3295940 CANADA INC., Appellant, v. HER MAJESTY THE QUEEN,, 2022 TCC 68

Docket: 2017-4685(IT)G BETWEEN: 3295940 CANADA INC., Appellant, and HER MAJESTY THE QUEEN, Respondent . [OFFICIAL ENGLISH TRANSLATION] Appeal heard on September 8, 2020, at Ottawa, Canada.

Before: The Honourable Justice Réal Favreau Appearances : Counsel for the appellant: Roger Taylor Marie-Claude Marcil Stéphanie Valois Counsel for the respondent: Yanick Houle Sara Jahanbakhsh Dominic Bédard-Lapointe JUDGMENT The appeal from the reassessment dated November 21, 2008, for the appellant’s taxation year ending March 31, 2005, is dismissed, with costs to the respondent, in accordance with the attached reasons for judgment. Signed at Montreal, Quebec, this 30th day of June 2022. “Réal Favreau” Favreau J. Translation certified true on this 24th day of August 2022.

François Brunet, Revisor Citation: 2022CCI68 Date: 20220630 Docket: 2017-4685(IT)G BETWEEN: 3295940 CANADA INC., Appellant, and HER MAJESTY THE QUEEN,

Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Favreau J. [ 1 ] This is an appeal from a reassessment made under the Income Tax Act , R.S.C., 1985, c. 1 (5th Supp .), as amended (the “Act”) by the Minister of National Revenue (the “Minister”), dated November 21, 2008 regarding the appellant’s taxation year ending March 31, 2005. [ 2 ] According to this reassessment, the Minister added a $31,500,000 capital gain in calculating the appellant’s income after applying the general anti-avoidance rule (the “GAAR”), provided for in

section 245 of the Act. [ 3 ] The facts in this case are not being contested and were the subject of a partial agreed statement of facts that has been reproduced in its entirety at the end of this judgment. [ 4 ] The background is appropriate to explain this litigation. [ 5 ] At the core of this litigation is a company specialized in developing, producing and distributing generic injectable drugs, notably morphine. [ 6 ] This company, known as Sabex Inc. (“Sabex”) was incorporated in 1973 under the

Canada Business Corporations Act . [ 7 ] In 1980, Sabex was acquired by Michel Saucier (“Saucier”) and Gilles R.

Dupuis (“Dupuis”), who each held 50% of the company’s shares at the time. [ 8 ] In 1996, Dupuis sold his stake in Sabex to Saucier, who financed the transaction with the assistance of the Caisse de dépôt et placement du Québec (“CDPQ”), which in turn received 25% of the company’s shares. [ 9 ] In 2001, Saucier wanted to divest himself of all his shares in Sabex, but if necessary would agree to remain involved in Sabex for a certain period of time to facilitate the transaction. [ 10 ] The tax attributes of the blocks of shares held by Sabex shareholders at that time were as follows: Shareholders Adjusted cost base (ACB) Fair market value (FMV) Safe income Michel Saucier $2,000 $172,500,000 $23,000,000 CDPQ/ Sofinov $7,500,000 $57,500,000 N/A [ 11 ] On January 25, 2002, the investment fund known as RoundTable Healthcare Partners, L.P. and RoundTable Investors L.P. (collectively, “RoundTable”) offered Saucier the opportunity to purchase 80% of Sabex.

Saucier accepted RoundTable’s proposal. RoundTable Healthcare Partners L.P. Is an American investment fund (based in the state of Illinois). I. Partial sale of 80% of Sabex in 2002 [ 12 ] To implement the 80% purchase of Sabex, the following transactions, including CDPQ’s sale of its 25% stake in Sabex, were put in place:

a) On March 19, 2022, Sabex 2002 Inc. (“Sabex 2002”) and Sabex 2002 Holdings Inc. (“Sabex 2002 Holdings”) were incorporated under the

Canada Business Corporations Act , and Sabex purchased a Class B common share in Sabex 2002 and Sabex 2002 Holdings for a nominal amount;

b) On April 10, 2002, Gestion Micsau inc. (“Micsau”) was incorporated under the

Canada Business Corporations Act ;

c) On April 17, 2002, Saucier transferred all his Sabex shares to Micsau, specifically 13,5000,000 common shares, 8,000,000 Class A preferred shares and 500,000 Class C preferred shares, in exchange for 120 common shares of Micsau. This transaction was subject to a joint election under subsection 85(1) of the Act, and the amount agreed upon by the parties was a nominal amount;

d) On April 18, 2002, Sabex sold all its shares to Sabex 2002 for $256,562,000. In exchange, Sabex received the assumption of $26,562,000 of its debts, a note payable in the amount of $176,000,000 and 1,999,999 Class B common shares, representing 20% of the common shares of Sabex 2002. The payment also included a $10,000,000 contingent consideration based on future performance. This transaction was also subject to a joint election under subsection 85(1) of the Act;

e) On April 18, 2002, CDPQ sold all its Sabex shares to Micsau in exchange for two notes payable totalling $47,460,000;

f) On April 18, 2002, Sabex transferred all its Sabex 2002 shares (2,000,000 Class B common shares) to Sabex 2002 Holdings in exchange for 1,999,999 Class B common shares of Sabex 2002 Holdings. This transaction was subject to a joint election under subsection 85(1) of the Act, and the amount agreed upon by the parties was a nominal amount;

g) On April 18, 2002, RoundTable purchased 8,000,000 Class A common shares of Sabex 2002 Holdings for $69,115,784;

h) On April 18, 2002, Sabex 2002 Holdings purchased 8,000,000 Class A common shares of Sabex 2002 Holdings for $69,115,784;

i) On April 18, 2002, Sabex 2002 borrowed $110,000,000 from a financial institution;

j) On April 18, 2002, Sabex 2002 paid off the $176,000,000 note payable to Sabex;

k) On April 18, 2002, Sabex paid a $47,460,000 dividend to Micsau;

l) On April 18, 2002, Micsau paid off the two notes payable totalling $47,460,000 to CDPQ. [ 13 ] After RoundTable purchased 80% of Sabex’s shares, the situation was as follows:

a) Saucier held 100% of shares in Micsau;

b) Micsau held 100% of shares in Sabex, whose corporate name had been changed to 3295940 Canada inc. (“3295940”) pursuant to a certificate of amendment dated April 25, 2002; c) 3295940 held 2,000,000 Class B shares, representing 20% of shares in Sabex 2002 Holdings, whose corporate name had been changed to Sabex Holdings Ltd. (“Holdings”) pursuant to a certificate of amendment dated April 1, 2004. These shares involved a nominal amount in terms of paid-up capital (PUC) and ACB.

d) RoundTable held 80% of shares in Holdings, i.e., 8,000,000 Class A shares;

e) Holdings held 100% of shares in Sabex 2002;

f) Sabex 2002 was operating the pharmaceutical company. [ 14 ] At all relevant times, 3295940 and Micsau were Canadian-controlled private corporations within the meaning of subsections 125(7) and 248(1) of the Act. [ 15 ] The ACB for all shares that Micsau held in 3295940 was $48,100,000 pursuant to

section 54 and subsection 248(1) of the Act. [ 16 ] Pursuant to the agreement concluded in 2002, in 2004 Holdings and RoundTable each had the option to buy or redeem, as applicable, 500,000 of the 2,000,000 Class B shares held by 3295940 for $13,310,000, and 3295940 could equally force Holdings to redeem said shares from them at the same price in 2004. II.

Sale of 100% of Sabex 2002 shares to Novartis Pharmaceuticals Canada Inc. (“Novartis”) [ 17 ] On June 25, 2004, pursuant to the agreement entered into with RoundTable in 2002, which is described in paragraph 16 below, RoundTable exercised its option to force the redemption of 500,000 Class B shares in Holdings held by 3295940 for $13,310,000. [ 18 ] The “safe income” for those 500,000 Class B shares in Holdings was $1,700,000 within the meaning of subsection 55(5) of the Act. [ 19 ] Given that the fees related to this transaction were $60,000 and that the PUC and ACB for those shares were a nominal amount, 3295940 realized a capital gain of $11,550,000 (i.e., $13,310,000 - $1,700,000 - $60,000) under subsection 55(2) of the Act. [ 20 ] As a result of this redemption, 3295940 realized a taxable capital gain of $5,780,000, and that amount was credited to the capital dividend account (“CDA”) of 3295940 pursuant to paragraph 38(1)(

a) and subsection 89(1) of the Act, respectively. A. The reorganization carried out in 2004 before proceeding with the sale of Sabex 2002

(1) Extraction of “safe income” [ 21 ] On January 29, 2004, Holdings increased the PUC of 1,500,000 Class B shares by $4,000,000, which resulted in increasing the “safe income” of those shares to $4,000,000 within the meaning of subsection 55(5) of the Act. [ 22 ] Consequently, Holdings is deemed to have spent, and 3295940 is deemed to have received, a $4,000,000 dividend pursuant to subsection 84(1) of the Act. [ 23 ] Given that this entire dividend came from “safe income” credited to 1,500,000 Class B shares, subsection 55(2) of the Act did not apply in terms of deeming this dividend a capital gain. [ 24 ] Furthermore, the ACB for 1,500,000 Class B shares in Holdings held by 3295940 increased by $4,000,000 pursuant to paragraph 53(1)(

b) of the Act.

