Case presentation on Tax avoidance: Stubart Investment v. The Queen

1. Stubart Investment v. The Queen
TAX AVOIDANCE & EVASION
Alexander Shaulov
Personal Tax course

2. ANTI-AVOIDANCE RULE s.245 ITA
• Subs 245(2) where a transaction is an avoidance
transaction, the tax consequences to a person shall
be determined as is reasonable in the circumstances
in order to deny a tax benefit that would result from
that transaction or from a series of transactions that
includes that transaction.

3. ANTI-AVOIDANCE RULE (cont.)
• subs 245(3) as a single transaction or one that is a part of a
series of transactions where the single transaction or the
series results directly or indirectly in a tax benefit, unless the
transaction is carried out primarily for bona fide purposes
other than to obtain the tax benefit.
• Subs. 245(4) where it may reasonably be considered that the
transaction would not result directly or indirectly in a misuse
of the provisions of the Act or an abuse…

4. DEFINITION
• Sham transaction:
• There mast be an element of deceit to create an
illusion that misleads the tax authority away from the
taxpayer.
• Transaction conducted that hides the true nature of
the events occurred to avoid otherwise tax payable.

5. FACTS OF THE CASE
• Stubart’s sister subsidiary Grover incurred considerable
losses that were recognized by and carry-forward in
accordance to ITA.
• Stubart sold its assets to Grover who appointed
Strubart as its agent to carry on business.
• At the end of each 3 fiscal years in question, Stubart
paid the net income realized over to Grover

6. FACTS OF THE CASE (cont.)
• Grover reported that amount in its corporate tax
return.
• MNR reassessed Stubart, set aside the entry
transferring the net income to Grover and charge it
back to Stubart taxable income.

7. TAX & FEDERAL COURT
• Tax Court rejected the appeal on the ground that the
transaction in question was a sham.
• Federal Court rejected the appeal because a clause
in the sale agreement allowed to reverse the
transaction at some future time and the sale was
incomplete.

8. ISSUE
• Whether a corp., with the affirmed purpose of
reducing its taxes, can establish an arrangement
whereby future profits are routed through a sister
subsidiary in order to avail itself of the latter corp.’s
loss carry-forward?

9. SCC DECISION
• It rejected the argument that a transaction may be
disregarded for tax purposes only on the basis that it was
entered into by a taxpayer without an independent or bona
fide business purpose (investors’ incentive).
• Reversibility of a transaction is not one of the elements of test
for sham and does not demonstrate that a transaction was
incomplete. (retail store return policy)

10. SCC DECISION (cont.)
• It affirmed that a taxpayer is entitle to take all appropriate legal
steps to reduce his/her tax liability otherwise the court will be
forced to interpret a taxing statute so as to bar the claim of
entitlement to other benefits explicitly allowed by ITA.
(expenditure to benefit from tax advantage).
• Transfer of profit from the business, was made by Stubart under
a clear, binding legal obligation and the Grover right to apply
the tax loss to the income so received from business was
within “the object and the spirit” of the ITA.
• The Appeal was granted with costs

11. WHY THIS CASE IS IMPORTANT?
• Business purpose test & a broad definition of sham
were overruled.
• Purpose of tax reduction is recognized to be legitimate.
• Parties to a transaction need not be at arm’s length.
• Attack on non-completion has been limited.
• An uncommitted intention to reverse the transaction
at some future time is irrelevant.
• Par. 65 guidance of the court.

12. MY OPINION
• The SCC, with its decision, reasoning and guidance,
clarify the application of s. 245 of ITA.
• There are only 3 elements needed to determine the
applicability of s.245 of the ITA:
1) is the transaction constitute a sham “artificial
transaction”.
2) is it abusive.
3) does it violates the spirit,
objective and purpose
of a provision in question.

13. QUESTIONS…
• Whether the longstanding principal that a person
might order his affairs so as to attract the least tax
liability is still alive in Canada?
• What is benefit under subs. 245(2)?
• Estey J. notes: “…tax advantage is NOT benefit..” as
defined in s. 245(1).