Principal Questions: What is the CRA's position with respect to the D&D Livestock decision?
Position: CRA will apply subsection 245(2) in similar files.
Reasons: The three requirements stated by the Supreme Court of Canada in Canada Trustco v. Canada, 2005 DTC 5523 (S.C.C.) for the GAAR to apply are satisfied.
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
2014 APFF CONFERENCE
Question 20
D & D Livestock
The Tax Court of Canada (the "TCC") in D & D Livestock Ltd v. The Queen (2013 TCC 318) confirmed that the taxpayer could take into account twice the amount of "safe income" available under subsection 55(2), thereby allowing the taxpayer to reduce the amount of tax on sale of the corporation. The TCC acknowledged that the double utilization of safe income frustrated the purpose of subsection 55(2). However, according to the explicit wording of that provision, and given that the CRA did not invoke the general anti-avoidance rule in subsection 245(2) ("GAAR"), the TCC allowed the transaction on the basis that it complied with the letter of the law.
Question to the CRA
What is the CRA's position on this issue?
CRA response
As noted in the preamble to the question, subsection 245(2) was not applied in this case. However, the CRA would not hesitate to invoke the GAAR in similar files. Indeed, transactions or series of transactions that are not consistent with the object or spirit of any of the provisions of the Income Tax Act are generally challenged by the CRA on the basis of subsection 245(2). The CRA considers among other things that transactions or series of transactions permitting the double utilization of the same amount of safe income in order to reduce a capital gain realized on an ultimate disposition of shares in the capital stock of a corporation are abusive and are contrary to the purpose of subsection 55(2).
Moreover, Graham J., in paragraphs 27 and 28 of the D & D Livestock decision, emphasized that the transactions in the case resulted in stripping of capital gains.
Furthermore, the CRA is also concerned by planning which can result in an unjustified duplication of fiscal attributes, for example, the duplication of the adjusted cost base of a share, regardless of the fact that the adjusted cost base exists by reason of safe income of a corporation. Similar transaction will be contested by the CRA, as appropriate.
Urszula Chalupa
2014-053467