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Supreme Court Upholds Tax Avoidance Scheme
(Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54.)
Published in the Transportation 2006 issue of Litigation Notes - View Article
On October 19, the Supreme Court of Canada released its reasons in a tax case of interest to companies involved in equipment leasing, as well as to Canadian taxpayers in general.
Canada Trustco Mortgage Co. (“CTMC”) purchased, with the assistance of a loan from the Royal Bank of Canada, a number of trailers from Transamerica Leasing Inc. for $120 million and then entered into a number of circuitous leasing transactions culminating in the trailers being leased back to the original owner which prepaid the entire lease obligation to an intermediate entity which was ultimately controlled by the Royal Bank. The arrangements were such that there was no real credit risk to CTMC or the Royal Bank.
Meanwhile CTMC claimed a capital cost allowance (“CCA”) of $31,196,700 on the purchased assets. The Minister of National Revenue disallowed the CCA claim on the basis that CTMC had not acquired title to the trailers and that the general anti-avoidance rule (“GAAR”) of the Income Tax Act applied to the transaction.
CTMC appealed the assessment and was successful at all levels of court. The Supreme Court of Canada confirmed the Duke of Westminster principle, namely that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable.
Three requirements must be established to permit the application of the GAAR. There must be (1) a tax benefit, (2) an avoidance transaction and (3) abusive tax avoidance, which occurs when it cannot be reasonably concluded that a tax benefit would not be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer. In this case the first two requirements were made out, but not the third, since the CCA provisions of the Income Tax Act apply to leasing transactions and the taxpayer was entitled to apply them in a manner which resulted in tax savings.