Copthorne Holdings Ltd v Canada

Last updated
Copthorne Holdings Ltd v Canada
Supreme court of Canada in summer.jpg
Supreme Court of Canada
Hearing: January 21, 2011
Judgment: December 16, 2011
Citations 2011 SCC 63, [2011] 3 SCR 721
Docket No.33283 [1]
Prior historyAppealed from Copthorne Holding Ltd. v. Canada, 2009 FCA 163, [2009] 5 C.T.C. 1, 2009 D.T.C. 5101, [2009] F.C.J. No. 625 (QL), 2009 CarswellNat 1368(21 May 2009), affirming Copthorne Holdings Ltd v. The Queen, 2007 TCC 481, [2008] 1 C.T.C. 2001, 2007 D.T.C. 1230, [2007] T.C.J. No. 335 (QL), 2007 CarswellNat 2808(28 August 2007)
Court membership
Chief Justice: Beverley McLachlin
Puisne Justices: Ian Binnie, Louis LeBel, Marie Deschamps, Morris Fish, Rosalie Abella, Marshall Rothstein, Thomas Cromwell
Reasons given
Unanimous reasons byRothstein J.

Copthorne Holdings Ltd v Canada, 2011 SCC 63, [2011] 3 SCR 721, [2] is a decision of the Supreme Court of Canada on the applicability of the General Anti-Avoidance Rule ("GAAR") in the interpretation of the Income Tax Act (Canada) . ("ITA")

Contents

The facts

Copthorne Holdings was part of a group of Canadian and non-resident companies controlled by Li Ka-Shing and his son Victor Li. It had purchased the Harbour Castle Hilton hotel in Toronto in 1981, and sold it for a substantial capital gain in 1989. The proceeds of the sale had been invested by Copthorne in Copthorne Overseas Investment Ltd. ("COIL"), a wholly owned Barbados company that carried on an active bond-trading business in Singapore.

Another company in the Li Group, VHHC Holdings, held directly (and indirectly through its subsidiary VHSUB Holdings) shares in Husky Energy Inc. By 1991, there was a substantial unrealized capital loss on that investment.

In 1992, VHHC Holdings was sold to Copthorne, and VHHC Holdings subsequently sold the majority of its VHSUB shares to Copthorne (inheriting the high adjusted cost base under stop-loss rules) which in turn sold the VHSUB shares to an unrelated purchaser at their fair market value, and thus realized the capital loss. This allowed Copthorne to carry the capital loss on the VHSUB shares back to shelter the capital gains from the sale of the Harbour Castle Hotel.

in 1993, Copthorne sold its holding in VHHC to its parent, thus making Copthorne and VHHC "sister" corporations. They, together with two other companies, were amalgamated and continued under the Copthorne name.

In 1994, amendments to the Foreign Accrual Property Income ("FAPI") rules in the ITA, which would have made COIL’s income FAPI, encouraged the Li Group to dispose of the business of COIL to another entity within the Li Group and to remove some or all of the proceeds of disposition from Canada. This was effected by a series of transactions that (in summary) involved the transfer of the shares of Copthorne and another related company to a new offshore company in the group, and redeeming certain shares of the company through a tax-free reduction of paid-up capital.

The Minister of National Revenue applied GAAR to recharacterize this payment as a deemed dividend, and thus subject to a 15% non-resident withholding tax plus related penalty.

The judgments below

At the Tax Court of Canada, Campbell J. found that all elements necessary to apply the GAAR had been established: a series of transactions, a tax benefit, an avoidance transaction, and the abusiveness of the transaction.

This ruling was affirmed by the Federal Court of Appeal, but Ryer J.A. noted that the Tax Court judge had applied too stringent a legal test to assessing the series of transactions. He concluded that a "strong nexus" need not exist between a series and a related transaction to find that the related transaction is part of the series. Instead, the series need only be a "motivating factor" for the related transaction (para. 49). Given the Tax Court judge’s finding that a strong nexus existed, he concluded that this less stringent motivating factor test was clearly met. He also upheld the conclusion of the Tax Court judge that the avoidance transaction had been abusive, but differed in his application of the GAAR.

