GAAR and a terminal loss
The Queen v Landrus, 2009 FCA 113
Jennifer Smith, Ernst & Young, Ottawa
The Federal Court of Appeal (FCA) has upheld the Tax Court of Canada’s (TCC) decision that the general
anti‐avoidance rule (GAAR) did not apply to a series of transactions whereby a terminal loss was
triggered on the sale of assets by two limited partnerships to a new limited partnership that was owned
directly or indirectly by the same parties. This case is of particular interest because of Tax Court Judge
Paris’s finding that the stop‐loss provisions in the Income Tax Act (the Act) do not show a clear and
unambiguous policy to deny a loss resulting from a sale of property to a related party. In fact, he
expressed the view that the so‐called “stop‐loss rules,” because of their specificity, are indicative of
exceptions to a general policy of allowing losses on all dispositions. This particular finding
was not challenged by the Crown, which appealed to the FCA on other grounds.
Two limited partnerships (“Roseland I” and “Roseland II”) were formed in 1989 to acquire adjacent
condominium buildings in London, Ontario. The taxpayer was a limited partner in Roseland II. Due to a
general downturn in the real estate market in Southern Ontario, the value of the Roseland I and
II properties dropped substantially in the years following their acquisition. In December 1994, Roseland I
and Roseland II sold all of their assets to a new limited partnership, Roseland Park Master Limited
Partnership (RPM), and the limited partners of Roseland I and II received partnership interests in
RPM. The sales triggered terminal losses to Roseland I and II. These losses were allocated to the limited
partners. The taxpayer deducted CDN$29,130 as his share of the terminal loss of Roseland II in
computing his income for the 1994 taxation year. The minister used the GAAR to deny the deduction of
the terminal loss.
The taxpayer conceded that the series gave rise to a “tax benefit” within the meaning of the GAAR
provisions of the Act. The TCC also found that the “saving rule” did not assist the taxpayer. On the
evidence, the transaction could not reasonably be considered to have been undertaken or arranged for
bona fide purposes other than to obtain the tax benefit. The taxpayer argued that the purpose of the
transfer of the two condominium buildings to the new partnership was to save on operating expenses,
but the TCC could find no evidence of a cost/benefit analysis having been performed. In contrast, a
significant effort was put into obtaining tax advice on the tax benefits of the restructuring. Therefore,
the disposition of partnership assets by Roseland II to RPM was an avoidance transaction. The TCC went
on to consider whether the disposition of the partnership assets to RPM involved any misuse of the
terminal loss provision in the Act, or any abuse of the Act as a whole. After the usual review of the
statements of the Supreme Court of Canada in Canada Trustco, the TCC conducted the “textual,
contextual and purposive interpretation” mandated by the Supreme Court.
First, the TCC found there was no ambiguity in the wording of the terminal loss provision of the Act
(subsection 20(16)). On a literal reading of the wording of that provision, the conditions set out were
met. Second, the TCC reviewed the context and purpose of subsection 20(16) by considering the general
scheme of the capital cost allowance system, the purpose of the terminal loss rules, and the system of
stop‐loss rules in the Act, and concluded as follows:
“In my view, the particularity with which Parliament has specified the relationship that must exist
between the transferor and transferee for the purpose of each stop‐loss rule referred to by the
Respondent is more indicative that these rules are exceptions to a general policy of allowing
losses on all dispositions. In other words, where there is a general provision in the Act allowing for
the deduction of a loss, subject to a restriction or exception in certain circumstances, the limited
nature of the exception can be seen as underscoring the general policy of the Act to allow the loss.
Furthermore, it is not accurate to say that these rules deny losses on transfers between all related
parties. As seen above, the distinct relationship that Parliament sought to target in each case is clear.”
Therefore, the TCC was not satisfied that there was a general or overall policy in the Act prohibiting
losses on any transfer between related parties, or parties described by counsel as forming an economic
unit. The minister could not use the GAAR to fill in the gaps left by Parliament. To do so would be an
inappropriate use of the GAAR, as noted by Associate Chief Justice Bowman in Geransky v The Queen. As
a result, the TCC allowed the taxpayer’s appeal. The Crown appealed the decision to the FCA on several
grounds. The Crown did not take issue with the TCC’s assessment of the object, purpose and spirit of
subsection 20(16), but instead argued that since a terminal loss is predicated on the fact that the
taxpayer is no longer able to use the particular property, this provision was misused.
The FCA made relatively short shrift of that argument, noting that the series of transactions altered the
taxpayer’s legal rights and obligations. The taxpayer ceased to be a partner in Roseland II and joined
RPM. As a result, he acquired an undivided interest in assets double in size and shared in an extended
rental pool that accounted for the revenues generated by both Roseland I and Roseland II. These
changes were considered by the FCA to be material in terms of risks and benefits. The Crown also
contended that the Lipson decision provided additional support for its contention that the decision of
the Tax Court judge was flawed on the following grounds:
• As in Lipson, two tax benefits were derived: the creation of the terminal loss on the transfer of the
assets to RPM, and the actual deduction of the loss by the taxpayer by virtue of the application of the
partnership rules (subsection 96(1)).
• The Tax Court judge erred in not conducting an object, spirit and purpose analysis of subsection 96(1)
beyond demonstrating that this provision had been complied with at the time of the transfer.
• The transactions in issue were structured so as to avoid the application of subsection 85(5.1),
thereby giving rise to an abuse.
The FCA also rejected these arguments, finding that there was no abuse of subsection 96(1). The tax
benefit arose under subsection 20(16), and subsection 96(1) was simply the means that allowed that
benefit to be allocated to the taxpayer. In any event, the Crown failed to identify any policy behind
subsection 96(1) that was frustrated by the transactions in issue.
Finally, the FCA refused to consider the Crown’s subsection 85(5.1) argument, as it was not relied on
when the reassessment was confirmed and was not raised at the TCC.