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Enhanced Capital Loss – Determined to Be Abusive
In this matter, a Canadian-incorporated company transferred its partnership interest to a third party, resulting in a capital loss. The loss was applied against capital gains from prior years under the carry-back provisions.
Revenue authorities alleged that the cost base of the partnership interest had been artificially increased to create an abusive capital loss, contrary to the Income Tax Act. While the taxpayer acknowledged obtaining a tax benefit through an impermissible avoidance arrangement, the central issue was whether the transaction constituted abuse of the statute’s provisions.
The Court conducted an analysis of the object, spirit, or purpose (OSP) of the relevant provisions and concluded that the General Anti-Avoidance Rule (GAAR) was properly invoked. It was noted that the taxpayer received a double benefit by orchestrating multiple transactions within the arrangement. This case highlights a situation in which the technical requirements of the law were met, yet its underlying intent was contravened.
The cost base of the partnership interest related to Canadian resource property, specifically oil and gas rights, as the underlying assets.
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