[1997] 1 F.C. 780
A-259-96
Her Majesty the Queen (Appellant)
v.
Placer Dome Inc. (Respondent)
Indexed as: Canada v. Placer Dome Inc. (C.A.)
Court of Appeal, Strayer, Robertson and McDonald JJ.A.—Toronto, October 7; Ottawa, November 5, 1996.
Income tax — Income calculation — Dividends — Taxpayer disposing of interest in mining company, soliciting bids for shares held — Latter successful bidder, agreeing to pay dividends while acquiring shares — Taxpayer reassessed on basis of Income Tax Act, s. 55(2), purpose of which to prevent “capital gains stripping” — Tax-free intercorporate dividends deemed under s. 55(2) not to be dividends, rather proceeds of disposition of capital property — Whether transaction intended to effect significant reduction in portion of capital gain — Term “purposes” in s. 55(2) to be understood in subjective sense — Words “purpose”, “result” distinguished — Nature of evidence required of taxpayer to discharge onus of establishing inapplicability of s. 55(2) — No tax-avoidance purpose on taxpayer’s part.
This was an appeal from a decision of the Tax Court of Canada involving the interpretation of subsection 55(2) of the Income Tax Act. That provision seeks to prevent what is referred to as “capital gains stripping”. Placer Dome, which owned shares in Falconbridge Inc. and in McIntyre Mines Ltd., decided to dispose of its non-controlling interest in Falconbridge and solicited bids for the shares it held. Falconbridge wished to bid for these shares in order to forestall a competitor from achieving a creeping takeover without paying a control premium to all shareholders but was prohibited by provisions of the Ontario Securities Act from offering to purchase them without making an offer to purchase the shares of all other Falconbridge shareholders. To avoid that requirement, Falconbridge had to obtain an exemption from the Ontario Securities Commission (OSC). With this objective in mind, the company’s vice-president conceived the idea of paying a dividend to all shareholders, including Placer Dome. The OSC granted the exemption and Placer Dome accepted Falconbridge’s offer. Dividends of $4.75 and $11.96 were paid to Placer Dome and all others who had been shareholders of record of Falconbridge and McIntyre, respectively. The amount of the cash dividends was part of the total consideration Placer Dome received on selling its shares. Normally, intercorporate dividends are rendered tax-free under subsection 112(1) of the Act. In this case, however, the Minister reassessed the taxpayer so as to include the total dividend amount of $82,756,115 on the basis of subsection 55(2) which, in certain circumstances, deems dividends to be proceeds of disposition for the shares on which the dividends were received. For subsection 55(2) to be applicable, it must be established that one of the purposes of the transaction was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a sale of the shares at fair market value. The issue on appeal was whether the Tax Court Judge was right in concluding that neither Placer Dome nor Falconbridge possessed the required purpose and that, therefore, subsection 55(2) was not applicable.
Held, the appeal should be dismissed.
There is no uniformity with respect to the criteria used for characterizing tax avoidance, some provisions embracing a “purposes” test, while others require a “reason” or “results” analysis. Where the word “purposes” is used, the question to be addressed is whether that term is to be understood in a subjective as opposed to objective sense. The principal difference between a subjective and objective appreciation of the term “purposes” is that the former extends a personal invitation to the taxpayer to testify as to his state of mind at the time the transaction was carried into effect. In theory, a subjective appreciation could mean that identical transactions carried out by different taxpayers may incur different tax results. Assuming that subsection 55(2) of the Act employs the term “purposes” in its subjective sense, the onus rests on the taxpayer to establish the inapplicability of that provision. Mere denial by a taxpayer that his purpose was to effect a significant reduction in capital gain is not by itself a sufficient basis on which to discharge that burden. It is not necessary that the taxpayer adduce corroborative or additional evidence which shows that his testimony is true. Once it is established that a transaction has the effect of reducing significantly a capital gain, it is proper for the Minister to infer that the taxpayer had such a purpose. To rebut that inference, the taxpayer must offer an explanation which reveals the purposes underlying the transaction. That explanation must establish that none of the purposes was to effect a significant reduction in capital gain. Uncorroborated but credible testimony can be sufficient proof of taxpayer intention. Both the words “purpose” and “result” cannot be interpreted as embracing an objective criterion. The use of the term “purpose” in one context and “result” in another requires that a different meaning be attributed to each that is consistent with their use and context within subsection 55(2). The discussions between Falconbridge and Placer Dome of “safe income” did not establish that one of the purposes of the transaction was to effect a significant reduction in capital gain and could not bring respondent within the ambit of subsection 55(2) of the Act. Cognizance of the fact that respondent was entitled to reduce significantly the capital gain otherwise realizable on the transaction, to the extent that the dividend payment could be attributed to “safe income”, cannot be equated with a tax-avoidance purpose on respondent’s part.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Finance Act, 1960 (U.K.), 1960, c. 44, s. 28(1).
Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 12(1)(j), 55(1) (as rep. by S.C. 1988, c. 55, s. 33), (2),(3),(4),(5), 84(3), 112(1), 138(6).
Income Tax Assessment Act 1936-1973, Austl. Acts P. 1901-1973, ss. 51(1), 260.
Securities Act, R.S.O. 1990, c. S.5.
CASES JUDICIALLY CONSIDERED
APPLIED:
C.P.L. Holdings Ltd. v. Canada, [1995] 1 C.T.C. 447; (1995), 95 DTC 5253 (F.C.T.D.); Commissioners of Inland Revenue v. Brebner (1967), 43 T.C. 705 (H.L.).
DISTINGUISHED:
Newton v. Commissioner of Taxation of Australia, [1958] A.C. 450 (P.C.); Ashton v. Inland Revenue Comr., [1975] 1 W.L.R. 1615 (P.C.); Magna Alloys and Research Pty Ltd v. Federal Commissioner of Taxation (1980), 33 ALR 213 (Fed. C. of A.).
REFERRED TO:
454538 Ontario Ltd. v. M.N.R., [1993] 1 C.T.C. 2746; (1993), 93 DTC 427 (T.C.C.); The Queen v. Covertite Ltd., [1981] CTC 464; (1981), 81 DTC 5353 (F.C.T.D.); McAllister Drilling Ltd. v. Canada, [1994] 2 C.T.C. 211; (1994), 95 DTC 5001; 81 F.T.R. 139 (F.C.T.D.); Bentleys, Stokes & Lowless v. Beeson (1952), 33 T.C. 491 (C.A.).
AUTHORS CITED
Arnold, B. J. et al., eds. Materials on Canadian Income Tax, 10th ed. Scarborough, Ont.: Carswell, 1993.
Jones, J. F. Avery. “Nothing Either Good or Bad, But Thinking Makes It So—The Mental Element in Anti-Avoidance Legislation—I”, [1983] Brit. Tax Rev. 9.
Krishna, Vern. The Fundamentals of Canadian Income Tax, 5th ed. Scarborough, Ont.: Carswell, 1995.
McDonnell, T. E. “Legislative Anti-Avoidance: The Interaction of the New Rule and Representative Specific Rules” in Report of the Proceedings of the Fortieth Tax Conference, 1988 Conference Report. Toronto: Canadian Tax Foundation, 1989.
APPEAL from a decision of the Tax Court of Canada ([1996] 2 C.T.C. 2258) that the taxpayer’s transaction did not effect a significant reduction in the portion of the capital gain that, for the dividend, would have been realized on a sale of the shares at fair market value within the meaning of subsection 55(2) of the Income Tax Act. Appeal dismissed.
COUNSEL:
Max J. Weder and John Shipley for appellant.
Ian H. Pitfield and John R. Owen for respondent.
SOLICITORS:
Deputy Attorney General of Canada for appellant.
Thorsteinssons, Vancouver and Toronto, for respondent.
The following are the reasons for judgment rendered in English by
Robertson J.A.: This is an appeal from a decision of Judge Bell of the Tax Court of Canada [[1996] 2 C.T.C. 2258] involving the interpretation and application of subsection 55(2) of the Income Tax Act [R.S.C., 1985 (5th Suppl.), c. 1] (the Act). As an anti-avoidance provision, subsection 55(2) seeks to prevent the conversion of taxable capital gains into tax-free intercorporate dividends, or what is colloquially referred to as “capital gains stripping”.
