Insights and Commentary from Dentons

dentons.com Insights and Commentary from Dentons On March 31, 2013, three pre-eminent law firms Salans, Fraser Milner Casgrain, and SNR Denton combined to form Dentons, a Top 10 global law firm with more than 2,500 lawyers and professionals worldwide. This document was authored by representatives of one of the founding firms prior to our combination launch, and it continues to be Growing with offered to provide our clients with the information they need to do business in an increasingly complex, interconnected and competitive marketplace. The role of government has never been more critical

Tax Litigation a journal devoted to litigation issues for tax practitioners Volume XVI, No. 2 2009 GAAR Supreme Court hands down ruling in Lipson Earlier this year, a badly fractured seven-member panel of the Supreme Court of Canada handed down an animated 4:2:1 split decision in Lipson v. R., the first judgment of the Court to address the general anti-avoidance rule ( GAAR ) since its landmark decisions in Canada Trustco Mortgage Co. v. R. and Mathew v. R. Justice LeBel, writing for the majority, invoked a new overall result analysis to support the reassessment by the Minister of National Revenue. In dissent, Justice Binnie rejected the approach advocated by the majority on the basis that the decision did not further the interests of consistency, predictability and fairness in the tax system. In a separate dissent, Rothstein J. concurred with much of Binnie J. s analysis but went further to hold that the presence of a specific anti-avoidance rule in subsection 74.5(11) of the Income Tax Act (the Act ) precluded the use of the GAAR to cover the same ground even where, as was the case in Lipson, the Minister of National Revenue did not rely upon that specific anti-avoidance rule. Interestingly, however, all three sets of reasons were in agreement on one point: that the interest deduction in the hands of Mrs. Lipson did not constitute a misuse or abuse of the Act. As William Innes, Chia-yi Chua and Timothy Fitzsimmons explain, the decision of the majority comes close to endorsing what may be characterized as a judicial smell test. 982 GAAR Federal Court of Appeal reverses MacKay On March 19, 2008, the Federal Court of Appeal ( FCA ) reversed the decision of the Tax Court of Canada in The Queen v. MacKay et al., which involved the application of the general anti-avoidance rule ( GAAR ). Justice Campbell had concluded, despite the recent decisions of the FCA and the Supreme Court of Canada in Kaulius et al. v. The Queen and OSFC Holdings Ltd. v. Canada, respectively, that the GAAR did not apply because none of the transactions in the series which resulted in a tax benefit could be described as an avoidance transaction, within the meaning of subsection 245(3) of the Income Tax Act (the Act ). The principal issue before the FCA was whether Justice Campbell had erred in law in concluding that no avoidance transaction was to be found in the series of transactions. Roger Taylor, Al-Nawaz Nanji and Sharona Ishmael examine the FCA s judgment in MacKay, which suggests that the determination of whether certain transactions are caught by the GAAR will more likely be made with reference to subsection 245(4) of the Act rather than subsection 245(3). 989 David C. Nathanson, QC Editor-in-Chief Lerners LLP Jacques Bernier Bennett Jones LLP Thomas M. Boddez Thorsteinssons LLP Chia-yi Chua Fraser Milner Casgrain LLP William I. Innes Fraser Milner Casgrain LLP Edwin G. Kroft McCarthy Tétrault LLP Clifford L. Rand Stikeman Elliott LLP Kenneth S. Skingle, QC Felesky Flynn LLP David E. Spiro Blake, Cassels & Graydon LLP Roger E. Taylor Couzin Taylor LLP Matthew G. Williams Thorsteinssons LLP Adrienne K. Woodyard Lerners LLP

