Editor’s Note: This post was written as a preview of an upcoming Supreme Court of Canada decision for the Fantasy Courts website and newsletter.
Hi, here’s what you need to know about the Supreme Court of Canada this week in 4 minutes.
- The SCC is releasing its decision in the tax avoidance case of Canada v. Deans Knight Income Corporation on Friday, May 26, 2023. At issue are laws designed to prevent taxpayers from reducing tax on their income by purchasing corporations with pre-existing losses.
- Hansman v. Neufeld, 2023 SCC 14 was released on May 19, 2023. As 82% correctly predicted, the SCC allowed the appeal and confirmed the motion judge’s decision to dismiss a defamation action using anti-SLAPP provisions.
Head over to Fantasy Courts to lock in your predictions for this week’s decision or read more about the cases below.
Transferring Losses & Tax Avoidance
Appeal by leave from Canada v. Deans Knight Income Corporation, 2021 FCA 160
At trial: The appellant, Deans Knight Income Corporation, was a Canadian public corporation that had approximately $90 million of unused non-capital losses and other deductions. It sought to realize the value of these tax attributes and entered into an agreement with a corporation that had expertise in arranging such transactions. From 2009 to 2012, the appellant deducted a majority of its tax attributes to reduce its tax liability. CRA issued reassessments to deny the deductions. The appellant successfully appealed to the Tax Court.
At the Court of Appeal: The Court of Appeal allowed Canada’s appeal. It found that the statutory conditions for the application of the general anti-avoidance rule (“GAAR”) were met. It was admitted and clear that there was a tax benefit comprised of the deduction of the tax attributes. It was also clear that there were avoidance transactions because they were undertaken primarily to obtain the tax benefit. The avoidance transactions frustrated the object, spirit and purpose of the Income Tax Act.
What Was Argued at the SCC?
Appellant: The appellant argued that the FCA decision goes against two decades of case law in which courts have applied a lower standard for the level of control required. The test should be de jure control rather than de facto or actual control.
Respondent: The respondent argued that transactions involving the appellant manipulated share rights and relationships in order to strip control of the appellant from its voting shareholder without an acquisition of voting control. The FCA correctly held that the transactions blatantly avoided an acquisition of control of the appellant in order to circumvent the loss restriction in the Income Tax Act.
What Else Should You Know Before Making a Prediction?
Justice Côté has authored reasons in many tax decisions, often in favour of the taxpayer. Based on the questions at the appeal hearing, I suspect the same will be true here, and we may see a similar split to that in Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49 where Justices Rowe and Martin, and Chief Justice Wagner were in dissent. If Justice Brown is out still, this could be the closest we come to a tie as a result of his absence.
Last Week at the SCC
On May 26, 2023, the SCC released Hansman v. Neufeld, 2023 SCC 14. The Court allowed (8:1) the appeal.
Held: The defamation action was properly dismissed. Claims with substantial merit will be dismissed where the public interest in preserving free debate outweighs the harm to the plaintiff that the litigation purports to address.
- To succeed on the weighing exercise, a plaintiff must provide evidence that enables the judge to draw an inference of likelihood of harm of a magnitude sufficient to outweigh the public interest in protecting the defendant’s expression.
- There is no chilling effect in barring potential plaintiffs from silencing their critics and collecting damages through a defamation suit.
- The other side of the weighing exercise evaluates the public interest in protecting the defendant’s expression. The closer the expression lies to the core values of s. 2(b), including truth‑seeking, participation in political decision-making and diversity in the forms of self‑fulfillment and human flourishing, the greater the public interest in protecting it.
- 82% correctly predicted the outcome. Justice Côté was the lone judge in dissent. She held that the respondent/plaintiff deserved his day in court.
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