Deans Knight Income Corporation Appellant v. His Majesty The King, 2023 SCC 16

SUPREME COURT OF CANADA Citation: Deans Knight Income Corp. v. Canada, 2023 SCC 16 Appeal Heard: November 2, 2022 Judgment Rendered: May 26, 2023 Docket: 39869 Between: Deans Knight Income Corporation Appellant and His Majesty The King Respondent - and - Attorney General of Ontario, Canadian Chamber of Commerce, Tax Executives Institute, Inc., and Agence du Revenu du Québec Interveners Coram: Wagner C.J. and Karakatsanis, Côté, Brown, * Rowe, Martin, Kasirer, Jamal and O’Bonsawin JJ.

R easons for J udgment : (paras. 1 to 141) Rowe J. (Wagner C.J. and Karakatsanis, Martin, Kasirer, Jamal and O’Bonsawin JJ. concurring) Dissenting Reasons : (paras. 142 to 197) Côté J. Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports .

* Brown J. did not participate in the final disposition of the judgment. Deans Knight Income Corporation Appellant v. His Majesty The King Respondent and Attorney General of Ontario, Canadian Chamber of Commerce, Tax Executives Institute, Inc., and Agence du Revenu du Québec Interveners Indexed as: Deans Knight Income Corp. v. Canada 2023 SCC 16 File No.: 39869. 2022: November 2; 2023: May 26.

Present: Wagner C.J. and Karakatsanis, Côté, Brown, * Rowe, Martin, Kasirer, Jamal and O’Bonsawin JJ. on appeal from the federal court of appeal Taxation — Income tax — Tax avoidance — Application of general anti-avoidance rule — Limitation on losses deductible from taxable income — Corporation lacking income sufficient to use non- capital losses and other tax attributes from previous years to reduce corporate income tax — Corporation entering into transactions with other parties and deducting non-capital losses from income earned in new investment venture — Deductions denied by Minister — Tax Court holding that transactions were tax avoidance but were not abusive under general anti-avoidance rule — Court of Appeal concluding that transactions abusive — Whether general anti-avoidance rule applicable to deny corporation’s deductions of non-capital losses — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 111(5) , 245 .

Section 111(1) (

a) of the Income Tax Act allows a taxpayer’s non-capital losses to be carried back or forward to different taxation years to offset income in those years. However, s. 111(5) restricts non-capital loss carryovers for a corporation if control of the corporation has been acquired by a person or group of persons, unless it continues the same or similar business that incurred the losses.

Prior to the transactions in issue, Deans Knight Income Corporation (“Deans Knight”), then operating under the name Forbes Medi-Tech Inc. (“Forbes”), had approximately $90 million of unused non-capital losses, scientific research and development tax expenditures, and investment tax credits but given that it was in financial difficulty, it did not have income which its past losses could offset. It entered into an investment agreement with a venture capital company, Matco, and a complex arrangement was devised to take advantage of the loss carryover deduction in s. 111(1) (

a) without triggering the restriction in s. 111(5). First, Forbe’s assets and liabilities were moved into a new parent company, Newco. Second, pursuant to the investment agreement, Matco purchased a debenture convertible into some of the voting shares and all of the non-voting shares that Newco held in Forbes. While Newco was not obliged to sell its shares to Matco, it was promised that it would receive at least a guaranteed amount if it sold the shares or if such an opportunity did not present itself .

Third, Matco would find a new business venture for Forbes, which would be used to raise money through an initial public offering (“IPO”). The profits from this venture could be sheltered by the tax attributes Forbes originally could not utilize. Other than when acting pursuant to the investment agreement, Newco and Forbes could not engage in a variety of activities without the consent of Matco. The arrangement went according to plan.

Matco found a mutual fund management company, Deans Knight Capital Management, that agreed to use Forbes for an IPO through which it would raise money to invest in high-yield debt instruments. Forbes’ name was changed to Deans Knight. The IPO and subsequent investment business succeeded. Accordingly, for its 2009 to 2012 tax years, Deans Knight deducted a majority of its non-capital losses to reduce its tax liability. The Minister reassessed Deans Knight and denied the deductions. Deans Knight objected to the reassessments and appealed to the Tax Court.

Among other arguments, the Minister adopted the position that the general anti-avoidance rule in s. 245 of the Income Tax Act (“ GAAR ”) applied to deny the deductions because the transactions constituted abusive tax avoidance. The Tax Court agreed the transactions were tax avoidance transactions that resulted in a tax benefit but held they were not abusive. On appeal, the Federal Court of Appeal held that the transactions were abusive and the GAAR applied to deny the tax benefits. It set aside the judgment of the Tax Court and dismissed Deans Knight’s appeal of the reassessments.

Held ( Côté J. dissenting): The appeal should be dismissed.

Per Wagner C.J. and Karakatsanis, Rowe , Martin, Kasirer, Jamal and O’Bonsawin JJ.: The transactions were abusive and therefore the GAAR applies to deny the tax benefits. The object , spirit and purpose of s. 111(5) is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. Through a complex series of transactions, Deans Knight underwent a fundamental transformation that achieved the outcome that Parliament sought to prevent, while narrowly circumventing the text of s. 111(5).

Without triggering an “acquisition of control”, Matco gained the power of a majority voting shareholder and fundamentally changed Deans Knight’s assets, liabilities, shareholders and business. This severed the continuity that is at the heart of the object, spirit and purpose of s. 111(5). The result obtained by the transactions frustrated the rationale of s. 111(5) and therefore constituted abuse. The GAAR was a choice by Parliament to complement its specific anti-avoidance efforts with the enactment of a general rule.

While abusive tax avoidance can involve unforeseen tax strategies, it is more broadly designed to capture situations that undermine the integrity of the tax system by frustrating the object, spirit and purpose of the provisions relied on by the taxpayer. Some uncertainty is unavoidable when a general rule is adopted, but a reasonable degree of certainty is achieved by the balance struck within the GAAR itself.

A GAAR analysis involves a structured, three-step test, and asks whether (1) there was a tax benefit; (2) the transaction giving rise to the tax benefit was an avoidance transaction; and (3) the avoidance transaction was abusive. Analyzing whether the avoidance transactions are abusive involves determining the object, spirit and purpose of the relevant provisions, and determining whether the result of the transactions frustrated that object, spirit and purpose. The object, spirit and purpose represents the legislative rationale that underlies specific or interrelated provisions of the Act .

It is critical to distinguish the rationale behind a provision from the means chosen to give that rationale effect within the provision. The object, spirit and purpose of a provision must be worded as a description of its rationale. A court is not repeating the test for the provision or crafting a new, secondary test; rather, the object, spirit and purpose is a concise description of the rationale underlying the provision, such as why relief is being provided, the conduct that Parliament sought to encourage, or the result or mischief that Parliament sought to prevent.

The use of a provision’s text, context and purpose to determine the rationale differs from traditional statutory

interpretation. Since in a GAAR analysis, the search is for the rationale that underlies the words, considering the provision’s text, context and purpose ensures that the intrinsic and extrinsic evidence used to discern that rationale remains tied to the provision itself. Considering a provision’s text involves asking how it sheds light on what the provision was designed to achieve, since the language and structure of the provision can be evocative of Parliament’s underlying concerns.

Courts must also consider the provision’s context, with a focus on the relationship between the provision alleged to have been abused and the particular scheme within which it operates. Understanding the provision’s purpose is central to the GAAR analysis, and legislative history and extrinsic evidence provide insight into the rationale for specific provisions. Once the object, spirit and purpose has been ascertained, the abuse analysis focuses on whether the result of the transactions frustrates the provision’s object, spirit and purpose.

Avoidance transactions will be abusive where their result: is an outcome that the provisions relied on seek to prevent; defeats the underlying rationale of the provisions; or circumvents provisions in a manner that frustrates their object, spirit and purpose. Courts must go beyond the legal form and technical compliance of the transactions; they must compare the result of the transactions to the underlying rationale of the provision and determine whether that rationale has been frustrated. In coming to such a conclusion, the abusive nature of the transaction must be clear.

However, there is no bar to applying the GAAR in situations where the Act specifies precise conditions that must be met, as with a specific anti-avoidance rule; even specific and carefully drafted provisions are not immune from abuse. A review of s. 111(5)’s text, context and purpose reveals its underlying rationale. With respect to the text of the provision, s. 111(5) is a restriction on a taxpayer’s ability to make use of its non-capital losses incurred in another taxation year. First, the text of s. 111(5) references “control”, which has been interpreted as referring to de jure control.

The general test for de jure control is whether the controlling party enjoys, by virtue of its shareholdings, the ability to elect the majority of the board of directors. Second, control must be “acquired by a person or group of persons”. Third, s. 111(5) creates an exception that losses remain deductible if, after an acquisition of control, the corporation engages in the same or a similar business. Thus, the connection to past losses is severed only when control has been acquired and there is a break from the corporation’s past business.

