Canada Safeway Limited v. Alberta, 2011 ABQB 329

Court of Queen’s Bench of Alberta Citation: Canada Safeway Limited v. Alberta, 2011 ABQB 329 Date: 20110516 Docket: 0901 00988 Registry: Calgary Between: Canada Safeway Limited Plaintiff/Appellant - and - Her Majesty the Queen In Right of Alberta Defendant/Respondent _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice B.E. Romaine _______________________________________________________ Introduction [ 1 ] Two taxpayers, members of the Safeway group of companies, appeal re-assessments by the Alberta Minister of Finance and Enterprise (the “Minister”).

The issue is whether certain transactions that were part of a sophisticated tax plan (labelled by the Minister as the “Ontario shuffle”) were part of a legitimate tax minimization scheme or abusive tax avoidance. Facts [ 2 ] In 2001, Canada Safeway Ltd. (“CSL”) and related companies (the “Safeway Group”) put into place a plan that would allow them to minimize tax payable by CSL. The Appellant CSL is the successor by amalgamation of three of the corporations involved in the plan:

CSL, Canada Safeway Holdings Ltd. (“CSHL”) and Safeway Foreign Sales Limited (“SFSL”). The parties agree that the latter three corporations were at all material times “taxable Canadian corporations” under ss. 89(1) of the Income Tax Act , R.S.C. 1985, c.1 (5 th Suppl) (the “ITA”), as adopted by ss. 8(1) of the Alberta Corporate Tax Act , R.S.A. c. A-15 (the “ACTA”). [ 3 ] The plan called for CSL to replace retained earnings with monies borrowed from another Safeway Group corporation, enabling CSL to claim a deduction for the interest expense on the borrowed funds.

The foreign-incorporated company resident in Ontario that ultimately received interest payments on the loan, Safeway Ontario Finance Corporation (“SOFC”), included them in its income but did not pay tax on them, as such income was not included in SOFC’s tax base due to the operation of the Corporations Tax Act , R.S.O. 1990, c. C-40 (“OCTA”) as it was then in force.

The plan was neutral from a federal tax standpoint but saved CSL an estimated $6 to $7 million per year, equivalent to the provincial tax that would have been paid had the interest expense not been deducted from CSL’s income. [ 4 ] Although there were a number of transactions that made up the plan, the following are the most relevant to the issues in this appeal. [ 5 ] To bring the plan into effect, the Safeway Group incorporated CSHL in October 2001. CSHL became a holder of common shares in CSL. Between November 20, 2001 and December 20, 2001, CSL distributed an aggregate of $600 million in dividends to CSHL.

On the same days the dividends were declared and distributed, CSL borrowed an aggregate of $600 million from CSHL under deeds of specialty debt (the “Deeds”) (collectively, the “Borrowings”). The Borrowings created a legal obligation for CSL to pay interest to CSHL. [ 6 ] The money from the Borrowings was used to repay commercial paper that CSL had used for the purpose of earning income from its business.

The parties agree that s. 20(3) of ITA deems the Borrowings to be used for the purpose for which the commercial paper had been issued: earning income from CSL’s business. [ 7 ] In December 2001, SOFC was incorporated under the laws of the British Virgin Islands. However, SOFC had a permanent establishment in Ontario and was resident in Canada. This structure was important to the plan. [ 8 ] Effective December 2001, CSHL acquired shares in SOFC, and in consideration assigned the Deeds to SOFC, endorsing them in the name of SOFC.

SOFC thus became the legal beneficial owner of the Deeds, and interest on the Deeds became payable to SOFC. As a corporation incorporated under the laws of a jurisdiction outside Canada but with a permanent establishment in Ontario, SOFC was not required to pay tax on interest income by virtue of ss. 37(1) of the OCTA (since amended). [ 9 ] The following diagram illustrates, in a simplified manner, the structure created: CSHL

SOFC CSL ← $600 Million Debt ← Canadian Business [1] From the time CSL borrowed the $600 million in 2001 to the time the Borrowings were repaid in 2005, CSL incurred an interest expense on the principal amounts borrowed totalling approximately $173,000,000. All of the interest required to be paid on the Deeds was paid by CSL, initially to CSHL and later to SOFC. [2] The only years under appeal are CSL’s and CSHL’s taxation years ending December 28, 2002, January 3, 2004 and January 1, 2005 (the “Appeal Years”), being the taxation years that followed the assignment of the Deeds to SOFC.

The total interest paid to SOFC and deducted by CSL for the Appeal Years was $132,812,876. [3] SOFC included the interest payments made by CSL on the Deeds in its income for federal tax purposes. However, as noted previously, the interest was not taxable in Ontario. Ontario subsequently reassessed SOFC on this matter, asserting taxability of the interest in the hands of SOFC, and SOFC appealed the reassessment. [4] Further, as part of the plan, SOFC paid dividends to its shareholder CSHL. The SOFC dividends were paid after SOFC had received interest payments from CSL and set aside amounts for expenses.

The SOFC dividends totalled approximately $123,000,000. [5] After CSHL received the SOFC dividends, it loaned additional money to CSL. The additional loans were approximately $128,000,000. [6] The parties agree that SOFC’s only activities were receiving interest payments from CSL, paying the SOFC dividends to CSHL, filing tax returns and making tax remittances and holding a passive Ontario portfolio investment.

SOFC retained CSL to perform any necessary administrative services. [7] During the Appeal Years, CSHL included the SOFC dividends in its income for tax purposes and then in computing taxable income, deducted the same amount under s. 112(1) of the ITA (as adopted by ss. 8(1) of the ACTA). [8] Effective for taxation years ending May 11, 2005, Ontario introduced a measure to determine corporate tax liability with reference to whether a corporation is resident (rather than incorporated) inside or outside Canada.

As a consequence of the resulting amendment, SOFC’s interest received from CSL became taxable under the OCTA . As a result, SFSL and SOFC converted to Alberta unlimited liability corporations. CSL in effect repaid the Borrowings to these unlimited liability corporations and SOFC discontinued its registration as a British Virgin Islands corporation. The repaid Borrowings, net of Canadian withholdings tax, were eventually paid to

the American shareholder of SFSL. [9] An attempt was made by the Minister to compel Canada Safeway to settle before an audit was conducted. In November, 2005, Ontario Finance provided the Alberta Tax Revenue Administration (the “Alberta TRA”) with a list of corporations (Safeway included) with permanent establishments in Alberta that were involved in this type of plan. On July 14, 2006, the Alberta TRA met in Ottawa with representatives from Ontario, Quebec and the Canada Revenue Agency (“CRA”) to discuss with taxpayer representatives possible solutions or alternatives to the plan.