(2) Reorganization of the capital of 3295940 and incorporation of 4244851 Canada Inc. (“4244”) [ 25 ] On June 29, 2004, 3295940 amended its articles of incorporation to make it possible to create a new class of shares, Class D preferred shares, which are non-voting shares that are redeemable by the corporation or the shareholder at $1 per share. [ 26 ] On June 30, 2004, 3295940 redeemed all shares of its capital stock held by Micsau, which at the time had an ACB of $48,100,000 and a FMV of $101,800,000.

In exchange, Micsau received 31,500,000 Class B preferred shares and 100 common shares from 3295940. [ 27 ] This transaction was subject to a joint election under subsection 85(1) of the Act, and the amount agreed upon by the parties was established at $48,100,000. The ACB and FMV of the 31,500,000 Class B preferred shares in 3295940 held by Micsau were established at $31,500,000 pursuant to paragraph 85(1)(

g) of the Act, while the ACB of the 100 common shares in 3295940 held by Micsau were established at $16,600,000 pursuant to paragraph 85(1)(

h) of the Act. [ 28 ] The PUC of the 31,500,000 Class D preferred shares and the 100 common shares in 3295940 were established at a nominal amount (see table at paragraph 41 of the partial agreed statement of facts). [ 29 ] On June 21, 2004, 4244851 Canada Inc. (“4244”) was incorporated, and Micsau purchased a common share for a nominal amount when it was incorporated. [ 30 ] On June 30, 2004, Micsau gave 4244 the 31,500,000 Class D preferred shares in 3295940 in exchange for 31,500,000 Class D preferred shares of the capital stock of 4244. [ 31 ] The Class D preferred shares in 4244 were non-voting shares that are redeemable by the corporation or the shareholder at $1 per share.

The PUC for these shares was nominal, while the ACB and FMV were $31,500,000, respectively. [ 32 ] No gains were made as a result of this transaction since the FMV of the 31,500,000 Class D preferred shares in 3295940 that Micsau disposed of was equal to their ACB (see table at paragraph 47 of the partial agreed statement of facts).

(3) The sale of Holdings shares to 4244 [ 33 ] On June 30, 2004, 3295940 disposed of the 1,500,000 Class B shares in Holdings (worth $88,500,000) to 4244 in exchange for 57,000,000 Class D preferred shares and 31,500,000 common shares of the capital stock of 4244. [ 34 ] This transaction was subject to an agreement under subsection 85(1) of the Act, and the amount agreed upon by the parties was established at $57,000,000. In accordance with paragraph 85(1)(

g) of the Act, the ACB of the 57,000,000 Class D preferred shares in 4244 held by 3295940 was established at $57,000,000. Pursuant to paragraph 85(1)(

h) of the Act, the ACB of the 31,500,000 common shares in 4244 held by 3295940 was established at a nominal amount. The PUC of the 57,000,000 Class D preferred shares and the 31,500,000 common shares in 4244 held by 3295940 was established at a nominal amount. [ 35 ] Given that the ACB for the 1,500,000 Class B shares in Holdings was $4,000,001 and that the amount agreed upon by the parties was $57,000,000, 3295940 made a $52,999,999 capital gain, $26,500,000 of which is taxable. In accordance with subsection 89(1) of the Act, the CDA of 3295940 increased by $26,500,000 to reach $32,280,000 (see table at paragraph 56 of the partial agreed statement of facts).

(4) Cross redemption of shares [ 36 ] On August 11, 2004, 3295940 redeemed the 31,500,000 Class D preferred shares in its capital stock held by 4244 in exchange for a $31,500,000 note payable. [ 37 ] In accordance with subsection 84(3) of the Act, 3295940 is deemed to have paid to 4244, and 4244 is deemed to have received a $31,499,999 dividend. This dividend is deemed a capital dividend as result of 3295940 so electing under subsection 83(2) of the Act. This dividend was not supposed to be included in calculating the income of 4244.

It must be transferred from the CDA of 3295940 to the CDA of 4244 pursuant to the definition of “capital dividend account” found in subsection 89(1) of the Act. [ 38 ] On August 11, 2004, 4244 redeemed the 31,500,000 common shares and 110,000 of the 57,000,000 Class D preferred shares in its capital stock held by 3295940 in exchange for a $31,500,000 promissory note. [ 39 ] Pursuant to subsection 84(3) of the Act, 4244 is deemed to have paid, and 3295940 is deemed to have received, a $31,389,999 dividend on the common shares and a $110,000 dividend on the Class D preferred shares.

These dividends are deemed capital dividends as a result of 4244’s so electing under subsection 83(2) of the Act. These dividends were not supposed to be included in calculating the income of 3295940. They must be transferred from the CDA of 4244 to the CDA of 3295940 pursuant to the definition of “capital dividend account” found in subsection 89(1) of the Act. [ 40 ] On August 11, 2004, the $31,500,000 notes payable that 3295940 and 4244 owe each other balance each other out (see table at paragraph 67 of the partial agreed statement of facts).

(5) The sale of shares in 4244 to 3295940 [ 41 ] On August 12, 2004, Micsau transferred its common share and its 31,500,000 Class D preferred shares in 4244 to 3295940 in exchange for 31,500,000 Class D preferred shares of the capital stock of 4244. [ 42 ] This transaction was subject to a joint election under subsection 85(1) of the Act; The amount agreed upon by the parties was established at $31,500,000. In accordance with paragraph 85(1)(

g) of the Act, the ACB of the 31,500,000 Class D preferred shares in

3295940 held by Micsau was established at $31,500,000. No gain was made as a result of this transaction because the FMV of the common share and the 31,500,000 Class D preferred shares in 4244 that Micsau disposed of was equal to the respective ACB of those shares. [ 43 ] Following this transaction, 3295940 held a common share and 88,390,000 Class D preferred shares with an ACB of $88,390,000 (see table at paragraph 73 of the partial agreed statement of facts). [ 44 ] On August 13, 2004, 3295940 sold its common share and 88,390,000 Class D preferred shares in 4244 to Novartis in exchange for $88,390,000.

The fees for this transaction were $170,000. Given the $88,390,000 ACB for the common share and 88,390,000 Class D preferred shares in 4244 held by 3295940 and the $170,000 fees for the transaction, 3295940 incurred a $170,000 capital loss (see table at paragraph 76 of the partial agreed statement of facts).

(6) The redemption of Micsau’s shares in 3295940 [ 45 ] On August 16, 2004, 3295940 redeemed the 31,500,000 Class D preferred shares in its capital stock held by Micsau in exchange for $31,500,000. [ 46 ] In accordance with subsection 84(3) of the Act, 3295940 is deemed to have paid to Micsau, and Micsau is deemed to have received, a $31,500,000 dividend. Pursuant to paragraph (

j) of the definition of “proceeds of disposition” set out in

section 54 of the Act, Micsau is deemed to have disposed of 31,500,000 Class D preferred shares in 3295940 for proceeds equal to nil and consequently incurred a capital loss of $31,500,000 since the ACB of these shares was $31,500,000.

In accordance with subsection 112(3) of the Act, this loss is deemed to be equal to nil. [ 47 ] Following these transactions, the ACB of the 100 common shares in 3295940 held by Micsau increased to $16,600,000. [ 48 ] Following various transactions carried out by 3295940, the capital gains realized and capital losses incurred by 3295940 are as follows: Redemption of 500,000 Class B preferred shares in Holdings $11,500,000 (gain) Sale of 1,500,000 Class B preferred shares in Holdings $53,000,000 (gain) Sale of a common share and 88,500,000 Class D preferred shares in 4244 $170,000 (loss) Total: $64,380,000 (net gain) III.