Decision of the Supreme Court of Canada

The decision of the Federal Court of Appeal was affirmed unanimously by the Court, together with clarification as to the proper analysis and application intended for GAAR.

GAAR is a provision of last resort, and, before being applied to deny a tax benefit, a Court must conduct an objective, thorough and step-by-step analysis. After concisely summarizing the facts and his analysis on the existence of a tax benefit and an avoidance transaction, Justice Rothstein focused on the question whether there was an abusive transaction. The majority of his lengthy reasons provide a template for the type of detailed analysis that is expected in a GAAR appeal.

In order to determine whether a transaction is an abuse or misuse of the Act, a court must first determine the object, spirit or purpose of the provisions that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids. While an avoidance transaction may operate alone to produce a tax benefit, it may also operate as part of a series of transactions that results in the tax benefit. While the focus must be on the transaction, where it is part of a series, it must be viewed in the context of the series to enable the court to determine whether abusive tax avoidance has occurred. In such a case, whether a transaction is abusive will only become apparent when it is considered in the context of the series of which it is a part and the overall result that is achieved.

The analysis will lead to a finding of abusive tax avoidance:

These considerations are not independent of one another and may overlap.

Significance

Following on the Court's previous rulings in 2005 in Canada Trustco Mortgage Co. v. Canada, [3] and in 2009 in Lipson v. Canada, [4] GAAR has a firm basis in the application of Canadian income tax law in the analysis of abusive tax transactions. There is, however, debate as to whether this decision will lead to predictability and consistency in GAAR analysis. [5] [6] [7]

Copthorne also imported into Canadian tax jurisprudence the SCC's framework for reversing its own decisions, as noted by Rothstein J.:

[57] Trustco is a recent decision of this Court. Reversing a recent decision "is a step not to be lightly undertaken". [8] Before a court will entertain reversing a recently decided decision, there must be substantial reasons to believe the precedent was wrongly decided. In this case, Copthorne has not met the "high threshold for reversing a precedent" [9] and it is appropriate to reaffirm the Trustco interpretation of s. 248(10).

There is debate as to whether Canada Trustco was more in the nature of dicta , whereas Fraser dealt with the reversal of ratio decidendi . [10]

The Court also emphasizes the importance in tax planning of going beyond the mechanical application of particular provisions of the Act as if it were a mere instruction manual or limited book of rules. [11]

Related Research Articles

<i>R v Big M Drug Mart Ltd</i> 1982 Supreme Court of Canada decision

R v Big M Drug Mart Ltd(Her Majesty The Queen in Right of Canada v Big M Drug Mart Ltd) is a landmark decision by Supreme Court of Canada where the Court struck down the federal Lord's Day Act for violating section 2 of the Canadian Charter of Rights and Freedoms. This case had many firsts in constitutional law including being the first to interpret section two.

<i>Auton (Guardian ad litem of) v British Columbia (AG)</i> Supreme Court of Canada case

Auton v British Columbia (AG), [2004] 3 S.C.R. 657, 2004 SCC 78 is a leading decision of the Supreme Court of Canada wherein the Court ruled that government funding for non-core medically necessary treatments is not protected under section 15(1) of the Canadian Charter of Rights and Freedoms.

Section 6 of the Canadian Charter of Rights and Freedoms is the section of the Canadian Constitution that protects the mobility rights of Canadian citizens, and to a lesser extent that of permanent residents. By mobility rights, the section refers to the individual practice of entering and exiting Canada, and moving within its boundaries. The section is subject to the section 1 Oakes test, but cannot be nullified by the notwithstanding clause.

