The taxpayers were private companies controlled by a resident individual (Grenon), whose RRSP held 58% of the units of a publicly traded income fund (“FMO”). They engaged in a series of transactions that were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts (CDAs), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day.
After finding that the transactions were an abuse of the object, spirit and purpose of the capital gain and capital loss provisions in the Act because they entailed recognition and use of a CDA addition without any change in the economic position of the taxpayers, Monaghan JA went on to reject the taxpayers’ argument that it was not a reasonable consequence under s. 245(2) for them to be assessed under Part III at an “arbitrary” rate of 60%, stating (at para. 255):
[W]here the tax benefit is the avoidance of tax, an argument that a reasonable tax consequence does not include liability for the avoided tax is without merit. GAAR does not invite an inquiry into whether the rate of tax payable, once the tax benefit is denied, is reasonable in a quantitative sense.