GAAR Lipson v. R.: The Shuffle of Cheques, Decks and Equity William I. Innes Chia-yi Chua Timothy Fitzsimmons Fraser Milner Casgrain LLP A badly fractured seven-member panel of the Supreme Court of Canada handed down an animated 4:2:1 split decision in Lipson v. R., 1 the first decision of the Court to address the general anti-avoidance rule ( GAAR ) since the landmark decisions in Canada Trustco Mortgage Co. v. R. 2 and Mathew v. R. 3 Justice LeBel, writing for the majority, invoked a new overall result analysis to support the reassessment by the Minister of National Revenue (the Minister ). In dissent, Justice Binnie rejected the approach advocated by the majority on the basis that the decision did not further the interests of consistency, predictability and fairness in the tax system. In a separate dissent, Rothstein J. concurred with much of the analysis of Binnie J. but went further to hold that the presence of a specific anti-avoidance rule in subsection 74.5(11) of the Income Tax Act 4 precluded the use of the GAAR to cover the same ground even where, as was the case in Lipson, the Minister did not rely upon that specific anti-avoidance rule. Facts Earl and Jordanna Lipson agreed on April 24, 1994 to purchase a personal residence in Toronto for $750,000. The closing date was September 1, 1994. On August 31, 1994, Mrs. Lipson borrowed $562,500 from the Bank of Montreal and gave the bank an interestbearing demand promissory note. With those funds, she bought from her husband 20 5/6 shares of a family company, Lipson Family Investments Limited, for $562,500. On September 1, 1994, the couple borrowed $562,500 from the bank secured by a mortgage on the new house. The $562,500 borrowed on the mortgage was used to pay off Mrs. Lipson s demand loan from the bank. Mr. Lipson did not elect under subsection 73(1) of the Act not to have the subsection apply to his transfer of shares to his wife. Accordingly, the transfer was deemed to have occurred at his adjusted cost base so that he realized no gain or loss on the sale. Additionally, any income or loss on the shares realized or received by Mrs. Lipson was deemed to be Mr. Lipson s under subsections 74.1(1) and 74.2(1) of the Act. In his return of income for the 2004 taxation year, Mr. Lipson claimed a loss in respect of his return of income for the shares in the amount of $12,948, arising by virtue of the interest expense on the mortgage. In his return of income for the 1995 taxation year, he reported net income in respect of the shares consisting of a taxable dividend in the amount of $53,546, less interest expense of $47,371. In his return of income for the 1996 taxation year, he claimed a loss consisting of a taxable dividend in the amount of $12,895, less interest expense of $44,572. In 1997, the Canada Revenue Agency disallowed the interest deduction in respect of the second loan on the basis of the Tax Court of Canada s decision in Singleton (in which the Court held that the true economic purpose of the transaction in question was to make the mortgage interest deductible). 5 After the judgments of the Federal Court of Appeal 6 and the Supreme Court of Canada 7 in Singleton were subsequently issued, 8 the Minister took the position that Mr. Lipson was not entitled to the interest deduction on the basis that the GAAR applied. 4 R.S.C. 1985, c. 1 (5th Supplement), as amended, hereinafter referred to as the Act. Unless otherwise stated, statutory references in this article are to the Act. 982 5 96 DTC 1850 (T.C.C.). 1 2009 DTC 50145 (S.C.C.). 6 99 DTC 5362 (F.C.A.). 2 2005 DTC 5523 (S.C.C.). 7 2001 DTC 5533 (S.C.C.). 3 2005 DTC 5538 (S.C.C.). 8 The Supreme Court stated that the test for deductibility under paragraph 20(1)(c) is direct use and not the taxpayer s motivation in structuring the transaction.