<i>Calder v British Columbia (AG)</i> 1973 Supreme Court of Canada case

Calder v British Columbia (AG) [1973] SCR 313, [1973] 4 WWR 1 was a decision by the Supreme Court of Canada. It was the first time that Canadian law acknowledged that aboriginal title to land existed prior to the colonization of the continent and was not merely derived from statutory law.

<i>R v Lavallee</i> Supreme Court of Canada case

R v Lavallee, [1990] 1 S.C.R. 852 is a leading Supreme Court of Canada case on the legal recognition of battered woman syndrome. The judgment, written by Justice Bertha Wilson, is generally considered one of her most famous. The court held in favour of allowing battered woman syndrome to explain how the mental conditions for self-defence were present in this case, and Lavallee's acquittal was restored.

<i>R v Ron Engineering and Construction (Eastern) Ltd</i> Supreme Court of Canada case

R v Ron Engineering and Construction (Eastern) Ltd, of 1981 is the leading Supreme Court of Canada decision on the law of tendering for contracts. The case concerned the issue of whether the acceptance of a call for tenders for a construction job could constitute a binding contract. The Court held that indeed in many cases the submission of an offer in response to a call for tenders constitutes a contract separate from the eventual contract for the construction. With the release of the decision, the tendering process practiced in Canada was fundamentally changed.

<i>Caloil Inc v Canada (AG)</i> Supreme Court of Canada case

Caloil Inc v Canada (AG) is a leading constitutional decision of the Supreme Court of Canada on the Trade and Commerce power under section 91(2) of the Constitution Act, 1867. The Court upheld a federal law prohibiting the transport or sale of imported oil in a certain region of Ontario.

<i>Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd</i> Supreme Court of Canada case

Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd, [1999] 3 SCR 108 is a leading Supreme Court of Canada decision where the court re-affirmed and expanded on the exception to the doctrine of privity first established in London Drugs Ltd v Kuehne & Nagel International Ltd, [1992] SCR 299.

<i>Central Trust Co v Rafuse</i> Supreme Court of Canada case

Central Trust Co v Rafuse, [1986] 2 SCR 147 is a leading decision of the Supreme Court of Canada on liability of solicitors in negligence and breach of contract as well as the doctrine of discoverability under the statute of limitations.

United Food and Commercial Workers, Local 1518 v KMart Canada Ltd, [1999] 2 S.C.R. 1083 is a leading Supreme Court of Canada (SCC) decision on freedom of expression under section 2(b) of the Canadian Charter of Rights and Freedoms. The Court struck down a provision in the Labour Relations Code of British Columbia, which prohibited strikers from distributing fliers outside of their primary picketing area.

<i>R v Mapara</i> Supreme Court of Canada case

R v Mapara, 2005 1 S.C.R. 358, 2005 SCC 23, was a decision by the Supreme Court of Canada on criminal conspiracy.

The table below lists the reasons delivered from the bench by the Supreme Court of Canada during 2001. The table illustrates what reasons were filed by each justice in each case, and which justices joined each reason. This list, however, does not include decisions on motions.

<i>Nova Scotia (AG) v Walsh</i> Supreme Court of Canada case

Nova Scotia (AG) v Walsh, [2002] 4 S.C.R. 325 was a leading case decided by the Supreme Court of Canada on section 15 of the Canadian Charter of Rights and Freedoms and matrimonial property. The Court held that the Nova Scotia Matrimonial Property Act, which excluded unmarried cohabitating couples, was not in violation of the section 15 equality guarantee.

<i>R v Harbottle</i> Supreme Court of Canada case

R v Harbottle, [1993] 3 SCR 306 is a Canadian criminal law case decided by the Supreme Court of Canada on the standard of causation required in order for an accused to be convicted of first degree murder under section 231(5) of the Criminal Code. The Court held that the standard for this provision must be strict requiring a "substantial and integral cause". On the facts, the Court found that Harbottle's conduct in holding the victim's legs while she was strangled to death was sufficient to be a substantial and integral cause. This standard does not apply to all first degree murder, where the standard articulated in R v Nette applies.

