that Account. The Tax Court erred, however, in its interpretation of the definition of “advantage” in s. 207.01(1)(b) of the Act and erred in failing to find that the increase in the fair market value of the Savings Account in 2010 and 2012 was indirectly attributable to the swap transactions undertaken in 2009 to fall within the definition of “advantage”. The Tax Court also erred when interpreting the phrase “directly or indirectly” contained in the definition of “advantage”.

The requirement in the definition of “advantage” to reasonably consider all relevant circumstances, led the Tax Court to apply a narrow reading of “directly or indirectly” and improperly excluded from the scope of an “advantage” any increase in value in a Saving Account in subsequent years that was attributable to amounts previously inappropriately shifted into the Account due to improper transactions. But for the swap transactions, the appellant would not have had the necessary capital to engage in the volume and dollar amounts of the share transactions that she did which gave rise to the fair market increases in the Account in 2010 and 2012. The Tax Court’s concerns about legislative tension and the future, ongoing impact of impugned transactions did not diminish the clear anti-avoidance purpose of ss. 207.01 and 207.05 that supported a broad interpretation of the definition of “advantage”. While the increase in value in the Account in 2010 and 2012 was directly attributable to the performance of the shares held in the Account each year, it was indirectly attributable to the swap transactions which increased the number of shares held in the Account and their value.

Louie v. Canada, [2019] F.C.J. No. 1179, Federal Court of Appeal, M. Nadon, E.R. Dawson and A.L. Mactavish JJ.A., October 17, 2019. Digest No. TLD-November252019006