Copthorne Holdings Ltd v Canada: “Series of Transactions” Under the GAAR

A fundamental tenet of Canadian tax law, as stated in Commissioners of Inland Revenue v Duke of Westminster, [1936] AC 1 (HL), is that a taxpayer is entitled to make any lawful arrangement that he or she sees fit in order to reduce his or her liability to tax. The General Anti-Avoidance Rule (“GAAR”), at section 245 of Canada’s Income Tax Act, RSC 1985, c 1 (5th Supp), has greatly confused this once-clear principle. While “tax evasion” is the general term for efforts to not pay taxes by illegal means, what is known as “tax avoidance” is the otherwise not illegal navigation of the tax regime to reduce tax payable.

Legal Background

The GAAR, as its name would suggest, stands as a general damper on the latter. The rule entails that, even if one follows to the letter the (other) rules as laid out, the government may feel fit to disregard such compliance and levy the tax that it deems would otherwise have been payable had such (other) rules not been taken advantage of. Specifically, the benefit of a tax avoidance transaction may be denied if, pursuant to s. 245(4), the transaction constitutes a “misuse” or “abuse” of the tax-related provisions it utilized.

Noted tax law scholar Vern Krishna related the gist of general anti-avoidance legislation at a recent lecture competition:

The law allows you to do something. You do it according to the law, and take advantage of the law, and then somebody says, “No… that was not very nice. You went too far.” And you say, “How far is ‘too far’?” And [they] say, “Well, we’ll tell you when we find out.” (Laughter.) But you say, “I need to know, because I need to plan in advance!” And they say, “No, you’ll find out in the fullness of time.” (Laughter.)

Thus, general fairness concerns of uncertainty, unpredictability, and retroactivity arise. Furthermore, having to do with but a property interest, general anti-avoidance legislation is not subject to Charter scrutiny under s. 7. As expected, the courts are left to divine the meaning of “misuse” and “abuse” under s. 245(4), demarcating the line between valid and non-valid arrangements of financial affairs.

Facts and TCC Decision

This brings us to Copthorne Holdings Ltd v Canada, 2009 FCA 163, the latest tax avoidance case that the Supreme Court of Canada is set to hear. Granted leave to appeal on January 28, Copthorne Holdings concerns a series of avoidance transactions in the corporate context. Involved in a dizzying corporate web is a group of interrelated companies owned by the family of Hong Kong businessman Li Ka-Shing (“the Li group”). Unravelling this web, the pertinent facts, as best as I can understand, are as follows:

  • 1991: The Li group invests $96.7m in its corporation, VHHC Investments Inc. (“VHHC Investments”). VHHC Investments invests $67.4m of that amount in a subsidiary, VHHC Holdings Ltd. (“VHHC Holdings”). At the end of the year, the issued shares of VHHC Investments and VHHC Holdings thus have paid-up capital (“PUC”) amounts of $96.7m and $67.4m respectively.
  • 1992: VHHC Holdings is transferred from VHHC Investments to another Li group company, Copthorne Holdings Ltd. (“Copthorne I”). VHHC Holdings realizes a capital loss.
  • 1993: The decision is made to amalgamate VHHC Holdings and Copthorne I. Since VHHC Holdings is Copthorne I’s subsidiary, such a vertical amalgamation would result in the intercorporate elimination of VHHC Holding’s PUC. VHHC Holdings is instead transferred to Copthorne I’s parent corporation for its nominal fair market value (“the 1993 Share Sale”), making VHHC Holdings and Copthorne I sister corporations prior to amalgamating to form Copthorne Holdings Ltd. (“Copthorne II”), thereby preserving VHHC Holdings’ $67.4m as part of Copthorne II’s aggregate PUC.
  • 1994: In response to the announcement of proposals to amend foreign accrual property income (“FAPI”) provisions of the Income Tax Act, the Li group decides to undertake a corporate reorganization. Copthorne II as well as VHHC Investments are transferred to L.F. Investments (Barbados) Ltd. (“L.F. Investments”).
  • 1995: Copthorne II and VHHC Investments are amalgamated to form Copthorne Holdings Ltd. (“Copthorne III”). Copthorne III’s PUC is roughly $164.1m, consisting of the $96.7m PUC of VHHC Investments and the preserved $67.4m of VHHC Holdings, the PUC of all other parties to these successive amalgamations being nominal. Following this amalgamation, Copthorne III redeems a number of shares from its parent, LF Investments (“the 1995 Redemption”). Since the redemption price of each share was equal to its PUC, the redemption did not give rise to taxable income in the form of a deemed dividend pursuant to s. 84(3) of the ITA. Accordingly, Copthorne III did not withhold or remit tax on behalf of L.F. Investments in respect of the redemption proceeds.