<i>Lavoie v Canada</i> Supreme Court of Canada case

Lavoie v Canada, [2002] 1 SCR 769, 2002 SCC 23 is a leading decision of the Supreme Court of Canada on whether preference on basis of citizenship infringed equality guarantee under section 15(1) of the Canadian Charter of Rights and Freedoms. The Court found that the federal Public Service Employment Act (PSEA), which gave preference to citizens when referring to departments, was discriminatory. The violation was saved under section 1 of the Charter as a reasonable limitation on equality rights.

<i>R v Khelawon</i> Supreme Court of Canada case

R v Khelawon, 2006 SCC 57 is a leading decision by the Supreme Court of Canada on the principled approach to hearsay evidence.

<i>R v Rahey</i> Supreme Court of Canada case

R v Rahey, [1987] 1 S.C.R. 588 is a leading constitutional decision of the Supreme Court of Canada. The accused challenged a delay of over eleven months on an application for a directed verdict as violation of the right to a trial within a reasonable time under section 11(b) of the Charter. The Court found that there was a violation of section 11(b) and granted a stay of proceedings.

<i>Canada Trustco Mortgage Co v Canada</i> Supreme Court of Canada case

Canada Trustco Mortgage Co v Canada, is a significant case of the Supreme Court of Canada on the intersection of the Income Tax Act and the Bills of Exchange Act and the ability to seize funds that have been deposited by a debtor into an account held at a financial institution in Canada.

<i>Canada v GlaxoSmithKline Inc</i> Supreme Court of Canada case

Canada v GlaxoSmithKline Inc is the first ruling of the Supreme Court of Canada that deals with issues involving transfer pricing and how they are treated under the Income Tax Act of Canada ("ITA").

<i>Daishowa-Marubeni International Ltd v Canada</i> Supreme Court of Canada case

Daishowa-Marubeni International Ltd v Canada is a significant case of the Supreme Court of Canada concerning the application of Canadian income tax law, as well as the purposive interpretation of statutes.

References

  1. ↑ SCC Case Information - Docket 33283 Supreme Court of Canada
  2. ↑ Full text of Supreme Court of Canada decision available at LexUM and CanLII A complete chronology of the transactions and series of transactions is given in Schedule A.
  3. ↑ Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601 Full text of Supreme Court of Canada decision available at LexUM and CanLII
  4. ↑ Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3 Full text of Supreme Court of Canada decision available at LexUM and CanLII
  5. ↑ Ed Kroft, Deborah Toaze. "Copthorne: Supreme Court of Canada's Latest Views on Statutory Interpretation and GAAR". Blake, Cassels & Graydon. Archived from the original on 2012-11-03. Retrieved 2011-12-20.
  6. ↑ Nigel Johnston; Gabrielle M.R. Richards; Brandon Siegal. "Bad News for Aggressive Taxpayers — Canada Revenue Agency Wins Another GAAR Case". McCarthy Tétrault . Retrieved 2011-12-20.
  7. ↑ Drew Hasselback (2011-12-16). "Supreme Court clamps down on use of tax loopholes". Financial Post . Retrieved 2011-12-20.
  8. ↑ Ontario (Attorney General) v. Fraser, 2011 SCC 20 at paras. 56–57, [2011] 2 SCR 3, per McLachlin C.J. and LeBel J.
  9. ↑ Fraser, at para. 60
  10. ↑ Fournier, Olivier (2012). "The SCC's Framework for Reversing Its Precedents". Canadian Tax Focus. 2 (1). Canadian Tax Foundation: 7–8. Retrieved 24 October 2012.
  11. ↑ "The latest on GAAR: Supreme Court of Canada releases decision in Copthorne Holdings Ltd." (PDF). Ernst & Young Tax Alert - Canada. 2011-12-22. Archived from the original (PDF) on 2012-07-20. Retrieved 2011-12-22.

Full text of Supreme Court of Canada decision available at LexUM and CanLII

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.