The essential facts are that Placer Dome (Placer) decided to dispose of its non-controlling interest in Falconbridge Ltd. (Falconbridge) and solicited bids for the shares it held. Falconbridge was the successful bidder, having agreed to pay dividends of nearly $83 million while acquiring Placer’s shares for approximately $450 million. Normally, intercorporate dividends are rendered tax-free pursuant to subsection 112(1) of the Act. In this case, however, the Minister of National Revenue (the Minister) reassessed Placer on the basis of subsection 55(2) which, in defined circumstances, deems dividends to be proceeds of disposition for the shares on which the dividends were received. It is the deeming effect of subsection 55(2) which converts tax-free dividends into taxable capital gains.
Before subsection 55(2) is applicable it must be established, inter alia, that one of the purposes of the transaction(s) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a sale of the shares at fair market value. The Tax Court Judge concluded that neither Placer nor Falconbridge possessed the required purpose and, therefore, subsection 55(2) is not applicable. In reaching that conclusion the Minister insists that the Tax Court Judge incorrectly applied a subjective rather than an objective test in determining the purpose of the transaction which led to the sale of the Falconbridge shares and payment of dividends. In my respectful opinion, the learned Tax Court Judge did not err. My analysis begins with the legislative framework relevant to the issue at hand.
I. LEGISLATIVE FRAMEWORK
Subsections 55(2) to (5) form a set of anti-avoidance provisions which prevent a Canadian resident shareholder from converting a taxable capital gain on the disposition of shares held in another corporation into a dividend that would not be taxable under Part I of the Act. When subsection 55(2) applies it deems tax-free intercorporate dividends not to be dividends but rather proceeds of disposition of a capital property or, where the shares have not been disposed of, a gain on the disposition of capital property. Subsection 55(2) reads as follows:
55. …
(2) Where a corporation resident in Canada has after April 21, 1980 received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or 138(6) as part of a transaction or event or a series of transactions or events (other than as part of a series of transactions or events that commenced before April 22, 1980), one of the purposes of which (or, in the case of a dividend under subsection 84(3), one of the results of which) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3)(a), notwithstanding any other section of this Act, the amount of the dividend (other than the portion thereof, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series of transactions or events)
(a) shall be deemed not to be a dividend received by the corporation;
(b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and
(c) where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property. [Emphasis added.]
The foregoing provision embraces a number of conditions precedent before it can be deemed applicable. First, the dividend must be received after April 21, 1980. Second, the dividend must have been received by a corporation resident in Canada. Third, the dividend must be one which would be otherwise deductible under either subsection 112(1) or 138(6) of the Act. Fourth, subject to the fifth requirement, the dividend must be received as part of a transaction or series of transactions, one of the purposes of which was to effect a reduction of what otherwise would have been a capital gain. Fifth, if the dividend is deemed to arise under subsection 84(3), then it need only be established that one of the results of the transaction(s) was to effect such a reduction. Sixth, the reduction effected must be a significant one. Seventh, the potential capital gain that is being reduced must be attributable to anything other than income earned by the dividend paying corporation after 1971 and prior to the time of the receipt of the dividend.
While the distinction to be drawn between the use of the term “purposes” and “results” is pivotal to this appeal, the seventh condition precedent requires a brief explanation. It is common ground that subsection 55(2) does not apply to dividends wholly attributable to income earned by Falconbridge after 1971 or what is referred to in tax circles as “safe income”. The amount that can be paid as a dividend without offending subsection 55(2) is colloquially referred to as a “safe dividend” and can be paid to the extent that there is safe income on hand immediately before the dividend is paid. In the event a dividend is not wholly attributable to safe income, paragraph 55(5)(f) effectively permits a taxpayer to separate that portion of the dividend which represents safe income from that which does not, such that the former is unaffected by subsection 55(2). The tax literature reveals that the more problematic aspect of this exception to subsection 55(2) lies in the method of calculating the amount of “safe income”: see generally 454538 Ontario Ltd. v. M.N.R., [1993] 1 C.T.C. 2746 (T.C.C.), at page 2754 and B. J. Arnold, T. Edgar & J. Li, Materials on Canadian Income Tax, 10th ed. (Scarborough, Ont.: Carswell, 1993), at pages 726-727.
