The Tax Court continues to be unimpressed by clever planning. Brian Arnold thinks that the current generation of tax judges is much more willing to apply the GAAR or other anti-avoidance rules to planning that reduces tax. Mady v R, 2017 TCC 112, is another case that supports his thesis.
In Mady, the wife of an Ontario dentist was a beneficiary with her husband of a trust that held shares in the capital of a hygiene corporation. Apparently, the Royal College’s rules changed so that neither the trust nor the wife could hold the shares. How to split income anyway? The trust distributed some shares to the wife who then gifted the shares to her husband. The husband received dividends on the shares, but the wife reported the dividends on the basis that the attribution rules applied in respect of her gift of shares to her husband.
The CRA reassessed the husband under the anti-avoidance rule in subsection 74.5(11) to include the dividends in his income. The Tax Court upheld the reassessment. In doing so the Court held that, per Lehigh Cement Limited v R, 2014 FCA 103, it was entitled to look at the entire series of transactions leading up to the wife’s transfer of shares in order to infer its purpose even though subsection 74.5(11) refers only to “one of the main reasons for the transfer [emphasis added]”.
In another set of transactions, the taxpayer had undertaken a freeze of his professional corporation and then sold common shares, whose value was supposedly nominal, to his wife and children. They, in turn, sold the shares to an arm’s length purchaser and claimed the capital gain exemption to offset the gain they had realized.
The court decided that the valuation used in the freeze had been much too low so that the dentist realized a large gain in connection with the freeze and subsequent sale of shares to his wife and daughters. It seems that the finding did not necessarily mean that the gain realized by the dentist would, in effect, bump the tax cost of the shares to the wife and daughters. The agreements used for the dentist’s sales of shares to his wife and daughters contained price adjustment clauses. Would the adjustment clauses increase the tax cost of their shares? Or could the sale transactions be treated as gifts instead so that the wife and daughters would be deemed to acquire the shares for a cost equal to the fair market value of the shares? The court refused to rule on these issues because they would not affect the result in the appeal actually before him, and the wife and daughters were not appellants with appeals before him.
Finally, the judge discussed several aspects of the behaviour of the taxpayer that led the judge to decide that gross negligence penalties should not have been applied in respect of the freeze transaction.