Taxpayer’s Attempt at Pleading “Sham” Fails

In a rather bold move, the taxpayer in Coast Capital Savings Credit Union v. Canada (2015 TCC 195) claimed that it was the victim of a “sham” and sought to amend its notice of appeal on a motion before the Tax Court of Canada. The taxpayer believed that such a finding would permit the Court to recharacterize the transactions and allow an appeal on the basis that reassessment should take place in accordance with the recharacterization. The Court did not find in favour of the taxpayer, instead finding that the doctrine of sham can only be claimed by the Minister.

Briefly, the facts were as follows: the taxpayer was the trustee of trusts that were self-directed registered retirement savings plans (“RRSPs”) and registered retirement income funds (“RRIFs”). In the taxpayer’s capacity as trustee, it acquired shares of Canadian corporations from a non-resident person. The Minister of National Revenue considered the shares to be taxable Canadian property of the non-resident person and took the position that the taxpayer, as trustee of the trusts, was a “purchaser” as defined in subsection 116(5) of the Income Tax Act. As a result, the Minister assessed the taxpayer under Part 1 of the Act for an amount of tax equal to 25% of the cost of the shares and further applied penalties under subsection 227(9). The taxpayer sought to amend its notice of appeal (the “Notice”) on the basis that it was in fact a victim of a “sham” RRSP strip, having not known the facts underlying the strip until discoveries took place. The taxpayer argued that if it was found to be the “purchaser” (which it had denied in the Notice), it should be reassessed on the basis that the impugned transactions involving the shares were a sham because the “true intention” of the transaction was to transfer funds into an offshore account for the unfettered use and benefit of the annuitants of the RRSPs and RRIFs. As such, the transaction was designed to deceive the taxpayer. The Minister disagreed and took the position that the sham doctrine had no application because only the Minister could make a sham argument in a tax case. The Court agreed with the Minister after a brief review of the concept of “sham” in Canadian law, concluding from the Supreme Court of Canada’s remarks that “a court will make a finding of ‘sham’ only when it is the Minister who is deceived” (see Stubart Investments Ltd. v. R, [1984] 1 S.C.R. 536).

Upon reviewing this case, some may find it straightforward as it seems only to reaffirm what was already implicit in prior case law. However, looking beyond the printed page, some commentary is nonetheless merited. First, to a certain extent, it was perhaps necessary for the Tax Court to state outright that the sham doctrine is only available to the Minister. The case law proves that Coast Capital is not an isolated incident where a taxpayer has endeavoured to use the sham doctrine to their benefit; indeed, this decision has already been relied on in Mattacchione v. Canada (2015 TCC 283) where another taxpayer also attempted to use the sham doctrine to a similar effect.

Second, while not a direct parallel, one can certainly see the similarity between an attempted use of the sham doctrine and other instances where taxpayers have also tried to use for their own benefit tools designed to aid the Minister. A well-known example is the use of the general anti-avoidance rule (“GAAR”) as a planning tool since it is well established that taxpayers cannot apply the GAAR to themselves when filing returns (see for example, Copthorne Holdings Ltd. v. The Queen, 2007 TCC 481 (aff’d S.C.C.)). Similarly, the CRA has recently expressed disapproval of intentional triggering of subsection 55(2) of the Act in a scenario where surplus in excess of safe income on hand is distributed by a corporation (Question 4 at the Annual National Tax Conference, November 24, 2015).

Finally, while it is expected that Coast Capital will be confirmed on appeal, it will nonetheless be interesting to see the Federal Court of Appeal’s views on the sham argument. As the tax practise ultimately becomes increasingly complex, practitioners will undoubtedly look for new ways of applying the Act. The benefits of creativity will certainly be reaped in many cases, but as this case shows, applying the Minister’s arsenal of tools against her will not always be successful.