Ultimate magazine theme for WordPress.

Rogers Enterprises (2015) Inc. v The Queen – Canadian Tax Lawyer’s Analysis On The General Anti-Avoidance Rule


Rogers Enterprises (2015) Inc. v The Queen – Canadian Tax Lawyer’s Analysis On The General Anti-Avoidance Rule

16 September 2020

Rotfleisch & Samulovitch P.C.

To print this article, all you need is to be registered or login on Mondaq.com.

Introduction – GAAR and a series of corporate restructure

Edward Samuel Rogers was the president and CEO of Rogers
Communications Inc., a Canadian public corporation. From 1981 to
1991, twelve life insurance policies insuring the life for Mr.
Rogers were issued to RPC Group which included several private
corporations and a family trust. When each insurance policy was
first issued, the policyholder was the beneficiary. After a series
of corporation restructure, CGESR (a member of RPC Group) became
the beneficiary of the policies while ESRL (another member of RPC
Group), that held shares of CGESR through another corporation,
ESRIL 98, became the policy holders of ten policies and paid the
premium. The other two insurance policies were continued to be held
by the family trust. When Mr. Rogers passed away, CGESR received
life insurance proceeds of about 102 million dollars which was
added to its capital dividend account (“CDA”). In 2009,
CGESR paid dividends that was deemed to be capital dividends to
ESRIL 98 by way of s.83(2) election, which then added those
dividends to its CDA.

In August 2015, the Minister of National Revenue relied on
General Anti-Avoidance Rule (“GAAR”) to reassess Roger
Enterprise (2015) Inc. (“RE 2015”) which was the
successor by amalgamation to both CGESR and ESRIL 98, and
determined the dividends paid by CGESR to ESRIL 98 were tax
dividends as opposed to capital dividends.

The Tax Court of Canada allowed the appeal based
on the findings that:

  • There was no tax benefit from the series of reorganization
  • The definition of capital dividend account under s.89(1)
    indicated using the adjusted cost basis (“ACB”) of a life
    insurance policy to a corporate beneficiary as opposed to the
  • There was no misuse or abuse of the tax provision as the series
    of transactions fell within the object, spirit or purpose of the

Tax Court conclusion-There was no tax benefit resulted directly
or indirectly from the series of reorg transactions
The tax court started its analysis on the 1st step of the 3 steps
GAAR analysis process – whether there was a tax benefit arising
from a transaction. Under s.245(1) of the Income Tax Act, “tax
benefits” means a reduction, avoidance or deferral of tax or
other amount payable under this Act or an increase in a refund of
tax or other amount under the Income Tax Act. Despite the argument
by the Canadian tax lawyer for CRA that there were 4 tax benefits
resulted from the transactions, the tax court ruled there was no
tax benefit at all after examining each of them.

A CDA Increase of CGESR and ESRIL 98

With respect to the interpretation of s.245(1), the court
disagreed with the Canada Revenue Agency’s
(“CRA”)’s submission that “an increase in other
amount under the act” constitutes a tax benefit. In its
analysis, the tax court laid out five reasons:

  • Based on the wording of the provision, the word “an”
    or “another” would have appeared before the phrase
    “other amount” if Crown’s position were to be
  • Although the Explanatory Notes released by the Department of
    Finance when GAAR was introduced do not clarify how to read the
    provision, the ejusdem generis rule indicates the wording
    “other amount under the act” is generally referred to as
    interest, penalties and source deductions.
  • In Canada Trustco, the Supreme Court of Canada ruled the phrase
    “other amount” means “something that a particular
    taxpayer has paid, or is required to pay” under the Income Tax
  • CRA’s interpretation is not consistent with the analysis of
    the Income Tax Act.
  • According to Robert Couzin’s article regarding s.245(3) of
    the Income Tax Act, the phrase “other amount under this
    Act” indicates an amount that is refundable.

Reduction in Computation of Income

The Canadian tax lawyer for CRA also argued that a reduction in
the computation of income was a tax benefit. However, the tax court
ruled it was insufficient that there be a reduction in the
computation income to constitute a tax benefit. Furthermore, the
tax court concluded there would still be no reduction in tax even
there was a reduction in income after examining the specific facts
in the case.

Avoidance of Part III tax by ESRIL 98 and Reduction of Part I
tax by its ultimate shareholders

The tax court first analyzed the Part III tax issue and adopted
the comparison approach set out in Copthorne and Canada Trustco by
essentially looking at what a corporation would have done if it did
not stand to gain from the tax benefits. But because it was
difficult to conclude whether ESRIL 98 would reasonably carry out
the alternative based on the facts of the case, the tax court
decided not to agree with the CRA.

Regarding Part I tax reduction by ESRIL 98’s ultimate
shareholders, the tax court cited the Federal Court of Appeal’s
ruling in Wild that the earliest time that CRA can make a
determination is the first taxation year in which the taxpayer
claims a benefit. Due to the fact that the ultimate shareholders
are getting a future reduction, the CRA has to wait till that
happens and cannot tax at this time.

Avoidance of Part III tax by CGESR

To tackle this issue, the tax court applied the alternative
comparison principle identified by Justice Bonner in Canadian
Pacific. Since the CRA’s view was only a theoretical
possibility, the tax court could not support their position.

Restructure transactions fell within the object, spirit or
purpose of the provision

Since Step 2 of the GAAR test was not a major issue in this
case, the tax court then moved to the 3rd step – whether there was
misuse or abuse of the tax provision. At this stage, the tax court
set out its analysis by identifying the applicable principle
– whether a transaction or a series of transaction under
s.245(3) was within the object, spirit or purpose of the
provisions. It then followed the approach set out in Canada Trustco
and Copthorne by analyzing the text, context and purpose of the
reduction provision.

By examining the history of legislation and the effect of
amendment, the tax court concluded that Parliament acted
deliberately and intentionally in describing the adjusted cost
basis of a life insurance policy and the text and purpose of the
relevant provision clearly indicated that in determining the
portion of the life insurance proceeds to be added to the capital
dividend account of the corporate beneficiary in 2008 and 2009
(when reorganization transactions took place), the adjusted cost
basis of a life insurance policy to a corporate beneficiary of the
policy was to be used as opposed to the adjusted cost basis of the
policy to the holder of the policy. CRA also failed to persuade the
tax court that the purpose was inconsistent with text and context
of the provision. Therefore, the tax court ruled there was no
misuse or abuse of the reduction provision by RE 2015

Pro tax tips – carrying out tax planning – Beware the Tax
Trap of GAAR When Carrying out Tax Planning

Although the taxpayer was successful in the case, GAAR is a
formidable tool to counter aggressive tax planning. Whether a taxpayer could
successfully implement a series of transactions to minimize his tax
burden eventually comes down to how offensive those transactions
are. If you are preparing to reorganize your corporations and need tax
planning advice, contact our office to speak with an experienced
Canadian tax lawyer to discuss the potential impact of the tax trap
of GAAR.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


Marginal Tax Rates

Rotfleisch & Samulovitch P.C.

Taxpayers are often confused or unclear about the amount of tax for which they are actually liable.

Corporate Amalgamation

Rotfleisch & Samulovitch P.C.

In this context, the property and liabilities of each amalgamating corporation continue to be the property and liabilities of the new corporation.

Source link