November 12, 2018
Thibault, Schrager, Hogue
Appeal from a judgment of the Court of Quebec dismissing the appeals from tax assessments. Dismissed.
The appellants are related companies forming part of the Iberville Group controlled by Adams and his family. In the context of a series of transactions resulting in the sale of shopping centres and other immovables by the appellants, the Agence du revenu du Québec (ARQ) applied the general anti-avoidance rule (GAAR) to some of these transactions and reassessed the appellants accordingly. The GAAR was applied to the “Quebec Year-End Shuffle” interprovincial tax planning strategy, which allowed the appellants to avoid the payment of virtually all provincial tax on capital gains realized in Quebec. In addition to the application of the GAAR to capital gains of over $728 million and the recapture of depreciation of over $67 million, the appeal concerns the tax treatment of the sale of certain land and the characterization of expenses incurred for certain construction projects. The appellants admit the existence of a tax benefit and the avoidance transactions but deny that these transactions were abusive. The trial judge found that establishing different year-ends for provincial and federal tax purposes, which allowed the appellants to avoid paying tax in Quebec, was abusive. The transactions had no real commercial purpose. He also found that the transactions were abusive because they were inconsistent with the object and spirit of the allocation rules among the Canadian provinces.
The trial judge did not err in applying the GAAR. The transactions are abusive, as they run contrary to the object and spirit of section 7 of the Taxation Act (CQLR, c. I-3), which defines a company’s fiscal year, to the rollover provisions, and to the rules regarding allocation among the Canadian provinces, which are intended to allocate income among the provinces where a corporation carries on business, not to avoid provincial tax. The British Columbia Court of Appeal erred in Veracity Capital Corporation v. Canada (National Revenue), (B.C.C.A., 2017-01-05), 2017 BCCA 3, SOQUIJ AZ-51354488, when it overturned the judgment of the British Columbia Supreme Court (Veracity Capital Corp. v. R., 2015 BCSC 2278), on which the trial judge relied in finding that the allocation formula must result in 100% of the income being taxed somewhere. Moreover, the judge was correct in finding that the sale of land gave rise to business income, not capital gains. From the outset, this land was acquired as inventory. Finally, the judge did not err in applying Canderel Ltd. v. Canada (S.C. Can., 1998-02-12), SOQUIJ AZ-98111028, J.E. 98-386,  1 S.C.R. 147, and in finding that the expenses incurred for certain construction projects were in the nature of capital, not current expenses.
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