On July 24, 2006, the CRA sent a letter to taxpayer representatives confirming “terms of compliance” discussed at the meeting on July 14, 2006 with the direction that notification of compliance was to be received by October 13, 2006. [ 10 ] The Minister’s officer for purposes of examination for discovery in this appeal indicated that he thought the CRA would have approached the Safeway Group in October of 2006 and invited it “to enter into a discussion about settling the matter known as the Ontario Shuffle, along with other taxpayers who were involved in similar arrangements.” The Safeway Group declined to do so, and was thus regarded to be “non-compliant”. [ 11 ] Accordingly, on January 9, 2007, the Alberta TRA began an audit.

On February 7, 2007, it sent a letter advising Safeway of its audit of the Appeal Years, stating specifically that “[t]he primary focus of our audit will be the review of the financing arrangements and transactions involving Canada Safeway Holdings Ltd. and or any related corporations and Safeway Ontario Finance Corporation”. [ 12 ] On February 28, 2008, the Minister advised the Appellants of its intent to issue reassessments under Alberta’s general anti- avoidance rule, s. 72.1 of the ACTA (the “Alberta GAAR”). The Minister’s proposal letter stated:

Section 72.1(2) of the ACTA, being the charging provision for the Alberta GAAR, will therefore result in a reassessment of CSL to deny, as a reasonable tax consequence, [its] deduction of the amount of interest expense resulting from the $600 million Deeds.

As an alternate, CSHL will also be reassessed with the reasonable consequence being the inclusion in its taxable income [of] the amount of interest income SOFC earned on the same $600 million Deeds had the Deeds not been endorsed to SOFC. [ 13 ] The proposed reassessment amounted to $6,993,242 of Alberta tax due by CSL, and, alternatively it now appears, a total of $16,600,421 of Alberta tax due by CSHL. Subsequently, the Minister issued notices of reassessment giving effect to the proposal letter. The Appellants have appealed both the CSL and the CSHL reassessments.

Issues [ 14 ] As regards CSL, the Appellant admits that the deduction of $132,812,876, being the total interest payable by CSL during the Appeal Years, was a tax benefit. The Appellant also admits that the transaction was an avoidance transaction. The Appellant makes no such admission with regards to CSHL. [ 15 ] With respect to the CSL reassessment, the issue is whether there was a misuse or abuse of the relevant statutory provisions within the meaning of ss. 72.1 (3.1) of the ACTA. [ 16 ] With respect to the CSHL reassessment the issues are:

a) whether there was a “tax benefit” to CSHL;

b) whether there was an “avoidance transaction”; and

c) whether there was a misuse or abuse of the relevant statutory provisions.

Standard of Review [ 17 ] The parties agree that this is a hearing de novo , and that pursuant to ss. 50(4) and 52(1) and s. 53 of the ACTA, this appeal is deemed to be a normal course action in this Court and not a judicial review of the correctness or reasonableness of the assessments at issue. They also agree that the function of the Court is to arrive at a correct assessment, unless it is unable to do so and considers it necessary to refer the matter back to the Minister. There is no deference to the Minister. Analysis The Alberta GAAR [ 18 ] The Alberta GAAR applies and may result in reassessment of a taxpayer where three elements are established:

a) the transaction, or a transaction that is part of a series of transactions, results, directly or indirectly, in a tax benefit;

b) the transaction is an avoidance transaction in the sense that it cannot reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit (or for other reasons not relevant in this case); and

c) the transaction may reasonably be considered to result, directly or indirectly, in a misuse or abuse of the provisions of the ACTA or other taxing legislation, rules or treaties applicable in Alberta, including the ITA . [ 19 ] If the Alberta GAAR applies, the consequences to the taxpayer are what is determined to be reasonable in the circumstances in order to deny the tax benefit that would otherwise result from the avoidance transaction. [ 20 ] The Alberta GAAR is in substance the same as the federal GAAR and thus federal GAAR principles and jurisprudence apply. [ 21 ] The Supreme Court summarized the approach to be taken to the federal GAAR in Canada Trustco Mortgage Co. v.

Canada , 2005 SCC 54 at para. 66 : 1. Three requirements must be established to permit application of the GAAR:

(1) A tax benefit resulting from a transaction or part of a series of transactions (s. 245(1) and (2)); (2) that the transaction is an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit; and (3) that there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer. 2.

The burden is on the taxpayer to refute (1) and (2), and on the Minister to establish (3). 3. If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer. 4. The courts proceed by conducting a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit in order to determine why they were put in place and why the benefit was conferred. The goal is to arrive at a purposive

interpretation that is harmonious with the provisions of the Act that confer the tax benefit, read in the context of the whole Act.

5. Whether the transactions were motivated by an economic, commercial, family or other non-tax purpose may form part of the factual context that the courts may consider in the analysis of abusive tax avoidance allegations under s. 245(4). However, any finding in this respect would form only one part of the underlying facts of a case, and would be insufficient by itself to establish abusive tax avoidance. The central issue is the proper

interpretation of the relevant provisions in light of their context and purpose. 6. Abusive tax avoidance may be found where the relationships and transactions as expressed in the relevant documentation lack a proper basis relative to the object, spirit or purpose of the provisions that are purported to confer the tax benefit or where they are wholly dissimilar to the relationships or transactions that are contemplated by the provisions . [emphasis added] [ 22 ] The Court noted at para. 31 that, in enacting the federal GAAR: ...

Parliament recognized the Duke of Westminister principle “that tax planning – arranging one’s affairs so as to attract the least amount of tax – is a legitimate and accepted part of Canadian tax law” (p. 464). Despite Parliament’s intention to address abusive tax avoidance by enacting the GAAR, Parliament nonetheless intended to preserve predictability, certainty and fairness in Canadian tax law. Parliament intends taxpayers to take full advantage of the provisions of the Income Tax Act that confer tax benefits.

Indeed, achieving the various policies that the Income Tax Act seeks to promote is dependent on taxpayers doing so. McLachlin, C.J. also noted that, although transactions that are undertaken primarily for a non-tax purpose are specifically excluded from the ambit of the GAAR, Parliament did not intend the GAAR to exempt only transactions that have a real business purpose, commenting that “Parliament recognized that many provisions of the Act confer legitimate tax benefits notwithstanding the lack of a real business purpose”: paras. 32-33. [ 23 ] The Court also addressed the difficulties in

interpretation arising from the wording of s. 245(4) (substantially identical in the Alberta GAAR), in which the concept of “misuse of the provisions of the Act” is separated from the concept of “abuse having regard to the provisions of the Act ... read as a whole”.

McLachlin, C.J. commented that: Parliament could not have intended [a two-step process that would include consideration of whether there was an abuse of any policy of the Act read as a whole], which on its face raises the impossible question of how one can abuse the Act as a whole without abusing any of its provisions. [ 24 ] She thus agreed with the comment of the trial judge in Canada Trustco that the analysis of misuse of the provisions of the Act and the analysis of abuse having regard to the provisions of the Act read as a whole are inseparable: para. 39.

