Policy Forum: Who, What, Where, When, Why, and How Discerning an Avoidance Transaction

canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2, 294-306 Policy Forum: Who, What, Where, When, Why, and How Discerning an Avoidance Transaction Angelo Nikolakakis* A b s t r a c t This article raises two questions: whether a transaction that results in more than one tax benefit is necessarily an avoidance transaction with reference to all the resulting tax benefits if the transaction is undertaken or arranged primarily for the purpose of obtaining any one (or more) of the benefits; and whether having as a primary purpose for a particular transaction the obtaining of a particular tax benefit that does not result in abusive tax avoidance can be a bona fide purpose other than obtaining the tax benefit with reference to a different, collateral tax benefit resulting from the same transaction. Keywords: GAAR n avoidance n transactions n multiple n tax benefits n bona fide purposes C o n t e n t s Introduction 294 The Question 295 The Statutory Language 296 Lipson Revisited 302 Conclusion 305 Intro duc tion Somewhat surprisingly, the meaning of avoidance transaction remains a bit of a mystery, 1 although it is over 20 years since the addition of the general anti-avoidance * Of Couzin Taylor LLP (allied with Ernst & Young LLP), Montreal (e-mail: angelo.nikolakakis @ca.ey.com). 1 There is a cartoon that my children like to watch, called Busytown Mysteries, all about solving mysteries. Each episode includes a song based on the phrase who, what, where, when, why, and how. More seriously, in the context of avoidance transactions, there is also the reference to the how and the why in MIL (Investments) SA v. The Queen, 2006 DTC 3307, at paragraphs 50 and 53 (TCC). I might just as well have alluded to the more poetic To be, or not to be [an avoidance transaction ]: that is the question, from William Shakespeare s Hamlet (act 3, scene 1). 294

discerning an avoidance transaction n 295 rule to the Income Tax Act. 2 While certain questions have been resolved, 3 others persist. One such question is this: Where a particular transaction results in more than one tax benefit, is the determination as to whether or not the particular transaction is or is not an avoidance transaction to be made separately with reference to each resulting tax benefit, or once and for all with reference to any resulting tax benefit? The purpose of this article is to explore this question, and certain of its permutations, and to suggest that there does not, to date, appear to be any compelling authority on point. The Que s t ion It is appropriate to begin by developing a better statement of the question, and there are different ways to articulate it. In addition to the formulation in the preceding paragraph, one could state the question as whether or not the status of being an avoidance transaction is something that is absolute rather than relative to a particular tax benefit, or a particular series of transactions. In other words: Is a transaction an avoidance transaction (or not) for all purposes and for all times once that status attaches for any reason, or is it an avoidance transaction only in respect of a particular tax benefit or a particular series, such that it can be an avoidance transaction with respect to the particular tax benefit or series and not be an avoidance transaction with respect to a different tax benefit or series? To illustrate the point of the question, one might consider the following type of situation. Assume that a particular transaction results in two tax benefits, benefit a and benefit b. Assume, further, that the primary purpose (say, as to 90 percent of the driving force ) 4 for undertaking the transaction was to obtain benefit a. Finally, assume that benefit a would be regarded as a perfectly legitimate tax benefit under a subsection 245(4) misuse or abuse analysis, but benefit b would be considered abusive. In that context, if the transaction is regarded as an avoidance transaction with reference to each of the tax benefits, benefit a should survive, but benefit b will also have to be tested under subsection 245(4) and may not survive. In contrast, if the transaction is not an avoidance transaction with reference to benefit b (despite the fact that it may be an avoidance transaction with reference to 2 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as the Act ). Unless otherwise stated, statutory references in this article are to the Act. Section 245 was added in 1988. 3 For example, we know from The Queen v. Canadian Pacific Limited, 2002 DTC 6742 (FCA), that an aspect of a transaction (including the choice between two specific alternative forms of transaction) is not a separate transaction. This is also consistent with the reasoning in MIL, supra note 1, in relation to the references to the how and the why. We also know from the concurrent decisions in The Queen v. Canada Trustco Mortgage Co., 2005 DTC 5523 (SCC), and Mathew v. The Queen (sub nom. Kaulius et al. v. The Queen), 2005 DTC 5538 (SCC), that each transaction in a series must be tested separately as to whether or not it is an avoidance transaction, and from The Queen v. MacKay et al., 2008 DTC 6238 (FCA), that having an overall non-tax purpose for the series of transactions as a whole does not necessarily imbue each of the transactions within the series with the same purpose. 4 See Canada Trustco, supra note 3, at paragraph 28.

