Case Comment on Gilchrist Properties Ltd. v. The King

The Tax Court of Canada (“TCC”) released an interim decision on a Rule 53 motion from the Appellant. The object of the motion was to strike the Crown’s Reply, (the Crown’s pleadings) or for the matter to be dismissed because the Reply, combined with the Crown’s discovery materials provided to date, revealed that their positions had no substantive merit. The Appellant lost, but the issues that arose in this matter are of interest to all tax professionals and anyone who has ever had a dispute with the Canada Revenue Agency (“CRA”).

The main issue in this case is that in 2016 Gilchrist Properties Ltd. (“GPL“) engaged in a fairly common transaction called ‘Non-CCPC Planning’. Canadian-Controlled Private Corporations (“CCPCs”) have certain tax advantages, but there is also a downside. Specifically, if the entity is a holding company for passive investments, there is an additional corporate tax that makes holding bankable (stocks/bonds/funds etc.) investments in CCPCs tax inefficient. The tax policy objective is to prevent deferral of income by allowing investments to sit in corporations, so depending on how much is held, it is slightly more efficient to dividend out cash and hold the investments in the shareholder’s personal name. However, if you can un-CCPC the corporation, it becomes much more tax efficient to hold such investments inside the entity.

In this case GPL was continued from being an Alberta corporation to the British Virgin Islands (“BVI“) and became a BVI corporation. On departure from Canada there is a deemed disposition, but GPL had just realized a large capital gain (so half was in the capital dividend account) and had paid tax on that, so there was not much latent gain to trigger. But there was over CAD$10 million in bankable investments still in the company.

A CCPC is defined in subsection 125(7) of the Income Tax Act (the “Act”) as a corporation that as of the end of the tax year must be a “Canadian corporation” that is not a public corporation, nor controlled by public companies nor non-residents of Canada nor a combination thereof.

The term Canadian corporation is defined in subsection 89(1) as a corporation ‘resident’ in Canada and incorporated in Canada or resident in Canada from 1972 to the tax year in question. Effectively because GPL was not a Canadian corporation because it was no longer incorporated in Canada. Note that the definition of “resident in Canada” for the purposes of this definition is not ‘tax resident’ but rather a more generic concept.

In this specific case, the CRA assessed GPL outside of the ‘normal reassessment period’. This means that the burden of proof lies on the Crown to prove that there was ‘misrepresentation’ due to fraud, willful blindness, negligence or carelessness on the part of the taxpayer. The Crown’s position was that GPL filed its return as a non-CCPC, but it was a CCPC all along, so the company misrepresented its status on its return. As is also typical of the Crown, it made this assumption of fact in the pleadings. However, the Crown had so far during the entire disclosure process provided zero evidence whatsoever that the status of GPL was in fact wrong, nor is there any evidence provided by the CRA that somehow GPL knew or ought to have known that its position was wrong. NO EVIDENCE AT ALL. ABSOLUTE SWEET FA!

Classically, the Crown has just assumed that the burden of proof lies on the taxpayer to prove that it is not a CCPC, and they do not have to prove anything… but wait, because the assessment was out of time did I not just state that because the assessment is ‘out of time’ that the burden shifts to the Crown? Yes, I did.

So why did the motion not prevail? Frankly, I have no clue. I read the decision, but the TCC just hates motions under rule 53 in general, is my takeaway.

However, the CRA and the Crown make the assumption that they can assume away their burden of proof with regard to assessments out of time, usually by also leveling penalties, all the time. And the TCC lets them get away with it by not dismissing cases when the CRA has provided no evidence whatsoever of something that they face the burden of proving. In any event, the issue will be decided on the merits of the case.

I would note in passing that this situation is exactly why it is beneficial to get a legal opinion before doing any Canadian tax planning. If a taxpayer has obtained such a legal opinion, determining, for example, that GPL was not a CCPC after moving to the BVI, then it would be impossible for the Crown to prove that GPL knew or ought to have known that it was making a misrepresentation because their legal counsel had advised them that this was the correct position. This is why tax legal opinions are valuable. I do not know if GPL has such an opinion on file or if they just followed their accountants’ advice. I will just leave that there for your consideration.