The text of s. 111(5) reflects a concern with denying loss carryovers when there is a lack of continuity within the corporation, as measured by both the identity of its controlling shareholders and its business activity. A contextual analysis also sheds light on the rationale behind s. 111(5). First, s. 111(5) should be considered against the foundational principles of the Income Tax Act . Under the Act, every person, including a corporation, is a separate taxpayer, and it is a foundational principle that taxpayers are to be taxed on their own earnings.

When there has been an acquisition of control and a corporation’s business ceases to operate, it can no longer be understood as the same taxpayer. Furthermore, s. 111(5) delineates the boundaries of the benefit-conferring provision, s. 111(1) (a). Section 111(1) (

a) modifies the general rule that each taxpayer is taxed based on their income and losses within a single taxation year to allow a taxpayer to deduct non-capital losses against income in a future or prior taxation year, but only the taxpayer who suffered the loss is entitled to deduct the loss. Section 111(5) ensures that this principle is given effect for corporations. While a corporation is still the same legal person after an acquisition of control, the identity of those behind the corporation has changed.

Section 111(5) functions so that the tax benefits associated with those losses will not benefit a new shareholder base carrying on a new business. This restriction is consistent with other provisions in the Act which also treat a corporation as, effectively, a new taxpayer following an acquisition of control . There are reasons why Parliament chose the de jure control test as the standard to be used on an application of s. 111(5): it is a clearer benchmark than de facto control, meaning greater certainty for the majority of transactions, which are not tax-motivated.

However, the provision’s rationale is not fully captured by the de jure test; rather , the rationale of s. 111(5) is illuminated by related provisions which both extend and restrict the circumstances in which an acquisition of control has occurred, including by looking beyond the standard documentation under the de jure control test. These provisions suggest that de jure control is not a perfect reflection or complete explanation of the mischief that Parliament sought to address. It is also necessary to consider extrinsic evidence of Parliament’s purpose.

The legislative history behind s. 111(5) illustrates that Parliament was concerned with addressing the trading of loss corporations, which was undermining the tax base and creating inequity among taxpayers. While the means Parliament has chosen to address these concerns have evolved over time, its rationale for including the non-capital loss carryover restriction in the Act has been consistent. When a corporation changes hands, and the loss

business ceases to operate, the corporation is effectively a new taxpayer that cannot avail itself of non-capital losses accumulated by the old taxpayer . The business continuity exception was included to encourage the recovery of unprofitable enterprises that require new investment by new owners to strengthen the corporation’s business. Although the corporation may have changed hands, the link in continuity is preserved through a different marker and the justification for s. 111(1) (

a) remains applicable. This reinforces that, at its core, s. 111(5) serves to delineate the circumstances in which the basis for the loss carryover rule in s. 111(1) (

a) is non-existent. Taken together, the object, spirit and purpose of s. 111(5) is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. Parliament sought to ensure that a lack of continuity in a corporation’s identity was accompanied by a corresponding break in its ability to carry over non-capital losses. This is the rationale underlying the provision and properly explains why Parliament enacted s. 111(5).

An analysis of the transactions at issue demonstrates that their result served to frustrate the object, spirit and purpose of s. 111(5): they achieved the outcome that Parliament sought to prevent and provided Matco with the benefits of an acquisition of control, all while narrowly circumventing the application of s. 111(5). They resulted in Deans Knight’s near-total transformation: it became a company with new assets and liabilities, new shareholders and a new business whose only link to its prior corporate life was the tax attributes. It was used as the vessel for an unrelated venture selected by Matco.

Matco achieved the functional equivalent of an acquisition of control through the investment agreement, while circumventing s. 111(5), because the transactions dismembered the rights and benefits that would normally flow from being a controlling shareholder. First, it contracted for the ability to select Deans Knight’s directors.

Second, the investment agreement placed severe restrictions on the powers of the board of directors which, but for a circuit-breaker transaction that occurred in this case, would normally occur through a unanimous shareholders agreement and which would lead to an acquisition of de jure control. Third, the transactions allowed Matco to reap significant financial benefits, while depriving Newco, the majority voting shareholder on paper, of each of the core rights that it could ordinarily have exercised.

Any residual freedom that Deans Knight had was illusory and reinforces how the transactions frustrated the rationale of s. 111(5). Deans Knight’s acceptance of the corporate opportunity presented by Matco was a fait accompli because Deans Knight was prohibited from engaging in any activity other than studying and accepting the corporate opportunity, and because the consequences of refusing the opportunity were severe.

As for Newco’s ability to sell its remaining shares to a party other than Matco or to opt not to sell at all, Deans Knight’s actions were already locked down by the investment agreement, and the benefits of share ownership were already negated by being subjected to Matco’s approval. The ability to receive the guaranteed amount without selling the remaining shares to Matco was important because in certain circumstances, Matco’s purchase of the shares might lead to an acquisition of de jure control.

The complex series of transactions and the flexibility built into the investment agreement were necessary only because the contracting parties sought to achieve the very mischief that s. 111(5) was intended to prevent. Considering the circumstances as a whole, the result obtained by the transactions frustrated the rationale of s. 111(5). Per Côté J. (dissenting): The appeal should be allowed and the Tax Court’s judgment restored. The avoidance transactions did not frustrate the rationale of s. 111(5), and therefore, do not amount to abuse.

The GAAR requires a careful balance between the interest of the taxpayer in minimizing his or her taxes through technically legitimate means and the legislative interest in ensuring the integrity of the income tax system. Despite Parliament’s unambiguous adoption of the de jure control test in s. 111(5) of the Income Tax Act , the majority has opted for an ad hoc approach that expands the concept of control based on a wide array of operational factors.

This approach invites the exercise of unbounded judicial discretion and will result in the loss-trading restrictions in s. 111(5) being applied to transactions on a circumstantial basis. The majority’s approach to determining the object, spirit and purpose of s. 111(5) fails to account for the central principle that the GAAR does not and cannot override Parliament’s specific intent regarding particular provisions of the Act . The GAAR analysis rests on the same interpretive approach employed by the Court in all questions of statutory

interpretation, and is little more than a specialized form of statutory

interpretation to determine Parliament’s intent. It should not be assumed that the GAAR plays a role in every transaction and in every context. There is agreement with the majority that there is no bar to applying the GAAR in situations where the Act specifies precise conditions that must be met to achieve a particular result, as with a specific anti-avoidance rule; however, a provision’s text can sometimes be conclusive and fully explain its underlying rationale. The key question is whether Parliament specifically intended to prevent or permit a certain type of transaction.

Where an anti-avoidance provision has been carefully crafted to include some situations and exclude others, it is reasonable to infer that Parliament chose to limit its scope accordingly. The GAAR was intended to catch unforeseen tax strategies, but if Parliament drafts a specific anti-avoidance provision in a way that keeps a highly foreseeable gap open, the gap is more likely to be intentional, and relying on it should not be considered abusive.

Section 111(5) is a specific anti-avoidance rule that limits what would otherwise be permissible deductions under s. 111(1) (a), which allows taxpayers to deduct non-capital losses for the purpose of computing taxable income for a taxation year. Upon an acquisition of control, s. 111(5) prevents a corporation from carrying over losses unless the business, carried on by the corporation subject to the change of control, is continued for profit or with a reasonable expectation of profit.

It bars corporate acquisitions for the singular purpose of accessing tax attributes by restricting the use of those attributes if accessed through the exercise of control. Courts have determined that “control” for the purposes of the Act means de jure control. De jure control refers to the ownership of a sufficient number of shares to have a majority of votes in the election of the corporation’s board of directors. A corporation’s constating documents create de jure control because they restrain the ability of shareholders to exercise their voting power freely.

In contrast, external agreements give rise to obligations that are contractual and not legal or constitutional in nature. Consequently, the distinction between de jure and de facto control lies in the breadth of factors that can be considered in determining who has control over the corporation. The object, spirit and purpose of s. 111(5) is to restrict the use of tax attributes if accessed through an acquisition of de jure control.

A textual, contextual and purposive analysis of s. 111(5) of the Act reveals that Parliament never intended courts to consider factors other than those related to share ownership in determining who has control over a corporation. The majority introduces the notion of functional equivalence, which treats the investment agreement as a constating document for the purposes of control. This ignores that constating documents and external agreements are enforced in radically different ways: an ordinary contract can never be functionally equivalent to a constating document.

The GAAR cannot be invoked to override Parliament’s clear intent, and the majority’s approach departs from Parliament’s clear articulation of a de jure control test for restricting losses under s. 111(5).