Concession by 3295940 [ 49 ] For the purposes of its appeal only, 3295940 concedes that the transactions put in place and described in paragraphs 30 to 74 in the partial agreed statement of facts, which culminated in the sale of 3295940’s indirect holdings in the pharmaceutical company known as Sabex 2002 through a sale of the shares it held in 4244 to Novartis, allowed 3295940 to reduce the capital gain amount by $31,500,000 that it would have otherwise realized if 3295940 had sold directly to Novartis, following 4244’s redemption of its 500,000 Class B shares held by 3295940 and its 1,500,000 Class B shares in Holdings.

Consequently, 3295940 concedes that the transactions concerned constitute a series of transactions for the purposes of subsection 245(3) of the Act that resulted in a tax benefit, within the meaning of the definition of that expression found in subsection 245(1) of the Act, in the amount of $31,500,000. For this reason, the transactions concerned constitute avoidance transactions within the meaning of subsection 245(3) of the Act. IV.

Testimony [ 50 ] Jacques Gauthier, an accountant for Ernst & Young until 2009 and Michel Saucier’s advisor, and Pierre Fréchette, President and Chief Operating Officer of the pharmaceutical company operated by Sabex 2002 from 2002 to 2004 and currently associate at RoundTable, both testified at the hearing. They confirmed the facts presented in the partial agreed statement of facts as well as their respective roles in the transactions described therein. [ 51 ] Tax planning for the transactions described in the partial agreed statement of facts was carried out by Ernst & Young in 2004.

The documents explaining the different planning options considered, including three (3) alternative reorganization projects, were entered into evidence. V. Issue [ 52 ] The only issue consists of determining whether the series of transactions resulted in abusively defeating the object, purpose and spirit of the provisions pertaining to calculating capital gains set out in sections 38, 39 and 40 of the Act and to calculating capital dividend and CDA set out in subsections 83(2), 89(1) and 55(2) of the Act.

VI. Statutory provisions [ 53 ] The relevant statutory provisions of the Act enabling the Court to dispose of this appeal are subsections 55(2), 83(2), 89(1) and 245(1) to (5). A copy of these provisions, from the version applying to the 2005 tax year, are attached to this judgment. VII.

Positions of the parties Position of the appellant [ 54 ] According to counsel for the appellant, the planning done by Ernst & Young is both legitimate and non-abusive because it is part of the bona fide sale of the Holdings subsidiary to a corporation at arm’s length from the corporate group (Novartis). [ 55 ] Since some of the transactions were carried out in years preceding the year at issue in this case, the parent company (Micsau) held a stake with a high ACB in the appellant.

Consequently, Michel Saucier did everything in his power to sell the 3295940 shares, but RoundTable and Novartis refused given their lack of interest and out of fear of inheriting certain liabilities from 3295940. The purpose of the 2004 reorganization was therefore to account for the acquisition cost in calculating the capital gain during the sale of shares in Holdings. [ 56 ] The appellant submits that using the ACB of the shares held by the parent corporation for selling its stake in Holdings does not result in an abuse or misuse of the Act.

Based on comments from the Finance Minister of Canada, counsel for the appellant conclude that transferring deductions, credits or losses within the same corporate group cannot result in an abuse or misuse of the provisions regarding calculating capital gain. The acknowledged capital gain from selling the shares in Holdings simply reflects the reality of accounting for the acquisition cost and should not be double-taxed. Lastly, the overall result of such a sale should not result in taxation except in terms of net capital gain. Counsel mainly based their arguments on a comment of Mr.

Justice Noël in Triad Gestco Ltd. v. Canada , 2012 FCA 258 [ Triad Gestco ] . [ 57 ] Based on the holding of Oxford Properties Group Inc. v. The Queen , 2016 TCC 204 , overturned on appeal, 2018 FCA 30 , [ Oxford ] , the appellant explained that the GAAR cannot apply to a purpose not specifically set out in a provision. For example, in Oxford , supra , even though subsection 100(1) of the Act prevents the avoidance of a latent recapture, the GAAR cannot apply when the taxpayer bumps the tax base. Indeed, there can be no abuse or misuse of the provision if that is not what the provision was intended to prevent.

Similarly, the GAAR cannot apply to the series of transactions concerned, given the fact that the purpose of the CDA scheme and subsection 55(2) of the Act is not to prevent using the tax base through implicit bumping. [ 58 ] Counsel for the appellant do not see that this is clearly an abuse or misuse of the provisions regarding capital dividend. The capital dividend mechanism, which is interrelated with the CDA mechanism, supports the principle of fairness of the Act by ensuring that an amount can be imposed once only.

The provisions in issue instead ensured that half of the capital gain remained non-taxable and was transferred into the hands of its real shareholder, once again without taxation. [ 59 ] The election to designate a capital dividend, when permitted by the CDA, is not an abuse or misuse in and of itself of subsection 55(2) of the Act. Indeed, this anti-avoidance provision applies only to taxable dividends, meaning capital dividends are consequently not included. [ 60 ] Counsel for the appellant argued that the reorganization, as it was carried out, was not the most beneficial alternative for the appellant.

Indeed, three proposals were submitted to RoundTable to minimize the fiscal impact on the appellant from selling their stake in Holdings. These three proposals were all rejected due to lack of time and interest from both the buyer and RoundTable. That being the case, the corporate group that the appellant is a part of proceeded with a reorganization that allowed for a capital gain that was lower but still higher than would have been possible through the previous proposals.

Counsel for the appellant highlighted the scope of the alternative transactions for establishing the wrongful nature of the transactions based on the decision of Mr. Justice Webb of the Federal Court of Appeal in Univar Holdco Canada ULC v. The Queen , 2016 TCC 159 , 2017 FCA 207 [ Univar ] . [ 61 ] According to that case, the alternative transactions are a relevant factor in deciding whether there was abuse or misuse in applying the provisions of the Act.

If the taxpayer is able to demonstrate that they could have achieved the same result without triggering any tax, this would tip the scale towards not applying the GAAR.

According to counsel for the appellant, the alternative transactions would have resulted in an honest outcome, where the acquisition cost for a stake in the company corresponded with the product received at the time of the final sale of that same stake in the company. [ 62 ] Lastly, the appellant stated indicated that in their opinion, the relevance of the alternative transactions should not be determined based on the possibility that they could have been carried out, but rather based on whether they would have produced the same result.

In this way, the alternative transactions that the appellant proposed to RoundTable and Novartis would have resulted in relatively lower taxes, that is to say a more significant tax benefit. Position of the respondent " [ " " 63 " " ] " The GAAR allows the minister, and ultimately the Court, to " “deny the tax benefits of certain arrangements that comply with a literal

interpretation of the provisions of the Act, but amount to an abuse of the provisions of the Act.” " " " [ 64 ] Although the transactions comply with the letter of the provisions in issue, it must be determined whether these transactions comply with the object, purpose and spirit of these provisions. It is up to the respondent to describe the object and purpose of these statutory provisions and to prove abuse of those provisions in accordance with one of the following circumstances:

i. It achieves an outcome the statutory provision was intended to prevent; ii. The transaction defeats the underlying rationale of the provision; or iii.

The transaction circumvents the provision in a manner that frustrates or defeats its object, spirit or purpose. [65] According to the respondent, the series of transactions put in place by 3295940 made it possible to circumvent the application ofsubsection 55(2) of the Act through the inappropriate use of the CDA scheme to reduce the capital gain realized by 3295940 fromdisposing of shares in Holdings by $31,500,000. [66] Through various transactions, the appellant shifted the tax base held by its parent corporation (Micsau) to thereby achieve this taxbase in the unrealized capital gain of shares in Holdings.

Indeed. the CDA amount for 3295940 from the realization of a portion of thegain on the shares in Holdings was transferred to 4244 then returned to 3295940 through the cross redemption of shares. The CDA fromthis partial realization of the gain was used to erase the remaining portion of 3295940’s gain from shares in Holdings. [67] Consequently, the transactions at issue achieved an outcome that subsection 55(2) of the Act was intended to prevent, namelysurplus stripping by declaring inter-corporate dividends that are taxable but also deductible within the meaning of

Part I of the Act. TheCrown is partially relying on D & D Livestock Ltd. v. The Queen, 2013 TCC 318 [D&D Livestock] to support its arguments concerningthe abuse of subsection 55(2) of the Act by drawing a parallel between the double use of safe income in D&D Livestock and the circularand double use of a capital dividend in this case. [68] The series of transactions was therefore not carried out for a bona fide purpose. Indeed, according to the respondent, the appellantwas seeking only to reduce the capital gain attributed to the sale of their block of shares and consequently the tax payable on the sale.

