Court of Appeal of Quebec

Agence du revenu du Québec c. Custeau

500-09-027827-187, 500-09-027828-185

Schrager, Sansfaçon, Moore

Appeals from a judgment of the Court of Quebec allowing appeals from tax assessments. Dismissed.

The respondents are shareholders of management corporations, which are themselves shareholders of a corporation that was reorganized between 1997 and 2006. During the reorganization, various share conversion, division, exchange, redemption, and transfer transactions took place that resulted in a change to the capital. The Agence du revenu du Québec (ARQ) considers that the respondents performed a series of transactions that included avoidance transactions, which resulted in a tax benefit constituting an abuse of ss. 517.1 and 570 of the Taxation Act (CQLR, c. I-3). The ARQ assessed them, adding $499,950 to their income for 2006. The trial judge found that the transactions were required by the solidarity fund that financed the corporation, which was having financial difficulties, and that the transactions were therefore not part of any tax planning. The judge held that the respondents adduced sufficient evidence that there was no avoidance transaction. He nevertheless considered the abusiveness of the transactions. Following the rebuttal of the presumption of validity of the assessments, he found that the ARQ had not proved the existence of a clear tax policy, that the tax benefit obtained by the respondents resulted from the alleged avoidance transactions, or that they constituted an abuse of that tax policy. The judge also concluded that there was no abusive tax avoidance within the meaning of Copthorne Holdings Ltd. v. Canada (S.C. Can., 2011-12-16), 2011 SCC 63, SOQUIJ AZ-50813474, 2012EXP-24, J.E. 2012-20, [2011] 3 S.C.R. 721.

The determination of what constitutes a series of transactions of avoidance is a question of fact regarding which there is no reason to intervene in the absence of a palpable and overriding error. In this case, the judge rightly concluded that the transactions that took place were only for a commercial purpose, that is, the survival of the corporation. No one could have predicted in 1998 that the corporation would have sufficient liquidity to redeem the shares in 2005 and 2006. Contrary to the ARQ’s argument, Copthorne Holdings Ltd. does not require the judge to analyse the transactions prospectively and retrospectively. It may be a relevant exercise depending on the particular circumstance of the matter. In 2006, the respondents certainly benefited from a situation created in 1998, but these transactions were of a commercial, not tax, nature. There is no “strong nexus” between the 2006 transactions and those of 1998. Since the dilution of the paid-up capital resulted from the conversion, division, and subscription of shares in 1998, and it was not an avoidance transaction or series of transactions, the general anti-avoidance rule does not apply to the transactions in 2006.

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