It is a fundamental principle of Anglo-Canadian law that a taxpayer is entitled to arrange his or her affairs to minimize tax. The frequently decision is the judgment of the
The
Thus, the statement that "every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be" raises the inevitable question: what are the circumstances when the principle does not apply?
Background of Tax Avoidance
Similarly,
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of
However, Canadian courts interpret tax law strictly and literally on the traditional constitutional theory of parliamentary supremacy in tax legislation.
The resilience to change is only partly attributable to the influence of the
The Westminister principle is foundational in Canadian tax law, but subject to contrary provisions in the Act, such as, section 245.2
...this Court has never held that the economic realities of a situation can be used to recharacterize a taxpayer's bona fide legal relationships. To the contrary, we have held that, absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer's legal relationships must be respected in tax cases.
The
The facts in Stubart were simple. The taxpayer, Stubart, was a profitable business. Its sister corporation, Grover, had accumulated losses. Pursuant to amendments in 1951, the Income Tax Act prohibited the consolidation of income from separate corporate operations. To overcome the restriction on consolidation of income, Stubart sold its assets to its sister corporation ("Grover"), which had accumulated large tax losses.
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Concurrent with the agreement of purchase and sale of the assets, Grover appointed Stubart as its agent to carry on the business. Stubart continued to operate the business as usual, but now only as an agent of the sister corporation. At the end of each of the relevant fiscal years, Stubart paid Grover the net income that it realized from the business. Grover, in turn, reported the income in its corporate tax returns for the relevant years. The result was to merge the profits of the profitable business with the losses of the sister corporation. The sole purpose of the transactions was to mitigate taxes through the utilization of tax losses in the sister corporation. The transfer had no other business purpose.
Section 137 of the Income Tax Act (as it read at the time), an anti-tax avoidance provision, provided in part as follows:
"(1) In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income".
However, the Crown failed to plead section 137.
"The Attorney General of
Estey J. in obiter would likely have upheld the assessment under section 137 (at p. 547):
"Clearly the cheque transferring the profit from the appellant to Grover at the end of the year is a disbursement, and it is a disbursement the deduction of which leaves no taxable income in the appellant from the business".
However, the Crown framed its appeal based on the absence of a "genuine business purpose" to the arrangements or the "abuse of rights" principle, which formed part of the taxation principles in the laws of the
The
"I would therefore reject the proposition that a transaction may be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose. A strict business purpose test in certain circumstances would run counter to the apparent legislative intent which, in the modern taxing statutes, [we] may have a dual aspect. Income tax legislation, such as the federal Act in our country, is no longer a simple device to raise revenue to meet the cost of governing the community. Income taxation is also employed by government to attain selected economic policy objectives. Thus, the statute is a mix of fiscal and economic policy. The economic policy element of the Act sometimes takes the form of an inducement to the taxpayer to undertake or redirect a specific activity. Without the inducement offered by the statute, the activity may not be undertaken by the taxpayer for whom the induced action would otherwise have no bona fide business purpose. Thus, by imposing a positive requirement that there be such a bona fide business purpose, a taxpayer might be barred from undertaking the very activity
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Footnotes
1. Inland Revenue Commissioners v. McGuckian [1997] STC 908 (HL).
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