Specifically, the Court rejected what it called a “two-stage overriding-policy approach to abuse and misuse”: para. 80. [ 25 ] McLachlin, C.J. commented at paras. 41 and 42: The courts cannot search for an overriding policy of the Act that is not based on a unified, textual, contextual and purposive

interpretation of the specific provisions in issue . First, such a search is incompatible with the roles of reviewing judges. The Income Tax Act is a compendium of highly detailed and often complex provisions. To send the courts on the search for some overarching policy and then to use such a policy to override the wording of the provisions of the Income Tax Act would inappropriately place the formulation of taxation policy in the hands of the judiciary, requiring judges to perform a task to which they are unaccustomed and for which they are not equipped .

Did Parliament intend judges to formulate taxation policies that are not grounded in the provisions of the Act and to apply them to override the specific provisions of the Act? Notwithstanding the interpretative challenges that the GAAR presents, we cannot find a basis for concluding that such a marked departure from judicial and interpretative norms was Parliament’s intent. Second, to search for an overriding policy of the Income Tax Act that is not anchored in the textual, contextual and purposive

interpretation of the specific provisions that are relied upon for the tax benefit would run counter to the overall policy of Parliament that tax law be certain, predictable and fair, so that taxpayers can intelligently order their affairs. Although Parliament’s general purpose in enacting the GAAR was to preserve legitimate tax minimization schemes while prohibiting abusive tax avoidance, Parliament must also be taken to seek consistency, predictability and fairness in tax law. These three latter purposes would be frustrated if the Minister and/or the courts overrode the provisions of the Income Tax Act without any basis in a textual, contextual and purposive

interpretation of those provisions. [emphasis added].

The CSL Reassessment [ 26 ] As noted previously, the Safeway Group concedes that, in so far as CSL is concerned, the transaction in issue resulted in a tax benefit and was an avoidance transaction. The sole issue is therefore whether there was abusive tax avoidance. [ 27 ] To rely on the GAAR, the Minister must identify the “object, spirit and purpose of the provisions that are claimed to have been frustrated or defeated”: Canada Trustco , para. 65.

The Minister bears the burden of establishing on a balance of probabilities that the transaction in issue lacked a proper basis relative to such object, spirit or purpose, or frustrated such object, spirit or purpose.

If there is any doubt, the benefit of that doubt goes to the taxpayer. [ 28 ] I must thus first conduct a “unified, textual, contextual and purposive” analysis of the provision giving rise to the tax benefit that is in issue with respect to CSL to determine why the provision was put in place and why the benefit was conferred. [ 29 ] The transactions in the series that make up the plan must be considered as a whole, but it is implicit in the analysis that they must be considered specifically with respect to the taxpayer being reassessed.

This follows from the wording of s. 75.1(1) of the ACTA, which refers to the tax consequences of an avoidance transaction “to a person”. As noted in Lipson v. The Queen , 2009 SCC 1 at para. 34 , the entire series of transactions should be considered in determining whether individual transactions within the series are abusive, but “care should be taken not to shift the focus of the analysis to the “overall purpose” of the transactions.

Such an approach might incorrectly imply that the taxpayer’s motivation or purpose of the transaction is determinative.” [ 30 ] The only provision identified by the Minister as being abused by CSL with respect to the series of transactions is CSL’s use of para. 20 (1) (

c) of the ITA , the interest deduction claimed by CSL against Alberta-source income for the interest payments it made to SOFC pursuant to the Deeds. The Minister agrees that the deduction of interest paid by CSL meets the technical requirements of para. 20(1)(

c) and ss. 20(3) of the ITA, but submits that there was misuse or abuse of these provisions in the context of the Alberta GAAR. [ 31 ] Paragraph 20 (1)(

c) allows a taxpayer to deduct interest on borrowed money used to earn income from a business even if the interest is on account of capital and would thus be subject to a restriction under para. 18(1) (

b) of the ITA . Paragraph 18(1) (

a) is a general limitation section, and important to the analysis only because “income” in the context of para. 18(1)(

a) is understood to mean gross income and not net income, such that expenses must be connected to an income earning process. [ 32 ] Subsection 20(3) of the ITA is a rule enacted for greater certainty that addresses the situation where a taxpayer uses borrowed money to repay money previously borrowed.

The rule deems the borrowed money to be used for the same purpose as the money that was repaid, and the rule applied in this case when CSL used the Borrowings to repay commercial paper used in CSL’s business for the purpose of earning income from that business. [ 33 ] There is clear guidance as to the object, spirit and purpose of these provisions from the Supreme Court in a number of cases, including Lipson at paras. 29 and 30 : Section 20(1)(

c) allows taxpayers to deduct interest on borrowed money used for a commercial purpose. The purpose of this provision is to “create an incentive to accumulate capital with the potential to produce income” ... or to “encourage the accumulation of capital which would produce taxable income” ... Section 20(3) was enacted “[f]or greater certainty” in order to make it clear that interest that is deductible under s. 20(1)(

c) does not cease to be deductible because the original loan was refinanced. It serves “a practical function in the commercial world of facilitating refinancing” ... [ 34 ] There appears to be no issue with respect to the “use” of the borrowed money: the Crown concedes that it was for a commercial purpose. There is also no issue that the interest deducted was paid in the years in which it was sought to be deducted, that the interest was paid pursuant to a legal obligation to do so, or that the amount of interest paid was reasonable. The sole issue is whether the purpose of earning income requirement was met.

[35] In considering this requirement, the Supreme Court in Shell Canada Ltd. v. Canada, (SCC), [1999] 3 S.C.R.622 at para. 31 stipulated that the focus is not on the purpose of the borrowing per se but the taxpayer’s purpose in using the borrowedmoney. Thus, the taxpayer’s motivation in using borrowed money rather than other sources of funding is not relevant to the availabilityof the interest deduction: also Bronfman Trust v. Canada, (SCC), [1987] 1 S.C.R. 32 at para. 29. [36] Using borrowed money to earn income need not be the only purpose of borrowing in order to meet the requirements of para.20(1)(c).

In Ludco Enterprises Ltd. v. Canada, 2001 SCC 62 at paras. 49 and 50, Iacobucci, J specifically rejected a “bona fide purpose”test to determine whether the requisite income earning purpose is present and noted that “the only express requirement related to‘purpose’ is that the borrowed money must have been ‘used for the purpose of earning income”. He commented that nothing in para.20(1)(

c) indicates that the requisite purpose “must be the exclusive, primary or dominant purpose”, as long as one of the taxpayer’spurposes is to earn income. He noted at para. 51: In this connection, the objectives that have been heretofore used by courts to characterize the requisite purpose in s. 20(1)(c)(i), such as“bona fide”, “actual”, “real” or “true”, are to my mind ultimately useful only when describing whether the transaction at issue was amere sham or window-dressing designed to obtain the benefit of interest deductibility.

