Top 10 need-to-know Canadian income tax cases from 2024

1. Jurisdiction of the Tax Court and Federal Court: Taxpayers beware

Dow Chemical Canada ULC v. Canada, 2024 SCC 23

Iris Technologies Inc. v. Canada, 2024 SCC 24

The Tax Court of Canada has exclusive jurisdiction to determine the correctness of a tax assessment, which involves a non-discretionary determination of a taxpayer's tax liability. The Federal Court has exclusive jurisdiction to review discretionary decisions of the Minister, except where Parliament has expressly provided otherwise.

In Dow Chemical, the Supreme Court of Canada concluded that the Minister's decision to deny a downward transfer pricing adjustment was a discretionary decision and that only the Federal Court had jurisdiction.

In Iris Technologies, the Supreme Court of Canada concluded that the essential nature of the taxpayer's judicial review was an attack on the correctness of the assessment and that only the Tax Court had jurisdiction. While the Federal Court had jurisdiction to deal with the allegation that the Minister acted with an improper purpose, no such facts were alleged in its application.

For more information about this case, please see this McCarthy Tétrault article.

2. No abusive tax avoidance where alternative transactions would have allowed similar tax results

3295940 Canada Inc., 2024 FCA 42

Miscau held shares of generic drug company (Opco) that was to be sold to a third party. Miscau held its share through the taxpayer (3295), a holding company. Since the adjusted cost base of the shares of 3295 was higher than the adjusted cost base of the shares of Opco, Miscau wanted to sell 3295 directly to realize a lower capital gain. The third party was not interested in purchasing 3295. Miscau entered into transactions in order to replicate the lower capital gain it would have realized if it had sold 3295 directly.

The Federal Court of Appeal concluded that a circumvention of subsection 55(2) on a cross-redemption of shares (resulting in the reduction of the capital gain on a subsequent sale) did not result in abusive tax avoidance. Specifically, the Federal Court of Appeal relied on the availability of alternative transactions that would have allowed similar tax results.

The Supreme Court of Canada denied leave to appeal on November 21, 2024.

For more information about this case, please see this McCarthy Tétrault article.

3. Break fees are income as inducement payments

Glencore Canada Corporation v. Canada, 2024 FCA 3

In 1996, Falconbridge Limited (Glencore's predecessor) offered to acquire publicly traded shares of Diamond Fields Resources Inc. The merger agreement provided for a commitment fee of $28 million payable upon entering into the merger agreement and a break fee of $73 million that was not payable unless a competing offer was accepted. A competing offer was accepted, and Falconbridge was paid a non-completion fee (break fee) of $73 million.

The Federal Court of Appeal concluded that: (1) the break fee was not business income under subsection 9(1) because there was no linkage to revenue as it was not in the business of acquiring mines and was linked to acquiring shares; (2) the break fee did not give rise to a capital gain because the terms of the agreement did not provide that the break fee was for the termination of the merger agreement; and (3) the break fee was income from business as an inducement under paragraph 12(1)(x) as it was to entice bidders, even though it was only paid on termination.

The Supreme Court of Canada denied leave to appeal on August 8, 2024.

4. Repo transactions are not shams and are not abusive

Agence du revenue du Québec c. Kone inc., 2024 QCCA 678

The taxpayer borrowed funds to purchase preferred shares of a US-resident affiliate from a Dutch affiliate. The taxpayer also entered into a repurchase agreement whereby the Dutch affiliate would later repurchase those shares. The taxpayer received dividends on the shares, which were fully deductible as they were paid out of the US-resident's exempt surplus. The taxpayer also deducted interest paid on the intercompany debt.

For US tax purposes, the repo transaction was viewed as a loan made by the taxpayer to the Dutch affiliate, secured by the shares. The Quebec Revenue Agency challenged the transactions on the basis of sham and GAAR, alleging that the repo transaction was "equivalent to loans."

The Quebec Court of Appeal confirmed that: (1) based on the contractual obligations, the repo transaction did not result in a sham; and (2) the GAAR did not apply as there was no abusive tax avoidance and that the taxpayer was entitled to choose the financing structure that provided the most favourable tax outcome.

