[1]

 Further to the Lipson case and the Lanrus case, GAAR is considered to be losing teeth.

Dan White

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Corporate Tax - Canada

Landrus: Specificity Ousts GAAR

Contributed by [2] Borden Ladner Gervais LLP

June 05 2009

On April 16 2009 the Federal Court of Appeal affirmed the decision of the Tax Court of Canada in The Queen v Gary Landrus,[3] (1) holding that the general anti-avoidance rule (GAAR) did not deny the deduction of a ‘terminal loss’ under Section 20(16) of the Income Tax Act.[4] (2)

Landrus involved a reorganization in which two partnerships transferred buildings that had declined substantially in value to a new partnership comprising the same partners. The transfer triggered a terminal loss, which the minister of finance disallowed by invoking the GAAR on the basis that the transactions were abusive. Since the partners had continued to own an interest in the property through the new partnership, they did not realize a ‘true’ loss.

The court took into account the object, spirit and purpose of Section 20(16), the scheme of the ’stop loss’ rules in the Income Tax Act and the overall result of the transactions to conclude that the object, spirit and purpose of Section 20(16) were not frustrated. Therefore, the transactions were not abusive transactions for the purposes of the GAAR, even though they were avoidance transactions.

This case is notable for its use of an ‘overall results’ analysis for the purposes of applying the GAAR based on the Supreme Court of Canada’s decision in Lipson v The Queen.[5] (3) The case also provides guidance on the application of the GAAR in circumstances where the taxpayer, although engaged in an avoidance transaction, will not be considered to have misused or abused the provisions relied upon to claim the tax benefit. In particular, the existence of detailed and carefully crafted specific anti-avoidance provisions in the Income Tax Act may preclude the application of the GAAR to a transaction which falls outside the scope of these rules.

For further information on this topic please contact [6] Elinore J Richardson, [7] Larissa V Tkachenko or [8] Maria Anzola at Borden Ladner Gervais LLP by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email ([9] erichardson@blg.com or [10] ltkachenko@blgcanada.com or [11] manzola@blgcanada.com).