Tax Court of Canada 9 The taxpayer admitted there was a tax benefit and that the transaction was an avoidance transaction. Accordingly, the only issue before the Court was whether the avoidance transaction constituted a misuse or abuse of the provisions of the Act. Chief Justice Bowman (as he then was) considered the Supreme Court s statements in Canada Trustco Mortgage Co. v. R. and Mathew v. R. in respect of the application of the GAAR and the requirement that the Minister establish that the avoidance transaction resulted in a misuse or abuse of the Act. Bowman C.J. held that there was a misuse or abuse of paragraph 20(1)(c) and subsection 20(3) of the Act because the overall purpose of the transactions was to make the interest on money used to buy a personal residence deductible. In the Court s view, abusive tax avoidance exists where the taxpayer relies on provisions of the Act to achieve a result that those provisions seek to prevent. Bowman C.J. stated that the provisions of the Act clearly establish that interest paid on a mortgage on a personal residence is not deductible, and the use of paragraph 20(1)(c) and subsection 20(3) of the Act to achieve that result is a misuse and abuse of the provisions. He went on to say that whatever the commercial purpose for the borrowing, it was subservient to the objective of making the interest deductible. Further, he stated that, to the extent that subsection 73(1) and section 74.1 of the Act were used to achieve such misuse or abuse of the Act and to execute the scheme as a whole, these provisions had also been misused. Federal Court of Appeal 10 The Federal Court of Appeal dismissed the taxpayer s appeal and upheld the Minister s reassessment. The taxpayer argued before the Federal Court of Appeal that, based on the Supreme Court decisions in Singleton and Shell Canada Ltd. v. R., 11 avoidance transactions should be assessed in light of what actually took place, and not by recharacterizing the transactions on the basis of a judge s perception of their economic reality or overall purpose. According to the taxpayer, the Tax Court erred when, in determining misuse/abuse, it considered the overall purpose of the transactions rather than the actual transactions and the legal relationships they created. The Federal Court of Appeal agreed that without considering the overall purpose identified by the Tax Court, it would be difficult to find that there had been a misuse or abuse of any of the provisions relied upon. Noël J.A., writing for the panel, stated that, considering the transactions as they unfolded, each of the provisions in question operated as it was intended. However, he also held that the overall purpose of the transactions must be considered in the misuse and abuse analysis: I believe that Bowman C.J. was entitled to consider the transactions as a whole and their overall purpose in the conduct of his misuse and abuse analysis and to give this factor the weight that he did. [ ] It follows in my view that where a tax benefit arises from a series of transactions, the series becomes relevant in ascertaining whether any transaction within the series gives rise to an abuse of the provisions relied upon to achieve the tax benefit. [S]ubsection 245(4) must also be read in context and where the benefit results from a series of transactions under subsection 245(3), the series cannot be ignored in conducting the abuse analysis. 12 Accordingly, the Court determined that Bowman C.J. had not erred; he was entitled to give substantial weight to the purpose of the series in determining the overall purpose of the transactions. The Supreme Court of Canada The taxpayer s appeal was heard by a seven-member panel. The Court s decision was split 4:2:1 with Justice LeBel writing for the majority (Fish, Abella, Charron JJ. concurring) and Justice Binnie (Deschamps J. concurring) and Justice Rothstein writing separate dissents. 9 2006 DTC 2687 (T.C.C.). 10 2007 DTC 5172 (F.C.A.). 11 99 DTC 5669 (S.C.C.). 12 Supra note 10 at paragraphs 43 and 45. 983

The Majority Opinion Before the Supreme Court, the taxpayer argued that what was at issue was not one tax benefit the deductibility of interest but two tax benefits: (1) Mrs. Lipson s interest deduction; and (2) Mr. Lipson s interest deduction by application of the attribution rules. On this point, the Court agreed that the GAAR analysis should be conducted in respect of each of those benefits. Accordingly, the Court interpreted the four provisions at issue to determine their object, spirit and purpose. The Court agreed with the lower courts interpretation of the provisions: paragraph 20(1)(c) of the Act allows taxpayers to deduct interest on borrowed money used for a commercial purpose and subsection 20(3) of the Act makes it clear that interest