Objective: The appeal focused on the application of the General Anti-Avoidance Rule (GAAR) to transactions by Deans Knight Income Corporation aimed at monetizing non-capital losses and other tax deductions.
Tax Law Context: Under the Income Tax Act, non-capital losses can be carried back 3 years or carried forward 20 years to offset income. However, this carryover is limited if control of a corporation changes, unless it continues the same or similar business that incurred the losses.
Appellant's Strategy: Deans Knight, facing financial difficulties, had about $90 million of unused non-capital losses, scientific research and development tax expenditures, and investment tax credits. To utilize these losses, it entered into a complex arrangement with Matco Capital Ltd. This included transferring all assets and liabilities to a parent company, Matco obtaining a debenture convertible into shares of Deans Knight, and finding a new business venture for an IPO to shelter profits using the tax attributes.
Legal Proceedings:
Deductions Denied: For tax years 2009 to 2012, Deans Knight deducted most of its tax attributes to reduce its liability. However, these deductions were reassessed and denied by the Minister of National Revenue.
Compliance with Act: The parties acknowledged that Deans Knight complied with the Act's text, notably that there was no "acquisition of control," thereby not triggering the loss carryover restriction in section 111(5).
Key Legal Issue:
The central issue was whether the General Anti-Avoidance Rule (GAAR) applies to deny the tax benefits claimed by Deans Knight despite its technical compliance with the Act's provisions??.
