The case involved Stubart Investment selling its assets to its sister subsidiary Grover in order to use Grover's tax loss carryforwards to offset the profits from the business. The Minister of National Revenue reassessed Stubart, arguing the transaction was a sham to avoid taxes. The Supreme Court of Canada rejected the sham argument and ruled that Stubart was entitled to structure transactions to minimize its taxes. The Court established a new test that a transaction will only be denied for tax purposes if it constitutes an artificial transaction, is abusive, or violates the spirit and purpose of the Income Tax Act. The decision affirmed a taxpayer's right to reduce its tax liability through appropriate legal means.

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).