296 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2 benefit a), then benefit b should not have to be tested under subsection 245(4) and should also survive (even if it would not have survived if it did have to be so tested). There are also other conceivable scenarios in which this type of question can arise. The recent decision of the Supreme Court of Canada in Lipson v. Canada 5 clearly acknowledges the possibility of multiple benefits, and holds that the subsection 245(4) analysis must be conducted separately with regard to each relevant tax benefit (see paragraph 22), but this assumes that each such tax benefit results from an avoidance transaction (or a series of transactions that includes such a transaction), which was conceded in that matter. Thus, the decision does not directly address the question at hand. 6 The Stat uto ry L a nguage The relevant statutory language has often been considered, or at least acknowledged, but seldom parsed. Subsection 245(2) provides as follows: (2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction. Thus, subsection 245(2) can apply to do either of two things: first, to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction ; or second, to deny a tax benefit that, but for this section, would result, directly or indirectly,... from a series of transactions that includes that transaction. This brings us to the collateral but possibly critical question of how to determine what a tax benefit results from: Does it result from a particular transaction or, rather, from a series of transactions? Moreover, how does this question affect the avoidance transaction determination with regard to the more general question explored in this article? If there are two distinct series of transactions, and the transaction that is in question (as to whether it is an avoidance transaction ) is part of the first series but is not part of the second series (bearing in mind the wide scope that the second series can have if it can include an earlier transaction that the participants to the second series knew of or took into account ), 7 then it seems that if the tax benefit in question results from the second series but not as such from the transaction or the first series, then subsection 245(2) cannot apply, because it is not the case that we have either a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or a tax benefit that, but for this section, would result, directly or indirectly,... from a series of transactions that includes that transaction. The tax benefit (we have assumed) results from the second series and the transaction in question is not part of the second series, so subsection 245(2) cannot 5 2009 SCC 1. 6 The Lipson decision is discussed below in greater detail. 7 See Canada Trustco, supra note 3, at paragraphs 25-26.

discerning an avoidance transaction n 297 apply on that count even if the transaction in question is an avoidance transaction (as an absolute status because it was an avoidance transaction as part of the first series). Arguably, it may be reasonable to consider that a tax benefit results from a transaction only to the extent that the transaction changes the consequences that would arise in the absence of the transaction. But there will also be cases in which the tax benefit does not result at all unless each of two or more transactions is undertaken. In such cases, perhaps it would be reasonable to consider that the tax benefit results from a series of transactions, rather than from a particular transaction. The correct approach to take in making determinations with respect to this type of question also remains a bit of a mystery, but is beyond the scope of this article. For present purposes, it will be assumed that it can be and is determined that more than one tax benefit results from a single transaction. On that type of assumption (more specifically, that two distinct tax benefits result from the tested transaction namely, benefit a and benefit b, as described above), the question then arises: Is the transaction an avoidance transaction with respect to either or both of the tax benefits, and how exactly does one make this determination? Subsection 245(3) provides as follows: (3) An avoidance transaction means any transaction (a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or (b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. Thus, according to subsection 245(3), an avoidance transaction is defined as (that is, means ) any transaction that fits the description set out in paragraph (a) or (b). However, the statutory language does not explicitly address the possibility that more than one tax benefit may result from one transaction. Interestingly, the opening language does not say An avoidance transaction means, with respect to a particular tax benefit, any transaction, or anything along the lines of For the purpose of applying subsection (2) in respect of a particular tax benefit, an avoidance transaction means any transaction. Moreover, even if it did say exactly that, it would not seem to follow that the status of a transaction as an avoidance transaction (or not) is a relative matter (relative to the tax benefit in question) because the description in paragraph (a), for example, refers first to a tax benefit, not the tax benefit. That is, if the opening language actually said (or implicitly says), For the purpose of applying subsection (2) in respect of a particular tax benefit, an avoidance transaction means any transaction, the balance of the provision in paragraph (a) would still say that, but for this section, would result, directly or indirectly, in a tax benefit [not the tax benefit ], unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit ; and even in that context, it seems doubtful that it would be