II. FACTS
Placer owned shares of Falconbridge, as well as 52.9% of the issued shares in McIntyre Mines Ltd. (McIntyre). In turn, McIntyre held shares in Falconbridge. In effect, Placer held 24.7% of the outstanding share capital in Falconbridge on a fully diluted basis. On May 10, 1988, Placer’s board of directors passed a resolution authorizing the solicitation of bids for the Falconbridge shares held by itself and McIntyre. Placer retained RBC Dominion Securities Inc. (RBC) to solicit interest in and to invite bids for the purchase of the shares in question. On June 16, 1988, RBC issued an invitation to bid for the Falconbridge shares to four companies, including Falconbridge and Noranda Inc., the latter being a competitor of the former.
Falconbridge wanted to participate in the bidding process because it was concerned that the shares would be acquired by Noranda or another bidder, allowing them to effect a creeping takeover of Falconbridge without paying a control premium to all shareholders. Falconbridge was prohibited by provisions of the Ontario Securities Act [R.S.O. 1990, c. S.5] from offering to purchase the Falconbridge interest without making an offer to purchase the shares of all other Falconbridge shareholders (the issuer bid requirements). Because Placer’s interest in Falconbridge represented more than 20% of its issued shares on a fully diluted basis, any purchaser of the Falconbridge shares, other than Falconbridge itself, was prohibited by the Securities Act from offering to pay a price in excess of 115% of the average trading price on the Toronto Stock Exchange over a prescribed period of time, unless that purchaser was prepared to offer to purchase at the same price all other shares of Falconbridge from all other shareholders (the takeover bid requirements). Given these requirements Falconbridge wanted to be able to compete with outside bidders, such as Noranda, who would be able to bid up to 115%, without making a similar offer to all other shareholders.
To avoid the issuer bid requirement that Falconbridge extend any offer to all its shareholders, it required an exemption from the Ontario Securities Commission (OSC). With this objective in mind, Falconbridge’s vice-president and chief financial officer conceived the idea of paying a dividend to all shareholders, including Placer. By paying one or more dividends on all its shares it was felt that all shareholders could partake equally in the control premium with the result that, after the transaction, the amount of dividends paid to and the value of shares of Falconbridge or McIntyre owned by shareholders other than Placer would be approximately equal to the amount of dividends paid to Placer and the purchase price of its Falconbridge shares. The idea of applying to the OSC for an exemption order presented Falconbridge’s management with what it concluded was the only method of proceeding. In a majority decision the OSC granted the exemption.
Both Falconbridge and Noranda submitted offers. On June 30, 1988, Placer accepted Falconbridge’s offer. That offer required Falconbridge to declare a dividend of $4.75 per common share and McIntyre to declare a dividend of $11.96 per share payable to shareholders of McIntyre as of August 15, 1988. On August 22, 1988, dividends of $4.75 and $11.96 were paid to Placer and all others who had been shareholders of record of Falconbridge and McIntyre, respectively. The amount of the cash dividends was part of the total consideration Placer received on selling its shares. Including those dividends, Falconbridge’s offer equalled approximately 118% of the market price of its shares.
In filing its tax return for the 1988 taxation year, Placer reported the amount of $25.75 per Falconbridge share and $64 per McIntyre share as proceeds of disposition of capital property totalling approximately $450 million. Placer also reported the amounts of $59,523,409 and $23,232,706 as dividends to be included in income pursuant to paragraph 12(1)(j) of the Act and deducted these same amounts as required by subsection 112(1). As well, Placer designated the amounts of $4,114,435 and $1,123,945 as separate taxable dividends (relating to safe income) received from Falconbridge and McIntyre respectively, pursuant to subparagraph 55(5)(f)(ii) of the Act. The Minister reassessed the taxpayer so as to include the total dividend amount of $82,756,115 as proceeds of disposition, pursuant to subsection 55(2).
III. DECISION BELOW
At the outset the Tax Court Judge reviewed the testimony of the representatives and advisers of both Placer and Falconbridge. Against this evidentiary background the Tax Court Judge framed the issue in the following terms [at page 2267]:
The next question is whether one of the purposes of the transactions (assuming a transaction can have a purpose) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized by the Appellant on the sale at fair market value of the shares of Falconbridge and McIntyre.