Whether an avoidance transaction is abusive is a fact-intensive inquiry that raises a question of mixed fact and law. Absentan extricable error of law, the application of the law to the facts is subject to the standard of palpable and overriding error. No such errorexists in the instant case. As de jure control is an essential element of the object, spirit and purpose of s. 111(5), the key question iswhether Matco acquired de jure control of Deans Knight and the relationship between Matco and Deans Knight is the proper focus of theabuse analysis. The Tax Court’s decision was based on a combination of findings of fact and an

interpretation of the investmentagreement that is supported by the evidence. There is no reviewable error in the Tax Court’s conclusion that Matco did not acquire“effective” control of Deans Knight. At no point did Matco own or have a right to own enough shares to reach a majority shareholderposition. The investment agreement is of no relevance as to whether Matco acquired de jure control. It did not give Matco control overNewco’s sale of the shares remaining after Matco converted the debenture or require that Matco present a sale opportunity for thoseshares.

Parliament’s test for control is squarely focused on voting rights arising from ownership. The right to dividends is irrelevant. Theonly relevant incidence of ownership is voting power, something that the investment agreement did not take away. The Tax Court madea specific credibility finding on the point that Deans Knight remained a free actor throughout the transactions. Mischaracterization ofs. 111(5) did not taint this important credibility finding. Matco did not acquire Deans Knight in any practical sense.

Matco was only afacilitator of the transactions and did not use Deans Knight’s non-capital losses for its own benefit. The existence of abusive taxavoidance is, at best, unclear and the benefit of the doubt should go to the taxpayer. Cases Cited By Rowe J. Distinguished: Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49; applied: Canada Trustco Mortgage Co. v.Canada, 2005 SCC 54, [2005] 2 S.C.R. 601; Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, [2011] 3 S.C.R. 721; referred to: DuhaPrinters (Western) Ltd. v. Canada, (SCC), [1998] 1 S.C.R. 795; Mathew v.

Canada, 2005 SCC 55, [2005] 2 S.C.R.643; Stubart Investments Ltd. v. The Queen, (SCC), [1984] 1 S.C.R. 536; Triad Gestco Ltd. v. Canada, 2012 FCA 258,[2014] 2 F.C.R. 199; Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3; The Gladwin Realty Corporation v. The Queen, 2020 FCA 142,[2020] 6 C.T.C. 185; Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1; Craven v. White, [1989] A.C. 398;Canada v. Oxford Properties Group Inc., 2018 FCA 30, [2018] 4 F.C.R. 3; Fiducie Financière Satoma v. The Queen, 2018 FCA 74,2018 D.T.C. 5052; Housen v.

Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Buckerfield’s Ltd. v. Minister of National Revenue, (CA EXC), [1965] 1 Ex. C.R. 299; Silicon Graphics Ltd. v. Canada, 2002 FCA 260, [2003] 1 F.C. 447; Canada v. 594710British Columbia Ltd., 2018 FCA 166, [2019] 5 C.T.C. 1; OSFC Holdings Ltd. v. Canada, 2001 FCA 260, [2002] 2 F.C. 288. By Côté J. (dissenting) Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3; Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R.601; Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1; Canada v.

Alta Energy Luxembourg S.A.R.L., 2021 SCC49; Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, [2011] 3 S.C.R. 721; Minister of National Revenue v. Landrus, 2009 FCA 113,392 N.R. 54; Buckerfield’s Ltd. v. Minister of National Revenue, (CA EXC), [1965] 1 Ex. C.R. 299; Duha Printers(Western) Ltd. v. Canada, (SCC), [1998] 1 S.C.R. 795; Minister of National Revenue v. Consolidated Holding Co., (SCC), [1974] S.C.R. 419; Silicon Graphics Ltd. v. Canada, 2002 FCA 260, [2003] 1 F.C. 447; Lyrtech RD Inc. v. TheQueen, 2014 FCA 267, 2015 D.T.C. 5054; Housen v.

Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Sattva Capital Corp. v. CrestonMoly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633. Statutes and Regulations Cited Business Corporations Act, CQLR, c. S-31.1, ss. 2 “to control”, 112. Business Corporations Act, R.S.O. 1990, c. B.16, ss. 1(5), 115(1).

Canada Business Corporations Act, R.S.C. 1985, c. C-44, ss. 2(3), 24(3), 102(1), 115(3). Civil Code of Québec, arts. 310, 335, 336. Income Tax Act, R.S.C. 1952, c. 148, s. 27(1)(e) [rep. & sub. 1958, c. 32, s. 12(1)], (5) [ad. idem, s. 12(2); rep. & sub. 1963, c. 21, s. 6(1);rep. & sub. 1970-72, c. 63, s. 1], (5a) [ad. 1963, c. 21, s. 6(2)]. Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 2 to 4, 111(1)(a), (5), (5.4), 245, (1) “tax benefit”, 248(10), 249(4), 251(5)(b), 256(5.1)[ad. 1988, c. 55, s. 192], (7), (8), 256.1 [ad. 2013, c. 40, s. 94]. Authors Cited Arnold, Brian J., and James R. Wilson. “The General Anti-Avoidance Rule —

Part 2” (1988), 36 Can. Tax J. 1123. Canada. Department of Finance. Explanatory Notes to Legislation Relating to Income Tax. Ottawa, 1988. Canada. Department of Finance. Guidelines for Tax Reform in Canada. Ottawa, 1986. Canada. Department of Finance. Modernizing and Strengthening the General Anti-Avoidance Rule: Consultation Paper, 2022 (online:https://www.canada.ca/content/dam/fin/documents/modernizing-strengthening-general-anti-avoidance-rule.pdf; archived version:https://www.scc-csc.ca/cso-dce/2023SCC-CSC16_1_eng.pdf). Canada. Department of Finance. Tax Reform 1987: Income Tax Reform. Ottawa, 1987. Canada. Department of Finance. The White Paper: Tax Reform 1987. Ottawa, 1987.

Canada. House of Commons. House of Commons Debates , vol. IV, 1st Sess., 26th Parl., October 16, 1963, pp. 3636-37. Canada. House of Commons. House of Commons Debates , vol. V, 1st Sess., 26th Parl., November 1, 1963, p. 4287. Canada. Privy Council Office. Guide to Making Federal Acts and Regulations , 2nd ed. Ottawa: Department of Justice Canada, 2001. Canada. Report of the Royal Commission on Taxation , vol. 4,

part C, Taxation of Income . Ottawa, 1966. Canada. Senate. Debates of the Senate , 1st Sess., 24th Parl., August 21, 1958, pp. 650-51. Dodge, David A. “A New and More Coherent Approach to Tax Avoidance” (1988), 36 Can. Tax J. 1. Duff, David G. “General Anti-Avoidance Rules Revisited: Reflections on Tim Edgar’s ‘Building a Better GAAR’” (2020), 68 Can. Tax J. 579. Duff, David G. “ The Interpretive Exercise Under the General Anti-Avoidance Rule ”, in Brian J. Arnold, ed., The General Anti-Avoidance Rule — Past, Present, and Future . Toronto: Canadian Tax Foundation, 2021, 383. Duff, David G., et al.

Canadian Income Tax Law , 7th ed. Toronto: LexisNexis, 2023. Fiscal Statement , edited by Richard De Boo Limited. Toronto: Richard De Boo (special release April 28, 1980). Flynn, Gordon W. “Tax Planning for Corporations with Net Capital and Noncapital Losses”, in Corporate Management Tax Conference, Current Developments in Measuring Business Income for Tax Purposes . Toronto: Canadian Tax Foundation, 1982, 208. Krishna, Vern. Fundamentals of Canadian Income Tax , vol. 1, Personal Tax , 2nd ed. Toronto: Thomson Reuters, 2019. Krishna, Vern. The Fundamentals of Income Tax Law . Toronto: Carswell, 2009.

Leach, Campbell W. “Making the Most of Your Losses”, in Canadian Tax Papers No. 19, Corporate Management Conference . Toronto: Canadian Tax Foundation, 1960, 27. Li, Jinyan. “‘Economic Substance’: Drawing the Line Between Legitimate Tax Minimization and Abusive Tax Avoidance” (2006), 54 Can. Tax J. 23. Li, Jinyan. “The Misuse or Abuse Exception: The Role of Economic Substance” , in Brian J. Arnold, ed., The General Anti-Avoidance Rule — Past, Present, and Future . Toronto: Canadian Tax Foundation, 2021, 295. Lord, Guy, et autres. Les principes de l’imposition au Canada , 13 e éd. Montréal: Wilson & Lafleur, 2002.