Inthis way, if one of the transactions in the series was not performed primarily for a bona fide non-tax purpose, it is an avoidancetransaction and the GAAR then removes the tax benefit resulting from the series of transactions. [69] Since there was abusive tax avoidance under subsection 55(2) of the Act and the sections relating to capital dividend, and given thefact that a portion of the appreciation of 3295940’s stake in Holdings will never be taxed, the Minister was justified in applying section245 of the Act to include $31,500,000 in capital gain in calculating their income for the 2005 tax year.

The assessment was thereforedesigned to eliminate the tax benefit obtained by the appellant. [70] According to the respondent, the overall outcome of the series of operations does not account for the separate legal entities of thecorporation, the shareholder or the capital gains tax regime. In this way, the inappropriate use of the CDA scheme did not comply withthe principle of integration set out in the Act. [71] The alternative transactions presented by the appellant cannot be weighed in the way that the opposing party has done within themeaning of Univar, supra.

According to the respondent, the three proposals do not represent comparable scenarios that could haveachieved the same outcome since the shares sold would have been 3295940’s shares. Based mainly on Fiducie financière Satoma v. TheQueen, 2017 TCC 84, upheld on appeal 2018 FCA 74 [Satoma], the Crown argued that the alternative transactions proposed must at thevery least be examples of valid comparison because the very essence of the transactions must be essentially the same in each of thealternatives. VIII.

Analysis Application of the general anti-avoidance rule (GAAR) [72] The general conditions of application of the GAAR are set out in paragraphs 30 to 44 of the judgment I rendered in Pomerleau v.The Queen, 2016 TCC 228, upheld on appeal by Noël, J., 2018 FCA 129. Those paragraphs have been reproduced below, unaltered. [30] The landmark case with respect to the relevant test criteria in applying the GAAR was decided by the Supreme Court ofCanada: Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 , [2005] 2 SCR 601.

That case decided that threeconditions must be met for the GAAR to apply, in which case subsection 245(2) of the Act allows the Minister to deny thetax benefit arising from the series of avoidance transactions at issue and to determine what the reasonable tax consequencesshould be. [31] In paragraphs 65 and 66 of Canada Trustco Mortgage Co. v. Canada, supra, the Supreme Court of Canada explainedthe approach that the courts must follow when performing this type of analysis: 65 For practical purposes, the last statement is the important one.

The taxpayer, once he or she has shown compliance withthe wording of a provision, should not be required to disprove that he or she has thereby violated the object, spirit or purposeof the provision. It is for the Minister who seeks to rely on the GAAR to identify the object, spirit or purpose of theprovisions that are claimed to have been frustrated or defeated, when the provisions of the Act are interpreted in a textual,contextual and purposive manner.

The Minister is in a better position than the taxpayer to make submissions on legislativeintent with a view to interpreting the provisions harmoniously within the broader statutory scheme that is relevant to thetransaction at issue. 66 The approach to s. 245 of the Income Tax Act may be summarized as follows. 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 orarranged 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 beconsistent 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 thetax benefit in order to determine why they were put in place and why the benefit was conferred. The goal is to arrive at apurposive

interpretation that is harmonious with the provisions of the Act that confer the tax benefit, read in the context ofthe whole Act. 5. Whether the transactions were motivated by any economic, commercial, family or other non-tax purpose may form part ofthe 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 byitself to establish abusive tax avoidance. The central issue is the proper

interpretation of the relevant provisions in light oftheir context and purpose. 6. Abusive tax avoidance may be found where the relationships and transactions as expressed in the relevant documentationlack a proper basis relative to the object, spirit or purpose of the provisions that are purported to confer the tax benefit, orwhere they are wholly dissimilar to the relationships or transactions that are contemplated by the provisions. 7.

Where the Tax Court judge has proceeded on a proper construction of the provisions of the Income Tax Act and onfindings supported by the evidence, appellate tribunals should not interfere, absent a palpable and overriding error. [32] The parties acknowledged that the first two criteria to be met for the GAAR to apply—the presence of an avoidancetransaction in the series of transactions and a tax benefit—were satisfied.

Thus, the only issue to be resolved to dispose ofthis appeal is whether the avoidance transaction or series of avoidance transactions giving rise to the tax benefit was abusivewithin the meaning of subsection 245(4) of the Act. Burden of proof [33] It is for the Minister to prove that, on the balance of probabilities, abusive tax avoidance has occurred within themeaning of subsection 245(4) of the Act.

To do this, the Minister must demonstrate that, considering the text, context andpurpose of the provisions at issue, the avoidance transaction or series of avoidance transactions frustrates the object, spirit orpurpose of the provisions of the Act. The GAAR will therefore apply where, according to a literal or strict

interpretation of the relevant provisions, theirapplication has been circumvented and the object, spirit or purpose of the provisions in question is thereby frustrated (seeparagraph 66 of Canada Trustco Mortgage Co. v. Canada, supra, and paragraph 21 of Lipson v. Canada, 2009 SCC 1, [2009] 1 SCR 3). [35] As the Supreme Court of Canada noted in paragraph 66 of Canada Trustco Mortgage Co. v. Canada, supra, if it isunclear whether the avoidance transaction or series of avoidance transactions constitutes abusive tax avoidance, the benefitof the doubt goes to the taxpayer.

Abusive tax avoidance [36] As the Supreme Court of Canada stated in Canada Trustco Mortgage Co. v. Canada, supra, section 245(4) of the Actimposes a two-part inquiry to determine whether an avoidance transaction or a series of avoidance transactions frustrates theobject, spirit or purpose of the Act: 55 In

summary, s. 245(4) imposes a two-part inquiry. The first step is to determine the object, spirit or purposeof the provisions of the Income Tax Act that are relied on for the tax benefit, having regard to the scheme of theAct, the relevant provisions and permissible extrinsic aids.

The second step is to examine the factual context ofa case in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purposeof the provisions in issue. [37] Therefore, the first step consists in determining the object, spirit and purpose of the provisions giving rise to the taxbenefit by conducting a unified textual, contextual and purposive analysis of those benefits. Indeed, it may happen that“[t]he rationale that underlies the words may not be captured by the bare meaning of the words themselves (see paragraph70 of Copthorne Holdings Ltd. v.

Canada, 2011 SCC 63 , [2011] 3 SCR 721). [38] The second step is to determine whether the object, spirit or purpose of the provisions at issue has been frustrated bythe avoidance transaction or the series of avoidance transactions (see paragraph 65 of Canada Trustco Mortgage Co. v.Canada, supra). This step “requires a close examination of the facts in order to determine whether allowing a tax benefitwould be within the object, spirit or purpose of the provisions relied upon by the taxpayer” (see paragraph 59 of CanadaTrustco Mortgage Co. v.

Canada, supra). [39] Due to their importance, it is necessary to reproduce hereinafter paragraphs 44, 45, 46, 49 and 50 of Canada TrustcoMortgage Co. v. Canada, supra:

4 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 avoidance transaction falls within or frustrates that purpose. The overall inquiry thus involves a mixed question of fact and law. The textual, contextual and purposive

interpretation of specific provisions of the Income Tax Act is essentially a question of law but the application of these provisions to the facts of a case is necessarily fact-intensive. 45 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. 46 Once the provisions of the Income Tax Act are properly interpreted, it is a question of fact for the Tax Court judge whether the Minister, in denying the tax benefit, has established abusive tax avoidance under s. 245(4).

Provided the Tax Court judge has proceeded on a proper construction of the provisions of the Act and on findings supported by the evidence, appellate tribunals should not interfere, absent a palpable and overriding error. […] 49 In all cases where the applicability of s. 245(4) is at issue, the central question is, having regard to the text, context and purpose of the provisions on which the taxpayer relies, whether the transaction frustrates or defeats the object, spirit or purpose of those provisions.

The following points are noteworthy: 1) While the Explanatory Notes use the phrase “exploit, misuse or frustrate”, we understand these three terms to be synonymous, with their sense most adequately captured by the word “frustrate”.

(2) The Explanatory Notes elaborate that the GAAR is intended to apply where under a literal

interpretation of the provisions of the Income Tax Act , the object and purpose of those provisions would be defeated.

(3) The Explanatory Notes specify that the application of the GAAR must be determined by reference to the facts of a particular case in the context of the scheme of the Income Tax Act .