deductible under paragraph 20(1)(c) remains deductible upon refinancing; subsection 73(1) of the Act facilitates inter-spousal transfers without triggering immediate tax consequences; and subsection 74.1(1) operates to prevent spouses (or other related persons) from reducing tax by taking advantage of their non-arm s length relationship (i.e., income splitting). At the second step of the analysis whether the avoidance transaction frustrates the object, spirit or purpose of the relevant provisions Justice LeBel held that the individual transactions must be viewed in the context of the series of transactions. While a court may consider the series of transactions in the misuse/abuse analysis under subsection 245(4) of the Act, the focus of the analysis should not be on the overall purpose of the transactions, but rather on the overall result. The taxpayer s motivation is relevant in the subsection 245(4) analysis only insofar as the taxpayer s motivation or the economic substance of the transaction establishes whether the transaction frustrates the purpose of the relevant provisions. Turning to the specific provisions, Justice LeBel held that, in respect of the first tax benefit, the Minister had not established that there had been a misuse or abuse of paragraph 20(1)(c) or subsection 20(3) of the Act. However, the series became problematic when the Lipsons turned to subsections 73(1) and 74.1(1) of the Act to have Mr. Lipson apply his wife s interest deduction to his own income. This result was contrary to the purpose of subsection 74.1(1) of the Act. The attribution by operation of subsection 74.1(1) allowed Mr. Lipson to deduct the interest, which reduced his tax payable on the dividend income. Justice LeBel commented as follows: [T]o allow s. 74.1(1) [sic] to be used to reduce Mr. Lipson s income tax from what it would have been without the transfer to his spouse would frustrate the purpose of the attribution rules. Indeed, a specific antiavoidance rule is being used to facilitate abusive tax avoidance. 13 Having found that there was an avoidance transaction, Justice LeBel stated that the reasonable tax consequences in the circumstances would be to disallow the interest deduction in the hands of Mr. Lipson and to attribute the deduction back to Mrs. Lipson. Justice Binnie s Dissent Justice Binnie characterized the transactions in issue as Singleton with a twist and would have allowed the appeals on the basis that the Minister had not established that Singleton with a spousal twist is abusive tax avoidance. 14 Justice Binnie went on to say: In my view, moreover, the additional fact that the attribution occurred as part of a Singleton shuffle does not render the series of transactions abusive unless the Singleton shuffle is itself abusive, which is a position the Minister declined to advance. 15 Justice Binnie appears to have proceeded on the basis that the Minister conceded that the interest deduction in the hands of Mrs. Lipson was not abusive tax avoidance. 16 He appears to further assume that the facts of Mrs. Lipson s interest deduction are within the circumstances contemplated in Singleton. Accordingly, the only question for the Court was whether a Singleton interest deduction becomes abusive when income or losses are attributed back to the transferor by operation of subsections 73(1) and 74.1(1) of the Act. On this point, Justice Binnie held that there was no misuse or abuse because the provisions operated exactly as Parliament had intended 13 Supra note 1 at paragraph 42. 14 See Singleton, supra note 7. 15 Supra note 1 at paragraph 81. 16 Ibid. at paragraph 58. 984

the income or loss on the transferred property was attributed back to the transferor spouse: If the interest deduction is not per se abusive, I do not believe the Minister has shown why it becomes abusive with the addition of a spousal rollover that operates precisely as it was intended by Parliament. 17 Justice Binnie observed that the provisions operate such that the income or loss is attributed back to the transferor spouse, and where it is inappropriate for this attribution to operate, Parliament intended that the antiavoidance provision of subsection 74.5(11) of the Act would operate to deny the attribution. However, the Minister had conceded that subsection 74.5(11) did not apply in this situation. Justice Rothstein s Dissent A further dissent was written by Justice Rothstein, who agreed with the other two judgments in respect of the analysis of paragraph 20(1)(c) and subsection 20(3) of the Act. Justice Rothstein stated that there is no reason that taxpayers may not arrange their affairs so as to finance personal assets out of equity and income-earning assets out of debt. However, Justice Rothstein disagreed with the other opinions analysis