Sunday News Roundup 22.11.06: SCC Deans Knight, IFRS greedflation, and more Canadian accounting news

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TORONTO, Nov. 6, 2022 – The taxman may be headed towards a strikeout on just three pitches before the Supreme Court of Canada. In the past year, the Minister has lost two high-profile tax avoidance cases before the Supreme Court of Canada: Alta Energy and Loblaw Financial. This past week, the Supreme Court heard Deans Knight Income Corporation v. His Majesty the King, an appeal of a decision by the Federal Court of Appeal. 

All three cases turn a spotlight on statutory interpretation and tax avoidance in the application of the general anti-avoidance rule (GAAR). In Deans Knight, the case concerns the application of the GAAR to a tax loss monetization arrangement, in which the Minister appealed a Tax Court of Canada decision, and the FCA introduced the concept of “actual control.” 

For some fascinating viewing, you can watch an archived webcast of the Supreme Court hearing, which occurred this past Wednesday, and not only featured lawyers representing Deans Knight and the Crown, but intervenors from Revenue Quebec, Tax Executives Canada, the Attorney General of Ontario, and the Canadian Chamber of Commerce, to give you an idea of the importance of the case. And you can sense the conflicts between the justices in regards to the “toothless” (in the words of tax columnist Allan Lanthier) state of GAAR. 

In response to an answer prompted by a pointed question from the pro-business Justice Côté, at the 12-minute mark Justice Rowe interjects: “If your business is about structuring these transactions, you want the GAAR to cease to have any meaning, because you want to play the game of jigsaw puzzle, to get around the literal meaning and say, ‘Aha, my client gets to save a lot of money, and I get a nice fee.’” 

The whole hearing is filled with gems like these, from Justices Jamal and Kasirer expressing their frustration with the appellant’s argument, from Chief Justice Wagner (who dissented in Alta Energy) saying “I didn’t really get a great answer” and “what you’re saying is we got it wrong during Alta Energy Luxembourg,” during the arguments of the Crown. 

Our prediction? In a split decision, the Supreme Court will shy away from setting precedent and rule in favour of the appellant, by saying the FCA cannot introduce a new business concept and tax terminology. And, like the GAAR cases that preceded it, it is the reponsibility of the government, not the Supreme Court, to fix its own mistakes (which the government has indeed done in recent draft legislation). 

And now, on to the rest of the news from the past week in Canadian accounting. 

Is the buyback tax really a windfall tax?

This past week, the federal government followed the US in announcing a share buyback tax, in conjunction with clean energy tax credits. While Canadians for Tax Fairness supported the idea, some critics called the buyback tax “dumb” and the “epitome of stupidity” that may spur more buybacks in 2024. Others asked when a windfall tax was coming.

The CBC has the most interesting take on the tax: A tax on share buybacks will hit the oil and gas sector. Was that the whole point? That theory was lent some credence with the response from the energy sector: Canada's share buyback tax could backfire, energy sector warns. 

Accounting for Canadian grocery profits

The rising price of a basket of groceries has prompted critics to focus on Canadian grocery store profits amid accusations of “greedflation.” Last Thursday, the Canadian Press interviewed Samantha Taylor, a senior instructor of accounting at Dalhousie's Rowe School of Business, as to whether Loblaw, which has been a particular target of criticism, was profiting from inflation. 

Taylor points out the Internal Financial Reporting Standards (IFRS) allows publicly traded companies to “lump together” operating segments with similar characteristics. So it is impossible to tell whether a company like Loblaw, which sells clothing lines (Joe Fresh) and pharmaceuticals (Shoppers Drug Mart) within some of its grocery stores, is profiting from grocery sales growth.

Like oil and water: Irving empire and taxes

This past week saw some significant investigative reporting done by the CBC into the offshore holdings of the Irving family in the tax haven of Bermuda. It begins with How Irving's Bermuda insurance company piled up millions in offshore tax-free profits and continues with Bye bye, Bermuda? (What we now know — and still don’t know — about the Irvings’ offshore holdings). Indications are that the business empire has since shifted its holdings to other tax havens.

Clawing back at the Cronos case

While Canadian Accountant was the first to make the link between cannabis company Cronos and the recently approved clawback provisions of the SEC, David Milstead at the Globe and Mail did the heavy lifting of investigative reporting into Cronos and the weak enforcement penalties of the Ontario Securities Commission. Milstead points out that the profits of the company's top executives far outstripped the meagre penalties imposed by the SEC and OSC. "For that," writes Milstead, "the regulators deserve little congratulations." And, to our point, presumably those significant bonuses earned on inflated numbers would be clawed back under the Biden Administration's new rules. It's too bad Milstead's column has received just one comment as of our press time. It deserves more eyeballs.

Quick Hits: Articles of Interest

In Cronos enforcement action, is a little bit better than nada? (Globe and Mail)
CRA says T4 slips insufficient proof of income for CRB eligibility and judge agrees (Financial Post)
How do tax brackets work in Canada? We make it make sense (Toronto Star)
Tim Hortons founder spent up to $10M a year subsidizing his luxury Nova Scotia resort (CBC)
Up to 6,000 N.B. taxpayers to save $9 or less from $70 million tax cut package (CBC)
The Accountant Shortage Threatens Capitalism's Future (Bloomberg)
SEC Top Accountant Warns Auditors Are Becoming Less Professional (Bloomberg)
What Really Happens When Emissions Vanish (Bloomberg) 

By Canadian Accountant staff.