(4) The Explanatory Notes also elaborate that the provisions of the Income Tax Act are intended to apply to transactions with real economic substance. 50 As previously discussed, Parliament sought to address abusive tax avoidance while preserving consistency, predictability and fairness in tax law and the GAAR can only be applied to deny a tax benefit when the abusive nature of the transaction is clear. [40] In Lipson , supra , a majority of the Supreme Court of Canada described paragraphs 44 and 45 of Canada Trustco Mortgage Co. v.

Canada , supra , as capturing the essence of the approach used by the Court when the GAAR is in issue. In paragraph 40, the Court wrote: 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). [41] At paragraph 44 of Gwartz v. The Queen , 2013 TCC 86 , Hogan J. reviewed certain principles in relation to “(

i) tax planning in general, (ii) the appropriateness of using the GAAR as a gap-filling measure, (iii) the existence of a general policy in the ITA regarding surplus stripping.” [42] Hogan J. did indeed refer to Canada Trustco Mortgage Co. v. Canada and Copthorne, supra . Each of these cases reiterated the principle that any tax planning to reduce a taxpayer’s tax bill does not, by itself, constitute abusive tax avoidance within the meaning of subsection 245(4) of the Act. In Canada Trustco Mortgage Co. v.

Canada , supra , the Supreme Court of Canada stated the following: 61 A proper approach to the wording of the provisions of the Income Tax Act together with the relevant factual context of a given case achieve balance between the need to address abusive tax avoidance while preserving certainty, predictability and fairness in tax law so that taxpayers may manage their affairs accordingly. Parliament intends taxpayers to take full advantage of the provisions of the Act that confer tax benefits.

Parliament did not intend the GAAR to undermine this basic tenet of tax law. [43] In other words, “[a]busive tax avoidance cannot be found to exist if a taxpayer can only be said to have abused some broad policy that is not itself grounded in the provisions of the ITA ” (see paragraph 47 of Gwartz, supra ). It would therefore be “inappropriate, where the transactions do not otherwise conflict with the object, spirit and purpose of the provisions of the

ITA to apply the GAAR to deny a tax benefit resulting from a taxpayer’s reliance on a previously unnoticed legislative gap”(see paragraph 50 of Gwartz, supra). [44] Paragraph 50 of Gwartz, supra, noted that the courts have repeatedly held that surplus stripping does not inherentlyconstitute abusive tax avoidance. The Supreme Court reiterated this in Copthorne, supra, in which paragraph 118 reads asfollows: Copthorne submits that such a conclusion could only rest upon a general policy against surplus stripping.

Itargues that no such general policy exists and therefore the object, spirit and purpose of s. 87(3) cannot be toprevent surplus stripping by the aggregation of PUC. This argument is based upon this Court’s admonition inTrustco that “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” (para. 41). What is not permissible isbasing a finding of abuse on some broad statement of policy, such as anti-surplus stripping, which is notattached to the provisions at issue. However, the tax purpose identified in these reasons is based upon anexamination of the PUC sections of the Act, not a broadly stated policy. The approach addresses the rationale ofthe PUC scheme specifically in relation to amalgamation and redemption and not a general policy unrelated tothe scheme under consideration.

Statutory provisions at issue [73] The analysis should focus on the object, spirit or purpose of the provisions that give rise to the tax benefit, and on whether thetransactions at issue frustrate or defeat those provisions (see paragraph 69 of Canada Trustco Mortgage Co. v.

Canada, 2005 SCC 54, [2005] 2 SCR 601 [Trustco]). [74] In this case, the Minister contends that the series of transactions allowed the taxpayer to circumvent the application of subsections55(20, 83(2) and 89(1) of the Act in a manner inconsistent with the object, spirit or purpose of each of these provisions, resulting directlyor indirectly in an abuse of the provisions of the Act, read as a whole. The object, spirit and purpose of subsections 83(2) and 89(1) of the Act Textual analysis [75] In cases involving the GAAR, the literal

interpretation of a provision cannot generally be sufficient to determine whether theprovision has been abused or circumvented. However, the actual language of the provision remains relevant for the purposes ofdetermining the object, purpose or spirit that it embodies (see paragraph 88 of Copthorne Holdings Ltd. v. The Queen, 2011 SCC 63, [2011] 3 SCR 721 [Copthorne]). [76] Hogan, J., in paragraph 39 of the decision in The Gladwin Realty Corporation v. Canada, 2019 TCC 62 [Gladwin TCC], upheld bythe Federal Court of Appeal, 2020 FCA 142 [Gladwin FCA], analyzed the provisions pertaining to the CDA, which is the

interpretationthat Noël, J. used to support the decision upheld in the Federal Court of Appeal in paragraphs 22 and 23: [39] It is widely accepted that a Capital Dividend Account is a notional account maintained by private corporations to keeptrack of certain types of tax-free surpluses accumulated over time. In this regard, the definition of “Capital DividendAccount” allows a private corporation to determine its CDA balance at a particular time so that it may elect in a prescribedform to pay a tax-free capital dividend to its shareholders without incurring a liability under

Part III of the Act. To this end,CDA balance at a particular time is determined, in accordance with the definition found at subsection 89(1), by adding, interalia, (

i) the tax-free portion of capital gains, (ii) the amount of tax-free capital dividends received by the corporation fromother corporations and (iii) the proceeds of certain life insurance policies and subtracting, inter alia, (iv) the non-deductibleportion of capital losses and (

v) capital dividend distributions made before the particular time. [.. .] [77] In Gladwin FCA, Noël, J. added: Because a CDA is computed by reference to the qualifying amounts that may be distributed tax-free, it must, by definition,reflect a positive amount.

Mathematically, however, amounts that impact negatively on the CDA are kept track of evenwhen they bring the balance below zero in which case the CDA cannot become positive again unless and until the negativebalance is compensated by additional qualifying amounts specified in subsection 89(1). [.. .] [58] When a private corporation has a positive CDA balance, it may distribute those surpluses, tax-free, by way of a capitaldividend, but only to the extent of the corporation’s CDA balance immediately before the dividend becomes payable(subsection 83(2)).

Should a corporation elect to pay a capital dividend in excess of the CDA, it incurs the additional tax onexcessive elections imposed under

Part III of the Act, specifically subsection 184(2), unless it elects, with the agreement ofthe relevant shareholders, to treat the excess as a regular taxable dividend (subsection 184(3) and 184(4)). [78] More specifically, a CDA makes it possible to identify the tax-free amounts accumulated by a corporation so that it can later bedistributed to the shareholders through capital dividends. [79] The election to pay a capital dividend comes from subsection 83(2) of the Act. The election to pay a capital dividend must be inrespect of the full amount of the dividend (Canada Revenue Agency,

Interpretation Bulletin IT-66R6, Capital Dividends (May 31, 1991),paragraph 1). When a private corporation elects, in the prescribed form (T2054), to pay a capital dividend to its shareholders, no part ofthe dividend is included in computing the income of the shareholder. [80] If the capital dividend is received by a corporation, the full amount of the dividend is added to its CDA, thereby allowing the

corporation to in turn pay a tax-free dividend for its own shareholders (Canada Revenue Agency,

Interpretation Bulletin IT-66R6,Capital Dividends (May 31, 1991), paragraph 14). [81] Whether the dividend is received by a shareholder corporation or by an individual shareholders, the capital dividend is not includedin calculating the income of the shareholder in question (see paragraph 40 of Gladwin TCC). Contextual analysis [82] In Copthorne, supra, the Supreme Court of Canada stated at paragraph 91 that "“The consideration of context involves anexamination of other sections of the Act, as well as permissible extrinsic aids [.. .]. However, not every other

section of the Act will berelevant in understanding the context of the provision at issue.

Rather, relevant provisions are related ‘because they are grouped together’or because they ‘work together to give effect to a plausible and coherent plan’ [.. .].”" [83] In Gladwin TCC, supra, at paragraph 23, Hogan, J. explains that "“the legislative history of the CDA regime confirmed thatsubsections 89(1), 83(2), and 184(2) were implemented to give effect to what is commonly referred to as the principle of integration.”"Those provisions were indeed enacted as a result of the 1966 Report of the Royal Commission on Taxation to encourage Canadians toinvest and start a business in their own name or through a corporation. [84] It is worth specifying here that any amendments made to subsection 89(1) since the introduction of the Act are not relevant to theissue herein. [85] In terms of the similarity between the CDA scheme and the mechanism for paying capital dividends, in Gladwin FCA, Noël, J.explained the following: [76] I note in this respect that the existence of a positive CDA balance, however generated, is the sole condition that governsa taxpayer’s right to declare a capital dividend. [.. .] Purposive analysis [86] At this stage of the analysis, the Crown must demonstrate the underlying spirit of the provision at issue with precision (seeparagraph 94 of Lipson v.