McDonnell, Thomas E. “Legislative Anti-Avoidance: The Interaction of the New General Rule and Representative Specific Rules”, in Report of Proceedings of the Fortieth Tax Conference . Toronto: Canadian Tax Foundation, 1989, 6:1. McGuinness, Kevin Patrick. Canadian Business Corporations Law , 3rd ed. Toronto: LexisNexis, 2017. McGurran, H. D. “Principles of Income Tax: 2. Taxable Income from a Business” (1958), 6 Can. Tax J. 455. Riehl, Gordon W. Incorporation and Income Tax in Canada , 4th ed. Montréal: CCH Canadian, 1965.

Samtani, Pooja, and Justin Kutyan. “GAAR Revisited: From Instinctive Reaction to Intellectual Rigour” (2014), 62 Can. Tax J. 401. Scace, Arthur R. A., and Douglas S. Ewens. The Income Tax Law of Canada , 5th ed. Toronto: Carswell, 1983. Strain, William J., David A. Dodge and Victor Peters. “Tax Simplification: The Elusive Goal”, in Report of Proceedings of the Fortieth Tax Conference . Toronto: Canadian Tax Foundation, 1989, 4:1. Sullivan , Ruth. The Construction of Statutes , 7th ed. Toronto: LexisNexis, 2022.

Taylor, Roger, and Marie-Claude Marcil. “Duha Printers Revisited: Issues Regarding Corporate Control” (2022), 70 Can. Tax J. 495. APPEAL from a judgment of the Federal Court of Appeal (Stratas, Woods and Laskin JJ.A.), 2021 FCA 160 , 460 D.L.R. (4th) 731, [2021] 5 C.T.C. 39, 2021 D.T.C. 5095, [2021] F.C.J. No. 825 (QL), 2021 CarswellNat 2893 (WL), setting aside a decision of Paris J., 2019 TCC 76 , [2019] 4 C.T.C. 2001, 2019 D.T.C. 1059, [2019] T.C.J. No. 58 (QL), 2019 CarswellNat 1133 (WL). Appeal dismissed, Côté J. dissenting. Barry R.

Crump , Heather DiGregorio , Robert Martz and Jennie Han , for the appellant. Michael Taylor and Perry Derksen , for the respondent. Alexandra Clark , Dona Salmon and Jennifer Boyczuk , for the intervener the Attorney General of Ontario. Steve Suarez , Laurie A. Goldbach and Elizabeth Egberts , for the intervener the Canadian Chamber of Commerce. Al Meghji , Edward Rowe and Joanne Vandale , for the intervener the Tax Executives Institute, Inc. Pierre Zemaitis and Josée Fournier , for the intervener Agence du Revenu du Québec.

The judgment of Wagner C.J. and Karakatsanis, Rowe, Martin, Kasirer, Jamal and O’Bonsawin JJ. was delivered by Rowe J. — TABLE OF CONTENTS ParagraphI. Overview 1II. Facts 7III. Judicial History 26A. Tax Court of Canada, 2019 TCC 76, [2019] 4 C.T.C. 2001 26B. Federal Court of Appeal, 2021 FCA 160, 460 D.L.R. (4th) 731 34IV. Issues 39V. Analysis 40A. Background to the General Anti-Avoidance Rule 40B. The Relationship Between the GAAR, the Duke of Westminster Principle andUncertainty 46 C. Applying the GAAR 51(1) Tax Benefit 53(2) Avoidance Transaction 54(3) Abusive Tax Avoidance 56(

a) The Object, Spirit and Purpose Reflects the Rationale of the Provision 58(

b) The Provision’s Text, Context and Purpose Are Used to Determine Its Rationale 62(

c) The Abuse Analysis Focuses on Whether the Result of the TransactionsFrustrates the Provision’s Object, Spirit and Purpose 69 (

d) Summary 73VI. Application 75A. Which Provisions Are at Issue? 75B. What Is the Object, Spirit and Purpose of Section 111(5)? 78(1) The Text of the Provision 79(2) The Context of the Provision 84(a) Section 111(5) Should Be Considered Against the Foundational Principles of theAct 85 (b) Section 111(5) Delineates the Boundaries of the Benefit-Conferring Provision,Section 111(1)(a) 86 (

c) Parliament’s Selection of Control Tests Differs Across the Act 91(

d) The Control Test in Section 111(5) Is Expanded and Restricted by Other“Deeming” Provisions 96

(3) The Purpose of the Provision 100(4) Conclusion on Object, Spirit and Purpose 113C. Was There an Abuse of Section 111(5)? 121VII. Conclusion 141Appendix I. Overview [1] This tax appeal raises the issue of the application of the general anti-avoidance rule (the “GAAR”) to transactionsundertaken by the appellant, Deans Knight Income Corporation, to monetize non-capital losses and other deductions. [2] Under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”), a taxpayer’s tax burden is normally calculatedbased on the income and losses from that taxation year (s. 2).

However, the Act allows non-capital losses to be carried back 3 years orcarried forward 20 years in order to offset income in those years (s. 111(1)(a)). This ability to carry over losses is limited: one such limitis that, if control of the corporation has been acquired, non-capital losses from before the acquisition cannot be carried over, unless thecorporation continues the same or similar business that incurred the losses (s. 111(5)).

An acquisition of control occurs where a person orgroup of persons acquires de jure control, which generally involves acquiring sufficient share ownership to elect a majority of the boardof directors (Duha Printers (Western) Ltd. v. Canada, (SCC), [1998] 1 S.C.R. 795). It is also deemed to occur when ataxpayer acquires a right to acquire such shares if the purpose is to avoid the application of the loss carryover restriction (ss. 256(8) and251(5)(b); see Appendix). [3] The appellant sought to take advantage of the loss carryover rule in s. 111(1)(

a) without triggering the restriction ins. 111(5). Although the transactions in this appeal will be explained in detail in the following section, a brief

summary is warranted. Priorto the transactions at issue, the appellant was a struggling Canadian corporation that had approximately $90 million of unused non-capital losses, scientific research and development tax expenditures (“SR&ED” expenditures), and investment tax credits (“ITCs”)(collectively, the “Tax Attributes”). Given that it was in financial difficulty, it did not have income which its past losses could offset. Itsought to monetize their value and entered into an agreement with a venture capital company, Matco Capital Ltd. (“Matco”), in order todo so.

A complex arrangement was devised involving the following key transactions. First, all of the appellant’s assets and liabilitieswould be moved into its newly created parent company. Second, Matco would obtain a debenture which could be converted into sharesof the appellant, and the appellant’s parent company was promised that it would receive at least a guaranteed amount for the sale of itsremaining shares. Third, Matco would find a new business venture for the appellant, which would be used to raise money through aninitial public offering (“IPO”).

The profits from this venture could be sheltered by the Tax Attributes the appellant originally could not

utilize. The arrangement went according to plan. For the 2009 to 2012 tax years, the appellant deducted a majority of its Tax Attributes to reduce its tax liability. However, the Minister of National Revenue reassessed and denied these deductions. [ 4 ] Before this Court, the parties accept that the appellant complied with the text of the Act . In other words, the parties agree that there was no “acquisition of control” and that, therefore, the loss carryover restriction in s. 111(5) did not apply.

The central issue in this appeal is whether s. 245 of the Act , known as the general anti-avoidance rule or the GAAR , applies to deny the deductions. The GAAR operates to deny tax benefits flowing from transactions that comply with the literal text of the Act but nevertheless constitute abusive tax avoidance.

For the GAAR to apply to a transaction, three elements found in s. 245 must be met: (1) there must be a “tax benefit”; (2) the transaction must be an “avoidance transaction”, meaning one that is not undertaken primarily for a bona fide non-tax purpose; and (3) the avoidance transaction giving rise to the tax benefit must be an “abuse” of the provisions of the Act (or associated enactments). [ 5 ] The Tax Court found that the transactions were tax avoidance transactions that resulted in a tax benefit, but concluded that they were not abusive.

On appeal, the Federal Court of Appeal held that the transactions were abusive, such that the GAAR applied to deny the tax benefits. I note that the parties and the lower courts focused on the non-capital loss deductions since the SR&ED and ITC provisions function similarly. As was the case in the Federal Court of Appeal, the only issue on appeal is whether the appellant’s series of transactions resulted in abusive tax avoidance. [ 6 ] For the reasons that follow, I would dismiss the appeal. The transactions were abusive.

The object, spirit and purpose of s. 111(5) of the Act is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. Through a complex series of transactions, the appellant underwent a fundamental transformation that achieved the outcome that Parliament sought to prevent, while narrowly circumventing the text of s. 111(5) . The result of the transactions thereby frustrated the provision’s rationale. Since the GAAR applies to deny the tax benefits, the Minister’s reassessments must be restored.