The Minister of Finance, applying the GAAR, determined that a deemed dividend had in fact arisen on the 1995 Redemption, for which withholding tax was due on the part of Copthorne III. The 1993 Share Sale was determined to be the avoidance transaction, though the tax benefit of it was not realized until the later 1995 Redemption. Since the GAAR applies not only to a “transaction” pursuant to s. 245(3)(a) but also to a “series of transactions” pursuant to s. 245(3)(b), the tax benefit that arose from 1993 Share Sale and 1995 Redemption was open to be denied if the two transactions were found to constitute a series thereof and furthermore were found to be abusive per the statute and related case law. The Tax Court of Canada, agreeing with the Minister’s tax assessment, explained the abusiveness of the transactions and the deemed dividend that should have otherwise arisen:

25     … [T]he calculation of PUC resulted in the very blatant advantage of a “double counting” in the amount of $67[.4m]. None of the provisions in the Act ever intended that an artificial inflation of PUC be preserved for a subsequent return of such an increase to shareholders on a tax-free basis. I am dealing with a total PUC of $164[.1m] belonging to Copthorne III … The origin of this amount is made up of $96[.7m] PUC originally belonging to VHHC Investments and $67[.4m] PUC belonging to Copthorne II. However the $67[.4m] is easily traced to the initial investment made by VHHC Investments in VHHC Holdings. This PUC was preserved by the 1993 Share Sale and maintained throughout the First and Second Amalgamations. This means that the $67[.4m] PUC is part and parcel of or is derived from the $96[.7m] PUC. To permit transactions that produce an aggregate of these two amounts creates a double counting of PUC in the amount of $67[.4m]. …

74     … When VHHC Investments is later amalgamated with Copthorne II, the underlying principles respecting the calculation of PUC are offended because approximately $67 million of PUC is essentially double counted in the PUC of the newly amalgamated corporation. It is this double counting that circumvents the proper application of the relevant provisions in a manner that frustrates and defeats the object, spirit and purpose of those provisions, which individually, together and when read in conjunction with other provisions in the Act, are meant to operate to prevent the artificial increase of PUC on amalgamation and its subsequent return to shareholders on a tax-free basis.

The FCA Decision

At issue on appeal to the Federal Court of Appeal was the precise definition of a “series of transactions.” Where s. 245(3)(b) makes “series[‘] of transactions” subject to the GAAR, s. 248(10) helps to set out and broaden the definition of a “series” beyond the common law definition: a “series [of transactions or events] shall be deemed to include any related transactions or events completed in contemplation of the series.”

The proper interpretation of s. 248(10), specifically the words “completed in contemplation of the series”, was the question of law on appeal. Justice Ryer, for the unanimous Federal Court of Appeal, reviewed the case law on which the Tax Court of Canada based its decision:

40     Subsection 248(10) was interpreted by Rothstein J.A. in [OSFC Holdings Ltd. v. Her Majesty the Queen, 2001 FCA 260 (“OSFC“)] (at paragraph 36). There, he stated:

… Subsection 248(10) does not require that the related transaction be pre-ordained. Nor does it say when the related transaction must be completed. As long as the transaction has some connection with the common law series, it will, if it was completed in contemplation of the common law series, be included in the series by reason of the deeming effect of subsection 248(10). Whether the related transaction is completed in contemplation of the common law series requires an assessment of whether the parties to the transaction knew of the common law series, such that it could be said that they took it into account when deciding to complete the transaction. If so, the transaction can be said to be completed in contemplation of the common law series. [Emphasis added]