Canada, 2009 SCC 1 , [2009] 1 SCR 3 (Lipson), paragraph 41 of Trustco, supra, and paragraph 30 ofEvans v. The Queen, 2005 TCC 684). [87] The provisions pertaining to the CDA scheme allow the non-taxable portion of capital gains realized by a private corporation to bedistributed without generating additional taxation. Consequently, the amount of tax to be paid remains the same, whether the gain isrealized by an individual or through a corporation. [88] The concept was put forward once again in 2529-1915 Québec Inc. v.

Canada, 2008 FCA 398, wherein Noël, J. said the following: [8] Before going further, a few words on the operation of CDAs are in order. A CDA is composed of the non-taxable portionof a capital gain generated by a corporation (i.e., half of the gain realized during the period at issue). The legislativeobjective is to ensure that a capital gain is taxed in the same manner, whether it is earned directly by an individual orindirectly through a corporation.

To this end, the system provides that, subject to the prescribed elections being made, thenon-taxable portion of a capital gain, once included in a CDA by the corporation that realized it, remains tax-exempt whentransferred from one corporation to another by way of dividend, until it is ultimately distributed to an individual in the formof a non-taxable dividend, also called a “capital dividend”. [89] In fact, the CDA regime "“neutraliz[es] the impact of the interposition of a corporation in the manner in which capital gains aretaxed.

Given that only one half of capital gains is taxable (section 38), Parliament provided for a mechanism whereby a corporation canpreserve the tax-free portion of the gain for distribution to a shareholder without attracting an extra level of tax—this mechanismgoverns the manner in which the CDA is computed. In essence, the CDA regime ensures that no more than the tax-free portion isdistributed to shareholders by way of a capital dividend so as to mirror the tax treatment of an individual taxpayer who generates theunderlying gain directly.”" (Gladwin FCA, at para. 60).

The object, spirit and purpose of subsection 55(2) of the Act [90] As I indicated in 101139810 Saskatchewan Ltd. v. The Queen, 2017 TCC 3 [Saskatchewan], the

interpretation of

section 55 has beendiscussed many times in the past. At times, the doctrine and the case law (see D&D Livestock, supra at para. 26 as well as LamontManagement Ltd. v. Canada, (FCA), [2000] 3 FC 508, [2000] 54 DTC 6256 (FCA), at para. 20) characterized theprovision as being complex and lacking clarity. However, it should be noted that the intended purpose or object of a provision cannotreplace clear legislative language (Canada v. Placer Dome Inc., (FCA), [1996] FCJ No 1435 (QL) — [1997] 1 CTC72).

Textual analysis [91] In GAAR cases, although the literal application of the provisions at issue will not generally preclude a tax benefit the taxpayer seeksby entering into the transaction or series, the very language of the provision does remain relevant for the purposes of determining theobject, spirit or purpose of the provision (see paragraph 88 of Copthorne, supra). [92] The rule found in subsection 55(2) of the Act applies when the following conditions are met (see Saskatchewan, supra, at para. 12): [12] [.. .]

(

a) the taxpayer is a corporation resident in Canada; (

b) the taxpayer received a taxable dividend in respect of which it is entitled to a deduction under subsections 112(1) or (2); (

c) the dividend is received as part of a transaction or series of transactions which is deemed by subsection 248(10) of the Act to include any related transactions or events completed in contemplation of the series; and (

d) where dividends are declared and paid by a corporation, one of the purposes of the dividend was to effect a significant reduction in a capital gain that would, but for the dividend, have been realized on a disposition at fair market value of any share; or in the case of deemed dividends under subsection 84(3) of the Act, which is the situation in these appeals, if the result (not the purpose) of the dividend is to effect a significant reduction in a capital gain that would, but for the deemed dividend, have been realized on a disposition at fair market value of any share. [ 93 ] There are four exceptions to subsection 55(2), however: 1 .

The first exception is included in the charging provision and covers situations where the dividend can reasonably be attributable to anything other than income earned or realized by any corporation after 1971 (“safe income”). Safe income is protected from the application of subsection 55(2) because this income has been subject to corporate income tax and should therefore be allowed to be paid as an additional tax-free dividend ( Saskatchewan, supra at para. 13).

In this case, all the safe income that could potentially have been extracted from Holdings was extracted, and the benefit of that exception was maximized by 3295940. 2 . The second is provided for in paragraph 55(3)(

a) and covers dividends received in the course of certain related-party transactions provided there was not, at any particular time, a disposition of property or a significant increase in the total direct interest in a corporation in the circumstances described in subparagraphs 55(3)(a)(

i) to (v) ( Saskatchewan, supra , at para. 14). The purpose of the exception provided for in paragraph 55(3)(

a) is to facilitate reorganizations between affiliated corporations. It does not apply in this case, because the dividends paid between 329540 and 4244 were part of a series of transactions resulting in the completion of a significant transaction with an unaffiliated third party. 3 . The third exception is provided for in paragraph 55(3)(

b) and covers dividends received as part of a butterfly or divisive reorganization, wherein corporate property is distributed pro rata among corporate shareholders on a tax-deferred basis. The object or purpose of paragraph 55(3)(

b) is to allow corporate shareholders to separate their common interests while the company’s business continues, which did not happen in this case. The object or purpose of this exception is not to allow the tax-free sale of corporate assets or of shareholders’ stake in the corporation to a third party ( Saskatchewan, supra, at para. 14). 4 . The fourth exception is included in the charging provision and covers situations where the dividend is subject to

Part IV taxes and where that tax is not reimbursed through the payment of a dividend to a corporation as part of the same series of transactions. In this case, this exception is not relevant because

Part IV taxes do not apply to capital dividends. [ 94 ] This textual analysis confirms that subsection 55(2) of the Act does not apply to an amount that was already corporately taxed, such as safe income or capital dividends. In this case, had it not been for the designation as a capital dividend, subsection 55(2) of the Act would have applied to the dividends deemed to have been paid between 3295940 and 4244 at the time of the cross redemption of shares on August 11, 2004 (see paragraphs 57 to 67 of the partial agreed statement of facts). [ 95 ] According to paragraph 35 of Canada v.

Kruco Inc. , 2003 FCA 284 , [2003] FCJ No 1012 (QL) , subsection 55(2) of the Act converts dividends that would otherwise be taxable into a capital gain for the corporation that is effectively receiving the dividend: Subsection 55(2) (when read in conjunction with paragraph 55(5)(f)) provides, in effect, that when a dividend (paid or deemed) has effected a significant reduction of the capital gain which would have resulted from a notional sale of the shares at fair market value, and this gain can reasonably be attributed to anything other than “income earned or realized” after 1971, the dividend is deemed to be a capital gain to the extent of the portion so attributed.

Conceptually, this approach captures the tax applicable to the portion of the notional gain attributable to an increase in value of the underlying assets while maintaining the tax-free treatment of that part of this gain attributable to “income earned or realized” since 1971. [ 96 ] " “Put another way, subsection 55(2) asks: if the corporation had sold any shares before it received the dividend, what would have been the amount of the capital gain? This capital gain is the starting point of the comparison.” " ( Saskatchewan, supra , at para. 38).

Contextual analysis [ 97 ] Subsection 55(2) of the Act is part of the legislative scheme applied to capital gains and losses. This legislative scheme was developed in 1972. Before then, capital gains were not taxed ( Triad Gestco , supra, at para. 27 ). [ 98 ] Since 1972, capital gains have been taxed at a rate established by legislative bodies.

That rate was set at 50%, 66.7% or 75% depending on the time period and was set at 50% for the period concerned in this case. [ 99 ] To determine the amount of the gain or loss resulting from the disposition of property, several provisions of the Act must be applied concurrently. Usually, capital gains are realized when an asset is sold for the “proceeds of disposition” beyond the “adjusted cost base.” These concepts are defined in

section 54 of the Act. [ 100 ] In paragraph 41, of Triad Gestco , supra , Noël, J. reiterated the comments formulated by the House of Lords in WT Ramsay Ltd v. Inland Revenue Commissioners , [1981] 1 A 11 ER 865 , (at page 873) : The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aber​deen Construction Group Ltd. v. Inland Revenue Com​missioners [19781 A.C. 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences.