II. Facts [ 7 ] Before the transactions at issue in this appeal, the appellant carried on a drug research and nutritional food additive business under the name Forbes Medi-Tech Inc. Its shares were publicly listed on the NASDAQ and TSX. In 2007, the appellant’s business was struggling and it faced a potential delisting of its shares from the NASDAQ because the bid price for its common stock had fallen below the minimum price required by the exchange.

At a meeting of the appellant’s board of directors in May 2007, then-CFO David Goold reported on a method of realizing the value of its accumulated Tax Attributes in the form of non-capital losses, SR&ED tax expenditures and ITCs. These unused Tax Attributes had accumulated to nearly $90 million by the end of 2007. Goold told the board that a reorganization of the company, followed by a takeover by another company, would allow the Tax Attributes to be monetized for between 4 and 4.5 cents on the dollar for a total of between $3.5 million and $4 million.

It was unlikely that the appellant would be able to use the Tax Attributes on its own at any point; indeed, by November 2007, it had only six months of cash flow left. [ 8 ] The appellant entered negotiations with Matco and signed a letter of intent in November 2007. However, the venture that Matco had wanted to offset with the appellant’s Tax Attributes fell apart and in December 2007, Matco informed the appellant that it would not be proceeding with the agreement. [ 9 ] In early 2008, the appellant reorganized and restructured by way of a court-approved Plan of Arrangement.

The board of directors had determined that this was the best way of maintaining compliance with the NASDAQ’s minimum bid price listing standard while facilitating a future monetization of its Tax Attributes. A new company, 0813361 B.C. Ltd. (“Newco”), was incorporated, and all outstanding common shares, options and warrants of the appellant were exchanged for common shares and warrants of Newco on an 8:1 basis. The appellant thus became a wholly owned subsidiary of Newco.

Newco’s shares began to be traded on the NASDAQ in substitution for the shares of the appellant. [ 10 ] On March 4, 2008, the appellant and Matco entered into a second letter of intent. On March 19, 2008, the appellant entered into an investment agreement with Newco and Matco (the “Investment Agreement”). [ 11 ] Under the Investment Agreement, Newco would receive roughly $3.8 million in the following manner. First, Matco purchased a convertible debenture for $3 million, subject to adjustments (ss. 2.2 and 2.3 of the Investment Agreement, reproduced in A.R., vol. II, at p. 86).

The debenture would be convertible into 35 percent of the voting shares and 100 percent of the non-voting shares that Newco held in the appellant (i.e., 79 percent of the equity shares in the appellant). Second, Matco guaranteed that Newco would be able to sell its remaining shares in the appellant for a minimum of $800,000 (the “Guaranteed Amount”), subject to adjustments (s. 5.5). The remaining shares represented a majority (65 percent) of the voting shares of the appellant. Newco was not obliged to sell its shares to Matco.

If an opportunity for Newco to sell its remaining shares did not present itself during the relevant period, then Matco would still be required to pay the Guaranteed Amount. [ 12 ] The appellant was to be reorganized: its assets, liabilities and the amount paid by Matco for the convertible debenture would be transferred to Newco (s. 3.2). Newco would also use its best efforts to ensure that the only three directors of the appellant would be Charles Butt (President and CEO of the appellant), Goold and a representative selected by Matco.

Butt and Goold would resign following the acceptance of a corporate opportunity (s. 3.4). [ 13 ] Matco would have one year to present this corporate opportunity — a business opportunity that would be suitable for the appellant to commence, involving a new business and likely a new management team. This would be the business that would generate profits against which the Tax Attributes would be deducted.

Newco could accept or refuse the corporate opportunity within a short timeframe (s. 4.1), but if it refused, Matco would be relieved from paying the Guaranteed Amount (s. 5.5(d)). [ 14 ] If an acquisition of control of the appellant or Newco occurred, then Matco would be relieved from paying the Guaranteed Amount, and Newco would be required to repurchase the convertible debenture from Matco and to pay an additional $1 million to Matco (s. 5.5(f)).

Moreover, other than when acting pursuant to the Investment Agreement, Newco and the appellant could not engage in the following activities without the consent of Matco (s. 6.1):

- issue any shares, options, warrants, calls, conversion privileges or rights of any kind to acquire any shares of the appellant, - sell, transfer, pledge, encumber or dispose of or agree to sell, transfer, pledge, encumber or dispose of any shares of, or any options, warrants, calls, conversion privileges or rights of any kind to acquire any shares of the appellant, - change or amend the appellant’s constating documents or by-laws, - split, combine or reclassify any outstanding shares of the appellant, - redeem or purchase any shares of the appellant, - reorganize, amalgamate or merge the appellant, - take any action or make any commitment with respect to, or in contemplation of, any complete or partial liquidation, dissolution or other winding-up of the appellant, - declare and/or pay dividends or reduce the capital of the appellant, - take any action that would or may give rise to a change of control of Newco or the appellant, other than in specific circumstances contemplated in the Investment Agreement, - enter into, assign, terminate or amend any contract or agreement in respect of the appellant, - create any encumbrance on any of the assets of the appellant, - in respect of the appellant, create, incur, guarantee, or assume any indebtedness for borrowed money or otherwise become liable or responsible for the obligations of any other person, - in respect of the appellant, make any loans, advances, or capital contributions to, or investments in, any other person, - change in any respect any of the accounting principles or practices used by Newco or the appellant, except for any change required by reason of a concurrent change in policy, and - engage in any activity other than examining and pursuing the corporate opportunity. [ 15 ] Before the Investment Agreement was executed, the managing director of Matco, Alan Ross, purchased 100 shares of the appellant from Newco through his wholly owned holding company, 1250280 Alberta Ltd.

One of the purposes for this was to ensure that the Investment Agreement would not constitute a unanimous shareholder agreement. [ 16 ] The Investment Agreement was executed on May 9, 2008. Pursuant to the agreement, the appellant’s assets and liabilities were transferred to Newco in exchange for a promissory note, which the appellant transferred to another subsidiary of Newco; Matco subscribed for the convertible debenture in the amount of nearly $3 million, which the appellant transferred to the other subsidiary.

As planned, all of the appellant’s directors resigned except Butt, and Goold and Ross were elected directors. [ 17 ] Matco sought to find a business that could use the appellant’s Tax Attributes. In December 2008, Matco presented the appellant with a corporate opportunity pursuant to the Investment Agreement. Deans Knight Capital Management (“DKCM”), a mutual fund management company, was interested in investing in high-yield debt instruments, which were selling at low prices because of the 2008 financial crisis. DKCM planned to raise money for the investments through an IPO.

Matco proposed that DKCM would use the appellant as the corporate vehicle for the intended IPO, rather than incorporating a new company, because the appellant’s Tax Attributes would shelter the majority of the portfolio income and capital gains. [ 18 ] The appellant’s board of directors discussed the proposal, did some investigation into DKCM, and approved the proposal. In December 2008, DKCM and the appellant entered into a letter of intent. The letter specified that the appellant must have at least $95 million in deductible amounts available to be used against income earned by the corporation in Canada.

To allow the appellant to be used for DKCM’s business venture, DKCM would be appointed to manage the appellant; 4 of the 5 directors of the appellant would be appointed by DKCM; and the appellant would be used in a $100 million minimum IPO, whose proceeds would be used to purchase corporate debt securities that would generate income and gains that could be sheltered by the Tax Attributes.

The IPO would be priced such that the appellant’s existing common shares (which would ultimately be held by Matco following its exercise of the convertible debenture) would be attributed a net asset value of $5 million. [ 19 ] In February 2009, the appellant’s name was changed to its current name, “Deans Knight Income Corporation”. DKCM’s President became a director of the appellant.

In March 2009, Matco’s managing director and four nominees of DKCM were appointed as directors of the appellant, and three officers of DKCM were appointed as officers of the appellant. [ 20 ] Immediately prior to the IPO, Matco converted its debenture into 35 percent of the appellant’s voting shares and 100 percent of its non-voting shares. Matco also obtained an exception to the post-IPO lock-up period to enable it to purchase the remaining shares from Newco within the time period contemplated under the Investment Agreement. [ 21 ] The IPO closed on March 18, 2009.

Notably, the prospectus indicated that there was a risk that the Canada Revenue Agency could “successfully challenge the amount of such tax attributes or their availability to the Company” (A.R., vol. III, at p. 30). A total of 10,036,890 shares were issued at $10 per share, for proceeds of over $100 million. At this valuation, Matco’s shares of the appellant were worth over $4 million. [ 22 ] In April 2009, Matco, through a related corporation, made an offer to Newco to purchase the remaining shares at the Guaranteed Amount.

