FCA Applies GAAR to Loss Transfer by Partnership Allocations
In Canada v. 594710 British Columbia Ltd. (2018 FCA 166; leave sought to appeal to the SCC), the FCA overturned a TCC decision (2016 TCC 288)
and applied GAAR on the basis that the taxpayer abused section 160.
This section is intended to prohibit a person with a tax liability from
avoiding the collection of tax by transferring property to a
non-arm's-length person for inadequate consideration. Although the
situation concerned a partnership loss transaction, the court disposed
of the appeal without commenting on the wider issue of whether there is a
general scheme in the Act against transferring losses, as suggested by
The case involved a partnership structure that consisted of four
Partnercos (incorporated for real estate construction projects) that
were indirectly owned (99.9 percent) by four brothers through individual
Holdcos. The remaining nominal interest belonged to a general
partnership held by one of the brothers. Toward the end of the project,
the members of the partnership were faced with taxable income of close
to $13 million. They attempted to mitigate their tax liability by
bringing into the partnership an unrelated public corporation with
available tax losses and deductions (Nuinsco) just before the
partnership's year-end. Virtually all of the partnership's income for
tax purposes was allocated to Nuinsco. As a consequence of this
transaction, there was no taxable partnership income to allocate to the
individual Holdcos. The CRA's reassessment of one of these Holdcos (the
respondent) on the basis of GAAR was the subject of this litigation.
The FCA ruling was based on whether the object, spirit, or purpose of
section 96 was frustrated within the series of transactions. The court
found that it was:
The result of the series of transactions was that the . . .
family had shifted the entire taxable income from the development to an
unrelated party which had virtually no economic interest or risk, except
for a 10 percent "deal fee." I agree with the Crown that this defeats
the object, spirit or purpose of subsection 96(1) and therefore there is
an avoidance transaction that is abusive. [Paragraph 71]
Further, there was no common business interest toward profit when
Nuinsco entered the partnership. This defeated the spirit and object of
section 96 since the allocation of the income was skewed to Nuinsco,
which had no common business interest with the partners; the only intent
was to avoid a tax liability. Such a requirement for common interest
was highlighted in an earlier SCC judgment: Mathew v. Canada (2005 SCC 55).
As a result, the FCA concluded that the application of GAAR to
Partnerco resulted in Partnerco being allocated a portion of the
partnership's taxable income, and therefore to have a tax liability for
the purpose of section 160.
The series of transactions also caused a transfer of cash from Partnerco
to Holdco without consideration (through a combination of a stock
dividend and redemption). Thus, by the creation of a deemed year-end in
Partnerco after a transfer of property but before the tax liability was
incurred, the application of section 160 was circumvented. Together,
these actions showed a tax benefit, an avoidance transaction, and an
abuse of section 160—accordingly, GAAR applies to Holdco.
An interesting aspect of this particular FCA ruling is the lack of
reliance on a specific provision within the Act regarding loss trading
or profit trading. (This issue was part of the basis for the TCC ruling
in favour of the taxpayer.) Rather, the FCA concluded that the object,
spirit, or purpose of subsection 96(1) was frustrated, which led through
a chain of analysis to the application of GAAR on the basis of an abuse
of section 160.
MNP LLP, Montreal