In Nicole L. Tiessen Interior Design LTD. v Canada (2021 TCC 29), the Tax Court of Canada (“TCC”) found that 30 corporations were deemed to be associated with each other under the anti-avoidance rule in s. 256(2.1) of the federal Income Tax Act (the “Act”). Each corporation had been formed in the course of a reorganization which the TCC ruled was designed to reduce tax by multiplying the small business deduction.
Prior to the reorganization, the taxpayers’ architecture and interior design business was run through one main corporation with 15 shareholders. After the reorganization, the business was run through a partnership with 30 corporate partners, organized into 15 pairs. Each pair was comprised of a Partnerco and Serviceco, both controlled by one of the former shareholders. The pairs of companies all claimed the small business deduction on the basis that, although Partnerco and Serviceco within each pair were associated corporations, the pairs controlled by different shareholders were not associated. Effectively, the group went from claiming one small business deduction to claiming 15.
The TCC found that s. 256(2.1) of the Act applied to deem all 30 corporations to be associated with each other because one of the main reasons for the reorganization, and for the separate existence of the 15 pairs of corporations, was the reduction of taxes by multiplying the small business deduction. The taxpayers appealed that decision to the Federal Court of Appeal (“FCA”).
On appeal, the taxpayers challenged the Tax Court’s application of subsection 256(2.1), arguing that: (i) the Court should have considered the purpose of the separate existence of two or more corporations, rather than the reorganization as a whole; and (ii) s. 256(2.1) requires that the purpose of each appellant be separately considered, rather than all corporations together.
The FCA declined to address those arguments in its decision (2022 FCA 53). Neither argument had been raised before the Tax Court and both required “an inquiry that is factually and legally different from the inquiry before the Tax Court”, where the focus had been on the purpose of the reorganization as a whole. Had the issue been raised in the Tax Court, the evidence and factual findings may have been different so it would be prejudicial to the Crown for the FCA to consider the Appellants’ new arguments at this stage. On that basis, the FCA dismissed the appeal without discussing the merits of the appellant’s arguments.