The Tax Court Judge went on to conclude that “neither the [taxpayer] nor Falconbridge had such purpose”. In so concluding he rejected the argument that a person is presumed to intend the material consequences of his actions and that in the present case one of the effects of the transaction was to reduce significantly the amount of the capital gain. In the view of the Tax Court Judge, the fact that a transaction has a certain effect does not lead to the conclusion that one of the purposes of the transaction was the payment or receipt of a tax-free dividend.
The Minister also submitted that in determining whether one of the purposes of the transaction was to effect a significant reduction in capital gain both the vendor’s and purchaser’s perspectives in light of the entire circumstances of the transaction must be analyzed. Accordingly, the Minister argued that Falconbridge recognized and acted on the dividend tax advantage, while Placer was aware of the “safe income” potential. Judge Bell concluded that Falconbridge’s purpose in paying a dividend was to obtain an exemption from the OSC with respect to the need to bid for all its issued shares. In his opinion, the evidence was compelling that Falconbridge had not sought to effect a significant reduction in the capital gain, either alone or in conjunction with Placer. As to Placer’s purpose, Judge Bell concluded that it had not participated in the creation and submission of the Falconbridge bid and that finding alone rendered it impossible to conclude that one of Placer’s purposes was to effect a significant reduction in the capital gain to be realized on the disposition of the Falconbridge and McIntyre shares. As to the purposes underlying the transaction he stated (at page 2268):
There is no suggestion in the evidence of any of the ten witnesses who appeared for [Placer] that the dividend paying idea was conceived for the purpose of reducing capital gain. Those witnesses occupied responsible and professional positions and were, in my estimation, credible. I find that the purpose of Falconbridge was simply and solely to achieve the goal of acquiring its shares and the shares of McIntyre. I find also that [Placer’s] purpose in accepting the “M” bid was to dispose of its shares of those two companies on what it determined to be an acceptable basis.
Finally, the Tax Court Judge held that the discussion of safe income by Placer and Falconbridge, and Placer’s decision to make a separate dividend designation under subparagraph 55(5)(f)(ii) of the Act, had no bearing on the outcome of the case. These actions were regarded as matters that prudent sophisticated taxpayers would consider in the course of a transaction of this nature.
IV. ARGUMENT
The principal argument of counsel for the Minister is premised on the understanding that the meaning of the term “purposes”, as used in subsection 55(2), does not embrace the motivation of each of the participants involved in a series of transactions. In other words, that term is to be understood in an objective, not subjective, sense. For this proposition, the Minister relies principally on an Australian decision, although there are two decisions of the Judicial Committee of the Privy Council which also lend support to the Minister’s argument. It is further argued that a purpose of a dividend is to effect a significant reduction in the capital gain when the dividend is inextricably linked to the disposition of a share. Thus, it is irrelevant whether one or both parties are motivated by tax avoidance considerations. The question is whether the dividend and disposition of the share are inextricably linked where the transaction has the effect of reducing substantially the amount of the capital gain that otherwise would have been realized. Here the Minister seeks to rely on and distinguish an earlier decision rendered in the Trial Division of this Court, namely, C.P.L. Holdings Ltd. v. Canada , [1995] 1 C.T.C. 447. The final submission of the Minister is that the fact that the matter of safe income was recognized as a tax advantage by both parties constitutes evidence that one of the purposes of the transaction was to reduce significantly the taxable capital gain.
Counsel for Placer responds by seizing on the fact that subsection 55(2) provides that in certain circumstances the “purpose” of a transaction will determine whether that subsection applies, while in another (namely, in the case of deemed dividends under subsection 84(3)), the “result” of a transaction will determine whether the provision applies. The use of the word “purpose” in one context and result in another requires that a different meaning be attributed to each word that is consistent with its’ use and context within the provision. Therefore, since Parliament has differentiated between the two terms and because the term result is necessarily objective, the term “purpose” must be applied in its subjective sense.