of the attribution rules. Stated simply, Justice Rothstein would have allowed the appeal on the basis that the GAAR would not apply here because there was a specific anti-avoidance rule that preempted the application of the GAAR. Justice Rothstein stated that the Minister may apply the GAAR only as a last resort. Subsection 245(4) requires that all other relevant provisions of the Act be read before the Minister may have recourse to the GAAR. Where a specific anti-avoidance rule precludes the use of an enabling rule to avoid or reduce tax, then the GAAR will not apply. In this case, the specific anti-avoidance provisions in subsection 74.5(11) of the Act precluded the application of subsection 74.1(1). Accordingly, there was no misuse or abuse of subsection 74.1(1) because its use would have been precluded by subsection 74.5(11), which, Justice Rothstein commented, should have applied in respect of the taxpayer s series of transactions. TAX LITIGATION Analysis The Supreme Court s decision in Lipson is a substantial victory for the Minister in relation to the GAAR. The principles that emerge from the decision are as follows: 1. The Minister and the courts must consider the overall purpose (or overall result ) of the series of transactions in conducting an analysis under subsection 245(4) of the Act. 2. Where it can be shown that there is more than one tax benefit, the misuse and abuse analysis must be conducted in respect of each tax benefit. 3. The availability of interest deductibility, as per Singleton, has been strongly affirmed. 4. Specific anti-avoidance rules play an important role in determining the application of the GAAR, but the Supreme Court appears to have not yet made a final determination on what that role is. The Court s affirmation of the first principle was not unexpected. The lower courts had held that a GAAR analysis under subsection 245(4) must include an examination of the overall result of the series of transactions. The second principle was likely more surprising to tax professionals, and it is unclear whether the distinction between one or more tax benefits in a series will make a significant impact in future GAAR cases. For example, it was not an issue in MacKay v. R., 18 in which the tax benefit at issue was the deduction of a $6 million loss that had been transferred from a bank to a partnership. Shortly after the Lipson decision was released, the Supreme Court refused leave to appeal in MacKay. In Landrus v. R., 19 the Federal Court of Appeal considered arguments by the Crown that there had been two tax benefits in a situation where a partnership realized a terminal loss on the disposition of certain assets (under subsection 20(16)) and such loss was allocated to the partners of the partnership (subsection 96(1)). The Federal Court of Appeal stated very briefly that there was only one tax benefit the terminal loss under subsection 20(16). 18 2008 DTC 6238 (Fed. C.A.), rev g 2007 DTC 425 (T.C.C.). 17 Ibid. at paragraph 77. 19 2009 FCA 113, aff g 2008 DTC 3583 (T.C.C.). 985

The third and fourth principles have a greater impact on tax planning and thus merit further analysis. Singleton Expanded The principle elucidated by the Supreme Court in Singleton is that the test for interest deductibility is use and not true economic purpose. During the Lipson hearing, the Crown conceded that the GAAR would not have applied in Singleton. However, the Crown did argue in Lipson that the lower courts were correct to find that the interest deduction itself (by either Mr. or Mrs. Lipson) was a misuse or abuse of the Act. Yet all three judgments of the Supreme Court in Lipson agreed that the interest deduction itself (and in the hands of Mrs. Lipson) was not a misuse or abuse of the Act: Mrs. Lipson financed the purchase of the income-producing property with debt, and the personal residence was financed with equity. This type of reorganization has been described as the shuffle of cheques, but it may be more aptly described as a shuffle of equity. In other words, where a taxpayer has built up tax-paid equity, and he reorganizes that equity in a series of transactions the end result of which is to have a personal residence and an interest deduction on the mortgage, this is permitted by paragraph 20(1)(c) and subsection 20(3) of the Act and will not attract the GAAR. The interesting aspect of the Supreme Court s decision in Lipson is that this principle has now been expanded to apply to the reorganization of equity within a spousal unit. For example, in Singleton, the taxpayer had equity in his partnership interest. This equity was extracted and used to pay for a personal residence. 