After discoveries had been completed for the taxpayer’s appeal of reassessments that applied GAAR to a series of transactions that avoided the application of s. 212.1 and which denied interest on a $300 million borrowing on the basis that it was not used for an income-producing purpose, the Crown sought to amend its pleadings to identify the thin capitalization rules as an alternative argument or basis for disallowing the taxpayer's interest expense and, in this regard, applied GAAR to adjust the tax attributes of the taxpayer's common shares for purposes of the thin capitalization calculation.
Before finding that the post-2016 version of s. 152(9) did not preclude this requested amendment, and allowing it, Yuan J stated (at para. 29):
The Technical Notes [for the 2016 amendments to s. 152(9)] make it clear to me that, aside from overriding the holding from Last that the Minister cannot rely on subsection 152(9) of the Act to make alternative arguments that involve different sources of income, the changes to subsection 152(9) were also made to reflect the government’s view that the issue in an appeal of an assessment is the dollar amount assessed, and to allow the Minister to support a reassessment using the broadest range of possible alternative approaches, subject to the express limitations set out in paragraphs 152(9)(a) and (b), provided that the amount payable under the reassessment does not increase.
Furthermore, the Crown in its proposed pleadings made it clear that it was only relying on the thin capitalization rules to support the amount of interest expenses that it had already disallowed under the s. 20(1)(c) use rule.
After finding (at para. 40) that “the 2016 amendments … overrode the requirement from prior case law that the tax under the alternative argument had to be derived from the same transaction that produced the originally assessed tax”, he noted that here the alternative bases for denying the interest expense were based on the same transaction being “the borrowing that established the Appellant's obligation to pay the interest expense in the first place” (para. 41). The fact that the thin capitalization argument would have taken additional tax attributes such as paid-up capital into account did not cause there to be a different transaction.
Finally, there was no prejudice to the taxpayer in the Crown being granting the amendment, given the Crown’s concession that an equity injection occurred at the start of a relevant taxation year, even though the taxpayer no longer had possession of the corporate minute books that evidenced that injection.