V. ANALYSIS
Parliament’s attempt to stifle or restrain the legal imagination of tax planners is nowhere more evident than in the sheer number of anti-avoidance rules strategically scattered throughout the Act. Yet, there is no uniformity with respect to the criteria used for characterizing tax avoidance: some provisions embrace a “purposes” test, while others require a “reason” or “results” analysis. Where the terms “purposes” or “reason” are found, they are conditioned by such modifiers as “one of the”, “one of the main”, “the principle”, or simply “the”. Given this diversity of terminology, the question was bound to arise as to whether the term “purpose” is to be understood in a subjective as opposed to objective sense: see generally T. E. McDonnell, “Legislative Anti-Avoidance: The Interaction of the New Rule and Representative Specific Rules” in Report of the Proceedings of the Fortieth Tax Conference, 1988 Conference Report (Toronto: Canadian Tax Foundation, 1989) at page 6:1.
The principal difference between a subjective and objective appreciation of the term “purposes” is that the former extends a personal invitation to the taxpayer to testify as to his or her state of mind at the time the transaction or transactions were carried into effect. In theory, a subjective appreciation could mean that identical transactions carried out by different taxpayers may incur different tax results. However, it must be recognized that in law few things are measured wholly in subjective terms. Let me explain.
Accepting for the moment that subsection 55(2) employs the term “purposes” in its subjective sense, there are three basic propositions relevant to the analysis. First, the onus or burden rests on the taxpayer to establish the inapplicability of subsection 55(2) of the Act. Second, mere denial (without explanation or elaboration) by a taxpayer that his or her purpose was to effect a significant reduction in capital gain is not by itself a sufficient basis on which to discharge that burden. Third, it is not necessary that the taxpayer adduce corroborative or additional evidence which shows or tends to show that his or her testimony is true. On these three points see, respectively, C.P.L. Holdings Ltd. v. Canada, supra; The Queen v. Covertite Ltd., [1981] CTC 464 (F.C.T.D.); and McAllister Drilling Ltd. v. Canada, [1994] 2 C.T.C. 211 (F.C.T.D.).
Practically speaking, it is evident that once it is established that a transaction has the effect of reducing significantly a capital gain it is proper for the Minister to infer that the taxpayer had such a purpose. To rebut that inference the taxpayer (or his advisors) must offer an explanation which reveals the purposes underlying the transaction. That explanation must be neither improbable nor unreasonable. All the while it must be remembered that subsection 55(2) of the Act speaks of “one of the purposes” of the transaction. Consequently, the taxpayer must offer a persuasive explanation that establishes that none of the purposes was to effect a significant reduction in capital gain. It is in this sense that uncorroborated but credible testimony can be sufficient proof of taxpayer intention: see V. Krishna, The Fundamentals of Canadian Income Tax, 5th ed., (Scarborough, Ont.: Carswell, 1995), at page 1391.
More likely than not a taxpayer will seek to bolster his or her explanation by adducing corroborative evidence, as did Placer. While the Tax Court Judge went on to conclude that since Placer had not participated in the creation and structure of the Falconbridge bid and that that finding alone rendered it impossible to conclude one of the purposes of Placer was to effect a significant reduction in capital gain, it remains for future determination whether this reasoning should itself be determinative of the issue. On the facts of this case it was held below that neither party to the transaction had such a purpose, a finding which tends to support the understanding that the purposes of both parties ought to be examined: on this last point see Bentleys, Stokes & Lowless v. Beeson (1952), 33 T.C. 491 (C.A.), at page 504, Romer L.J.
Putting aside these evidential matters, it remains to be decided whether the term “purposes” as employed in subsection 55(2) of the Act is to be understood in an objective sense. Standing alone that term is neutral. It is only when it is placed in a particular context that its meaning can be ascertained. While there may be instances where the term “purposes” is modified by words or phrases suggesting something other than a subjective understanding, that is not the case with respect to subsection 55(2) of the Act. The words of that subsection provide that in certain circumstances the “purpose” of a transaction will determine whether the subsection applies while in another (i.e., where the dividend is deemed to arise under subsection 84(3)) the “result” of a transaction will be determinative. Parenthetically, I note that subsection 55(1), a general anti-avoidance provision (since repealed) [as rep. by S.C. 1988, c. 55, s. 33] is limited to circumstances in which the “result” of a transaction is to artificially or unduly reduce the amount of gain. No one can doubt that the term “result” invites an objective appreciation of the factual circumstances. In this context I do not see how one can argue persuasively that both the words “purpose” and “result” are to be interpreted as embracing an objective criterion. In my opinion, it is clear that the use of the term “purpose” in one context and “result” in another requires that a different meaning be attributed to each that is consistent with their use and context within subsection 55(2).
