On October 13, 2017, the Federal Court of Appeal released its decision in Univar Holdco Canada ULC. v. H.M.Q. 2017 FCA 207 (“Univar”), overturning the trial decision at the Tax Court of Canada (2016 TCC 159). The judgment contained several important points as to the analysis and application of the General Anti-Avoidance Rule (“GAAR”), and will undoubtedly be relied upon by taxpayers in the future.
By way of background, a number of transactions were undertaken in the Univar corporate group following the arm’s length acquisition of the group’s Dutch parent. The tax result of these transactions, simply put, was to increase the amount of retained earnings that could be taken out of Canada without incurring Part XIII tax. The taxpayer relied on the exception under subsection 212.1(4) of the Income Tax Act (Canada) (the “Act”) to avoid the deemed dividend that would otherwise arise pursuant to subsection 212.1(1) of the Act. The issue that arose was whether the transactions were subject to the GAAR as “abusive” tax avoidance.
In coming to the decision that there was no abusive tax avoidance, the Federal Court of Appeal reiterated the principle in Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, that the Minister must clearly demonstrate that the transaction is an abuse of the Act and noted that in this case, the burden was not met. The Federal Court of Appeal also made the following observations in its GAAR analysis:
(i) Alternative transactions are a relevant factor in determining whether there has been an abuse of the provisions of the Act.
(ii) Alternative transactions that achieve the same result without triggering any tax are suggestive that the GAAR should not apply; and
(iii) Subsequent amendments to the Act and commentary drafted by the Department of Finance do not necessarily reinforce or confirm that transactions caught by the subsequent amendments are abusive before the amendments are enacted.
With respect to (iii), we would note that this decision comes as a welcome limitation on the impact of future legislative amendments in a GAAR analysis. Given the amendments at issue in Univar were introduced decades after section 212.1 came into force, a finding that these amendments were relevant to the GAAR analysis (as originally held by the trial judge at Tax Court) would have created considerable uncertainty going forward.