Absent a sham or window dressing or othervitiating circumstances, a taxpayer’s ancillary purpose may be nonetheless a bona fide, actual, real and true objective of his or herinvestment, equally capable of providing the requisite purpose for interest deductibility in comparison with any more important orsignificant primary purpose. [37] The Court commented that the requisite test to determine purpose for interest deductibility is “whether, considering all thecircumstances, the taxpayer had a reasonable expectation of income at the time the investment is made”: para. 54. [38] As a step in the series of transactions that made up the plan, CSL replaced capital with borrowed money and relied upon para.20(1)(

c) to deduct interest on that borrowed money. Prior to undertaking the plan, CSL had been financing its operations from itsretained earnings. However, a taxpayer is entitled to reorder its affairs to obtain an interest deduction. [39] In Singleton v. Canada, 2001 SCC 61, a taxpayer who had $300,000 of equity in his law firm decided to use the money topurchase a house and to refinance his law firm equity with borrowed money. The Court commented at paras. 32 to 34 as follows: In applying s. 20(1)(c)(

i) here, the relevant question is: to what use were the borrowed funds put? The Tax Court Judge found that thepurpose in using the money was to purchase a house and that this purpose could not be altered by the “shuffle of cheques” that occurredon October 27, 1988. I respectfully disagree. It is this “shuffle of cheques” that defines the legal relationship which must be given effect.The respondent had at least $300,000 of his own money in the law firm. Surely it follows that the $300,000 invested in the law firm wasnot frozen for all time in the form of its original investment.

The respondent was free to change his mind and decide whether to use hisown money or borrowed money to finance the business of his law firm. In reviewing what the respondent did, it is clear that the relevantcheques were deposited and honoured. There is no suggestion that the transaction was a sham. Giving effect to the legal relationships inthis case, it is clear that the respondent used the borrowed funds to refinance his capital account. This characterization of the use of the funds is not altered by the fact that the respondent used the money he withdrew from the firm topurchase a house.

Nor is it altered by the fact that the transactions occurred on the same day. In my respectful opinion, it is an error to treat this as one simultaneous transaction. In order to give effect to the legal relationships, thetransactions must be viewed independently. [40] In the case before me, there was no personal purpose to CSL’s reorganization of its affairs in order to obtain the benefit of para.20(1)(c). The Borrowings were used in a strictly commercial context and significant net income was earned by CSL from the use of thefunds.

Even in cases such as Singleton and Lipson, where there were mixed commercial and personal purposes, there was no finding ofabuse or misuse of s. 20(1)(

c) by reason of such mixed purposes. Those transactions, and the ones at issue in this case, were not “sham”transactions in the meaningful sense of failing to be consistent with their legal forms and purposes. [41] The Minister, however, submits that under a GAAR analysis the deduction of interest under para. 20(1)(

c) must be examined andevaluated with reference to the overall result of the entire series of transactions under the plan. The Minister cites the comments of LeBel,J. in Lipson at para. 34 to the effect that “the entire series of transactions should be considered”, but fails to focus on the words that

follow: “in order to determine whether the individual transactions within the series abuse one or more provisions of the Act.” It is true that individual transactions must be viewed in the context of the series as a whole. While LeBel, J. appears to suggest that the “overall result” of the series may be relevant, he also commented at para. 22 as follows: I agree that the GAAR analysis should be conducted in respect of each of those tax benefits. The appellants sought an overall result, that is, the deduction of the interest payments on the mortgage from their income.

Nevertheless, the legal analysis required by the GAAR cannot stop at this level. Its focus must be on the individual benefits - which may in combination have led to the overall result - in the context of the series of transactions. [emphasis added] [ 42 ] The Court in Canada Trustco at paras. 44 and 45 makes it clear that the analysis of whether a transaction directly or indirectly results in the abuse and misuse of provisions of the Act is a two-step inquiry: The heart of the analysis under s. 245(4) lies in a contextual and purposive

interpretation of the provisions of the Act that are relied on by the taxpayer, and the application of the properly interpreted provisions to the facts of a given case. The first task is to interpret the provisions giving rise to the tax benefit to determine their object, spirit and purpose . The next task is to determine whether the transaction falls within or frustrates that purpose .... This analysis will lead to a finding of abusive tax avoidance when a taxpayer relies on specific provisions of the Income Tax Act in order to achieve an outcome that those provisions seek to prevent.

As well, abusive tax avoidance will occur when a transaction defeats the underlying rationale of the provisions that are relied upon. An abuse may also result from an arrangement that circumvents the application of certain provisions, such as specific anti-avoidance rules, in a manner that frustrates or defeats the object, spirit or purpose of those provisions. By contrast, abuse is not established where it is reasonable to conclude that an avoidance transaction under s. 245(3) was within the object, spirit or purpose of the provisions that confer the tax benefit. [emphasis added] [ 43 ] In Lipson , Mr.

Lipson conducted a series of transactions whose conceded purpose was to minimize income tax. He also conceded that the transactions were avoidance transactions. As in this case with respect to CSL, the only issue was whether the transactions were abusive. [ 44 ] Mrs. Lipson bought a house in a transaction scheduled to close on September 1, 1994. Prior to closing, she borrowed approximately $560,000 to finance the purchase of shares from her husband in a family corporation. Mr. Lipson agreed to repay the loan in its entirety on the date of closing.

The Lipsons obtained a mortgage loan in the same amount as the share purchase loan which was advanced at closing on September 1, 1994, and used the proceeds to repay the share purchase loan. Mr. Lipson relied on four provisions of the ITA to claim a deduction of the mortgage loan interest: section 73(1) which allows a taxpayer to defer tax on inter-spousal transfers of property, s. 74.1 which attributes income or loss from property transferred from one spouse to another back to the transferring spouse, para. 20(1) (

c) and ss. 20(3) . Basically, Mr.

Lipson claimed a loss on the sale of shares equal to the mortgage interest costs. [ 45 ] LeBel, J noted at para. 38 that, in determining whether a transaction frustrates the object, spirit or purpose of the provisions giving rise to the tax benefit, “(m)otivation, purpose and economic substance are relevant under s. 245(4) only to the extent that they establish whether the transaction frustrates the purpose of the relevant provisions .”: paras 57-60, citing Canada Trustco . [ 46 ] It is thus not required, as submitted by the Minister, that the series must have as its purpose and overall result the “accumulation of capital with the potential to produce income”.