The foregoing conclusion is reinforced by the decision of the House of Lords in Commissioners of Inland Revenue v. Brebner (1967), 43 T.C. 705. That case involved subsection 28(1) of the Finance Act, 1960 [(U.K.), 1960, c. 44] which draws a clear distinction between the terms “effect” and “object”. It was held that the “object” which had to be considered involved a subjective matter of intention (at page 715). To the extent that the term “object” is synonymous with “purpose”, the reasoning in Brebner seems equally applicable to the case at hand. The validity of my conclusion, of course, must be measured against the precise wording of subsection 28(1) which reads as follows:
28.—(1) Where—
(a) in any such circumstances as are mentioned in the next following subsection, and
(b) in consequence of a transaction in securities or of the combined effect of two or more such transactions,
a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions:
Notwithstanding the position I have adopted, I am prepared to address the Minister’s argument which hinges on case law emanating from other Commonwealth jurisdictions. It cannot be denied that on at least two occasions the Privy Council has held that the term “purposes” found in certain anti-avoidance provisions is to be interpreted in an objective manner. In Newton v. Commissioner of Taxation of Australia , [1958] A.C. 450, the Privy Council construed the now repealed Australian blanket anti-avoidance provision such that “[t]he word `purpose’ means, not motive but the effect which it is sought to achieve” (at page 465). Again in Ashton v. Inland Revenue Comr. , [1975] 1 W.L.R. 1615, the Privy Council equated purpose and effect in relation to the now repealed, but similar, New Zealand blanket anti-avoidance provision.
In my opinion, both Privy Council decisions are easily distinguishable once attention is focused upon the statutory context in which the term “purpose” was being scrutinized. Given the similarities between the Australian and New Zealand provisions it is sufficient to reproduce only the relevant portion of section 260 of Australia’s Income Tax Assessment Act 1936-1973 [Austl. Acts P. 1901-1973]:
260. Every contract, agreement, or arrangement … entered into, orally or in writing … shall so far as it has or purports to have the purpose or effect of …
…
(c) … avoiding any liability imposed on any person by this Act …
…
be absolutely void as against the commissioner … [Emphasis added].
The textual differences between the wording of subsection 55(2) of the Act and the Australian provision reproduced above are clear. Since “purpose” and “effect” are used interchangeably only in the Australian and New Zealand legislation, it would be unproductive to explore further the legal rationale underlying the two decisions of the Privy Council. Others have already attempted to do so and nothing is to be gained by revisiting taxation regimes which do not bear upon the Canadian scheme: see J. F. Avery Jones, “Nothing Either Good or Bad, But Thinking Makes It So—The Mental Element in Anti-Avoidance Legislation—I”, [1983] Brit. Tax Rev. 9.
The one case the Minister does rely on is the decision of the Federal Court of Australia (General Division) in Magna Alloys and Research Pty Ltd v. Federal Commissioner of Taxation (1980), 33 ALR 213. Specifically the Minister relies on the following passage of Brennan J., at page 215:
Purpose may be either a subjective purpose—the taxpayer’s purpose—where it means the object which the taxpayer intends to achieve by incurring the expenditure; or it may be an objective purpose, meaning the object which the incurring of the expenditure is apt to achieve. Both motive and subjective purpose are states of mind and they are to be distinguished from objective purpose, which is an attribute of a transaction. An objective purpose is attributed to a transaction by reference to all the known circumstances; whereas subjective purpose and motive, being states of mind, are susceptible of proof not by inference alone but also by direct evidence, for a state of mind may be proved by the testimony of him whose state of mind is relevant to a fact in issue.
