Canada v. Quebecor Inc., 2025 FCA 207
In Canada v. Quebecor Inc., 2025 FCA 207, the Federal Court of Appeal (“Court”) rejected the Appellant’s argument that the general anti-avoidance rule (“GAAR”) applied to a series of transactions undertaken to consolidate capital losses within a related corporate group. The decision reaffirms that related taxpayers may structure transactions to facilitate loss consolidation without offending the object, spirit, or purpose of the Income Tax Act, RSC, 1985, c. 1 (5th Supp.) (“ITA”).
The decision also considers whether a potential GAAR issue may be raised if a taxpayer deliberately structures transactions by using a taxable wind-up to trigger paragraph 69(5)(d) of the ITA and thereby avoid the stop-loss rule in subsection 40(3.4) of the ITA.
Facts
Quebecor Inc. held shares in Abitibi-Consolidated Inc. (“Abitibi”) with a low adjusted cost base (“ACB”) and a high fair market value (“FMV”). Conversely, Quebecor Inc.’s indirect subsidiary, 3662527 Canada Inc. (“366”), held shares in Videotron Telecom Ltd. (“Videotron”) with a high ACB and a low FMV.
To offset the capital gain on the Abitibi shares with the capital loss in 366, Quebecor implemented the following transactions:
A. Preparation stage
- Step 1: In 2003, Quebecor Media Inc. (“QMI”) subscribed to shares of a newly created corporation, 9101-0827 Québec Inc. (“9101”).
- Step 2: 9101 acquired shares of 366 that had been held by a third party, the Carlyle Group.
B. Group (a) transactions: increasing the ACB of Quebecor’s Abitibi shares
- Step 1: section 85 rollover
Quebecor transferred its Abitibi shares to 366 on a tax-deferred basis under subsection 85(1) of the ITA, in exchange for preferred shares of 366. The elected amount for Quebecor’s proceeds of disposition of the Abitibi shares was $1, and 366’s ACB in the Abitibi shares was also $1.
- Step 2: 366 redeemed its preferred shares held by Quebecor
366 redeemed its preferred shares held by Quebecor for a $191.8 million note. This resulted in a deemed dividend under subsection 84(3) of the ITA, which was deductible to Quebecor under subsection 112(1) of the ITA as an intercorporate dividend.
- Step 3: Quebecor reacquired the Abitibi shares from 366
366 repaid the $191.8 million note by transferring the Abitibi shares back to Quebecor. As a result, 366 realized a capital gain of approximately $191.8 million on the transfer of the Abitibi shares; and Quebecor’s ACB in the Abitibi shares was increased to approximately $191.8 million.
In this way, the ACB of the Abitibi shares effectively stepped up from $1 to $191.8 million.
C. Group (b) transactions: materializing the unrealized loss
To use the capital loss in 366, the unrealized loss first had to be realized. Therefore, the group structured a taxable wind-up of 366. As part of the winding-up, 366 disposed of its assets, including its Class A shares in Videotron, and realized a capital loss of approximately $206 million.
Because the winding-up was governed by subsection 69(5), paragraph 69(5)(d) operated to exclude the application of subsection 40(3.4). Consequently, subsection 40(3.4) did not suspend the loss. This meant that the loss did not have to be suspended until the property left the affiliated group, and the loss could be immediately realized in the winding-up.
Ultimately, the $206 million capital loss offset the approximately $197.3 million capital gain.
Issue
As per section 245 of the ITA, GAAR applies where the following three questions are answered affirmatively:
- Is there a tax benefit?
- Is there an avoidance transaction giving rise to the tax benefit?
- Is the tax avoidance abusive?
Quebecor admitted that it received a tax benefit and that the transactions at issue were avoidance transactions. Therefore, the only issue before the Court was whether the series of transactions was abusive.
Analysis
1. The transactions did not result in an abuse of the ITA
The Appellant advanced three main reasons why it believed Quebecor had abused the tax mechanism.
First, the Appellant argued that, whether a winding-up is taxable or tax-free, the object, spirit, and purpose of the legislative provisions applicable to windings-up is to recognize only one loss for the same economic interest: either on the shares of the subsidiary held by the parent, or on the subsidiary’s underlying assets.
Here, the transactions produced two levels of losses for the same economic interest: first, the approximately $206 million capital loss realized by 366 on the disposition of the Videotron shares; and second, the approximately $400 million capital loss realized by QMI on its shares of 366.
The Court disagreed. It held that the Appellant’s proposed “matching principle” had no sufficient support in the ITA. The Court relied on the decision in Canada v. Produits Forestiers Donohue Inc., 2002 FCA 422, where it had previously held at para. 18 that “a gain or loss may be realized at the same time by a shareholder in respect of his shares and by the corporation in respect of its own property.” Therefore, the Appellant’s argument was without merit.
Second, the Appellant argued that Quebecor had abused the capital gain and capital loss system. However, the Appellant also acknowledged that 366 could deduct its loss during its final taxation year. As a result, there was no artificial increase resulting from a loss that should have disappeared.
Third, the Appellant asked the Court to consider the overall result of the series of transactions. The Court accepted that this was not only legitimate, but necessary in determining whether the transactions constituted an abuse of the ITA.
However, the Court held that loss consolidation transactions, i.e., loss transfer transactions between related persons, do not necessarily result in abuse. The Court referred to the explanatory notes for section 245 of the ITA, in which the Minister of Finance stated that a transfer of losses between related persons, even when undertaken primarily for tax reasons, generally does not result in a misuse or abuse of the ITA.
The Court also relied on the decision in Deans Knight Income Corp. v. Canada, 2023 SCC 16, where the Supreme Court recognized at para. 97 that “transfers can occur between related parties without the unused losses being denied due to a “’technical change in control of the corporation.’”
Therefore, the use of losses within a related corporate group does not, by itself, trigger the application of GAAR.
2. Stop-loss rule
Although the Court held that the Appellant had not discharged its burden of proving abuse, it nevertheless identified a possible abuse theory that the Appellant had not pursued.
At the preparation stage, 9101 was inserted into the structure and acquired part of the shares of 366. This prevented QMI from satisfying the 90% ownership threshold required for subsection 88(1) of the ITA to apply. Under subsection 88(1) tax-free winding up, the Videotron shares would have been disposed of on a rollover basis and the loss would not have arisen.
By contrast, because 9101 was inserted into the structure, the winding-up became a taxable winding-up under subsection 69(5) of the ITA. Therefore, 366 was deemed to dispose of the Videotron shares at fair market value, which allowed 366 to realize the $206 million capital loss.
At the same time, the loss property still remained within the affiliated group. Economically, the group had not truly disposed of the property to an outsider. In principle, this is the kind of situation in which subsection 40(3.4) of the ITA, the stop-loss rule, might apply to defer the loss and prevent its immediate realization.
However, paragraph 69(5)(d) of the ITA provides that subsection 40(3.4) of the ITA does not apply to property disposed of on a taxable winding-up. Therefore, the $206 million loss was not suspended and could be used immediately.
The Court observed that this might have raised a more precise GAAR issue: was it abusive to arrange for 9101 to hold shares of 366 so that 366 could undergo a taxable winding-up, thereby realizing a loss that might otherwise have been suspended under subsection 40(3.4) of the ITA?
However, the Appellant did not argue abuse of the stop-loss rules, so the Court did not have the basis to determine abuse on that ground. Accordingly, the Federal Court of Appeal held that GAAR did not apply and dismissed the Appellant’s appeal.
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