That is conflating the first inquiry as to the object, spirit and purpose of the provision giving rise to the tax benefit with the second inquiry of determining whether the transaction falls within or frustrates that purpose. [ 47 ] Putting his comment with respect to “overall result” further in context, LeBel, J. comments at para. 40 of Lipson : According to the framework set out in Canada Trustco , a transaction can result in an abuse and misuse of the Act in one of three ways: where the result of the avoidance transaction (

a) is an outcome that the provisions relied on seek to prevent; (

b) defeats the underlying rationale of the provisions relied on; or (

c) circumvents certain provisions in a manner that frustrates the object, spirit or purpose of those provisions ( Canada Trustco , at para. 45). One or more of these possibilities may apply in a given case. I should reiterate that in a case like the one at bar, the individual tax benefits must be analysed separately, but always in the context of the entire series of transactions and bearing in mind that each step may have an impact on the others, in order to determine whether any of the provisions relied upon for the tax benefit was misused and abused . [emphasis added]

[48] Conducting the analysis in this way in Lipson, LeBel, J. considered whether para. 20(1)(

c) was abused or misused, and found thatit was not. He stated that the transactions were “unimpeachable” with respect to para. 20(1)(c). [49] Where the Court found abuse was in Mr. Lipson’s use of ss. 73(1) and 74.1(1). LeBel, J. found that the purpose of ss. 74.1(1) is toprevent spouses from reducing tax by taking advantage of their non-arm’s length relationship when transferring property betweenthemselves. Thus, allowing the

section to be used to reduce Mr. Lipson’s income tax from what it would have been without the transferto his spouse “would frustrate the purpose of the attribution rules. Indeed, a specific anti-avoidance rule is being used to facilitateabusive tax avoidance”: para. 42. LeBel, J. concluded at para. 48: In

summary, the tax benefit of the interest deduction resulting from the refinancing of the shares of the family corporation by Mrs.Lipson is not abusive viewed in isolation, but the ensuing tax benefit of the attribution of Mrs. Lipson’s interest deduction to Mr. Lipsonis. It follows that this latter tax benefit can be denied under s. 245(2), which is triggered because the transactions in the series include theattribution of the interest deduction under s. 74.1(1) and this attribution frustrates the object, spirit and purpose of that provision.

I mustnow briefly consider the tax consequences of the denial of the tax benefit and the application of the GAAR. [emphasis added] [50] Thus, the Court found abuse and misuse in the use of an anti-avoidance rule to obtain a benefit, contrary to the purpose, object andspirit of that rule. [51] In the case before me, the only provision that conferred a benefit to CSL as identified by the Minister is para. 21(1)(c).

As in bothSingleton and Lipson, there is no persuasive argument that CSL’s reliance on this provision offended or frustrated the purpose or spirit ofthe provision. [52] The Minister seeks to find support for his position in the Court’s comments at para.52 of Lipson which refer to the dangers ofuncertainty in using the “direct use of borrowed funds” test. The Safeway Group does not rely on that test, but makes submissions basedon the Canada Trustco analysis. Nor do the comments of the court in 722540 Ontario Inc. v.

R. (“Novopharm”) aid the Minister, as thatcase involved money borrowed and invested in a company that had losses and no ongoing business. It is distinguishable from the factsbefore me, and at any rate, was decided under the previous federal GAAR provision. [53] The Minister further submits that the series of transactions was in effect an interest expense with no matching taxable interestincome to the non-arm’s length creditor, which the Minister submits is a result not in accordance with the scheme of the ITA.

In fact, theinterest earned by SOFC was fully taxable under the ITA, but was not included in the tax base prescribed for SOFC by the OCTA. [54] However, even if this submission was accurate, it smacks both of a recharacterization of the object, spirit and purpose of para.20(1)(

c) that the Supreme Court in Shell and Canada Trustco has warned against and a recharacterization of the economic realities of thetransactions. [55] In Shell, the taxpayer relied on para. 20(1)(

c) to deduct from income interest payments made to foreign lenders under debentureagreements that were part of a sophisticated corporate financing arrangement. The complicated arrangement allowed Shell to use foreignexchange gains to its advantage. The Minister argued that Shell should only be allowed to deduct interest at a rate it would have paid hadit used a more standard form of borrowing. The Supreme Court found that all of the requirements of para. 20(1)(

c) had been met by thetransaction. McLachlin, J. (as she then was) addressed the Minister’s implied argument that taxpayers were somehow disentitled fromrelying on para. 20(1)(

c) if the structure of the transaction was determined by a desire to minimize tax payable, which the Court calledthe “economic realities” argument. She noted at paras. 39 and 40: This Court has repeatedly held that courts must be sensitive to the economic realities of a particular transaction, rather than being boundto what first appears to be its legal form: Bronfman Trust, supra, at pp. 52-53, per Dickson C.J.: Tennant, supra, at para 26, per IacobucciJ. But there are at least two caveats to this rule.

First, this Court has never held that the economic realities of a situation can be used torecharacterize a taxpayer’s bona fide legal relationships. To the contrary, we have held that, absent a specific provision of the Act to thecontrary or a finding that they are a sham, the taxpayer’s legal relationships must be respected in tax cases. Recharacterization is onlypermissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect: ContinentalBank Leasing Corp. v. Canada, (SCC), [1998] 2 S.C.R. 298, at para. 21, per Bastarache J.

Second, it is well established in this Court’s tax jurisprudence that a searching inquiry for either the “economic realities” of a particulartransaction or the general object and spirit of the provision at issue can never supplant a court’s duty to apply an unambiguous provision

of the Act to a taxpayer’s transaction. Where the provision at issue is clear and unambiguous, its terms must simply be applied:Continental Bank, supra, at para. 51, per Bastarache J.; Tennant, supra, at para. 16, per Iacobucci J.; Canada v. Antosko, (SCC), [1994] 2 S.C.R. 312, at pp. 326-27 and 330, per Iacobucci J.; Friesen v. Canada, (SCC), [1995] 3 S.C.R. 103, atpara. 11, per Major J.; Alberta (Treasury Branches) v.

M.N.R., (SCC), [1996] 1 S.C.R. 963, at para. 15, per Cory J.[Emphasis added] [56] The Court then found the lower court’s recharacterization of Shell’s legal relationship with the foreign lenders for tax purposes tobe an error.

McLachlin, J. commented that, as between Shell and the foreign lenders, the payments made were entirely “interest”, notingat para. 41 “(t)hat characterization cannot be changed by whatever other legal relationships Shell may have concluded with third partiesor indeed anything that Shell did with the borrowed funds after receiving them from the foreign lenders.” [57] The Court concluded that, despite the fact that the arrangement allowed Shell a tax advantage, it was entitled to the benefit ofpara. 20(1)(c), and that it was an error for the Federal Court of Appeal to “stray from the express terms” of the provision and to“supplement [it] with extraneous policy concerns that were said to form part of its purpose.” [58] While it is true that Shell was decided before the enactment of the current GAAR, the Court in Canada Trustco has continued toreject the “economic realities” or recharacterization argument as it was put forward by the Minister in Shell. [59] In Canada Trustco, McLachlin, C.J. and Major, J. note at para. 12: The provisions of the Income Tax Act must be interpreted in order to achieve consistency, predictability and fairness so that taxpayersmay manage their affairs intelligently.