The above quotation is to the effect that the purpose of a transaction (objective purpose) can be different from the purpose of the person carrying out the transaction (subjective purpose). I pause here to note that at page 2267 of his reasons the Tax Court Judge appears to question the view that a transaction can have a purpose which is independent of the purpose of the person carrying out the transaction: “The next question is whether one of the purposes of the transactions (assuming a transaction can have a purpose)”.
At first blush, the positions of the Tax Court Judge and Brennan J. appear to be opposed to one another and yet they are compatible once the context within which Brennan J.’s observations were made is acknowledged. In Magna Alloys, it was subsection 51(1) of Australia’s Income Tax Assessment Act 1936-1973, that required interpretation. That subsection reads as follows:
51. (1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. [Emphasis added.]
Having regard to the foregoing provision it is understandable why Brennan J. concluded that the question of whether an expenditure is incurred for the purpose of carrying on a business or for the purpose of gaining or producing income does not depend upon the taxpayer’s state of mind (at page 225). In Magna Alloys the precise legal question was whether legal expenses (outgoings) incurred in defending directors and agents of the taxpayer against charges of criminal conspiracy were deductible. At page 225 Brennan J. concluded:
In the present case, the character and scope of the taxpayer’s business is known without reference to its state of mind. Equally, it is objectively certain that the relevant expenditure was incurred to defray the legal costs of the directors and agents in the criminal proceedings brought against them. The connection between the legal services thus acquired and the taxpayer’s business neither requires nor permits reference to the taxpayer’s state of mind. The nature of that connection is to be found in the objective facts found by his Honour or not in dispute between the parties.
Once Magna Alloys is placed in context the comments of Brennan J. cited earlier can be of no assistance to the Minister. That case is only authority for the proposition that an objective purpose test is appropriate in the context of the statutory framework prescribed by subsection 51(1) of the Australian Income Tax Assessment Act 1936-1973. Accordingly, the argument that the term “purposes”, as utilized in subsection 55(2) of our Act, must be interpreted in an objective manner cannot succeed. In the circumstances, it is unnecessary to deal in detail with the remainder of the Minister’s arguments. Nevertheless, I believe they merit some comment.
As noted earlier, the Minister maintains that a purpose of a dividend is to effect a significant reduction in realizable capital gains when the dividend is inextricably linked to the disposition of a share. In my view, this argument is premised on the mistaken assumption that the Minister would have been successful in C.P.L. Holdings had the necessary link between payment of the dividend and disposition of the shares been established. While it is true that the Trial Judge in that case held that the subsequent disposition of the shares was not part of the same transaction giving rise to the payment of the dividend, he did not go on to conclude that had he found otherwise the case would have been decided differently. At most, such a link gives rise to the rebuttable inference that a purpose of the transaction was to effect a significant reduction in capital gain. Equally important is the fact that the Trial Judge in C.P.L. Holdings acknowledged that subsection 55(2) draws a distinction between the terms “purpose” and “result”. At page 457 he stated:
Although [the Revenue Canada Auditor] had reasonable grounds to act as he did, I do not agree with his conclusion. The taxpayer has provided convincing evidence that the purpose of the rollover was to make [the taxpayer] a secured creditor of the corporation. I do not find that the purpose of the transaction was to reduce the fair market value of the shares, although I agree that it was one of the effects of the transaction. [Emphasis added.]
Finally, I fail to see how the discussions between Falconbridge and Placer of safe income could somehow bring Placer within the ambit of subsection 55(2) of the Act. The discussions of safe income that occurred do not establish that one of the purposes of the transaction was to effect a significant reduction in capital gain. What they do establish is that the parties were aware that subsection 55(2) does not apply to dividends attributable to safe income. Cognizance of the fact that Placer was entitled to reduce significantly the capital gain otherwise realizable on the transaction, to the extent that the dividend payment could be attributed to safe income, cannot be equated with a tax-avoidance purpose on the part of Placer. Indeed, it was not until after the transaction was completed that an outside accounting firm to Placer stumbled across the legal argument (and adroitly so) that the entire amount of the dividends might be held to be tax-free and not just the amount that related to safe income.
VI. CONCLUSION
For the above reasons I would dismiss the appeal with costs.
Strayer J.A.: I agree.
McDonald J.A.: I agree.