298 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2 appropriate to interpret the reference to the tax benefit as a reference to a particular tax benefit. Accordingly, while it may be argued that the opening words should be interpreted as implicitly saying For the purpose of applying subsection (2) in respect of a particular tax benefit which may be fair insofar as it is difficult to imagine what other purpose this definition could have that argument is not sufficient in itself to preclude the conclusion that the status of being an avoidance transaction is absolute in the sense that it applies for all purposes once it attaches. On the other hand, paragraph 245(3)(a) does not say that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit. The argument that emerges from this observation is based on the hypothesis that if the government had intended to necessarily make the status of being an avoidance transaction absolute, it would have referred to a tax benefit in the second reference instead of the tax benefit. The argument is more or less as follows. If the government had referred to a tax benefit in the second reference, it would have been clear that this benefit could be a benefit other than the benefit in the first reference. On that basis, the rule would be saying that obtaining a tax benefit any tax benefit, even a different one cannot be a qualifying bona fide purpose, since the end of the phrase would be undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit. In essence, that is the whole question here: Can a transaction be considered not to be an avoidance transaction with reference to a particular tax benefit if it is undertaken or arranged primarily to obtain another tax benefit which is legitimate? If a transaction that is undertaken or arranged primarily for the purpose of getting a particular tax benefit cannot, with respect to any other tax benefit, be regarded as having been undertaken or arranged primarily for a qualifying bona fide purpose (since the assumption is that obtaining the particular tax benefit is not a qualifying bona fide purpose), then it seems to follow that a transaction cannot be other than an avoidance transaction with reference to a particular tax benefit if it is undertaken or arranged primarily to obtain a different tax benefit. Indeed, it is exactly the converse to this very proposition that a relativistic approach to the status of being an avoidance transaction would produce. That is, the whole point of a relativistic approach is to be able to say that the transaction was undertaken or arranged primarily for the purpose of obtaining benefit a, and that obtaining benefit a is a bona fide purpose other than obtaining the tax benefit, being benefit b. The argument has its attractiveness, but does suffer from the weakness of being based to some extent on speculation what the government would have done. This type of speculation can also go in the opposite direction. It should be noted that the language in subsection 245(2) also refers to a tax benefit rather than the tax benefit (although the explanatory notes do refer to the tax benefit in this context). 8 8 Canada, Department of Finance, Explanatory Notes to Legislation Relating to Income Tax (Ottawa: Department of Finance, June 1988), clause 186.

discerning an avoidance transaction n 299 Thus, one could make an argument that had the government contemplated a relativistic approach, the more appropriate reference would have been to the tax benefit, since the transaction would necessarily be an avoidance transaction (or not) with reference to the particular tax benefit first referred to in subsection 245(3). The argument would then proceed that, since subsection 245(2) refers to a tax benefit, it contemplates that an avoidance transaction can result in multiple tax benefits, and that it can be an avoidance transaction with reference to multiple tax benefits, and further more importantly that the avoidance transaction determination can be made only once and for all and need not be made separately with reference to each particular tax benefit. What is interesting in this line of reasoning is that it does seem somewhat odd to posit that the government intended a relativistic approach to the avoidance transaction determination but then used a reference to a tax benefit in subsection 245(2), given that at least one particular benefit would have had to have been the driving force behind the transaction to make it an avoidance transaction in the first place. In other words, subsection 245(2) posits a condition Where a transaction is an avoidance transaction and then refers to a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction. In order for the transaction to be an avoidance transaction, it must result in a tax benefit and not have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. Thus, in the context of a relativistic approach to the definition of avoidance transaction, it would seem natural to refer to the tax benefit in subsection 245(2), because there must be a definite tax benefit in order for the transaction to be an avoidance transaction in the first place. The argument would conclude that, therefore, once a transaction is an avoidance transaction because it was undertaken or arranged primarily to obtain any tax benefit, any and all other tax benefits resulting from the transaction (each, together with the one that triggered that status, being a tax benefit referred to in subsection 245(2)) can be reversed under subsection 245(2), subject only to the application of subsection 245(4). It is always difficult to make arguments based on what the government might have done. What the government did do was refer to a tax benefit in the first reference and the tax benefit in the second reference. The upshot is that this language does not preclude the argument that a relativistic approach is appropriate, and that obtaining benefit a can be a bona fide purpose other than obtaining the tax benefit with reference to benefit b. It is also generally accepted, if not perfectly clear, that reasonably reducing provincial or foreign taxes can be a bona fide purpose in this context; therefore, if reasonably reducing some other tax payable under the Act (benefit a) does not get the transaction out of being an avoidance transaction with reference to benefit b, it is not because obtaining benefit a necessarily cannot be a bona fide purpose, but because an absolutist approach is the appropriate one. Moreover, since there is no textual limitation in the definition of avoidance transaction to compel a relativistic approach, that definition remains open to being interpreted as providing for an absolutist approach. One might as well ask whether, for example, a particular share that is a taxable preferred share as defined in subsection 248(1)

