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Canada’s Federal Court of Appeal upheld a claim by major chemicals firm Univar Holdco Canada ULC that the removal from Canada of C$892 million ($714 million) in surplus capital didn’t violate Canada’s tax law.
The ruling reverses a significant overreach by the Tax Court of Canada in the Univar case by applying Canada’s general anti-avoidance rule in a situation where there were viable alternative transactions to avoid paying tax on the surplus capital, tax lawyer Claire Kennedy said.
Removal of the accumulated surplus and avoiding any resulting taxes was part of the series of transactions in which Univar Canada was indirectly acquired in an arm’s-length deal, so there is no basis for suggesting the transactions were abusive, the appellate court said in the Oct. 13 ruling ( Univar Holdco Canada ULC v. The Queen, Can. Fed. C.A., No. A-245-16, 10/13/17).
Univar outlined an alternative series of transactions that could reasonably have been used to achieve the same avoidance of taxes as the transactions it used, Justice Wyman W. Webb said in writing the 3-0 ruling overturning a 2016 Tax Court decision. The ruling awarded Univar its costs.
“If the taxpayer can illustrate that there are other transactions that could have achieved the same result without triggering any tax, then, in my view, this would be a relevant consideration in determining whether or not the avoidance transaction is abusive,” he said. “These transactions do not frustrate the purpose of Section 212.1 of the Income Tax Act.”
The ruling also rejected the Tax Court’s consideration of 2016 amendments to the Income Tax Act that invalidated the approach taken by Univar to avoid taxes, if they had been in effect at the time the transactions were completed.
“The amendments were enacted approximately nine years after the transactions were completed,” it said. “The 2016 amendments cannot be used to make a finding that the avoidance transaction was abusive.”
The appellate court’s ruling confirms that the availability of an alternative transaction to achieve the same tax result is relevant in determining if a transaction is abusive, Kennedy, a partner in the Toronto office of Bennett Jones LLP, said Oct. 19.
That must be the case if commercial or other non-tax issues preclude the alternative approach, as was the case with Univar as it involved a takeover of a publicly traded indirect parent of the Canadian company, Kennedy told Bloomberg Tax.
“It was shocking that the Tax Court completely dismissed this argument, and totally appropriate that the Court of Appeal rejected that approach,” she said.
The appellate court also made it clear that the Tax Court incorrectly relied on legislative changes made after the Univar transaction as grounds for considering the transaction abusive, Kennedy said. Canada’s Department of Finance has gone too far in suggesting that major legislative changes are only “clarifying” changes as part of efforts to enhance the Canada Revenue Agency’s ability to reassess prior cases under the general anti-avoidance rule, she said.
“Again, the Court of Appeal’s pushback is very welcome,” she said.
Univar declined to comment. “We have nothing to add beyond the ruling,” Danielle Warden, Univar’s senior manager of U.S. communications, told Bloomberg Tax in an Oct. 20 email.
The Canada Revenue Agency can’t comment due to the confidentiality provisions of the Income Tax Act, agency spokesman Zoltan Csepregi said Oct. 20. The CRA has 60 days from the date of the ruling to file an application for leave to appeal to the Supreme Court of Canada, Csepregi told Bloomberg Tax in an email.
The case arose after Luxembourg-based CVC Capital Partners acquired in 2007 Netherlands-based chemicals company Univar NV, including Vancouver-based Univar Canada Ltd. The Canadian subsidiary was of particular interest to the purchaser because of its significant accumulated surplus.
Owned at the time by Redmond, Wash.-based Univar North America Corp., Univar Canada’s shares in 2007 had an adjusted cost base of C$10,000, paid-up capital of C$911,729 and a fair market value of C$889 million.
A series of transactions led to Univar Canada’s acquisition by Univar Holdco Canada ULC, created for the purpose of facilitating the series of transactions, and a C$589 million note payable to Univar Holdco’s U.S. parent, Univar North American Corp.
After those transactions, the U.S. company could extract C$892 million without attracting Part XIII tax in Canada—applied to the sale of shares in Canadian companies to non-residents—compared to C$911,729 without the transactions.
The companies relied on Article XIII of the Canada-U.S. Tax Convention (1980) to exempt from tax in Canada any capital gain created by the transactions, as well as Section 212.1(4) of the Income Tax Act to avoid the deemed dividend that would otherwise be created when the shares of Univar Canada were transferred by its U.S. shareholder to Univar Holdco Canada.
The appellate court noted that Univar acknowledged a tax benefit in avoiding Part XIII tax that would otherwise apply and that it undertook an avoidance transaction as defined under the act, but disputed that the transaction was abusive. The Tax Court judge, considering amendments to the act proposed in the 2016 federal budget, found that the transaction was abusive, it said.
The amendments to Section 212.1(4), for transactions after March 21, 2016, eliminated the exception from deemed dividends in circumstances such as the case at hand, the appellate court said. The Tax Court also rejected the taxpayer’s arguments that it could have structured the transactions differently to achieve the same result without attracting a deemed dividend, it said.
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