20 The taxpayer then borrowed money to finance the purchase of a partnership interest. In Lipson, Mr. Lipson had equity in his ownership of Lipson Family Investments Limited. His wife had no equity. She borrowed funds and bought the shares from her husband, who then used the equity to buy the house and then refinance and pay off her demand loan. The Supreme Court did not seem to be bothered at all by the fact that Mrs. Lipson had no equity at the time of the initial 20 Supra note 7 at paragraphs 2-3. However, note the Tax Court s description of the facts, supra note 5 at paragraphs 3-5. borrowing. The Court seemed satisfied that the Lipson facts are within the scope of Singleton because somebody somewhere (in this case, Mr. Lipson) had equity in the series of transactions that resulted in the interest deduction. Accordingly, in our view, this has expanded the scope of Singleton: now it is possible within a spousal unit to utilize the equity of either spouse for the purpose of refinancing, the end result of which is the spouses end up with a mortgage and an interest deduction by the spouse who took out the initial borrowing. So long as there is no spousal twist, then the GAAR will not apply. The Supreme Court s finding on this point was likely surprising to observers who had noted the lower courts emphasis on the overall result of the series of transactions the Lipsons had attempted to make mortgage interest on a personal residence deductible under paragraph 20(1)(c) of the Act. After finding a misuse and abuse of the interest deduction provisions, the Tax Court found that the spousal attribution rules had also been misused and abused. The Supreme Court offered no explanation as to why the overall result of making the mortgage interest deductible (the misuse and abuse identified by the Tax Court) was, in its opinion, not a misuse or abuse. 21 Specific Provisions Versus the GAAR The proper interaction of the specific antiavoidance rules in the Act and the general anti-avoidance rule elicited some of the strongest statements in each set of reasons. In this case, the Court wrestled with the interaction between the specific anti-avoidance rule in subsection 74.5(11) of the Act and the GAAR. Which, if either, applies and/or is paramount? Justice LeBel s majority opinion stated, in obiter, that the proper role of the GAAR is as follows: [W]here the language and principles flowing from the GAAR apply to a transaction, the court should not refuse to apply it on the ground that a more specific provision one that both the Minister and the taxpayers considered to be inapplicable throughout the 21 See, for example, the brief statement in the majority opinion, supra note 1 at paragraph 41. 986

proceedings might also apply to the transaction. [ ] The GAAR is a residual provision, but it is designed to address the complexity of transactions which fall outside the scope of specific anti-avoidance provisions. 22 Justice Binnie called Justice Rothstein s position on subsection 74.5(11) of the Act a deus ex machina to dispose of the appeals. In Justice Binnie s opinion, the parties had not raised the issue of the application of subsection 74.5(11) and the appeal should not have been disposed of on the basis of that subsection. And, of course, Justice Rothstein was clear that, in his view, the specific rule in subsection 74.5(11) precluded the application of the GAAR because the GAAR is not to be used to fill in the gaps between specific anti-avoidance provisions in the Act. Many observers will no doubt wish that the Court had dealt with this issue in a more coherent manner. As it is, the comments of the majority were in obiter and thus taxpayers and their counsel will have to wait for a future case to clarify the conflicting views of the GAAR s role vis-à-vis the specific antiavoidance provisions of the Act. One of those cases was recently decided by the Federal Court of Appeal. In Landrus v. R., the Tax Court allowed the taxpayer s appeal and held that the GAAR did not apply where a series of stop-loss rules (anti-avoidance provisions) did not apply to the facts of the taxpayer s transactions. In so holding, the Court cited the decision of Associate Chief Justice Bowman (as he then was) in Geransky v. R.: 23 The Income Tax Act is a statute that is remarkable for its specificity and replete with anti-avoidance provisions designed to counteract specific perceived abuses. Where a taxpayer applies those provisions and manages to avoid the pitfalls the Minister cannot say Because you have avoided the shoals and traps of the Act and have not carried out your commercial transaction in a manner that maximizes your tax, I will use GAAR to fill TAX LITIGATION in any gaps not covered by the multitude of specific anti-avoidance provisions. In Landrus, the Federal Court of Appeal side-stepped the war of words in respect of the interaction of the GAAR and specific antiavoidance