300 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2 is then a taxable preferred share for all purposes, unless it is defined as or deemed to be a taxable preferred share only for certain purposes. Before looking at collateral elements of legislative intent, one other point to note is that, however one comes out on this absolute/relative status debate, it is clear that a transaction will necessarily be an avoidance transaction with reference to every benefit that it produces, except in circumstances where the unless condition is satisfied. ( An avoidance transaction means any transaction... that... would result, directly or indirectly, in a tax benefit, unless.... ) Thus, if a transaction results in a tax benefit, whether that is any benefit or the particular benefit, it is an avoidance transaction unless the specified exception applies. It is in the context of the unless part of this definition that our question manifests itself. Can one say the unless part can be satisfied with reference to a different tax benefit (other than the particular tax benefit), and that pursuing that other benefit is a bona fide purpose? Under an absolutist approach, one could pick any single tax benefit against which to test the transaction and ask whether the transaction was undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. The answer would be no, unless the transaction was undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. Thus, a transaction will be an avoidance transaction for all purposes (that is, for purposes of all tax benefits) if at least 50 percent of its driving force is any single tax benefit (such that it cannot be said that the transaction was undertaken or arranged primarily for any other purpose). Thereafter, the only questions would be what other tax benefits resulted from the transaction and whether subsection 245(4) applies, not whether the transaction is an avoidance transaction with reference to those other tax benefits. Under a relativistic approach, one would text the transaction against each tax benefit, in each case asking whether the transaction was undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. The answer would be yes, except with reference to any particular tax benefit that represents at least 50 percent of the driving force, assuming that the other purposes are either bona fide non-tax purposes or bona fide tax purposes other than obtaining the particular tested tax benefit. This, too, gives rise to an interesting observation. Applying a relativistic approach, it would be possible to conclude that a transaction is an avoidance transaction with reference to one of the tax benefits resulting from the transaction ( the main benefit ) but not any other tax benefits resulting from the transaction ( collateral benefits ) if the transaction was undertaken or arranged primarily for the purpose of obtaining the main benefit and that purpose is a bona fide purpose other than obtaining the tax benefit with reference to the other benefits, even if all the benefits are contemplated. It seems arguable that if the main benefit is regarded as abusive, the purpose of the transaction should not be regarded as a bona fide purpose with reference to the collateral benefits, but if the main benefit is regarded as a bona fide benefit, then it could be. Thus, in that context, the transaction would be an avoidance transaction with reference to the main benefit, so that the analysis would proceed to subsection 245(4), such that the main benefit would be put through scrutiny as to its abusiveness. However, if the main benefit passes the abuse test, then the other tax benefits do not