As stated in para. 45 of Shell Canada Ltd., [1999] 3. S.C.R. 622: [A]bsent a specific provision to the contrary, it is not the courts’ role to prevent taxpayers from relying on the sophisticated structure oftheir transactions, arranged in such a way that the particular provisions of the Act are met, on the basis that it would be inequitable tothose taxpayers who have not chosen to structure their transactions that way. [Emphasis added.] See also 65302 British Columbia, at para. 51, per Iacobucci J. citing P.W. Hogg and J.E.

Magee, Principles of Canadian Income Tax Law (2nd ed. 1997), at pp. 475-76: It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to bequalified by unexpressed exceptions derived from a court’s view of the object and purpose of the provision. [60] Iacobucci, J. in Ludco Enterprises, for a Supreme Court unanimous in result, noted at para. 38 that, when interpreting the ITA,“judicial innovation is undesirable.” He reiterated McLachlin, J.’s comment in Shell Canada at para. 43 to the effect that the ITA is acomplex statute balancing a myriad of principles and that “(f)inding unexpressed legislative intentions under the guise of a purposiveinterpretation” risks upsetting that balance. [61] Iacobucci, J also noted at para. 39 that, given that the ITA has specific anti-avoidance provisions, it should not be embellished bythe courts in response to concerns about tax avoidance noting the “well-established principle” that “taxpayers are entitled to arrange theiraffairs for the sole purpose of achieving a favourable position regarding taxation”.

LeBel, J. concurred, directly stating: “there wasundoubtedly a loophole in the [ITA]... A well-crafted piece of tax planning took advantage of it, but remained clearly within the fourwalls of the statute.”: para. 82. [62] That is essentially the situation in this case. The plan was executed in accordance with applicable tax statutes in the jurisdictionsin which the various steps took place. The requisite purpose test and the other requirements for interest deductibility were satisfied withrespect to CSL’s reliance on para. 20(1)(c).

The object, spirit and purpose of the paragraph was not frustrated or abused. [63] The use of related-party debt or inter-affiliate charges as a means of reducing the taxable income of one corporation whileincreasing that of another member of the same group is not unusual and has been specifically sanctioned by both the Department ofFinance and the CRA. What the Minister objects to in this case is that the plan took advantage of an existing loophole in anotherprovince’s legislation. This is clear from the Minister’s submissions on the issue:

In a typical loss utilization transaction, the recipient (SOFC) would take the interest into income and then offset that income against existing non-capital losses. The fact is that SOFC didn’t have to take the interest into income for Ontario provincial tax purpose and SOFC had no existing non-capital losses. [ 64 ] As noted by the Safeway Group, the Minister did not challenge the deduction of interest that CSL paid to CSHL during the time CSHL held the Deeds (CSL tax year ending December 29, 2001).

Nor has the Minister challenged the deduction of interest CSL paid to SOFC in 2005, when the Ontario tax regime was amended to eliminate the anomaly with other provincial regimes. The clear inference from its submissions and reassessments is that the Minister’s application of the Alberta GAAR is based on the tax treatment of interest in the hands of the recipient taxpayer, SOFC, during a period of time when, validly under existing legislation, SOFC was not subject to provincial tax in Ontario on such interest. [ 65 ] I agree with the Safeway Group that this approach is untenable.

An otherwise legitimate tax deduction under the ACTA that does not frustrate the well-established object, purpose or spirit of the Alberta tax provision relied upon cannot be denied under the Alberta GAAR simply because a separate, albeit related, taxpayer is not subject to tax on that same amount in Ontario. [ 66 ] The Minister submits that the creation of the Deeds by CSL, and their assignment by CSHL to SOFC, indirectly resulted in the abuse and misuse of para. 20(1) (

c) and ss. 20(3) of the ITA because it cannot reasonably be held that the creation of an interest expense in furtherance of a tax avoidance scheme is within the object, spirit or purpose of those provisions. This ignores the principle that the application of the GAAR requires more than a tax avoidance scheme: it must be an abusive tax avoidance scheme. [ 67 ] The lack of a non-tax motivation to the series of transactions is not relevant to the misuse or abuse analysis under the third element of the GAAR test.

The Safeway Group has conceded a tax motivation with respect to the CSL appeal and the issue is whether this tax-motivation was abusive, whether it was an “unacceptable” tax avoidance: Canada Trustco at para. 14.

The Minister’s argument is that the plan differs from “acceptable” transactions in that CSL’s interest deduction “does not arise from some economic activity but rather purely as a consequence of a tax avoidance scheme”, a circular argument that goes back to the rejected “business purpose” test. [ 68 ] The reduction of tax payable in a province through the use of bona fide commercial transactions that transfer income from one province to another to take advantage of a lower tax rate or of a different tax base is not abusive tax avoidance.

As noted by the Safeway Group, the free flow of capital across Canada is constitutionally protected and choosing where to employ capital in order to obtain the most favourable provincial tax result is legitimate tax minimization. [ 69 ] It is noteworthy that CSL’s financial position was significantly altered by the implementation of the plan. CSL permanently relinquished ownership of $600 million of its after-tax retained earnings by declaring and paying cash dividends to its sole shareholder, CSHL.

CSL’s after-tax retained earnings were reduced by $600 million and its debt increased by $600 million while keeping its debt load and debt to equity ratio within arm’s-length and industry norms. The Borrowings were for a 10-year term, without a pre-set unwind mechanism. CSL used the $600 million borrowed from CSHL in its business to earn income. During the same period, CSL accumulated additional retained earnings of approximately $590 million. It cannot be reasonably be argued in this case that the income earnings purpose requirement of para. 20(1) (

c) was not satisfied by CSL’s use of the borrowed money. [ 70 ] Further, CSL never re-acquired ownership of the $600 million paid as cash dividends to CSHL in 2001. CSL paid the $600 million debt incurred in 2001 to SOFC in 2005 using additional retained earnings of CSL and money borrowed from arm’s length persons. The $600 million received by SOFC on repayment of the borrowed money was paid by SOFC to CSHL as a return of capital. Approximately $593 million was then paid as a dividend after payment of approximately $30 million of Canadian withholding tax. The $600 million never returned to CSL (or to Canada).

Thus, the economic substance of the series of transactions was consistent with its form, further eliminating any suggestion that the series of transactions was a sham. [ 71 ] The Minister has failed to establish on a balance of probabilities any misuse or abuse of the provisions relied upon by CSL. I therefore allow the appeal of the reassessment of CSL. The CSHL Reassessment [ 72 ] The Minister submits that it is inappropriate to separate the analysis of CSL from that of CSHL, arguing that Lipson mandates that the series of transactions as a whole must be considered.

While Lipson does indeed suggest that the entire series of transactions should be considered in order to determine whether individual transactions within the series are abusive, it is implicit in the comments made in

Lipson and other cases that this analysis is specific to the taxpayer that is being assessed pursuant to the GAAR. [ 73 ] Subsection 72.1(2) of the Alberta GAAR provides that where a transaction is an avoidance transaction (as defined), the tax consequences “to a person” shall be determined as is reasonable in the circumstances in order to deny the tax benefit claimed.

