A question that has lingered through the Summer and into the Fall has been answered in the last couple of days. Leave of the Supreme Court of Canada has been sought by the tax authorities to appeal the Federal Court of Appeal's early Summer decision in Cameco. If the Supreme Court grants leave, it will be the third tax case in short succession, with Alta Energy Luxembourg and Loblaw Financial Holdings, to enter their docket.
This Blog post will not engage with the substantive issues arising in or associated with these cases, in keeping with the view that these are "live" cases and it is only respectful that counsel on both sides be able to develop and present their cases as they decide without undue influence by those who are not directly involved.
But, within this self-imposed boundary, there is an obvious question. Why? This question gives rise to a variety of other questions posed by this post. What accounts for this interest of the Supreme Court in tax via these tax cases, which could in short order increase from two to three? After all, tax cases are few in the life of the Supreme Court even over an extended period. Is there an overarching issue of "national interest" that animates all these cases and the Supreme Court's interest in them? Is there an underlying tension or balance in the Canadian tax system captured by these cases which is due for reconsideration?
What do these cases have in common? Substantively, nothing - even though each has an "international" aspect and specific distinctive tax issues that go with it. Alta Energy, is a "treaty case", in the "popular" genre of "treaty shopping", concerning whether and to what extent the GAAR in section 245 of the Income Tax Act may be applied to change the outcome, otherwise, of the application of a tax treaty. Loblaw concerns the significance and scope of the accommodation of "foreign banks" in the Act's "foreign affiliate" regime for earning "exempt" foreign business income. And, Cameco is an intensely factual transfer pricing case that has absorbed considerable government and taxpayer resources already no doubt because it is so factual, focused on the meaning of the "tax avoidance branch" of section 247 of the Act in paragraphs 247(2)(b) and (d). We do not know, of course, if the Supreme Court will accept to hear Cameco.
Only one is a "GAAR case" - at least as such. All, however involve claims by the tax authorities that tax was avoided inappropriately through transactional and organizational means -- by the ways in which transactions were implemented in reliance on typical private law constructions, and by way of related interpretations of the Act or a tax treaty to which the tax authorities evidently take exception. In each of the cases, the tax authorities essentially say that the taxpayer did something that was somehow unnecessary to achieve the desired purely commercial or financial outcome: reorganize the ownership of Canadian property by transferring it to a Luxembourg owner (Alta Energy), include a "foreign bank" within the corporate family of a Canadian grocer (Loblaw), and organize the international procurement, sale, and distribution of uranium outside Canada via a Swiss branch of a Luxembourg entity / a Swiss entity serviced operationally by the Canadian taxpayer (Cameco), in all cases with different tax outcomes than if these events had not taken place. It is important, without traversing the evidence considered by the lower courts in these cases, that what the taxpayers portrayed as their transactional and organizational conduct in their planning was either not disputed or was found by the courts according to the evidence to be what they had done.
So, what might be an issue of "national importance" with tentacled tax implications that would spark the Supreme Court's interest, if there is just one issue. These cases deal with quite distinct regions of Canadian tax law. Is there anything common and fundamental about them, despite distinct "international tax" issues presented by each, which in themselves still may be attracting attention, that reaches to the core of the Act, to the Act's intersection with private law, and on which all of the tax outcomes, different thought they are, depend?
Might history play a role, offer some insight? In the Supreme Court's seminal decision in Stubart Investments over thirty years ago, it was decided that tax planned arrangements did not require a supervening "business purpose". In short, there was no business purpose required to sustain planning to avoid tax. Little time passed before the introduction of the GAAR in the 1987 tax reform. The GAAR does not, however, include a "business purpose test", at least as such. Instead, subsection 245(3) indirectly excuses a "transaction" that entails a"tax benefit" which could be an "avoidance transaction" if it "...may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit." Not a "business purpose test" -- or is it? That was a very "live" question when the GAAR appeared on the Canadian tax landscape in its present incarnation - because of how "avoidance transaction" is defined, although it has over the life of the GAAR receded from view. Even so, though, at least the sense of this question has not disappeared from view and in fact may be said to be systemic and an influential undercurrent. Notably, we have had sort-of "GAAR's" in the Act for a long time, in Section 32A of the Income War Tax Act (late 1930s), Section 138A of the "old" Income Tax Act (1960s), and by way of the composite effect of a suite of pre-GAAR provisions of the post-1971 Act which it was thought the GAAR had made redundant and therefore unnecessary ("old" sections 55, 245, and 247 together with essentially unlimited assessment powers in Section 246 -- the statutory environment, notably, when Stubart came along).
Does the GAAR incorporate, indeed implicitly, or indeed rely for its actual effectiveness in a business context on, what might amount to a "back-door business purpose test"? This is not a new question. The narrow answer for the record, after approximately thirty years of not entirely satisfying the GAAR jurisprudence, has been understood essentially to be "no", not in an affirmative sense. But, in relation to the taxation of business income, if a "purpose" is "bona fide" and "primarily" something else than "to obtain the tax benefit", what is it? How would we label it?
More generally, though, even with a hand-up from the GAAR, in the business context is there an underlying expectation that in fact an animating "business purpose" needs to be established to sustain the effectiveness of a choice among transactional and business organizational legal constructions with equivalent economic effect but different tax outcomes? Or, is this a ripple that could develop into a wave, releasing a sea change for Canadian taxation? This assumes that whatever the planning selection made by taxpayers, the implicit expectations of the chosen courses of conduct as a legal matter would be consonant with taxpayers' actual conduct as an evidentiary matter, informed by and inferred from the intrinsic features of the adopted legal framework. The planning defense would not simply be chanting the popular mantra of Lord Tomlin's famous observation in the Duke of Westminster case, as commonly though possibly not well understood, that more or less formalistic, even mechanical, tax planning is "enough" for defensible tax minimization. In other words is it possible that a business purpose test indeed is latent in the Act despite judicial history and statutory developments that includes a variety of "specific anti-avoidance rules" (SAARs) as well as the GAAR, to the effect that fresh steps taken by taxpayers must somehow, in a business context at least, transform their relevant circumstances in order to have sustainable tax effects?
The question posed here, then, is whether the connection among these different cases, assuming all three would be heard, is whether, indeed, with or without the GAAR and its important "series" aspect, there is a latent general "business purpose" test in Canadian tax law which would justify ignoring the effects of transactions and the participation of their parties which otherwise are effective and enforceable according to the system of law to which tax law is accessory but which are not considered to be "necessary" to achieve an outcome, without asserting "sham" or raising the "corporate veil" or, possibly, contending with the GAAR as such? In fewer words, are we on the cusp of re-litigating Stubart, untethered from the GAAR, to establish, confirm, or affirm, as the case may be (or not, depending on how the Supreme Court sees it), "business purpose" as a general and direct Canadian tax requirement? Is that a possible explanation that connects these cases? Do the "BEPS" ("base erosion and profit shifting") winds blowing in the "international tax" environment that would justify the "accurate delineation" (as now expressed in the transfer pricing world) or more broadly "recharacterization" of transactions presumed otherwise to be legally effective as they have been implemented, by tax authorities as a first step in applying their tax laws? Is a recalibration, in the Canadian tax context, of tax law's generally accepting dependence on the private law, an acceptance that lies at the heart of the OECD's BEPS project as in large part its quiet inspiration, in the works?
Back to the start. Why tax, why now, why so many all at once? Could something be in the offing that is more profound for the scope and texture of the tax system than "just" the resolution of a treaty case, a foreign affiliate case and, maybe, a transfer pricing case?
- Professor Scott Wilkie (Distinguished Professor of Practice, Osgoode Hall Law School)