discerning an avoidance transaction n 301 receive individual scrutiny as to their abusiveness they simply pass through because the transaction is not an avoidance transaction with reference to those benefits. Accordingly, with reference to the collateral benefits, this approach would effectively equate a bona fide tax purpose getting the main benefit (being a bona fide purpose other than to obtain the tax benefit ) to a bona fide non-tax purpose. That a bona fide tax purpose could be equated to a bona fide non-tax purpose in the context of a different tax benefit does not seem to be fundamentally inappropriate, or a result that the government could not conceivably have intended. However, is it what the government intended? A review of an earlier draft of the general anti-avoidance rule reveals that the unless part of the definition of an avoidance transaction referred only to bona fide business purposes. 9 This could have been interpreted to preclude the possibility of concluding that a tax purpose, however legitimate, could be a qualifying bona fide purpose with reference to any tax benefit. But a different interpretation would also have been conceivable. That reference was ultimately changed, but seemingly only in order to clarify that bona fide purposes could include non-business purposes, such as investment, succession, and other such purposes (and this is reflected in the explanatory notes), so the change does not assist very much in resolving the present question. Moreover, even the reference to bona fide business purposes could have been interpreted to encompass bona fide tax savings, and the specific exclusion in the current language referring to the tax benefit obviously suggests that obtaining a tax benefit is not necessarily and naturally excluded by bona fide purposes. However, the explanatory notes do not say that. Although in the context of subsection 245(2) they refer to the tax benefit, in the context of subsection 245(3) they refer repeatedly to bona fide non-tax purposes, potentially undermining the relativist view. 10 Another point to bear in mind in the context of a transaction that results in more than one tax benefit is that the possible interpretations of the language in subsection 245(3) seem to include construing the singular reference to a tax benefit to include the plural tax benefits (so that, consequentially, the singular reference to the tax benefit would also be construed to include the plural tax benefits ). 11 On that interpretation, a court could conclude that a transaction that results in more than one tax benefit is determined to be an avoidance transaction if obtaining those benefits aggregately constitutes as much or most of the driving force behind the transaction relative to other drivers which, at that point in the logic, would seemingly have 9 Canada, Department of Finance, Tax Reform 1987: Income Tax Reform (Ottawa: Department of Finance, June 18, 1987), 143. 10 Supra note 8. 11 Pursuant to section 33(2) of the federal Interpretation Act, RSC 1985, c. I-21, as amended, [w]ords in the singular include the plural, and words in the plural include the singular. Of course, section 15(2)(a) of that statute also provides that [w]here an enactment contains an interpretation section or provision, it shall be read and construed (a) as being applicable only if a contrary intention does not appear.

302 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2 to be non-tax-benefit oriented drivers or, perhaps, a different set of tax-benefitoriented drivers. That is, there could be two variations on this theme. First, a court could lump together the desire(s) to obtain all tax benefits on the one hand, and all non-tax-benefit-oriented drivers on the other hand, and then compare the aggregate weights of the two groups. Alternatively, it seems possible that a court could conclude that the singular includes the plural but the plural need not be comprehensive, in the sense that the reference to a tax benefit could be construed to include some of the tax benefits resulting from the transaction but not necessarily all of them. For example, a court could approach the issue by seeking to determine whether there exist any number of tax benefits that together represent as much or most of the driving force, without then needing to look at any other tax-benefit-oriented drivers. In either case, it seems likely that the court would conclude that the transaction is an avoidance transaction with reference to the tax benefits in the relevant set. Under the first variation, this would be all of the contemplated tax benefits, such that the distinction between applying an absolutist approach and applying a relativistic approach would be relevant only for tax benefits that were not contemplated. Under the second variation, it appears that the distinction between applying an absolutist approach and applying a relativistic approach would be more significant, in the sense that tax benefits could be contemplated that are not included in the relevant set. Lip son Re v isited Before concluding, it is appropriate to revisit the decision of the Supreme Court in Lipson, given that it proceeded on the premise of multiple tax benefits. It seems fair to say that in Lipson, there was one transaction (the share transfer), or perhaps two transactions together (the borrowing and the share transfer), that resulted in two or, perhaps, three separate tax benefits: (1) the creation of the interest deduction (which we can call benefit a ); (2) the attribution of the interest deduction to Mr. Lipson ( benefit b ); and, perhaps, (3) the deferral of Mr. Lipson s gain on the share transfer ( benefit c ). 12 Because the existence of an avoidance transaction was not in issue, the decision did not directly address the application of subsection 245(3). However, the logic of the court s analysis may support certain inferences in that regard. What if the taxpayer had not conceded the existence of an avoidance transaction? What would have been the analysis under an absolutist approach and under a relativistic approach? Let us begin with some assumptions perhaps even alternate assumptions as to the relative force of the drivers. We can assume that there was no non-tax purpose (that is, passing growth in wealth to Mrs. Lipson), or we can assume that there was some such purpose but that it was not of sufficient force to be the primary purpose, since then the series of transactions would not have constituted 12 Interestingly, the court (the majority at least) only identified the first two as tax benefits: Lipson, supra note 5, at paragraph 22.