As previously described, the focus is on individual transactions viewed in the context of the series as a whole, and when the analysis shifts to the third element of the GAAR test, on the provisions that conferred the benefit that were relied upon by the taxpayer.

It is therefore appropriate to consider the reassessment of CSHL separately from that of CSL. [ 74 ] The Minister reassessed CSHL as an alternative to the reassessment of CSL, alleging as a reasonable consequence the inclusion in CSHL’s taxable income of the amount of interest income SOFC earned on the Deeds as if the Deeds had not been endorsed to SOFC. [ 75 ] For the CSHL appeal, all the elements of the GAAR are in issue. A.

Did the transactions involve tax benefits and were they avoidance transactions? [ 76 ] A tax benefit is defined in the ACTA as being a “reduction, avoidance or deferral of tax” or “an increase in a refund of tax or other amount”. A transaction that results in a tax benefit is an avoidance transaction where it cannot reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

It is apparent from Canada Trustco and other cases that the presence or absence of a tax benefit cannot always be easily determined apart from the question of whether there is an avoidance transaction. [ 77 ] The Minister submits that the tax benefits and avoidance transactions that arise with respect to CSHL are as follows:

a) under ss. 112(1) of the ITA , the inter-corporate dividend deduction claimed by CSHL; and

b) under para. 12(1) (

c) of the ITA , the avoidance of an interest inclusion by CSHL as a result of CSHL’s transfer of the Deeds to SOFC. [ 78 ] The alleged tax benefit with respect to ss. 112(1) of the ITA can be characterized as a deduction and the para. 12(1) (

c) alleged benefit as the avoidance of tax. [ 79 ] The Court in Canada Trustco commented at para. 20 that, if a deduction against taxable income is claimed, the existence of a tax benefit is clear, since it would result in the “reduction” of tax. However, it may only be possible to establish the existence of a tax benefit “by comparison with an alternative arrangement”. The Court suggested as examples the characterization of an amount payable as an “annuity” rather than as a “wage”, or as a “capital gain” rather than as “business income”.

The test, in the end, is “whether through the use of a tax benefit, the taxpayer reduced, avoided or deferred tax payable under the Act.” [ 80 ] The inter-corporate dividend deduction claimed by CSHL under ss. 112(1) of the ITA is a deduction, and clearly falls within the meaning of a tax benefit. [ 81 ] The Minister’s allegation that the avoidance of an interest inclusion by CSHL as a result of CSHL’s transfer of the debt receivable under the Deeds to SOFC is a tax benefit is more problematic.

The Minister argues that, prior to the transfer of the Deeds to SOFC, CSHL received taxable interest income, and after the transfer, CSHL received tax free dividend income from SOFC in place of the interest income. Thus, the Minister argues, tax otherwise payable had the Deeds not been transferred was avoided, resulting in a tax benefit. [ 82 ] The alleged avoidance transaction arising from this alleged tax benefit is essentially the transfer of debt by CSHL to SOFC in exchange for common shares of SOFC.

The Minister’s submission, taken to its logical conclusion, is that a taxpayer obtains a tax benefit which may be an avoidance transaction whenever a taxpayer disposes of an income-earning asset. There is no authority for this

problematic proposition. Specifically, para. 12(1)(

c) of the ITA cannot be interpreted as suggesting that a taxpayer is not entitled to thetax consequences that naturally flow from divesting itself of ownership of a interest-bearing asset in exchange for ownership of adividend-bearing asset. [83] The Minister’s submissions also suffer from the necessary implication that the series of transactions should be analysed as if theyhalted at the stage at which CSHL held the Deeds, which is not a true comparison of the situation as it existed before the purportedavoidance was effected through the series of transactions.

In this case, before the series of transactions was put in place, CSHL did nothold the Deeds and therefore was not liable for tax on the income from this debt. In fact, before the series of transactions was put inplace, CSHL did not exist. The Minister in employing this argument seeks to rely on one step in the series.

While it may be valid tocompare the impugned transaction to the status quo in order to determine whether there has been a tax benefit and an avoidancetransaction, the status quo that is relevant is the one that existed prior to the implementation of the series of transactions, and not partway through. [84] In Canadian Pacific Ltd. v. R., 2001 FCA 398 , [2002] 3 F.C. 170 (Fed.

C.A.), in which the Crown argued that adesignation of foreign currency in a loan transaction was itself a “transaction”, the Court commented as follows at paragraph 26: The words of the Act require consideration of a transaction in its entirety and it is not open to the Crown artificially to split off variousaspects of it to create an avoidance transaction. [Emphasis added] [85] The Court in Canada Trustco discusses the analysis of whether an avoidance transaction exists at para. 30: The courts must examine the relationships between the parties and the actual transactions that were executed between them.

The facts ofthe transactions are central to determining whether there was an avoidance transaction. It is useful to consider what will not suffice toestablish an avoidance transaction under s. 245(3). The Explanatory Notes state, at p. 464: Subsection 245(3) does not permit the “re-characterization” of a transaction for the purposes of determining whether or not it is anavoidance transaction.

In other words, it does not permit a transaction to be considered to be an avoidance transaction because somealternative transaction that might have achieved an equivalent result would have resulted in higher taxes. [86] This is what the Minister purports to do in submitting that CSHL’s transfer of the debt receivable to SOFC is a tax benefit andavoidance transaction.

A few steps in the series of transactions are compared to a hypothetical situation which would result in analternative scheme that would give rise to higher taxes. [87] I also note that, in transferring the $600 million debt represented by the Deeds to SOFC, CSHL did not seek to rely on or avoidany provision of the ACTA or the ITA.

This was merely an ordinary commercial transaction, and the absence of a clearly identifiableprovision that was abused or misused precludes the possibility of a meaningful abuse analysis. [88] The Minister submits that since the CSL transaction is an admitted avoidance transaction, this taints the entire series oftransactions, rendering each transaction in the series an avoidance transaction, relying on para. 21 of Canada v.

Mackay, 2008 FCA 105.However, the Federal Court of Appeal in Mackay found the trial judge in error for failing to determine separately the purpose of eachtransaction within a series of transactions. Sharlow, J.A. commented at para. 21: I must respectfully disagree with Justice Campbell's

interpretation of subsection 245(3). In my view, her

interpretation is incorrectbecause it is not consistent with the language or the purpose of subsection 245(3), particularly paragraph 245(3)(b). As I read paragraph245(3)(b), it requires a determination of the primary purpose of any transaction (or transactions) within a series of transactions thatwould result in a tax benefit if the GAAR does not apply.

