28 LEXPERT MAGAZINE
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JANUARY/FEBRUARY 2017
CIT GROUP SECURITIES
(CANADA) INC. V. THE QUEEN
DECISION DATE: JULY 4, 2016
e decision in CIT Group Securities (Cana-
da) Inc. v. e Queen is the first to deal with
the interpretation of paragraph 95(2)(l) of
the Income Tax Act, a complex provision
found in the foreign accrual property in-
come (FAPI) rules. is provision deals with
the taxation of interest income earned by a
foreign affiliate of a Canadian taxpayer as
passive income. e provision does not apply
if certain conditions are met. First, the Cana-
dian taxpayer must be a regulated financial
institution. Second, its foreign affiliate must
be a regulated financial institution that car-
ries on the business of a financial institution
in that foreign jurisdiction.
e taxpayer succeeded in its appeal. No
appeal was taken by the federal government
to the Federal Court of Appeal. e Tax
Court of Canada determined that the inter-
est income earned by a Barbadian affiliate
of CIT Group was not subject to tax by the
CRA. e Barbadian affiliate qualified as a
"foreign bank" under the Canadian Bank
Act and its lending activities were regulated
by the Central Bank of Barbados. In such
circumstances, the Canadian Income Tax
Act could not treat the offshore income as
passive income or FAPI.
Canadian taxpayers who have set up off-
shore subsidiaries to earn interest income
will benefit from interpretive guidance re-
garding the effectiveness of such planning.
Moreover, the decision affirms the inability
of the CRA to tax in the absence of raising
specific statutory provisions which would
prevent such taxation. In this regard, the Tax
Court of Canada stated the following:
"[170] Second, the Respondent raised
neither the general anti-avoidance rule in
section 245 nor paragraph 247(2)(b) of the
transfer pricing rules. Instead, the Respon-
dent relied solely on the very specific text of
paragraph 95(2)(l). e Supreme Court of
Canada has long since put to rest the notion
that the sophistication of the tax planning
alters the manner in which one should in-
terpret specific provisions in the ITA such as
paragraph 95(2)(l). In Shell Canada Ltd. v.
Canada, the Supreme Court stated:
'[45] However, this Court has made it
clear in more recent decisions that, absent a
specific provision to the contrary, it is not the
courts' role to prevent taxpayers from relying
on the sophisticated structure of their trans-
actions, arranged in such a way that the par-
ticular provisions of the Act are met, on the
basis that it would be inequitable to those
taxpayers who have not chosen to structure
their transactions that way. is issue was
specifically addressed by this Court in Duha
Printers (Western) Ltd. v. Canada, [1998] 1
S.C.R. 795, at para. 88, per Iacobucci J. See
also Neuman v. M.N.R., [1998] 1 S.C.R.
770, at para. 63, per Iacobucci J. e courts'
role is to interpret and apply the Act as it was
adopted by Parliament. Obiter statements in
earlier cases that might be said to support a
broader and less certain interpretive prin-
ciple have therefore been overtaken by our
developing tax jurisprudence. Unless the Act
provides otherwise, a taxpayer is entitled to
be taxed based on what it actually did, not
based on what it could have done, and cer-
tainly not based on what a less sophisticated
taxpayer might have done.
'[46] Inquiring into the "economic re-
alities" of a particular situation, instead of
simply applying clear and unambiguous
provisions of the Act to the taxpayer's legal
transactions, has an unfortunate practical
effect. is approach wrongly invites a rule
that where there are two ways to structure a
transaction with the same economic effect,
the court must have regard only to the one
without tax advantages. With respect, this
approach fails to give appropriate weight to
the jurisprudence of this Court providing
that, in the absence of a specific statutory
bar to the contrary, taxpayers are entitled
to structure their affairs in a manner that
reduces the tax payable: Stubart, supra, at p.
540, per Wilson J., and at p. 557, per Estey
J.; Hickman Motors Ltd. v. Canada, [1997]
2 S.C.R. 336, at para. 8, per McLachlin J.;
Duha, supra, at para. 88, per Iacobucci J.;
Neuman, supra, at para. 63, per Iacobucci J.
An unrestricted application of an "economic
effects" approach does indirectly what this
Court has consistently held Parliament did
not intend the Act to do directly."
Blake, Cassels & Graydon LLP repre-
sented CIT Group before the Tax Court of
Canada with a tax team led by Edwin Kro,
QC, and included Paul Tamaki, Deborah
Toaze and Casey Richardson-Scott.
e Canadian government was represent-
ed by Elizabeth Chasson, Darren Prevost
and Leonard Elias.
INTEROIL
CORP. V. MULACEK
DECISION DATE: NOVEMBER 4, 2016
On November 4, 2016, the Yukon Court of
Appeal dismissed an application for approval
of a plan of arrangement effectively blocking
ExxonMobil Corp.'s proposed US$2.3 bil-
lion acquisition of InterOil Corp..
Cassels Brock & Blackwell LLP acted
for Philippe Mulacek with a litigation team
that included Wendy Berman, Lara Jackson,
Bill Burden, Derek Ronde, Carly Cohen and
David Kelman with support from corporate
solicitors, Gordon Chambers, John Chris-
tian and Jeffrey Roy.
Lamarche & Lang acted as local counsel
for Philippe Mulacek with a team that in-
cluded Graham Lang and Megan Hannam.
Goodmans LLP acted for InterOil Cor-
poration with a team that included Tom
Friedland and Melanie Ouanounou.
Austring, Fendrick & Fairman acted as
local counsel for InterOil Corporation with
a team that included Greg Fekete.
Blake, Cassels & Graydon LLP acted for
ExxonMobil Corporation with a team that
included David Tupper, Michael Dixon and
Matthew Good.
MacDonald & Company acted as local
counsel for ExxonMobil Corp. with a team
that included Grant MacDonald, QC. (See
lexpert.ca/big-suits for a full description.)
A LOOK AT THE TAX COURT OF CANADA'S DECISION IN CIT GROUP SECURITIES V. HMQ, WHICH PROVIDES GUIDANCE ON THE TAX-
ABILITY OF INTEREST INCOME EARNED BY A FOREIGN AFFILIATE OF A CANADIAN TAXPAYER AS PASSIVE INCOME; AND THE YUKON
COURT OF APPEAL'S DECISION IN INTEROIL V. MULACEK, EFFECTIVELY BLOCKING EXXONMOBIL'S ACQUISITION OF INTEROIL.
| RECENT LITIGATION OF IMPORTANCE |
BIG SUITS
