KPMG LLP

Date

January 2, 200 I

To Paul Hickey

National Tax
From

cc Denis Lacroix,
Subject

Barrie Philp

Offshore Company- Swnmary ofGAAR Committee Review

This is to summarize the results of the Corrunittee' s consideration of this solution, as detailed in
memoranda and related materials provided by Barrie.
After substantial discussion, including a detailed consideration of the recent TCC decision in Canadian
Pacific, we have concluded that (solely from a GAAR perspective) this structure may be offered at a
"should" level of opinion. However, we were somewhat concerned that it could be difficult to find a user
with appropriate facts, and that in the absence of such facts there could be significant obstacles to reaching
a sufficiently high level of opinion.' As that legaVfactual analysis is ·separate from a consideration of
GAAR. we have recorded our sensitivity to the point but have not provided funher analysis.
For purposes of our analysis we assumed that a "tax benefit" would result from the transactions (this seems
clear) as contemplated by subsection 245(1). We have then considered whether the series of transactions
includes an "avoidance transaction" as contemplated by subsection 245(3). In that connection, we noted
that the decision of the TCC in CP seems to penni! a series of transactions to fall outside of 245(3) as long
as the series of transactions has a bona fide non-tax primary purpose. If the statement of this point was
intended by the Conn in CP as a general proposition (rather than a factual conclusion in the particular
case), we do not regard it as likely to survive appeal or subsequent reconsideration. As such, we have
tested each component transaction in the series for a primary tax purpose, even if the series as a whole has
a primary bonafide non-tax purpose, and we have assumed that at least one or more of the component

1

Barrie has noted that, if the funds acquired by the OC or assets substituted therefor were ultimately to be reacquired
by the Donor, there would be a very heavy practical onus on the Donor to demonstrate that (a) it did not have some
kind of currently valuable legal interest in the OC, and (b) it was not always intended that the Donor receive such
funds back. In the former case, the specific anti-avoidance rules in sections 94 and following could well apply, while
in the latter case, it would be hard to argue that the arrangement did not constitute a trust, agency or nominee
relationship, or even a "sham" in the classical sense.

DODD

KPMGlll'. :1 Canadian owned limited liability partne1'1ihlp .
n!Jblilhetl und~r lk~ Iii- ol Ol'ltano, i1 a member firm
ol KPMG lnlemilllonal, a Swi11 iiiiOeiiOUon.

 Page2

2

transactions would have been entered into with no other primary purpose than to obtain a tax benefit.
Thus, our focus thereafter was on the ability of the transactions to shelter under the "no misuse or abuse"
provision in subsection 245(4).
We regard this structure as unusual in the GAAR context, specifically as to subsection 245(4). In most
cases, we believe the issue of misuse or abuse should be determined from the transactions themselves and
their tax consequences, without regard to "purpose" (whether determined subjectively or objectively).
However, in the present case we believe the purpose of the series of transactions, as evidenced by what
ultimately occurs in fact, will be highly relevant to this determination.
We noted first the strong and repeated discussions of the purpose for implementation of the structure as
having bona fide estate planning,' asset protection or philanthropic objectives. While we recognized the
possibility of circular argument here, we considered that what ultimately happens with the money
contributed to the OC would, with 20/20 hindsight, be extremely relevant to a determination of such
purpose. Specifically, if the income or capital ultimately were to fmd its way back to a Canadian resident
who would, if a beneficiary of an offshore trust, be subject to the current income inclusion rules under
section 94 (in particular, the Donor), there would be a significant practical onus on the Donor/beneficiary
(person assessed for tax) to support the purported non-tax purpose of the use of the OC (as opposed, for
example, to the use of a conventional offshore trust which might accomplish the non-tax objectives but be
subject to Canadian tax 4 ).
If the main purpose of the transactions were found to be the reduction of tax, whether by 20/20 hindsight
or otherwise, we noted that we could still refer to the specific rules in the Act (ITA 94 and following) to
support the non-application of GAAR. The argument would be that the Act has formulated a very clear
code as to what is and is not appropriate, that these specific rules are the best evidence of the "object and
spirit" of the Act, and that the Courts should be reluctant to apply the GAAR where such specific rules are
not violated but are clearly complied with. 5
2

In this connection, Barrie correctly points out that the only "transactions" likely in issue in this case would be the
formation of the OC and the contribution of assets thereto by the Donor. Therefore, the interpretive issue in CP may
not be of material impact here.

3

Although we did not discuss the point in our teleconference. I note that the fact that a taxpayer is motivated
primarily by ··estate planning" does not necessarily take us out of the realm of GAAR. Specifically. much of what is
generally meant by the term "estate planning" is in fact tax planning.
4

This is not to say that taxpayers are under an obligation to maximize their tax payable. It is still good law that a
taxpayer may choose, in implementing bonafide transactions, a structure which minimizes tax. However, the factual
minimization of tax is evidence of a tax rn.inimization main purpose, and it then falls to determine whether that
manner of tax minimization is an abuse or misuse as contemplated by IT A 245(4).
5

Barrie observes, with reservations, that ITA 94 and following may be regarded as indicative of a broader general
scheme of the Act, being the taxation (on either accrual or receipt) of Canadian-resident holders of "interests" in

 Page3

We also struggled with the argument that an ultimate distribution of OC assets to the Donor or Canadianresident relatives thereof would indicate that the transactions as a whole would result in an abuse having
regard to the section 94 rules, and as such the saving provision of ITA 245(4) would not apply". (By
contrast, if the income and capital ultimately does remain offshore, perhaps benefiting international
charities or non-Canadian relatives of the Donor, in our view the transactions should not be regarded as
abusive.) We were not unanimous as to the relevance of such ultimate distribution: we felt that the "right
tax policy" result would be for no Canadian tax to apply if there were no ultimate distribution back to
Canada (I believe we were unanimous on this point), but that (in the majority) if the Donor or relatives
thereof were from the outset intended to receive distributions from the OC it would be plausible to argue
that the "scheme" of ITA 94 and following was violated.
We noted in passing the fact that there may be a timing advantage arising from this analysis, in the sense
that it would be difficult for CCRA to criticize the transactions unless they have evidence of the moneys
coming back to (or intended to come back to) related Canadian "beneficiaries", and once that evidence
becomes a fact (if it were to do so) many taxation years could be statute-barred; however, we have not
regarded the foregoing as relevant to our analysis.
In summary, we have reached an overall "should" level of comfort on appropriate facts, although we
recognize a plausible argument that ITA 245(4) might not apply if the facts were adverse.
Additionally, we note the evidentiary importance of our assumptions as to future facts. Thus, we
believe partners considering application of this strategy should be very cautious in evaluating the
intentions of the client and in advising the client as to the foregoing considerations.

The foregoing is intended as a general summary of the primary considerations the Committee has taken
into account in reaching our determination. It is not, and should not be taken to be, a substitute for
detailed consideration in light of the particular facts of a proposed transaction, nor as a substitute for a
detailed opinion based on such particular facts.

offshore entities; however, he regards that scheme as seeking to impose tax only where the Canadian-resident holder
has an interest in the offshore entity which carries potentially valuable legal rights (by which, I take it, one would not
subjec;t to tax a Canadian-resident who has only contingent, speculative, unenforceable entitlements vis-A-vis the

offshore entity).
6

Barrie does not agree with this argument.