3295940 Canada Inc.: FCA overturns TCC GAAR ruling

  • 15 mai 2024
  • Danielle Karlin

In 3295940 (2024 FCA 42; rev’g 2022 TCC 68) (“3295”), the FCA provides welcome guidance on the court’s application of the General Anti-Avoidance Rule (the “GAAR”) in section 245 of the Income Tax Act (Canada) (the “Act”). 3295 is one of the few GAAR cases that has been decided in favour of the taxpayer after a long string of decisions following the Supreme Court of Canada’s decision in Deans Knight (2023 SCC 16).

Analysis

3295 involved a series of transactions to utilize the high adjusted cost base (“ACB”) of Micsau’s shares in 3295. 3295 was a minority shareholder in the target company (“Holdings”). The shares of Holdings had a low ACB. The majority shareholder of Holdings (“RoundTable”) negotiated the terms of the sale of Holdings without input from Micsau or 3295 and did not involve the purchase of 3295’s shares in Holdings.

Micsau intended to simply sell the shares of 3295 outright to the purchaser, however, due to business considerations, the purchaser was unwilling to directly or indirectly own the shares of 3295. Micsau wanted to utilize the high ACB of 3295’s shares and therefore, proposed four alternative transactions to RoundTable that would replicate the tax consequences of selling the shares of 3295 directly to the purchaser. RoundTable only presented one of the alternative transactions to the purchaser, which was further altered and ultimately accepted for a purchase price reduction of $1.5 million.