discerning an avoidance transaction n 303 an avoidance transaction in respect of any of the tax benefits. If we assume (for convenience) that there was no non-tax purpose, that leaves obtaining the tax benefits as the only purpose, and that purpose may or may not be a bona fide purpose. Let us also eliminate benefit c (the deferral of the gain on the share transfer), leaving only benefits a (the creation of the interest deduction) and b (the attribution of that deduction to Mr. Lipson) the same tax benefits identified by the court. As to the relative forces of these benefits, we can again make alternate assumptions. Either benefit a and benefit b had equal force, or one outweighed the other in driving the arrangement, resulting in three possibilities: 1. a = b, 2. a > b, or 3. a < b. Under an absolutist approach, in scenario 1, one can begin the analysis with either benefit a or benefit b. If we ask whether the transaction results in a tax benefit, the answer is yes in fact, two tax benefits, a and b. If we focus on benefit a (creating the deduction), we then consider the proposition that the transaction is an avoidance transaction unless it was undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit (benefit a). Since the other purpose (obtaining benefit b, the attribution of the deduction), even if it is a bona fide purpose, is not the primary purpose (since they are equal), the answer is that the transaction is an avoidance transaction with reference to benefit a. Moreover, as a consequence of taking the absolutist approach, the transaction is also an avoidance transaction with reference to benefit b. If one conducted the analysis focusing first on benefit b, the conclusion would be the same. Either way, since the transaction results in two tax benefits and obtaining each of them is an equal driver, so that there is no primary purpose, the transaction is an avoidance transaction in respect of both benefits. Interestingly, on these assumptions, the conclusion would also be the same under a relativistic approach, since one would do the same analysis as above for each of the two benefits. The only difference then, between the absolutist approach and the relativistic approach, where there are two tax benefits and they are equal drivers, is whether one has to bother testing the status of the transaction as an avoidance transaction with reference to the second tax benefit an exercise that seems to be pointless, since one will necessarily come to the same conclusion. In contrast, if the relative force of the two benefits is different (as in scenarios 2 and 3), then it does seem to matter whether an absolutist approach or a relativistic approach is used, unless neither benefit can be a bona fide purpose (that is, both are abusive). This is where things get interesting because, in Lipson, the court apparently concluded that benefit a (creating the deduction) was unimpeachable, while benefit b (the attribution) was abusive. 13 Let us then assume (although this does 13 Ibid., at paragraph 41.

304 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2 not necessarily follow) that, because benefit a was unimpeachable, obtaining it would be a bona fide purpose; and, because benefit b was abusive, obtaining it could not be a bona fide purpose. In scenario 2, where a > b, the primary purpose is obtaining benefit a (creating the interest deduction), and obtaining benefit b (the attribution) is collateral to that purpose. If we apply an absolutist approach, the transaction is an avoidance transaction in respect of both benefits, because it results in a tax benefit (benefit a) and was not undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit (since obtaining benefit a is the main driver). The avoidance transaction analysis is then over, and both benefit a and benefit b must be tested under subsection 245(4). Since both benefits were tested under subsection 245(4) in Lipson, the decision is not inconsistent with the above analysis premised on an absolutist approach. Applying a relativistic approach in scenario 2 and returning to our original assumptions, with reference to benefit a, we would conclude that the transaction is an avoidance transaction because obtaining benefit a is the primary driver, and not a bona fide purpose. However, with reference to benefit b, we would conclude that the transaction is not an avoidance transaction because it was undertaken or arranged primarily for the purpose of obtaining benefit a (which is assumed to be a bona fide purpose), and that is not the tax benefit resulting from the transaction. If the court in Lipson had applied a relativistic approach, it could not have reversed benefit b (the attribution), or even tested it under subsection 245(4), if obtaining benefit a was the primary driver (which the court concluded was a bona fide purpose). Since the court did the exact opposite, the decision is not consistent with this approach on these assumptions. However, if one changes the assumptions, as we do in scenario 3, the answer changes. In this case, a < b: that is, the primary purpose is obtaining benefit b (the attribution), and benefit a (creating the interest deduction) is collateral. According to the reasoning of the court in Lipson, one would conclude, with reference to benefit b, that the transaction is an avoidance transaction because getting that benefit is the primary driver. One would also conclude that the transaction is an avoidance transaction with reference to benefit a, because the primary driver (obtaining benefit b) is not a bona fide purpose. However, according to Lipson, obtaining benefit b cannot be a bona fide purpose because it is abusive, and not necessarily because benefit b is a tax benefit. Thus, on these assumptions, the court s decision could be consistent with a relativistic approach. Accordingly, the court s decision is not inconsistent with an absolutist approach, on any assumptions other than that the primary driver was a non-tax purpose. The court s decision is not inconsistent with a relativistic approach on the assumption that either (1) the drivers were obtaining two tax benefits, and were of equal force, or (2) the main driver was benefit b (the attribution) and this is not a bona fide purpose with reference to benefit a (creating the deduction). However, the court s decision is not consistent with a relativistic approach on the assumption that the main driver was benefit a (creating the deduction), if this is a bona fide purpose with reference to benefit b (the attribution).

