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Federal Tax - Sham. Magren Holdings Ltd v. Canada
In Magren Holdings Ltd v. Canada (Fed CA, 2024) the Federal Court of Appeal dismissed a appeal, this from a dismissed Tax Court appeal, this from a Ministerial assessment "imposing tax on the basis that all of the capital dividends those corporations paid in 2006 were excess dividends", and "where a corporation pays a capital dividend in excess of the balance of its capital dividend account, the corporation is liable for tax".
The court considers the concept of 'sham', here in a federal tax context:[156] As the Tax Court there described, a sham exists when acts are done or documents are executed with the intention of giving the appearance of creating legal rights and obligations that differ from the actual legal rights and obligations that the participants intend to create. A sham involves an element of deceit in that the participants know that their actual legal rights and obligations differ from those presented to others. The necessary "“element of deceit…generally manifests itself by a misrepresentation by the parties of the actual transaction taking place between them”": 2529-1915 Québec Inc. v. Canada, 2008 FCA 398, [2009] 3 C.T.C. 77 at para. 59 [Faraggi].
[157] As this Court has explained, the concepts of sham and abuse are not the same: Faraggi at paras. 54-55. The Tax Court recognized this, stating that neither a tax motivation nor taking steps to implement a "“tax plan”" by itself constitutes a sham, citing Cameco Corporation v. The Queen, 2018 TCC 195, [2019] 1 C.T.C. 2001 (aff’d 2020 FCA 112, [2020] 4 F.C.R. 104, leave to appeal to SCC refused, 39368 (18 February 2021) at paragraph 605: reasons at para. 220.
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[167] In Faraggi, this Court specifically criticized the Tax Court’s conclusion (in the decision under appeal there) that transactions were mere paper transactions and thus shams: Faraggi at paras. 69-70. This Court concluded that the capital dividend elections, not the transactions, were the shams: "“[i]n making these [capital dividend] elections, the subsidiaries misrepresented to the Minister and to all those affected by these elections that the disposition…had resulted in capital gains”"; "“[d]espite the impression given, no capital gains were made”": Faraggi at paras. 77-78.
[168] In Faraggi, third parties would have had to have been participants in the sham the Tax Court identified. This Court expressed skepticism that that was the case. I am of the same view here. Finding TOM was RRSP Trust’s agent equates with finding the Trustee or Agent was a participant in the sham. The respondent did not allege that was the case, and the Tax Court’s findings on knowledge about the "“deceit”" do not extend to the Trustee or Agent.
[169] I agree with the Tax Court that the appellants enjoyed no economic gain or loss from their acquisition and subsequent disposition of the FMO units. However, that does not lead to a conclusion that the transactions were shams. Here the capital gain arose on the disposition of the FVT units. There was no allegation that those units were not capital property. There can be no dispute that before the series of transactions began, FMO had an accrued gain on the FVT units attributable to the gain on the underlying operating business assets.
[170] Finally, although the Tax Court concluded that the transactions that purported to create the capital gains and capital losses were shams that should be disregarded, it does not explain what the "“real”" transactions were, or the consequences flowing from them. It merely repeats its assertion that FMO’s transfer of the FVT units to TOM is "“a circuitous transaction within the RRSP Trust”" that "“cannot be said [to have] triggered ‘real’ capital gains”": reasons at para. 223.
[171] My comments in paragraphs 109 to 115 above apply here. When confronted with a sham, courts are to "“consider the real transactions and disregard the one that was represented as being the real one”": Faraggi at para. 59. Here, the Tax Court disregarded transactions, but did not consider—or even identify—the real ones.
[172] In my view, the Tax Court’s conclusion that the appellants’ acquisition of the RRSP FMO units, TOM’s acquisition of the FVT units from FMO, and FMO’s redemption of the FMO units from the appellants, were shams cannot stand.
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