Though the Guaranteed Amount was a discount to the IPO price, Newco accepted the offer because it needed

money for its own operations and because its board believed the share price might decrease before the end of the post-IPO lock-up period. [ 23 ] The appellant’s investment business succeeded and it paid regular dividends to its shareholders in the first four years of operation. It began to wind up operations in its fifth year, as intended. [ 24 ] When filing its tax returns for 2009 to 2012 and in computing its income, the appellant claimed Tax Attributes from 2007 and earlier.

The appellant deducted nearly $65 million of its Tax Attributes to reduce its tax liability from the debt-securities business. [ 25 ] The Minister reassessed these taxation years to disallow the claimed losses and expenditures. The appellant objected to the reassessments and appealed to the Tax Court. III. Judicial History A. Tax Court of Canada, 2019 TCC 76 , [2019] 4 C.T.C. 2001 [ 26 ] At the Tax Court, Paris J. was faced with two issues.

The first issue was whether Matco had obtained an option to purchase the majority of the voting shares of the appellant, thereby acquiring control pursuant to ss. 256(8) and 251(5) (

b) of the Act . Paris J. concluded that Matco had not obtained such a right, and, accordingly, that there had been no “acquisition of control” triggering the application of s. 111(5) . This finding was not challenged on appeal and is therefore not before this Court. [ 27 ] As for the second issue, the question was whether the GAAR could apply to deny the deduction of the Tax Attributes.

This required Paris J. to determine whether there was a series of transactions that resulted in a tax benefit, whether the transactions were primarily for tax avoidance purposes and whether they resulted in an abuse of the provisions of the Act . Paris J. chose to focus on the non-capital loss provisions, since the SR&ED and ITC streaming restrictions operated in a similar manner. Applying each step of the GAAR test, Paris J. found that there was a series of transactions that resulted in a reduction of tax.

He also concluded that the primary purpose of the Investment Agreement, the restructuring of the appellant and all related transactions was to monetize the Tax Attributes. Consequently, the series of transactions could be characterized as avoidance transactions. However, Paris J. concluded that the transactions were not abusive because they did not frustrate the object, spirit and purpose of the provisions of the Act . [ 28 ] First, Paris J. considered the object, spirit and purpose of ss. 111(1) (a), 111(5) and 256(8) .

Regarding s. 111(1)(a), he concluded that the object, spirit and purpose was to “provide relief to taxpayers who have suffered losses, given that the government, through income tax, shares in the income of a taxpayer” (para. 99). [ 29 ] As for s. 111(5), Paris J. wrote that the acquisition of control test was the “means by which Parliament has determined that a loss has notionally been transferred to an unrelated party” (para. 103). He indicated that the notion of control was central to the working of s. 111(5) and that it has long been held to mean de jure control.

He also considered the history of s. 111(5) and acknowledged that Parliament introduced provisions that deem de jure control to exist or not exist in some circumstances, thereby allowing the Minister to look “beyond the share registry of the corporation to determine who in substance has control” (paras. 111 and 115). However, he noted that the de facto control test in s. 256(5.1) was not adopted. Paris J. moved to the purpose of s. 111(5) and found it to be “clear that subsection 111(5) was enacted to prevent tax loss trading.

The restriction on the use of losses is subject to limited exceptions relating to the rehabilitation of the loss business and to the transfer of losses between corporations under common control” (para. 126). He recognized that the underlying rationale for the choice to deny loss carryovers is that “after the acquisition of control, the corporation can be likened to a new taxpayer because it has different shareholders” (para. 128).

He also indicated that the acquisition of control test served as a reasonable marker between “situations where the corporation is a free actor in a transaction and when it is only a passive participant whose actions can be manipulated by a new person or group of persons in order to utilize the losses or Tax Attributes of the corporation for their own benefit” (para. 134). [ 30 ] Based on this analysis, Paris J. concluded that the object, spirit and purpose of s. 111(5) was to “target manipulation of losses of a corporation by a new person or group of persons, through effective control over the corporation’s actions” (para. 134).

He also briefly considered the object, spirit and purpose of s. 256(8) and found that it was to “prevent a taxpayer from circumventing the listed avoidance provisions by acquiring control over shares or share voting rights in order to achieve effective control of the corporation” (para. 138). [ 31 ] Turning to whether the object, spirit and purpose of the provisions were frustrated by the avoidance transactions, Paris J. framed the question as “whether despite there being no actual acquisition of de jure control by Matco, Matco acquired effective control of the Appellant such that the object, spirit and purpose of subsection 111(5) and the related tax attribute streaming restrictions was circumvented” (para. 144).

The judge rejected the argument that a change of management, business activity, assets and liabilities, and name were relevant to determining whether Matco gained effective control. He thereafter focused on whether Matco had effective control over the majority of the voting shares of the appellant prior to the IPO and answered in the negative.

He determined that “[t]he Appellant participated freely in the transactions that resulted in the use of the Tax Attributes against the investment business income” (para. 152). [ 32 ] Nor did Paris J. accept that the transactions frustrated the object, spirit and purpose of s. 256(8) of the Act .

He rejected the Crown’s submission that Matco had effective control over the remaining shares of the appellant held by Newco: Newco could have sold the shares without Matco’s consent; the Investment Agreement did not provide that only Matco could present an opportunity for Newco to sell its remaining shares; and the restrictions placed on the appellant’s activities did not amount to control over its shares. [ 33 ] In light of his conclusion that the GAAR did not apply, Paris J. allowed the appeal from the reassessments. B. Federal Court of Appeal, 2021 FCA 160 , 460 D.L.R. (4th) 731

[34] Before the Federal Court of Appeal, the only issue in dispute was the third step of the GAAR analysis, namely,whether the avoidance transactions were abusive. Woods J.A., writing for a unanimous court, allowed the Minister’s appeal and foundthat the transactions frustrated the object, spirit and purpose of s. 111(5) of the Act. [35] Woods J.A. agreed with Paris J.’s approach to ascertaining the object, spirit and purpose of s. 111(5). However, shereplaced the term “effective control” with “actual control”, since the former term had led to confusion.

Thus, she determined that theobject, spirit and purpose of s. 111(5) was to “restrict the use of specified losses, including non-capital losses, if a person or group ofpersons has acquired actual control over the corporation’s actions, whether by way of de jure control or otherwise” (para. 72 (emphasisadded)). [36] Woods J.A. rejected the argument that the object, spirit and purpose of s. 111(5) was fully expressed by its text.

Shenoted that the provision was introduced to prohibit trafficking in shares of companies with loss carryovers and that the GAAR itself was,in part, a response to the unintended use of loss carryovers. Moreover, she cited this Court’s recognition that “the general policy of theIncome Tax Act is to prohibit the transfer of losses between taxpayers, subject to specific exceptions” and that “[t]his policy is . . . to betaken into account in determining Parliament’s intent” (para. 81, citing Mathew v. Canada, 2005 SCC 55, [2005] 2 S.C.R. 643, atpara. 49).

Woods J.A. recognized that her formulation of the object, spirit and purpose of s. 111(5) “does include forms of de jure and defacto control” but indicated that the actual control test is different from the de facto control test (para. 83). [37] Turning to whether the avoidance transactions frustrated the object, spirit and purpose of s. 111(5), Woods J.A.concluded that the terms of the Investment Agreement gave Matco actual control over the actions of the appellant, both in general and inapproving the corporate opportunity.

At a general level, the restrictions in the Investment Agreement resulted in control being handed toMatco. As for approving the corporate opportunity, Woods J.A. remarked that “there was no realistic chance that a CorporateOpportunity would be rejected” (para. 104) because the Guaranteed Amount would have been forfeited.

Although the appellantdiscussed the proposal and did some investigation before approving it, it was not a free actor: Woods J.A. highlighted that it was alimited investigation to ensure that “this company was not a fly-by-night operation” (para. 108). [38] Woods J.A. concluded that s. 111(5) had been abused. Accordingly, the conditions for the application of the GAARwere met and the tax benefit should be denied. As a result, the Federal Court of Appeal allowed the appeal and set aside the judgment ofthe Tax Court. IV. Issues [39] Only the third step of the GAAR analysis is challenged before this Court.

The issues can therefore be stated asfollows:

(1) Did the Federal Court of Appeal err in its articulation of the object, spirit and purpose of s. 111(5) of the Act?

(2) Did the Federal Court of Appeal err in concluding that the avoidance transactions were abusive? V. Analysis A. Background to the General Anti-Avoidance Rule [40] The present appeal is not the first time this Court has considered the GAAR. A review of its origins and role withinthe Act nonetheless provides useful background. [41] In 1988, Parliament enacted the GAAR in s. 245 of the Act, partially in response to this Court’s decision in StubartInvestments Ltd. v. The Queen, (SCC), [1984] 1 S.C.R. 536. In Stubart, this Court rejected a literal approach tointerpreting the Act. At the same time, it also rejected an

interpretation of a precursor to the GAAR that would have required transactionsto have a bona fide business purpose. Instead, it offered guidelines to limit unacceptable tax avoidance arrangements. Parliament viewedthe decision in Stubart as an inadequate approach to the problem of tax avoidance (Canada Trustco Mortgage Co. v. Canada, 2005 SCC54, [2005] 2 S.C.R. 601, at para. 14). [42] Moreover, abusive tax avoidance had become a problem of significant concern for Parliament. Taxpayers, aided byexpert advice, increasingly devised complex legal transactions to avoid tax in ways unintended by Parliament.