[ 101 ] Consequently, in Canada, the object or purpose of the regime governing tax on capital gains is to tax increases in economic power at 50%. Furthermore, to ensure that actual gains and losses are taken into consideration, the Act includes several specific anti-avoidance provisions to reflect the economic reality of the taxpayer.

This includes but is not limited to subsection 55(2) of the Act. [ 102 ] In paragraph 11 of Saskatchewan, supra , I indicated that subsection 55(2) of the Act was introduced in the 1979 federal budget: " “It was directed against arrangements designed to use the intercorporate dividend exemption to unduly reduce a capital gain on a sale of shares.” " [ 103 ] In 1988, however, the earlier version of subsection 55(1) of the Act was repealed in conjunction with the adoption of the GAAR.

The Finance Minister’s Explanatory Notes for the year in question indicated the following: Subsection 55(1) of the Act is an anti-avoidance provision aimed at transactions designed to artificially or unduly reduce a capital gain or increase or create a capital loss on a disposition of property. Subsection 55(1) is repealed as a consequence of the introduction of new

section 245 of the Act, which constitutes a general anti-avoidance rule. Because the scope of that general anti-avoidance rule is broad enough to cover the transactions to which subsection 55(1) was intended to apply, that subsection is no longer necessary. Rules for bumping [ 104 ] Although the rules for bumping set out in paragraphs 88(1)(

c) and (

d) of the Act cannot apply to the facts in this case, they are still part of the context of the application of subsection 55(2).

Bumping rules apply in situations where a Canadian corporation is held by another Canadian corporation and one of those corporations is being wound up or vertically amalgamated. [ 105 ] If, during wind-up or merger with a subsidiary, the amount engaged by the parent corporation to acquire the shares of the subsidiary is higher than the cost of the subsidiary’s property, that excess amount can, under certain conditions, be spread across the property of the subsidiary to increase their ACB. [ 106 ] This is to avoid double taxation on capital transactions carried out by corporations for which the Act provides bumping rules.

The rationale for these rules is clearly explained by the Federal Court of Appeal in Oxford , supra : [77] The bump provided for in paragraphs 88(1)(

c) and (

d) rectifies this situation by first calculating the difference between the ACB of the parent’s shares and the tax cost of the subsidiary’s property. This amount is then allowed to be added to the tax cost of the non-depreciable capital property which the parent inherited from its subsidiary. In other words, the tax cost of this property is bumped. The bump essentially allows any ACB that would otherwise be lost on a vertical amalgamation to be preserved and transferred to different property that is taxed the same way. [ 107 ] Two conditions need to be met to obtain this bumping benefit, however.

Firstly, only the ACB of property that was held by a corporation during its last acquisition of control can be bumped under subparagraphs 88(1)(c)(ii) and (iii). Secondly, the excess amount of the ACB of a corporation’s shares that can be used for the purposes of the bumping rules must be reduced by an amount equal to the sum of the dividends paid on those shares. [ 108 ] In this case, the two required conditions were not met, and paragraphs 122 to 126 of the respondent’s proposals summarize the situation well: 122.

When Saucier became the majority shareholder of 3295 in 1996, his shares had a nominal ACB, and 3295 did not hold the shares in Holdings. 123. As a result, no premium can be considered to have been paid at the time of the acquisition of control of 3295 in 1996 that would not have been reflected in the ACB for Holdings shares. Through this condition, Parliament explicitly settled that the ACB of 3295’s shares could not be used to increase the ACB of Holdings shares acquired in 2002. 124.

In addition, when Micsau acquired shares in 3295 from CDPQ in 2002, a dividend corresponding to the ACB amount of these shares was paid by 3295 to finance this acquisition. Other dividends totalling $58 million were also paid immediately before the series of transactions in 2004 began to take place. Essentially, all the money considered received in 2002 during the sale of 3295’s assets was redistributed to Micsau in the form of dividends between 2002 and 2004. 125.

Consequently, since a value higher than the ACB of 3295’s shares was distributed by 3295 in the form of dividends, the ACB of these assets could not have been bumped as part of a wind-up or merger in anticipation of the sale of Holdings to Novartis. This bumping restriction implies that without these dividends, the ACB of 3295’s property would have been greater than the ACB of 3295’s shares. According to Parliament, no double taxation can consequently result from not using the ACB of 3295’s shares for the sale of its assets. 126. In

summary, Parliament specifically provided for bumping rules to avoid double taxation in the context of a capital gain realized by a corporation whose shares have a considerable ACB. However, 3295 and Micsau were not able to apply those rules, because in light of the Act, no double taxation resulted from the sale of Holdings’ shares in 2004.

Purposive analysis [ 109 ] The 1994 Explanatory Notes of the Minister of Finance explain the reasoning behind subsection 55(2) as follows: Subsection 55(2) of the Act is an anti-avoidance provision directed against certain arrangements designed to convert a capital gain on a disposition of shares into a tax-free dividend. It treats the dividend received in these circumstances either as

a capital gain or as proceeds of disposition that are taken into account in computing a capital gain. [110] An analysis of the object and purpose of subsection 55(2) of the Act has already been carried out in many cases, including inSaskatchewan, supra, at para. 46 to 52: [46] A number of cases have attempted to describe the general purpose of subsection 55(2).

It is clear that subsection 55(2)is an anti-avoidance provision that exists to prevent what is commonly known as “capital gains stripping” or the conversionof taxable capital gains into tax-free intercorporate dividends (see Placer Dome, cited above, at paragraph 1). [47] In order to prevent double taxation at the corporate level, the Act provides that, generally, dividends paid from onecorporation to another are in effect exempt from income tax pursuant to subsection 112(1) of the Act.

Without suchprovision, the corporation earning income giving rise to a dividend would be taxed, and the dividend recipient corporationwould also be subject to taxation on the dividend income. [48] However, as a result of these tax-free intercorporate dividends, there is an incentive to pay such dividends to reduce thefair market value of the shares, thereby decreasing the capital gain that would result on the disposition of the shares.Subsection 55(2) is designed to impose limitations on the use of tax-free intercorporate dividends to ensure that theunrealized appreciation since 1971 in the value of the underlying assets of the corporation is not avoided.

In LamontManagement Ltd., cited above, Justice Rothstein described at paragraphs 3 and 4, the mischief subsection 55(2) is intendedto address: 3 The Income Tax Act provides that, in accordance with specified provisions, dividends received by one corporation fromanother are exempt from income tax.

The purpose of the exemption is to preclude double taxation at the corporate level, i.e.once by the corporation earning the income giving rise to the dividend and again by the corporation receiving the dividendincome. 4 In circumstances where the Income Tax Act provides that dividends paid from one corporation to another are exempt fromtaxation, there is an incentive for the shareholding corporation to receive capital gains in the form of dividends.

Section 55is an anti-avoidance provision that is intended to limit use of tax exempt intercorporate dividends where they wouldotherwise be taxable. Where the limitation applies, the intercorporate dividend will be deemed not to be a dividend, butrather, proceeds of disposition of property, or a gain, of the recipient corporation, subject to tax at the rate applicable tocapital gains. However, where the intercorporate dividend is attributable to “income earned or realized by any corporation”,the anti-avoidance provision does not apply and the intercorporate dividend will continue to be treated as a dividend.

This issometimes referred to as “safe income”. [49] Justice Lamarre Proulx in Gestion Jean-Paul Champagne Inc. v Minister of National Revenue, (TCC), 97 DTC 155, [1996] 2 CTC 2537 (TCC), at paragraph 51 interpreted Parliament’s intention through a broader lens: We are surely dealing here with a provision whose purpose is to regulate tax avoidance and, more particularly, aprovision that supplements the effect of subsection 84(3) of the Act.

In a situation in which a corporate redeemsits own shares where those shares are held by another corporation, Parliament’s intent is to prevent everythingfrom being a non-taxable intercorporate dividend. [50] Justice Woods (as she then was) in 729658 Alberta Ltd, cited above, was of the view that the legislative scheme was notapparent from subsection 55(2) and deferred to the description by the government described by Noël J.A. in Kruco Inc.,cited above: The goal was to ensure that the capital gain inherent in the shares of a corporation that is attributable to anunrealized appreciation since 1971 in the value of the underlying assets of the corporation was not avoided bythe use of intercorporate tax-free dividends (subsection 112(1)).