discerning an avoidance transaction n 305 Of course, since there was no discussion such as the above in the decision, these musings are only speculation. Moreover, we have not advanced very far, since the scenario in which the decision is inconsistent with a relativistic approach (scenario 2, where a > b) is not necessarily the most likely on the facts. That is, it is not necessarily most likely, on the facts as reported, that simply creating the deduction was the primary driver, and that the parties would have been as content if Mrs. Lipson had received both the dividend revenues and the benefit of the interest expense, and there had been no attribution, although perhaps an argument to that effect can be made. Attribution gave Mr. Lipson additional effective shelter or benefit over what Mrs. Lipson would have had (if she had been entitled to both the dividends and the interest expense) only to the extent that the interest expense exceeded the dividends, and only if he had other income to shelter and she did not. In other words, there would be significant benefit in creating the interest expense, because it would allow that much shelter to either party (and let us remember also the deferral on the gain); so maybe attribution would add little to the mix in terms of the real aggregate value of the separate tax benefits. Indeed, if both spouses had sufficient other income to absorb the interest deduction, it would matter little whether there was attribution and all the value of the benefit fell into the creation of the deduction. 14 On the other hand, perhaps it could also be argued that, from Mr. Lipson s singular perspective, the attribution was more important than the creation of the deduction, because he needed the attribution to get the deduction into his hands in order for him to have any benefit from it at all. That is, from his perspective exclusively, Mrs. Lipson s having the deduction would give him no benefit, so it could not be the primary driver. Only attribution would give him a benefit, so attribution must be at least equal as a driver from his perspective, such that we are in either scenario 1, where a = b, or scenario 3, where a < b. Co nclusion Where does this leave us? The question addressed in this article does not appear to have been squarely addressed in any of the jurisprudence, or in the explanatory notes or administrative practice, or in other commentary. This is surprising because it is difficult to view the question as being academic. It might well not have been academic in Lipson, had it been addressed. Moreover, it might well not be academic, for example, in situations involving the conversion of an income trust to corporate form. Arguably, transactions implemented to effect the conversion could be viewed as having a primary non-tax driver (that is, facilitating the more efficient and effective raising of capital) or a primary legitimate tax driver (that is, getting out of the 14 It was noted in the dissent of Binnie and Deschamps JJ that [t]his case... is not about income splitting (ibid., at paragraph 80), in a comment that suggests that the majority may also have agreed with this characterization.

306 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2 sift rules, 15 assuming that this is or results in a tax benefit). If an absolutist approach is appropriate, and assuming that getting out of the sift rules is the primary driver, those transactions would be avoidance transactions with reference not only to the tax benefit of or resulting from getting out of the sift rules, but also with reference to any other tax benefits that may result from those transactions. In contrast, if a relativistic approach is adopted, and getting out of the sift rules is the primary driver and is regarded as a legitimate tax benefit and, therefore, as a bona fide purpose separate from obtaining any other tax benefit, then the transactions may not be avoidance transactions with reference to any such other tax benefit, such that no subsection 245(4) analysis should be required in that regard. However, all bets are off on this one if a court concludes that the singular reference in subsection 245(3) to a tax benefit includes the plural tax benefits. 15 The specified investment flow-through (SIFT) rules are anti-avoidance provisions applicable to certain trusts and partnerships: see sections 122.1 and 197, and related provisions.