The Quebec Revenue Agency has applied for leave to the Supreme Court of Canada.

For more information about this case, please see this McCarthy Tétrault article.

5. Transactions that resulted in no economic gain were abusive

Magren Holdings Ltd. v. Canada, 2024 FCA 202

The taxpayers were corporations controlled by a Canadian-resident individual, whose RRSP held 58% of the units a publicly traded income fund. The RRSP transferred units of the income fund to a unit trust in exchange for units of the unit trust. The taxpayers acquired the income fund units from the unit trust in consideration for promissory notes. The public transferred their units of the income fund to a new unit trust. The taxpayers acquired the public income fund units for promissory notes. The income fund realized $226 million in capital gains. The income fund distributed all of its assets to the taxpayers as a distribution of capital gains. The units of the income fund were repurchased by the income fund for nominal consideration. As a result, the taxpayers had full cost of their income fund units that were acquired from the RRSP and the new unit trust and the distribution of the capital gains did not reduce the adjusted cost basis of the income fund units.

The Federal Court of Appeal concluded that the purpose of the transactions was to generate an increase in the capital dividend account (CDA), and the taxpayer had no economic gain or loss since the reorganization did not change their economic power. The Court held that the capital loss and CDA provisions were abused because the taxpayer engaged in internal, non-commercial transactions that served no purpose other than to create CDA, which in turn was used to allow dividends to be issued tax-free. Thus, the avoidance transactions resulted in abusive tax avoidance, as the transactions could have been accomplished without the taxpayers' involvement. As a result, the corporations were liable for tax as they paid capital dividends in excess of their capital dividend accounts.

The taxpayer has filed an application for leave to the Supreme Court of Canada.

6. Arears interest starts when a loss carryback request is made, not when the loss carryback is applied

Bank of Nova Scotia v. Canada, 2024 FCA 192

The Minister and the Bank of Nova Scotia reached a settlement on March 13, 2015, for a transfer pricing adjustment of $54.9 million for the 2006 taxation year. One day prior, the Bank of Nova Scotia requested the carryback of a $54 million non-capital loss that arose in the 2008 taxation year to offset the additional income. The Minister assess interest in the amount of $7.9 million, calculating from the balance-due day for the 2006 taxation year to March 12, 2015, the day of the request for the carryback. The Bank of Nova Scotia believed that the interest should be calculated from the balance-due day for the 2006 taxation year to the date of the filing of the 2008 tax return.

The Federal Court of Appeal concluded that the interest starts accruing on the "balance-due day" and interest stops on the date the balance owing is paid. Where a taxpayer reduces its tax payable via a loss carryback, interest can stop accruing on a different date. For the purposes of this case, the date interest stopped was the later of the date on which the taxpayer's return of income for that subsequent year was filed (the filing of the return for 2008) and the date on which the taxpayer requested to take into account the deduction (the request for the carryback), even if it is a result of an adjust adjustment.

Bank of Nova Scotia has filed an application for leave to the Supreme Court of Canada.

For more information about this case, please see this McCarthy Tétrault article.

7. Crown can make new alternative arguments, but cannot increase the assessment

TPine Leasing Capital Corporation v. Canada, 2024 FCA 83

In its 2015 tax return, the taxpayer claimed a deduction for the cost of goods sold (COGS) and a deduction for capital cost allowance (CCA). The Minister reassessed denying a portion of the CCA on the basis that the taxpayer had claimed deductions for both CCA and COGS on the same equipment. The Minister sought to raise a new argument that, if the taxpayer had correctly deducted the CCA, then the taxpayer was not allowed the COGS deduction.

The Federal Court of Appeal concluded that the Minister could raise the new argument (that there was no COGS deduction because the equipment had been retained), even though it was contrary to the factual basis of the primary argument (that no CCA deduction was available because the equipment was sold). However, the Federal Court of Appeal noted that the new argument could not increase the amount for which the taxpayer was assessed.

For more information about this case, please see this McCarthy Tétrault article.