41     The Supreme Court of Canada approved and elaborated upon Justice Rothstein’s interpretation of subsection 248(10). At paragraph 26 of [Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 (“Canada Trustco“)], McLachlin C.J. and Major J. stated:

26     Section 248(10) extends the meaning of “series of transactions” to include “related transactions or events completed in contemplation of the series”. The Federal Court of Appeal held, at para. 36 of OSFC, that this occurs where the parties to the transaction “knew of the … series, such that it could be said that they took it into account when deciding to complete the transaction”. We would elaborate that “in contemplation” is read not in the sense of actual knowledge but in the broader sense of “because of” or “in relation to” the series. {…}

Copthorne Holding’s objection to the Tax Court’s ruling and argument before the Federal Court of Appeal:

43     The appellant contends that a close [causal] connection is required. … [T]he appellant argues that there is no causal connection between the [1993 Share Sale] and the 1995 Redemption, in the sense that the latter event was caused by the Proposed FAPI Amendments and therefore could not have been caused by the [1993 Share Sale] in which the PUC preservation transaction occurred. … [A]ny causal connection that might otherwise have existed between the [1993 Share Sale] and the 1995 Redemption was … broken by the Proposed FAPI Amendments.

44     In support of this … the appellant cites a passage from the decision of the Tax Court of Canada in MIL (Investments) S.A. v. The Queen, [2006] 5 C.T.C. 2552 (affirmed on other grounds, 2007 FCA 236). At paragraph 65 … Bell J. stated:

There must be a strong nexus between transactions in order for them to be included in a series of transactions. In broadening the word “contemplation” to be read in the sense of “because of” or “in relation to the series”, the Supreme Court cannot have meant mere possibility, which would include an extreme degree of remoteness. {…} [Emphasis added]

While agreeing that the Supreme Court of Canada’s broadening in Canada Trustco of “in contemplation” did not go so far as to mean “mere possibility”, Ryer J.A. rejected Bell J.’s stricter wording of “strong nexus”. This makes sense, as it would “require an even closer connection between the transaction and the series than was required under the interpretation offered Rothstein J.A. in OFSC.”

Following OFSC and Canada Trustco, and thus affirming the Tax Court in this regard, Ryer J.A. introduced the phrase “motivating factor”:

In my view, if a series is a motivating factor with respect to the completion of a subsequent transaction, the transaction can be said to have been completed “in contemplation of the series” and a direct causal relationship between the series and the transaction, as argued by the appellant, need not be established. In my opinion, this standard is reconcilable with the test as stated in OSFC and as broadened in Canada Trustco. [My underlining.]

Ryer J.A. affirmed the Tax Court’s application of OFSC and Canada Trustco to the facts and conclusion that “the 1995 Redemption formed part of [a s]eries [containing the 1993 Share Sale]”: “the conclusion that the PUC preservation that occurred in the [1993 Share Sale] was … a motivating factor in relation to the completion of the 1995 Redemption, is unassailable.”

In dismissing this appeal, the Federal Court of Appeal also affirmed the Tax Court of Canada’s finding of mixed law and fact that avoidance transactions of corporate PUC preservation, such as conducted here, are abusive within the meaning of the Act and the related case law, offending the principles respecting the calculation of PUC.


In closing, the Court will, having granted leave to appeal in Copthorne, at the very least have to abate whatever uncertainty there is in respect of the corporate tax consequences relating to amalgamations and paid-up capital. More importantly, the Court will have to settle any conflicting trends in the case law arising from a misinterpretation of its jurisprudence (i.e. Canada Trustco) with respect to the concept of a “series of transactions” as set out in the Income Tax Act.

Furthermore, when the Court ultimately settles on an appropriate standard (whether familiar or novel), as part of defining that standard it will have to demonstrate and elaborate on what exactly qualifies that standard. Fairness concerns aside, such jurisprudential wrangling seems an inescapable part of the administrative and judicial burden imposed by general anti-avoidance legislation such as our s. 245.

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