It follows that a subset of transactions within a series of transactions is anavoidance transaction unless the subset of transactions may reasonably be considered to have been undertaken or arranged primarily forbona fide purposes other than to obtain the tax benefit. In my view, the conclusion that a series of transactions was undertaken primarilyfor bona fide non-tax purposes does not preclude a finding that the primary purpose of one or more steps within the series was to obtain atax benefit.

It seems to me that this is what Chief Justice McLachlin and Justice Major had in mind when they wrote the following inCanada Trustco (at paragraph 34): If at least one transaction in a series of transactions is an "avoidance transaction", then the tax benefit that results from the series may be

denied under the GAAR. This is apparent from the wording of s. 245(3). Conversely, if each transaction in a series was carried outprimarily for bona fide non-tax purposes, the GAAR cannot be applied to deny a tax benefit. [Emphasis added] [89] Sharlow, J.A. then proceeded to determine the primary purpose of a subset of the transactions, not the whole of the series. Henoted at para. 25 and 26 that, while it was relevant to determine the primary purpose of a series of transactions, the analysis cannot stopat that point, but should include an analysis of the one or more impugned transactions within a series.

While a conclusion that there is abona fide non-tax purpose for a series of transactions as a whole does not preclude a finding that the primary purpose of one or moresteps within the series was to obtain a tax benefit, I must agree with the Safeway Group that the reverse should also be true. [90] Even if it can be concluded that there is an overall tax purpose for a series of transactions as a whole, this does not preclude orobviate an analysis of an impugned transaction or subset of transactions within the series to determine whether it or their primary purposewas to obtain a tax benefit and thus whether they are avoidance transactions. [91] At any rate, there is nothing in the GAAR analysis that allows the Minister to conflate the situations of two taxpayers, even if thecontext for the analysis involves a series of transactions between a number of taxpayers. [92] The Safeway Group conceded only that the impugned CSL transaction within the series was an avoidance transaction.

It is stillopen to the Appellants to argue that other transactions or subset of transactions within the series are not avoidance transactions. [93] I find that the Safeway Group has refuted the existence of a tax benefit arising from the alleged avoidance of an interest inclusionby CSHL under para. 12(1)(

c) of the ITA. Thus the question of whether this was an abusive avoidance transaction thus does not arise. [94] The Safeway Group must also refute that the inter-corporate dividend deduction claimed by CSHL under ss. 112(1) of the ITAwas a tax benefit. The Safeway Group submits that since CSHL was created, not to minimize Canadian tax but rather for U.S. taxpurposes, the inter-corporate dividend deduction falls within the exception in ss. 72.1(3), having been undertaken for bona fide non-Canadian tax purposes, and is thus not an avoidance transaction.

While CSHL was created to receive dividends from CSL in a mannerthat would avoid U.S. taxation, it was also created to utilize the Canadian inter-corporate dividend deduction, and therefore “to obtainthe tax benefit”. I find that this transaction was an avoidance transaction. B. Was the ss. 112(1) transaction an abusive avoidance transaction? [95] Subsection 112(1) has also been the subject of judicial commentary. In Lamont Management Ltd. v.

Canada, (FCA), [2000] 3 F.C. 508, at para. 3, the Court stated: The Income Tax Act provides that, in accordance with specified provisions, dividends received by one corporation from another areexempt from income tax.

The purpose of the exemption is to preclude double taxation at the corporate level, i.e. once by the corporationearning the income giving rise to the dividend and again by the corporation receiving the dividend income. [Emphasis added] [96] The issue in this case, of course, is that the corporation earning the income giving rise to the dividend, SOFC, was able to claimthe use of ss. 2(2) and ss. 37(1) of the OCTA, which offered an exception from tax levied on such income for corporations resident inOntario but incorporated outside of Canada.

The interest SOFC earned on the Deeds was not included in its Ontario tax base. [97] The Minister submits that the purpose of s. 112 of the ITA is to allow a deduction when the stream of income that resulted in thedividend was subject to tax but deny the deduction when it was not. The Safeway Group submits that the amount of tax paid by theoriginal recipient of the income is not relevant to the application of s. 112.

It submits that there are many ways under tax legislation thata corporate recipient may reduce or eliminate the incidence of tax on such income, such as through the use of loss carry-forwards,investment tax audits or provincial tax holidays, and that, had Parliament wanted to take the amount of tax paid by the dividend payorinto account, it could have enacted a rule that did so. It also points out that the Carter Commission in its review of Canada’s income taxsystem recommended a “full integration” approach with respect to inter-corporate dividends, but that approach was rejected byParliament.

Subsection 112(1) instead focuses on whether the dividend was received from a taxable Canadian corporation or acorporation resident in Canada.

[ 98 ] The Minister argues that, while from the federal perspective, the purpose of s. 112 was satisfied because SOFC was subject to federal tax as a resident, it was not satisfied at the provincial level because SOFC was subject to provincial tax as a non-resident. [ 99 ] The Minister’s argument fails to recognize the Supreme Court’s caution at para. 12 of Canada Trustco to avoid reading in unexpressed exceptions into the clear language of tax legislation, and McLachlin, J.’s comment in Shell at para. 43 that “[f]inding unexpressed legislative intentions under the guise of a purposive

interpretation” risks upsetting the balance of a complex body of income tax legislation. [ 100 ] On this point, the Safeway Group submits that the transaction did not engage any of the specific rules under

Part IV or

Part IV.1 of the ITA , nor any of the detailed anti-avoidance rules that specifically limit the circumstances in which ss. 112(1) can be relied upon. [ 101 ] I find that the Minister has not established that ss. 112(1) was abused or misused by this transaction nor that the purpose of ss. 112(1) was defeated or its object or spirit circumnavigated. Reasonableness of Reassessments [ 102 ] The Safeway Group argues further that the unreasonableness of the CSHL reassessments gives rise to a reasonable inference that they are erroneous.

Since I have found no abusive tax avoidance under the Alberta GAAR, it is not necessary that I address the reasonableness of the reassessments. While it appears that there was some pre-appeal confusion as to whether the CSHL reassessments were in addition to or an alternative to the CSL reassessment, during the course of the appeal the Minister made it clear that they were alternative to the CSL reassessment. Conclusion [ 103 ] As I have found that there was no abusive tax avoidance under the Alberta GAAR with respect to either CSL or CSHL, I allow the appeals, vacate the reassessments, and direct:

a) that CSL’s and CSHL’s respective Alberta income, taxable incomes and taxable amounts be reduced by the reassessed amounts, together with associated tax and interest, and

b) to the extent that the Safeway Group has over-paid any such amounts, interest on the over-payment is to be computed in accordance with the ACTA. [ 104 ] If the parties are unable to agree on costs, they may make further submissions. Dated at the City of Calgary, Alberta this 16 th , day of May, 2011. B.E. Romaine J.C.Q.B.A. Appearances:

Jacques Bernier, John Owen and April Grosse for the Appellant Canada Safeway Limited Clyde R. Davie and Tim Hay for the Respondent Her Majesty the Queen In Right of Alberta