Law Times

Page 12 January 29, 2018 • Law Times www.lawtimesnews.com government backed down on converting income to capital gains, known as surplus strip- ping, she doesn't expect the issue has gone away. "I don't think they will give up," she says. Cross says one simple way to tackle the problem would be to return the capital gains inclu- sion rate back to 75 per cent from 50 per cent, thereby lowering the differential between the tax paid on dividends versus capital gains. Whether the government has the appetite to do that remains to be seen. "I don't think we have seen the last of surplus stripping," she says. Lawyers continue to urge the government to rein in its plan in favour of a more comprehensive tax overhaul. Kennedy nots that with U.S. tax reform underway it would be "an opportune time to look at corporate taxation in Canada." "I still have a glimmer of hope that [the politicians] will wake up and say, 'This is stupid,' but they have been pushing so hard, I doubt it," says Juneja. LT to the risks and rewards accru- ing to them under these con- tracts. The intercompany con- tract prices are generally com- parable to those established in comparable contracts between arm's-length parties entered into at that time." Writing in the Tax Manage- ment Transfer Pricing Report Vol. 25, David Hogan and An- dre Oliveira of Richter LLP, not- ed that the Cameco case will "test the sham doctrine and the re- characterization rule to a degree never seen before in Canada." They added that "it's the first time that the government's abil- ity to re-characterize a transac- tion is being tested in court." Nixon says that the case "has far-reaching implications for future transfer pricing cases" and that there is a "significant amount of money at stake." The transfer pricing provi- sions are not that complex on their face, she says. However, she notes that "ap- plying them can be incredibly complex because it involves hy- potheticals. "The court has to look at what arm's-length parties would have done in the particular situation," she says. She also says it's the first tax case to consider the second branch of the Canadian trans- fer pricing rules, under s. 247(2) (b) of the Income Tax Act trans- fer pricing rules. The question is if these two branches are mutually exclusive or if the CRA raises both for the basis of an assessment, she says. "I hope that the court gives some guidance and clarity on the circumstances in which the two branches of the transfer pricing rules apply," she says. "Can the CRA argue both on the same set of facts or are they mutually exclusive?" With a decision expected lat- er this year, lawyers predict the case will be appealed regardless of what Tax Court rules. Oxford Property One of the thornier issues for taxpayers is the general anti- avoidance rule, set out in s. 245 of the Income Tax Act. The section provides that a transaction or series of transac- tions that are attempted purely for tax benefits can be invalidat- ed because they are abusive. Oxford undertook a series of transactions to package real es- tate holdings into a number of limited partnerships using s. 97 of the Income Tax Act, and it paid no tax on those transac- tions. It also used provisions in the ITA to bump up its cost base and later sold the properties to tax- exempt entities. When calculating its taxable capital gains on those sales, it re- lied on the bumped-up adjusted cost base, thereby lowering the amount of tax owed. The CRA concluded the roll- over and bumps were abusive and applied the GAAR to deny the bumps and increase the amount of the taxable capital gain on the sale. Oxford appealed and the judge, analyzing the purpose of various ITA sections, concluded they did not amount to abusive tax avoidance and the GAAR did not apply. That is now under ap- peal. The Tax Court noted there are three stages to a GAAR analysis. First, there must be a tax ben- efit. Second, there must be an ele- ment of avoidance. Third, there must be an abuse of the act. Kennedy notes that it's the third stage on which cases usu- ally turn. There, the onus falls on the government to show abuse. "It should be a fairly high threshold that the minister has to meet. I think what's happening is that the GAAR is being used by some judges essentially as legisla- tive gap filling," she says. However, she says, that "is not what the Supreme Court has said its function is. "I think GAAR is an impor- tant tool and a legitimate tool, but I think it is one that has to be applied rigorously, particularly if we want certainty in tax plan- ning," she says. LT Continued from page 10 Onus is on government to show abuse of act Significant change Continued from page 11 Margaret Nixon says two upcoming rulings on corporate tax cases will be important decisions for lawyers to note. 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