The taxpayer's wife ("Jordanna") borrowed $562,500 from the Bank of Montreal under an interest-bearing demand promissory note in order to purchase some of the shares of a family corporation from the taxpayer for that sum, with the sale proceeds being used by the taxpayer to purchase a family home. The next day, a mortgage loan on the home received from the Bank was used to retire the demand promissory note. The taxpayer did not report a capital gain on the sale of the shares (on the basis that the inter-spousal rollover in subsection 73(1) applied) and included in the computation of his income both the dividends on the shares purchased by Jordanna, and the interest expense incurred by her on the mortgage loan, on the basis that the attribution rules in subsection 74.1(1) applied.
Lebel J. found (at para. 42):
"As ... the purpose of s. 74.1(1) is to prevent spouses from reducing tax by taking advantage of their non arm's length relationship when transferring property between themselves ..., the attribution by operation of s. 74.1(1) that allowed Mr. Lipson to deduct the interest in order to reduce the tax payable on the dividend income from the shares, and other income, which he would not have been able to do were Mrs. Lipson dealing with him at arm's length, qualifies as abusive tax avoidance ... . Indeed, a specific anti-avoidance rule is being used to facilitate abusive tax avoidance.":
Respecting the position of Rothstein, J. who, in his dissenting reasons, stated (at para. 108) that "if there is a specific anti-avoidance rule [such, as here, s. 74.5(11)] that precludes the use of an enabling rule to avoid or reduce tax, then the GAAR will not apply", Lebel J. stated (at para. 45):
"Where the language of and principles flowing from the GAAR apply to a transaction, the court should not refuse to apply it on the ground that a more specific provision - one that both the Minister and the taxpayers considered to be inapplicable throughout the proceedings - might also apply to the transaction."