A corporate taxpayer, Canada Trustco Mortgage Company, purchased a number of trailers from Transamerica Leasing Inc., which it leased to Maple Assets Investments Limited. Maple, in turn, leased the trailers back to Transamerica, their original owner.
As a result of this transaction, Canada Trustco Mortgage Company claimed a capital cost allowance deduction against its new-found revenue from the trailers. The Minister of National Revenue objected to this deduction, relying on the general anti-avoidance rule (“GAAR”) and alleging that the entire transaction constituted abusive tax avoidance.
The Tax Court of Canada dismissed the Minister’s arguments, in a decision which was ultimately upheld by the Supreme Court of Canada.
Chief Justice McLachlin and Justice Major, writing for a unanimous court, found that “the courts must conduct a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit in order to determine why they were put in place and why the benefit was conferred.” In Canada Trustco’s case, this analysis led the Supreme Court to the conclusion that the leaseback agreement in question did not meet the standard of an abusive transaction that was contrary to the purposes of the Income Tax Act:
“The transaction at issue was not so dissimilar from an ordinary sale-leaseback as to take it outside the object, spirit or purpose of the relevant CCA provisions of the Act. The purpose of the CCA provisions of the Act, as applied to sale-leaseback transactions, was, as found by the Tax Court judge, to permit the deduction of a CCA based on the cost of the assets acquired. This purpose emerges clearly from the scheme of the Act’s CCA provisions as a whole.”
This decision is a vindication of taxpayers’ rights to structure their affairs in such a way as to minimize tax liability.
Decided by the Supreme Court of Canada on October 19, 2005.
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