Once the avoidancemechanisms relied on became evident, either from advance ruling requests or tax assessments, Parliament would react to “plug” theloopholes in the Act to prevent future use. The problem was that increasingly convoluted rules were vulnerable, creating new loopholesto exploit. This Court described this cycle in Stubart as “the action and reaction endlessly produced by complex, specific tax measuresaimed at sophisticated business practices, and the inevitable, professionally-guided and equally specialized taxpayer reaction” (p. 580;see also D. A.

Dodge, “A New and More Coherent Approach to Tax Avoidance” (1988), 36 Can. Tax J. 1, at p. 4). As this “cycle ofaction and reaction” between creative tax planners and Parliament continued, the Act grew in size and complexity (Department ofFinance, Guidelines for Tax Reform in Canada (1986), at p. 7). [43] Despite these efforts, Parliament was unable to curb the proliferation of tax avoidance schemes.

Corporate taxrevenues in 1985-86 “were $1.2 billion lower than the initial budgetary forecasts”, a shortfall which “was considered to be caused largelyby the unexpected application of loss carryforwards” (Dodge, at p. 3; see also W. J. Strain, D. A. Dodge and V. Peters, “TaxSimplification: The Elusive Goal”, in Report of Proceedings of the Fortieth Tax Conference (1989), 4:1, at pp. 4:43 and 4:52-53). [44] The GAAR was Parliament’s chosen mechanism to interrupt this cycle.

In the 1987 White Paper on Tax Reform, thegovernment recognized that specific anti-avoidance rules are “not always desirable” because they “make the tax system more complex;they sometimes create additional unintended loopholes, and they do not deal with transactions completed before the amendments becomeeffective” (see Department of Finance, The White Paper: Tax Reform 1987 (1987), at p. 57; see also B. J. Arnold and J. R. Wilson, “TheGeneral Anti-Avoidance Rule —

Part 2” (1988), 36 Can. Tax J. 1123, at p. 1140). A new general anti-avoidance rule was meant toovercome some of these disadvantages. The novel approach found within the GAAR explains why, upon its enactment, Parliament was

able to remove certain specific anti-avoidance rules that it felt were sufficiently addressed by a general rule ( White Paper , at p. 57; Triad Gestco Ltd. v.

Canada , 2012 FCA 258 , [2014] 2 F.C.R. 199, at paras. 52-53 ; Department of Finance, Tax Reform 1987: Income Tax Reform (1987), at p. 129; Dodge, at p. 8; Department of Finance, Modernizing and Strengthening the General Anti-Avoidance Rule: Consultation Paper , 2022 (online), at pp. 16 and 19-20; see also Arnold and Wilson, at p. 1148). [ 45 ] In light of the foregoing, the GAAR is best understood as a way to overcome the disadvantages of a system based solely on specific rules ( White Paper , at p. 57; Dodge, at p. 8).

The GAAR was a choice, made by Parliament, to complement its specific anti-avoidance efforts with the enactment of a general rule. To achieve this aim, the GAAR “draws a line between legitimate tax minimization and abusive tax avoidance” ( Trustco , at para. 16). Abusive tax avoidance can involve unforeseen tax strategies ( Canada v. Alta Energy Luxembourg S.A.R.L. , 2021 SCC 49 , at para. 80 ). For example, in Alta Energy , this Court treated evidence of Parliament’s knowledge and acceptance of the tax strategy at issue as a relevant consideration when ascertaining its intent.

However, the GAAR is not limited to unforeseen situations; as this Court has explained, it is designed to capture situations that undermine the integrity of the tax system by frustrating the object, spirit and purpose of the provisions relied on by the taxpayer ( Lipson v. Canada , 2009 SCC 1 , [2009] 1 S.C.R. 3, at para. 2 ; Copthorne Holdings Ltd. v. Canada , 2011 SCC 63 , [2011] 3 S.C.R. 721, at paras. 71-72 ; see also The Gladwin Realty Corporation v. The Queen , 2020 FCA 142 , [2020] 6 C.T.C. 185, at para. 85 ; D. G.

Duff, “General Anti-Avoidance Rules Revisited: Reflections on Tim Edgar’s ‘Building a Better GAAR’” (2020), 68 Can. Tax J. 579, at p. 591). B. The Relationship Between the GAAR, the Duke of Westminster Principle and Uncertainty [ 46 ] The GAAR must also be understood in light of its relationship to the Duke of Westminster principle. In Commissioners of Inland Revenue v.

Duke of Westminster , [1936] A.C. 1 (H.L.) , Lord Tomlin recognized the foundational principle that “[e]very man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be” (p. 19).

The principle that taxpayers can order their affairs to minimize the amount of tax payable has been affirmed by this Court on numerous occasions (see, e.g., Stubart , at p. 552; Trustco , at para. 11; Copthorne , at para. 65). [ 47 ] The Duke of Westminster principle, however, has “never been absolute” ( Lipson , at para. 21 ) and it is open to Parliament to derogate from it. Parliament has done so through the GAAR . The GAAR does not displace the Duke of Westminster principle for legitimate tax planning.

Rather, it recognizes a difference between legitimate tax planning — which represents the vast majority of transactions and remains unaffected, consistent with the Duke of Westminster principle — and tax planning that operates to abuse the rules of the tax system — in which case the integrity of the tax system is preserved by denying the tax benefit, notwithstanding the transactions’ compliance with the provisions relied upon. Even where the purpose of a transaction is to minimize tax, taxpayers are allowed to carry it out unless it results in an abuse of the provisions of the Act ( Lipson , at para. 25 ).

Where the transaction is shown to be abusive, the Duke of Westminster principle is “attenuated” by the GAAR ( Trustco , at para. 13). [ 48 ] In establishing a general anti-avoidance rule that operated to deny tax benefits on a case-specific basis, Parliament was cognizant of the GAAR ’s implications for the level of certainty in tax planning. Parliament sought to balance “the protection of the tax base and the need for certainty for taxpayers” (Department of Finance, Explanatory Notes to Legislation Relating to Income Tax (1988), at p. 461).

The GAAR was enacted to be “a provision of last resort” to address abusive tax avoidance only and was therefore not designed to create more generalized uncertainty in tax planning ( Trustco , at para. 21; Copthorne , at para. 66). Some uncertainty is unavoidable when a general rule is adopted (Dodge, at p. 21; Copthorne , at para. 123).

However, a reasonable degree of certainty is achieved by the balance struck within the GAAR itself. [ 49 ] First, as Professor Jinyan Li noted, “the GAAR cases generally involve situations that do not concern the majority of taxpayers, and the transactions are well planned and executed on the basis of professional tax advice” (“‘Economic Substance’: Drawing the Line Between Legitimate Tax Minimization and Abusive Tax Avoidance” (2006), 54 Can. Tax J. 23, at p. 40).

The GAAR only scrutinizes transactions motivated by tax avoidance, and even a tax-motivated transaction that is consistent with the object, spirit and purpose of the provisions of the Act is unaffected by the GAAR (see Explanatory Notes , at p. 461). By virtue of the rigorous analysis required by s. 245 , the GAAR only affects a small subset of transactions, largely conducted by sophisticated parties with the ability to properly evaluate the risks inherent in a GAAR reassessment.

Indeed, this is precisely what occurred in the present case: the prospectus relating to the appellant’s IPO expressly recognized the risk of a successful challenge to the use of the Tax Attributes. [ 50 ] Second, a proper application of the GAAR methodology serves to ensure reasonable certainty in tax planning (P. Samtani and J. Kutyan, “GAAR Revisited: From Instinctive Reaction to Intellectual Rigour” (2014), 62 Can. Tax J. 401, at p. 403). The GAAR is not a tool to sanction conduct that courts find immoral ( Copthorne , at para. 65; Alta Energy , at para. 48).

Rather, courts must conduct an “objective, thorough and step-by-step analysis” ( Copthorne , at para. 68). Within this analysis, the principles of certainty, predictability and fairness do not play an independent role; rather, they are reflected in the carefully calibrated test that Parliament crafted in s. 245 of the Act and in its

interpretation by this Court. It is to this test that I now turn. C. Applying the GAAR [ 51 ] As Rothstein J. wrote in Copthorne , “[i]t is relatively straightforward to set out the GAAR scheme. It is much more difficult to apply it” (para. 32). This is because the GAAR confers upon courts the “unusual duty of going behind the words of the legislation” (para. 66). While the duty imposed by the GAAR is unusual, the analysis involves a structured, three-step test that has been the subject of thorough guidance by this Court.

