As we begin a new year and reflect on the last, it seems to me that one of the more interesting tax developments of 2018 was the jurisprudence considering whether a taxpayer has realized a tax benefit within the meaning ascribed by subsection 245(1) of the Income Tax Act (Canada) (the “ITA”).[1] A tax benefit it one of three requirements for the application of the general anti-avoidance rule (“GAAR”) in subsection 245(2).[2] The existence of a tax benefit had only infrequently been disputed by taxpayers,[3] until a number of taxpayers took this tack in 2018.
Subsection 245(1) provides that a tax benefit means, inter alia, “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 this Act.” It is noteworthy that this definition does not include the creation of an attribute that could potentially reduce, avoid, or defer tax in the future.
The distinction between the reduction of tax and the creation of an attribute came to the fore in the Federal Court of Appeal’s decision in Perry Wild v Attorney General of Canada.[4] The facts in Wild are somewhat involved but, for our purposes, the following summary should suffice. Initially Mr. Wild was the sole shareholder of an operating corporation whose shares had nominal paid-up capital (“PUC”). In 2006, Mr. Wild implemented a corporate reorganization the end result of which was that he held shares of a holding company that indirectly wholly owned the operating company. The shares of the holding company had significantly higher PUC than the shares of the operating company even though Mr. Wild had not contributed any additional capital to either corporation.[5] Importantly, Mr. Wild did not use the additional PUC to make a tax free distribution in the year in which the transactions were undertaken or in any subsequent taxation year.
The Tax Court determined that the transactions had abused section 84.1 of the ITA,[6] and upheld the Minister of National Revenue’s notices of determination, which did not impose any additional tax on any taxpayer but did reduce the PUC of the shares of the holding company. The Federal Court of Appeal reversed the Tax Court’s decision on the basis that “the transactions that resulted in the increased PUC of the [shares of the holding company] did not result in a tax benefit.”[7] This decision confirms what is implicit in the definition of tax benefit: the mere creation of a tax attribute is not itself a tax benefit.
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