A week before realizing a $119 million capital gain on the disposition of investment property, the taxpayer, which until then was wholly-owned by a Canadian-resident individual (“Ebrahim”), issued voting preference shares to his non-resident children (who thereby acquired de jure control), but not to a resident son. CRA had decided not to take the position that the taxpayer had remained a Canadian-controlled private corporation (CCPC) by virtue of continued de facto control by Ebrahim but that the general anti-avoidance rule (GAAR) should instead be applied. CRA assessed the taxable capital gain on sale, so as to deny the general rate reduction under s. 123.4 and impose refundable tax under s. 123.3, on this basis.
Based on the Crown’s submissions at the hearing of this motion, its position appeared to be that, although Lark was no longer a CCPC because of the de jure control of the non-resident children, there was a GAAR abuse because de facto control was maintained in Canada. However, this position was not reflected in the Reply (both initially and as amended), which instead contained vague references to the integration system and abuse of ss. 123.3 and 123.4, and contained no reference to de facto control.
St-Hilaire J found (at para. 60) that the relevant part of the Reply “may prejudice the fair hearing of the appeal and is an abuse of process” and should be struck – but with leave to the Crown to amend its pleadings.