Principales Issues: What is the CRA position regarding the Foix case.
Position Adopted: General comments provided.
Reasons: See below.
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
18. Foix decision and hybrid sales
The application for leave to appeal to the Supreme Court of Canada from the decision of the Federal Court of Appeal in Foix (footnote 1) was dismissed with costs on February 29, 2024. In that decision, the Federal Court of Appeal had concluded that subsection 84(2) applied to a hybrid sale where certain conditions are satisfied.
Question to the CRA
In interpreting and applying subsection 84(2), will CRA apply the principles established in Foix only to facts that are identical to the facts in that decision?
CRA Response
No. The Federal Court of Appeal's comments have a much broader scope and are not limited to situations identical to the facts in Foix in the interpretation and application of subsection 84(2). According to the broad interpretation of subsection 84(2) adopted by the Court, “transactions leading to an alleged distribution or appropriation of funds or property are to be considered as a whole in a way that is temporally flexible” (footnote 2). With respect to the expression "in any manner whatever" in subsection 84(2), the Court noted that “[t]hese far-reaching words are anchored in history as they have always been part of this provision, and they faithfully reflect its anti-avoidance purpose” (footnote 3). Finally, the Court emphasized that when a facilitator is involved, “the distribution or appropriation of the target corporation’s funds or property can be carried out in a variety of different ways and take place through various steps that are organized so as to occur at different times” (footnote 4). It then added that "in the presence of an orchestrated attempt to extract surpluses without tax or at a reduced rate, the intention of Parliament requires a reading of subsection 84(2) that balances the words that are used, as an overly literal reading would defeat its anti-avoidance mission" (footnote 5).
It should also be noted that the Federal Court of Appeal also resolved the uncertainties arising from certain decisions that taxpayers frequently invoked against the application of subsection 84(2), namely McNichol (footnote 6), Descarries (footnote 7) and Robillard (footnote 8). The Court issued an important warning against the formalistic and restrictive application of subsection 84(2) put forward in those decisions.
In addition, it should be noted that the Federal Court of Appeal in Foix did not comment on the Tax Court of Canada's analysis in Geransky (footnote 9), but merely distinguished the two cases to indicate why Geransky was not relevant to its analysis. In fact, the Court noted that, on the basis of the evidence presented, it had been concluded in Geransky that the purchaser, in that case Lafarge, had not acted as a third party facilitator.
It is also important to note that the Geransky decision was handed down by the Tax Court of Canada in 2001. Since then, the Federal Court of Appeal has handed down decisions such as MacDonald (footnote 10) and Foix. It also clearly ruled that subsection 84(2) should be interpreted broadly. In this regard, the Federal Court of Appeal correctly reiterated that each provision of the Income Tax Act must be interpreted according to a textual, contextual and purposive analysis, citing Canada Trustco Mortgage Co. (footnote 11), a decision rendered by the Supreme Court of Canada in 2005 (footnote 12).
It is also appropriate to point out, with respect to the Geransky decision, that the CRA clearly indicated in its response to Question 2 of the Federal Roundtable at the 2002 APFF Conference (footnote 13) that it would continue to apply the GAAR in surplus stripping situations such as McNichol and RMM (footnote 14). Finally, the CRA stated that GAAR would not be applied in situations identical to the Geransky case. Taxpayers should therefore not rely on this document if the facts of their situation are not identical to the facts in the Geransky decision.
Finally, the ITRD has refused since 2007 (footnote 15) to issue favourable advance income tax rulings regarding the non-application of subsection 84(2) in respect of series of transactions that constitute a mechanism for stripping a corporation's surpluses tax-free or at a reduced rate and where all the conditions for the application of subsection 84(2) are satisfied.
In this context, any hybrid sale plan could therefore be analyzed by the CRA to determine whether, in a given situation, all of the conditions for the application of subsection 84(2) are satisfied.
Marc Séguin
October 10, 2024
2024-102735
FOOTNOTES
By reason of the requirements of our system, the footnotes in the original document are reproduced below:
1 Foix v. Canada, 2023 FCA 38 ("Foix").
2. Id., par. 67.
3. Id. at par. 68.
4. Id. at para. 69.
5. Id.
6. McNichol v. Canada, 97 D.T.C. 111 (T.C.C.) (“McNichol”)
7. Descarries et al v. The Queen, 2014 TCC 75
8. Robillard (Succession) v. The Queen, 2022 TCC 13
9. Geransky v. The Queen, 2001 DTC 243 (CCI) ("Geransky").
10. The Queen v. MacDonald, 2013 FCA 110
11. Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54
12. Foix, supra, note 6, par. 77
13. CANADA REVENUE AGENCY, Technical Interpretation 2002-0156695, October 11, 2002.
14. RMM Canadian Enterprises Inc. et al. v. The Queen, 97 D.T.C. 302 (T.C.C.)
15. CANADA REVENUE AGENCY, Technical Interpretation 2007-0224151E5, August 13, 2007.