Alexandra K. Brown

The respondent mortgage company purchased trailers and leased them back to the vendor to claim a substantial capital cost allowance (CCA) and offset revenue from other leased assets.

The Minister of National Revenue reassessed the respondent and disallowed the CCA claim under the general anti-avoidance rule (GAAR).

The Supreme Court of Canada held that while the transaction resulted in a tax benefit and was an avoidance transaction, it was not abusive tax avoidance under s. 245(4) of the Income Tax Act.

The Court found that the transaction was consistent with the object, spirit, and purpose of the CCA provisions, which permit deductions based on the cost of assets acquired, regardless of the economic risk involved.

The appellants, arm's length taxpayers, sought to deduct over $10 million in losses against their own incomes through a series of transactions involving partnerships.

The original losses belonged to an insolvent trust company, which transferred a portfolio of mortgages with unrealized losses to a non-arm's length partnership.

The trust company then sold its interest in the partnership to an arm's length party, and the appellants subsequently joined a new partnership to claim their proportionate shares of the losses.

The Minister of National Revenue reassessed the appellants and applied the general anti-avoidance rule (GAAR) to disallow the deductions.

The Supreme Court of Canada dismissed the appeal, holding that allowing the appellants to claim the losses would defeat the purposes of s. 18(13) and the partnership provisions of the Income Tax Act, thereby constituting abusive tax avoidance.