8. Shareholders liable for tax debt of corporations sold

Harvard Properties Inc. v. The King, 2024 TCC 139

The taxpayer was a co-owner of a shopping centre. The co-owners received an offer from Abacus proposing a tax plan involving the sale of the shopping centre to a third party. The tax plan was intended to allow the co-owners to receive a premium on the sale versus the after-tax amount that they would have received had they sold the shopping centre to the third parties and paid the resulting corporate income tax liability. The premium would be funded by Abacus avoiding or eliminating the tax liability created.

The taxpayer incorporated a new corporation (Newco) and transferred its interest in the shopping centre on a tax-deferred basis in exchange for voting and non-voting shares. A subsidiary of Abacus purchased the voting shares of Newco from the taxpayer in exchange for a $7 million promissory note and $0.7 million cash.

Newco sold the shopping centre to a third-party buyer. The Abacus subsidiary repaid the $7 million promissory note by directing Newco to pay the taxpayer from cash from the sale of the shopping centre. Newco increased the stated capital of the non-voting shares by the amount of the increase to the capital dividend account that resulted from the sale of the shopping centre and designated the deemed dividend as a capital dividend. The taxpayer sold the non-voting shares to the Abacus subsidiary for $8.7 million in cash. The intended result was for the tax liability from the sale to remain in Newco, which had no assets to satisfy the liability.

The Tax Court of Canada concluded that the taxpayer was liable under section 160 of the Income Tax Act for taxes owing by the Newco because of the sale of the shopping centre. The taxpayer knowingly received a premium for the sale that was only viable if the purchasers did not pay the tax owed by the subsidiaries resulting from the sale of the shopping centre. As a result, the taxpayer and the subsidiary of Abacus were not dealing at arm's length and section 160 applied. There was also no evidence of the fair market value of the voting and non-voting shares, nor the promissory note.

The taxpayer has appealed to the Federal Court of Appeal.

For more information about this case, please see this McCarthy Tétrault article.

9. Intentional changing CCPC status is not abusive tax avoidance

DAC Investment Holdings Inc. v. The King, 2024 TCC 63

The taxpayer was a Canadian-controlled private corporation (CCPC). In anticipation of the sale of shares of a subsidiary, the taxpayer continued to the British Virgin Islands and was deemed to be incorporated outside of Canada and thus, no longer was a Canadian company and a CCPC. However, the taxpayer remained a Canadian resident as its mind and management was in Canada. The taxpayer sold the shares of the subsidiary and realized a taxable capital gain. As a non-CCPC, the taxpayer was no longer subject to the 10 2/3% refundable tax on aggregate investment income and was entitled to claim the 13% general rate reduction in respect of its income from all sources.

The Tax Court of Canada concluded that the definitions of CCPC and Canadian corporation were not abused as there were specific criteria to be met, as Parliament intended. Parliament chose different taxation regimes for different types of corporations. Thus, the choice to be taxed as a non-CCPC did not abuse the Income Tax Act.

Parliament has subsequently enacted measures to deny the tax benefits realized by the Appellant to similarly situated taxpayers for taxation years ending after April 7, 2022.

The Crown has appealed to the Federal Court of Appeal.

For more information about this case, please see this McCarthy Tétrault article.

10. Solicitor-client privilege does not extend to accountants

Coopers Park Real Estate Development Corporation v. The King, 2024 TCC 122

The Tax Court of Canada ordered a taxpayer to produce documents on the basis that the taxpayer failed to provide adequate evidence to establish that solicitor-client privilege applied. Solicitor-client privilege extends only to communications essential to the solicitor-client relationship, and not to independent tax advice from accounting firms. Legal relationships should be properly documented to help support privilege claims; in this case, the failure of the accounting firm to explicitly only be acting as agent for the client for the purpose of obtaining legal advice caused the documents not to be privileged.

For more information about this case, please see this McCarthy Tétrault article.

To view the original article click here.

Dominic Bédard-Lapointe is partner in the Montreal office of McCarthy Tétrault LLP; Anu Koshal is a partner in the Toronto office of McCarthy Tétrault LLP; Al-Nawaz Nanji is a partner in the Toronto office of McCarthy Tétrault LLP.