One of 100 Rulings in Our New GAAR Case Finder
On October 13, 2017, the Federal Court of Appeal (FCA) released its decision in Univar Holdco Canada ULC v. The Queen, 2017 FCA 207 (Univar). The FCA overturned the decision of the Tax Court of Canada (TCC), finding that the general anti-avoidance rule (GAAR) did not apply to a series of transactions that facilitated the extraction of Canadian surplus without payment of withholding tax. Univar is one of approximately 100 rulings included in Tax Foresight’s new GAAR Case Finder. What follows is a summary of the case and an introduction to our Case Finder.
A Brief Summary of Univar
The provision alleged to have been abused: section 212.1
Section 212.1 of the Income Tax Act (ITA) is a specific anti-avoidance provision that prevents a non-resident person from indirectly extracting the accumulated surplus of a Canadian corporation in a non-arm’s length disposition to another Canadian corporation. Generally speaking, it operates by converting a capital gain (which could be exempt from taxation in Canada as a result of a tax treaty) into a deemed dividend (which is subject to withholding tax) to the extent that the amount paid exceeds the PUC of the shares transferred. At the time of the transactions at issue, subsection 212.1(4) provided an exception where the non-resident corporation was controlled by the purchaser corporation immediately before the disposition. The scope of this exception has since been limited—see “Subsequent Legislative Amendments” below.
Arm’s Length Sale of Univar NV and Subsequent Transactions
The transactions at issue took place following the acquisition of Univar NV, a Netherlands public corporation, by CVC Capital Properties (CVC), an arm’s length UK corporation. Univar NV’s corporate group included American and Canadian subsidiaries. One Canadian subsidiary, Univar Canada Ltd. (Univar Canada), had previously accumulated a large surplus. In order to extract this surplus without triggering a dividend under section 212.1, CVC reorganized the corporate group following the acquisition so as to satisfy the conditions of the exception in subsection 212.1(4). As part of the series of transactions, the American shareholder of Univar Canada sold its shares of Univar Canada to newly incorporated Univar Holdco ULC (the taxpayer), which immediately prior to the sale was the owner of the American shareholder.
Sole Issue: Was the Transaction Abusive?
The taxpayer conceded that there was a tax benefit as defined in subsection 245(1) of the ITA and an avoidance transaction as defined in subsection 245(3). The only issue was whether the avoidance transaction was abusive under subsection 245(4). At the TCC, Justice Williams held that the avoidance transaction was abusive. The FCA reversed this ruling in a decision that has important implications regarding the role of subsequent legislative amendments and alternative transactions in a GAAR analysis.
Relevance of Subsequent Legislative Amendments
Section 212.1(4) was amended in 2016 such that the exception relied upon by the taxpayer would no longer be available in the circumstances of the case. The TCC found that the proposed amendments (as they then were) and the supplementary information prepared by the Department of Finance supported the conclusion that the transactions offended the object, spirit and purpose of the ITA. In the FCA’s view, subsequent amendments that would capture a particular tax plan do not necessarily lead to the conclusion that the plan was abusive. Timing was an important factor for the FCA in Univar: the amendments to subsection 212.1(4) were enacted 9 years after the transactions were completed. The FCA found that the transactions were not abusive of section 212.1 as it was written in 2007, nor could the 2016 amendments lead to a finding of abuse.
Relevance of Alternative Transactions
The TCC did not accept the taxpayer’s argument that the same tax benefit could have been achieved using an alternative (and fairly common) structure involving capitalizing a Canadian-resident acquisition entity. In contrast, the FCA considered the alternative transactions presented by the taxpayer to be relevant to the question of abuse. Justice Webb noted that the wording of section 212.1 and the feasibility of the alternative transactions demonstrate a clear distinction between an arm’s length sale of shares and a non-arm’s length sale of shares. This distinction supported the conclusion that section 212.1 was not meant to prevent the removal of a previously accumulated Canadian surplus by an arm’s length purchaser of a Canadian corporation. Whether the transactions included those actually completed or the alternatives, the overall effect would have been the same: the extraction of Univar Canada’s surplus in the context of an arm’s length disposition. Therefore, the FCA held that the transactions did not frustrate the purpose of section 212.1.
Tax Foresight’s GAAR Case Finder
Univar is the most recent of approximately 100 rulings handed down since GAAR’s enactment and included in our GAAR Case Finder, a powerful research tool that allows you to search the entire body of GAAR case law by facts and outcomes, as opposed to keywords or citations. Cases can be filtered using over 20 different “tags” corresponding to relevant factors in a GAAR analysis. You can apply as many search filters as desired to find the cases most similar to the tax scenario at hand. For example, you can select one of 13 common transaction types that raise GAAR concerns, such as loss transfers, partnership utilization, surplus stripping or treaty issues. You can also search for cases by the specific provision numbers considered. Additional features of the Case Finder include relevance bars that allow you to prioritize search filters and links to the full text in Taxnet Pro.
Insights About Univar from the Case Finder
- Univar is the only case in which the Minister has specifically alleged abuse of section 212.1, although this specific anti-avoidance provision has been considered in Canada v. Collins & Aikman Canada Inc., 2010 FCA 251 (GAAR not applied) and RMM Canadian Enterprises Inc. v. The Queen, 1997 CarswellNat 400 (TCC) (GAAR applied).
- Section 212 was alleged and found to have been abused in Lehigh Cement Limited v. The Queen, 2009 TCC 237, but this finding was reversed in 2010 FCA 124.
- There are 14 GAAR rulings involving surplus stripping, three of which also involve a treaty issue.
- There are 10 GAAR rulings involving PUC shifting/creation.
- There are over 20 GAAR rulings in which the tax benefit has been conceded.
- Univar is the first GAAR decision authored by Justice Webb.
- Since January 1, 2016, GAAR has been applied in seven rulings and not applied in five.