October 07, 2011

Jabin Investments Limited (Appellant) v. Her Majesty the Queen (Respondent)

2001 DTC 1002
Tax Court of Canada
November 15, 2001

(Court File No. 1999-2166(IT)G.)

Deductions — Non-capital losses — General anti-avoidance rule (“GAAR”) — Corporate taxpayer was indebted to the Bank of Montreal (“the Bank”) — The Bank selling the Debt to a holding company (“W720”) which had been incorporated to “park” the Debt, it being under stood by certain of its shareholders and by the taxpayer that the Debt would not be collected but would remain legally enforceable — Purpose of the transaction to avoid the settlement or extinguishment of the Debt, to prevent the application of section 80 of the Act as it then read, and to preserve the taxpayer’s accumulated non-capital losses for future use — In computing its taxable income, taxpayer purporting to deduct certain non-capital losses — Minister denying these deductions, relying on the GAAR provisions of section 245 of the Act — Whether Minister’s position justified — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 80, 245 and 248(10).

As of October 1989, the corporate taxpayer was indebted to the Bank of Montreal (“the Bank”) for $2,278,990 (“the Debt”). On October 17, 1990, the Bank sold the Debt to a holding company, W720, for $50,406. (W720 had been incorporated to “park” the Debt, it being understood by certain of its shareholders and by the taxpayer that the Debt would not be collected but would remain legally enforceable.) The purpose of the transaction was to avoid the settlement or extinguishment of the Debt, to prevent the application of section 80 of the Act as it then read, and to preserve the taxpayer’s accumulated non-capital losses for future use. In computing its taxable income for 1992 and 1993, the taxpayer deducted non-capital losses of $445,037 and $545,695 respectively. The Minister denied these deductions, relying on the GAAR provisions of section 245 of the Act. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was allowed. At issue was whether section 245 of the Act applied to the transfer of the taxpayer’s Debt from the Bank to W720 such that the tax benefit to the taxpayer could be denied. This required an analysis of the principles applicable to section 245 which were set out by the Federal Court of Appeal in OSFC Holdings Limited v. The Queen. From 1972 through 1994, when the major revisions to section 80 of the Act took effect, the policy intended by Parliament was to impose tax consequences where a debt was legally extinguished. Applying the principles in the OSFC case, supra, therefore, the conclusions in the instant case were: (a) that the transfer of the Debt to W720 resulted in a tax benefit, and this was the primary purpose of such transfer; (b) that the “parking” of the Debt avoided the application of section 80, resulting in a nonuse, and hence, not a misuse, of section 80; (c) that the Debt had not been legally extinguished, so that the policy behind the Act with respect to the settlement of debts had not been abused; and (d) that, as a result, the Act had not been abused, so that the GAAR provisions of section 245 were inapplicable. The Minister, therefore, was ordered to reassess accordingly.