At the same time, Parliament did not want to impede the tax-free flow of dividends that were attributable toincome which had already been taxed.

Conceptually, this approach captures the tax applicable to the portion of the notional gain attributable to anincrease in value of the underlying assets while maintaining the tax-free treatment of that part of this gainattributable to “income earned or realized” since 1971. [51] In Ottawa Air, cited above, Justice Lamarre (as she was then) found that the 1979 federal budget clearly described thepurpose of subsection 55(2) as an anti-avoidance provision to ensure that a capital gain is recognized to the extent of theunrealized and untaxed appreciation since 1971 in the value of underlying assets: 27 The mischief that subsection 55(2) is aimed at is clearly described in the 1979 federal budget whichintroduced this provision.

Because of its importance in these appeals, I reproduce the relevant passage in itsentirety: Important amendments will be introduced to clarify and reinforce the intent of the anti-avoidance provisionrelating to artificial or undue reductions in capital gains. Concerns have been expressed as to the legislative scope and intended application of this anti-avoidanceprovision.

A number of plans have been developed whereby, as a preliminary step to certain sales of shares, acorporate vendor extracts what are in substance sale proceeds in the form of tax-free intercorporate dividends ordeemed dividends to decrease the value—or increase the cost base—of the shares to the point where capitalgains tax is avoided. These tax-free dividends frequently exceed the earnings of the corporation to be sold. Such

excessive dividends are usually motivated only by the vendor’s desire to reduce his exposure to capital gains tax. As a general rule, the objective of the tax law is that on most arm’s-length and on certain non-arm’s-length intercorporate share sales, a capital gain should arise at least to the extent that the sale proceeds reflect the unrealized and untaxed appreciation since 1971 in the value of underlying assets. This objective will generally be achieved where tax-free dividends on shares are limited to post-1971 taxed retained earnings.

Rules will be introduced to clarify the intention of the law in this respect.

These rules will ensure that where it can reasonably be considered that one of the main purposes of a tax-free intercorporate dividend was to reduce the proceeds on a disposition of a share, the capital gain otherwise determined will be adjusted to reflect the extent to which aggregate tax-free dividends have exceeded post-1971 taxed retained earnings. [52] From the foregoing, it is clear that Parliament intended to limit tax-free intercorporate dividends; however, only to the extent that the unrealized and untaxed appreciation in the value of underlying assets is realized such that income that has already been taxed should not be caught by subsection 55(2). [ 111 ] In general, capital gains stripping occurs when a corporation that wants to sell its shares to another corporation first receives a dividend then sells its shares at a reduced price of the amount of the dividend received, making it possible to decrease the unrealized capital gain that otherwise would have been realized.

The point is really to prevent an artificial decrease of a gain or the artificial increase of a loss from the disposition of a property. [ 112 ] The object and purpose of the introduction of subsection 55(2) of the Act is therefore to ensure that the capital gain inherent in the shares of a corporation that is attributable to an unrealized appreciation since 1971 in the value of the underlying assets of the corporation was not avoided by the use of intercorporate tax-free dividends.

At the same time, Parliament did not want to impede the tax- free flow of dividends that were attributable to income which had already been taxed ( Canada v. Kruco Inc. , 2003 FCA 284 , at para. 32 ).

Was the object, spirit or purpose of the provisions at issue frustrated or defeated? [ 113 ] Firstly, since the appellant admitted that there was a tax benefit arising from a series of avoidance transactions, the reasons for this reorganization are irrelevant for the purpose of determining whether these transactions frustrated or defeated the object, spirit or purpose of the relevant provisions (see paragraphs 34 to 38 of Lipson , supra ).

In this case, the fact that Novartis and RoundTable did not want to acquire 3295940 out of fear of inheriting potential liabilities for any other reason is therefore not useful. [ 114 ] Secondly, the GAAR does not apply as soon as it has been established that a series of transactions has given rise to a tax benefit.

Rather, the GAAR applies if that series of transactions frustrated, defeated or abused the object, spirit or purpose of the provision at issue (see paragraphs 44, 57 and 59 of Trustco, supra ). [ 115 ] As the Supreme Court of Canada explained in Lipson , “the entire series of transactions should be considered in order to determine whether the individual transactions within the series abuse one or more provisions of the Act” (see paragraph 34). [ 116 ] In its analysis to determine whether the transactions were abusive, the Court must give effect to the transactions as they unfolded and refrain from assessing the abuse on the basis of the overall result achieved.

What must be shown is that the provisions used to achieve this result, when construed with a focus on their object, spirit and purpose, reveal a clear underlying rationale that was frustrated by the series of transactions ( Gladwin FCA , supra , at para. 70 ). [ 117 ] Since subsection 55(2) of the Act is a specific anti-avoidance provision, the comments recently made by Noël, J. in Gladwin FCA , supra , allows for a significant nuance: the use of an anti-avoidance provision to obtain a tax benefit does not constitute abusive tax planning in every instance.

Abuse occurs when the anti-avoidance provision is used to obtain the outcome it is designed to prevent.

Lastly, at this stage, it must be shown that " “the anti-avoidance provision was used in a manner that defeats its underlying rationale.” " [ 118 ] In this case, the textual, contextual and purposive analysis revealed that the object, purpose or spirit of subsection 83(2), 89(1) and 55(2) of the Act is to prevent a taxpayer from using a tax-free dividend to avoid the capital gain inherent in the shares of a corporation that is attributable to an unrealized appreciation, which would go against the principle of integration that the CDA scheme is pursuing. [ 119 ] To determine whether the avoidance transactions carried out by the appellant were abusive, the appellant’s CDA must be reviewed at each stage of the plan.

On June 30, 2014, when the 1,500,000 shares held by the appellant in Holdings were transferred, the appellant’s CDA increased by half of the capital gain, namely $26,500,000, for a total of $32,280,000. This transfer also resulted in a cross redemption between 4244 and the appellant. On August 11, 2004, by first redeeming the appellant’s shares held by 4244, 3295940 was able to transfer nearly all its CDA to 4244 through a capital dividend. That same day, 4244 did the same thing.

All that was therefore left to do was to transfer the shares of the parent corporation in 4244 to the appellant by means of rollover and proceed with the sale of 4244 to Novartis to achieve the desired outcome. [ 120 ] Through its series of choices, the appellant succeeded in avoiding the application of subsection 55(2) at the time of the cross redemption of its shares and 4244’s shares.

Knowing that subsection 55(2) would have converted the taxable dividend paid by 4244 at the time that the shares were redeemed by the appellant, the only way to avoid this unfavourable outcome was to move the CDA—which was later restored in its initial location—through capital dividend.

The capital dividend was used in a way that does not conform with its purpose: instead of making it possible to track the tax-free amounts to the top of corporate group, it was moved then ultimately returned to its original location, i.e., belonging to 3295940. [ 121 ] Recycling the capital dividend in this way prevented the application of subsection 55(2) and prevented the dividend that was deemed to have been paid by 4244 to 3295940 from being converted into a capital gain.

The application of subsection 55(2) would have made it possible for the entire appreciation in value of Holdings’ shares to be taxed and thereby would have maintained the integrity of

the capital gains tax regime. [ 122 ] The climax of this case is this: moving the CDA made it possible to establish the appellant’s stake in the newly incorporated corporation at a value equal to its FMV, resulting in no tax payable during the sale of 4244’s shares to Novartis.

The appellant experienced only some of the disadvantages related to nominal tax base of its stake in Holdings. [ 123 ] In paragraph 76 of Gladwin FCA , Noël, J. indicated that " “the existence of a positive CDA balance, however generated, is the sole condition that governs a taxpayer’s right to declare a capital dividend.” " Without question, the provisions related to the CDA regime do not prevent the circular payment of a capital dividend, given their wording. The rationale for these provisions does not prevent it, but by proceeding in this way, the object or purpose of subsection 55(2) was frustrated.

The CDA move-around indirectly impacted the unrealized capital gain of the shares held by the appellant in 4244. To avoid the tax payable in connection with the unrealized capital gain, they simply had to sell their stake. However, subsection 55(2) should have applied to this decrease in capital gain. [ 124 ] The strategy used in this case is very similar to that used in D&D Livestock : even though the GAAR was not invoked, the double use of safe income made it possible for the appellant to avoid triggering subsection 55(2), which, according to Mr.

Justice Graham, resulted in capital gains stripping, which is an outcome the provision is intended to prevent. [ 125 ] Like in D&D Livestock , the

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