provisions. However, the Court did provide some guidance on the way specific anti-avoidance provisions are to be considered in a GAAR analysis. The Federal Court of Appeal upheld the Tax Court s analysis of the terminal loss provisions in subsection 20(16) and held that the Tax Court had not made an error of law when it construed the provisions of the Act on which the taxpayer relied to obtain the tax benefit. Subsection 20(16) was part of the capital cost allowance scheme in the Act, and the legislative context of the CCA scheme includes certain other stop-loss provisions the specific anti-avoidance provisions that deny losses where property is transferred between related parties. The Federal Court of Appeal upheld the Tax Court s finding that these specific anti-avoidance provisions were not evidence of a clear and unambiguous policy in the Act to disregard dispositions and deny any loss where the disposition was to a related party in fact, the policy in the Act is to allow losses on all dispositions, but to limit loss claims in respect of certain transfers depending on the identity of the transferor and transferee. Accordingly, specific anti-avoidance rules are extremely important in determining the object, spirit and purpose of the provision that gives rise to the tax benefit. The Federal Court of Appeal stated: I agree with [the Crown] that the fact that specific anti-avoidance provisions can be demonstrated not to be applicable to a particular situation does not, in and of itself, indicate that the result was condoned by Parliament (Canada v. Central Supply Company (1972) Ltd., [1997] 3 F,C, 674 (F.C.A.)). However, where it can be shown that an antiavoidance provision has been carefully crafted to include some situations and exclude others, it is reasonable to infer that Parliament chose to limit their scope accordingly. 24 The Federal Court of Appeal did not go so far as to directly address the question as to whether the non-operation of a relevant 22 Ibid. at paragraphs 45 and 48. 23 2001 DTC 243. 24 Landrus, supra note 19 at paragraph 47. 987

specific anti-avoidance rule would act as an absolute bar to the successful application of the GAAR the Court appears to say that the GAAR may apply in situations where specific anti-avoidance rules do not. However, the Court has affirmed that such specific antiavoidance rules form a crucial part of the legislative context within which the provision that gave rise to the tax benefit will be considered in the misuse/abuse stage of the GAAR analysis. Returning to Lipson, we note that the dissents of Justice Binnie and Justice Rothstein may, in fact, agree upon more about subsection 74.5(11) of the Act than may be apparent at first glance. Justice Binnie states that subsection 74.1(1) is merely an attribution provision that has its own specific antiavoidance provision (subsection 74.5(11)). He appears to accept this as an indication that the series of transactions was not contrary to the object, spirit or purpose of subsection 74.1(1), which operates as a mere attribution provision. In such a situation, the GAAR did not apply. Our view is that both Justice Binnie and Justice Rothstein recognize the importance of the specific anti-avoidance rules in the Act and that they are likely both correct in their views. A specific anti-avoidance rule can be evidence of the object, spirit, and purpose of the provisions in the Act. Where a specific anti-avoidance rule is not offended, that makes it much more difficult for the Crown to establish that there has been a misuse or abuse of the Act. However, we, like all other tax professionals, welcome some additional consideration of these very important points. Conclusion The overall result in Lipson did not come as a surprise to the professional tax community. Its unfortunate effect, however, is that whatever clarity emerged from the decision of the Supreme Court of Canada in Canada Trustco has been muddied. The majority in Lipson arguably went much further than the trial judge s carefully reasoned decision and appears to have endorsed what many will argue comes very close to a judicial smell test. We humbly predict that the future of the GAAR now lies in the hands of the two judges who did not take part in the Lipson hearing: the most senior (Chief Justice McLachlin) and the most junior (Justice Cromwell, appointed December 22, 2008). Until the Court shuffles the deck and revisits the GAAR, there is no way of knowing how Chief Justice McLachlin and Justice Cromwell will approach these issues. While there is some reason to think that Chief Justice McLachlin may lean more in the direction of Justice Binnie s consistency, predictability and fairness analysis, we as yet know nothing of Justice Cromwell s approach to income tax issues. 988