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CRA closes tax loophole with win over billionaire's companies

The Supreme Court of Canada has ruled that a series of transactions by billionaire Li Ka-Shing's holding company Copthorne violated the “spirit” of the tax avoidance statute.

VICTOR FRAILE/REUTERS

A Supreme Court of Canada ruling in a complex case involving companies controlled by billionaire Li Ka-Shing and his son Victor Li gives the government new legal tools to challenge corporate transactions crafted to avoid taxes.

The case, Copthorne Holdings Ltd. v. Canada, centred on the application of a key provision for the Income Tax Act, known as the General Anti-Avoidance Rule or GAAR.

But it's sending ripples of concern through corporate Canada. Legal experts said the importance of the case extends far beyond Li Ka-Shing to potentially hundreds, if not thousands, of business transactions in Canada. It also gives the Canada Revenue Agency vast legal authority to question tax savings deals.

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"Our phones have been ringing off the hook with clients calling to ask for advice," said Chia-yi Chua, a tax partner and litigator at McCarthy Tétrault in Toronto.

In a unanimous decision Friday, the court ruled that a series of transactions by Copthorne, a Li family holding company, violated the "spirit" of the tax avoidance statute and was therefore "abusive." The case involved more than $140-million in withholding taxes on income taken out of the country.

Mr. Chua said the ruling sets the standard for what he called a "judicial smell test." Companies are still allowed to arrange their affairs to minimize tax, but the ruling lowers the bar for what's considered abuse under the tax avoidance statute.

The ruling is likely to embolden the CRA when questioning transactions and will boost the role of the Tax Court of Canada in settling disputes, according to Mr. Chua.

At the same time, the Supreme Court also directed lower courts to "conduct an objective, thorough and step-by-step analysis and explain the reasons" for applying the GAAR statute.

Friday's ruling will affect a broader universe of business transactions, agreed David Spiro of Fraser Milner Casgrain LLP. He said the CRA is probably looking at a few dozen large transactions similar to those in the Copthorne case, but the implications of the ruling would apply to many more types of business deals.

The ruling sets the standard that just because a transaction isn't specifically prohibited, doesn't mean it's legal under the tax avoidance statute, he said. The ruling limits a commonly used legal loophole, Mr. Spiro explained.

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"The ruling has application to any kind of transaction where one stickhandles around specific provisions of the Income Tax Act," Mr. Spiro explained.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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