In order for the GAAR to apply, the following questions must be asked (para. 33, citing Trustco , at paras. 18, 21 and 36): 1. Was there a tax benefit? . . . 2. Was the transaction giving rise to the tax benefit an avoidance transaction? . . . 3. Was the avoidance transaction giving rise to the tax benefit abusive? [ 52 ] The taxpayer bears the burden of refuting the Minister’s assumption of the existence of a tax benefit ( Copthorne , at para. 34; Trustco , at para. 63) and the burden of proving the existence of a bona fide non-tax purpose ( Copthorne , at para. 63; Trustco , at

para. 66). In contrast, at the third step, the Minister bears the burden of proving that the avoidance transaction results in an abuse ( Lipson , at para. 21 ). ( 1 ) Tax Benefit [ 53 ] The first step in the GAAR analysis is to determine whether a tax benefit arises from a transaction or a series of transactions ( s. 245(2) of the Act ; Trustco , at para. 18). A tax benefit is defined as a “reduction, avoidance or deferral of tax” or “an increase in a refund of tax or other amount” paid under the Act ( s. 245(1) of the Act ).

The existence of a tax benefit may be clear on the face of the transactions; it is also appropriate to have regard to alternative arrangements that “might reasonably have been carried out but for the existence of the tax benefit” ( Copthorne , at para. 35, citing D. G. Duff et al., Canadian Income Tax Law (3rd ed. 2009), at p. 187). ( 2 ) Avoidance Transaction [ 54 ] The second step in the GAAR analysis is to determine whether the transaction or series of transactions was made primarily for the purpose of obtaining a tax benefit ( s. 245(3) of the Act ; Trustco , at paras. 17, 21 and 66).

This requirement removes the majority of transactions from the ambit of the GAAR , including those that are made for family and investment purposes ( Trustco , at paras. 21 and 33). A transaction may have both tax and non-tax purposes; in such a case, the taxpayer must satisfy the court that it is reasonable to conclude that the non-tax purpose was primary (paras. 27 and 29). [ 55 ] Moreover, in a series of transactions, if at least one transaction in the series is an avoidance transaction, the second step has been satisfied ( Copthorne , at para. 64).

As explained in Trustco , a series of transactions involves transactions that are “‘pre-ordained in order to produce a given result’ with ‘no practical likelihood that the pre-planned events would not take place in the order ordained’” (para. 25, citing Craven v. White , [1989] A.C. 398 (H.L.), at p. 514, per Lord Oliver).

A series of transactions also includes “related transactions or events . . . in contemplation of the series” (s. 248(10)), which refers to transactions or events before or after the series which were undertaken “‘in relation to’ or ‘because of’ the series” ( Copthorne , at para. 46, citing Trustco , at para. 26). ( 3 ) Abusive Tax Avoidance [ 56 ] The third step of the GAAR analysis is frequently the most contentious. Indeed, it is the only step at issue in the present appeal.

Analyzing whether the transactions are abusive involves, first, determining the object, spirit and purpose of the relevant provisions and, second, determining whether the result of the transactions frustrated that object, spirit and purpose ( Trustco , at para. 44; Copthorne , at paras. 69-71). [ 57 ] The object, spirit and purpose reflects the rationale of the provision. The provision’s text, context and purpose help to shed light on this rationale. Once the object, spirit and purpose has been ascertained, the abuse analysis focuses on whether the result of the transactions frustrates the provision’s rationale.

I provide guidance on these aspects below. (

a) The Object, Spirit and Purpose Reflects the Rationale of the Provision [ 58 ] To determine whether a transaction is abusive, courts must identify the object, spirit and purpose of the provisions alleged to have been abused, with reference to the provisions themselves, the scheme of the Act and permissible extrinsic aids ( Trustco , at para. 55). The object, spirit and purpose of the provisions has been referred to as the “legislative rationale that underlies specific or interrelated provisions of the Act ” ( Copthorne , at para. 69, citing V.

Krishna, The Fundamentals of Income Tax Law (2009), at p. 818). [ 59 ] At this juncture, it is critical to distinguish the rationale behind a provision from the means chosen to give that rationale effect within the provision. The drafting process reflects the task of translating government aims into legislative form in order to create intelligible, legally effective rules (see, e.g., Canada, Privy Council Office, Guide to Making Federal Acts and Regulations (2nd ed. 2001), at pp. 122-29).

The means selected by drafters and adopted by Parliament are relevant indicia within the broader text, context and purpose analysis, since they may shed light on the rationale underlying the provision. However, the means do not necessarily provide a full answer as to why the provision was adopted ( Canada v. Oxford Properties Group Inc. , 2018 FCA 30 , [2018] 4 F.C.R. 3, at para. 101 ).

This is not to imply that Parliament cannot translate its aims into effective legislation — quite the opposite: when drafting legal tests, Parliament is seeking to establish a general standard that is most faithful to its objectives from the options which are available and practicable. But even the most carefully drafted provision can be abused, which is why the GAAR exists to protect the provision’s underlying rationale. [ 60 ] The object, spirit and purpose of a provision must be worded as a description of its rationale ( Copthorne , at para. 69).

When articulating the object, spirit and purpose of a provision, a court is not repeating the test for the provision, nor is it crafting a new, secondary test that will apply to avoidance transactions.

Discerning the object, spirit and purpose does not rewrite the provision; rather, the court merely takes a step back to formulate a concise description of the rationale underlying the provision, against which a textually compliant transaction must be scrutinized ( Trustco , at para. 57; Copthorne , at para. 69). [ 61 ] For example, for a provision conferring a tax benefit, the rationale might relate to the basis for providing relief to taxpayers in such circumstances or, for targeted relief, the conduct that Parliament sought to encourage.

Conversely, for a specific anti- avoidance rule, the rationale might relate to the specific result, or mischief, that Parliament sought to prevent. (

b) The Provision’s Text, Context and Purpose Are Used to Determine Its Rationale [ 62 ] Although the GAAR analysis involves a consideration of the provision’s text, context and purpose, the use of these elements differs from “traditional” statutory

interpretation ( Copthorne , at para. 70; Alta Energy , at para. 30, per Côté J., and at para. 116, per Rowe and Martin JJ., dissenting but not on this point; Oxford Properties Group , at paras. 40-44). It must be recalled that the GAAR is a provision of last resort ( Trustco , at para. 21; Copthorne , at para. 66). There is a distinction between the application of a provision in general and the application of the GAAR to a transaction motivated by tax avoidance. If a court is performing a GAAR analysis, the impugned transactions necessarily comply with the provisions of the Act , properly interpreted and applied (see Copthorne , at para. 88;

D. G. Duff, “The Interpretive Exercise Under the General Anti-Avoidance Rule”, in B. J. Arnold, ed., The General Anti-Avoidance Rule — Past, Present, and Future (2021), 383, at p. 391). This is self-evident: if there is a specific provision with which the taxpayer has not complied, the Minister need not resort to the GAAR . [ 63 ] In traditional statutory

interpretation, the court considers a provision’s text, context and purpose to determine what the words of the statute mean. In the GAAR analysis, however, “[t]he search is for the rationale that underlies the words that may not be captured by the bare meaning of the words themselves” ( Copthorne , at para. 70 (emphasis added); Triad Gestco , at para. 51). The object, spirit and purpose analysis has a precise function: to discern the underlying rationale of the provisions. A consideration of the text, context and purpose gives structure to this analysis.

Indeed, the object, spirit and purpose analysis should not turn into a “value judgment of what is right or wrong nor . . . what tax law ought to be or ought to do” ( Copthorne , at para. 70). Nor should it become a “search for an overriding policy of the Act ” that is not founded in the text, context and purpose of the provisions ( Canada Trustco , at para. 41; Alta Energy , at para. 49). Rather, a focus on the provision’s text, context and purpose ensures that the intrinsic and extrinsic evidence used to discern a provision’s rationale remains tied to the provision itself.

To that end, a brief discussion on how to conduct this analysis is useful. [ 64 ] The text of the provision is relevant to the analysis of a provision’s object, spirit and purpose ( Alta Energy , at para. 58). Bearing in mind the search for the provision’s underlying rationale, courts may ask how the text sheds light on what the provision was designed to achieve. Put differently, what was the provision intended to do? ( Copthorne , at para. 88). This includes considering what the text of the provision expressly permits or restricts. Similarly, the langua

[…]