In the recent case of MacKay v. The Queen (2007 TCC 94), the Tax Court made a detailed review of the intention of the taxpayers in determining whether the General Anti-Avoidance Rule (“GAAR”) applied. In this case, a bank had acquired a shopping mall by way of mortgage foreclosure. The mortgage outstanding was approximately $16 million. The taxpayers had agreed to acquire the property from the bank for $10 million. It was clear that, throughout the discussions, the focus of the purchase structuring was to acquire the property. It was not just a way to claim a tax write-off. The purchase was structured in a way that permitted the taxpayers to claim a non-capital loss of approximately $6 million, the difference between the outstanding mortgage and the purchase price. The purchaser structured the transaction through a partnership that allowed the loss to be allocated to the partners. If no steps had been taken to acquire the property via a partnership, the loss would not have been available.

The taxpayers were involved in real estate development. It was clear that they intended to purchase the shopping mall, build it up and sell it at a profit. The CRA did not challenge the taxpayers’ claim that the property was inventory that could be written down under subsection 10(1) of the Income Tax Act.

The Court made it clear that while reviewing each transaction, an overall review of the purpose of the series of transactions is required. Even though the overall purpose is not determinative, it is one of the pertinent facts to be considered in determining whether there was an avoidance transaction. In its analysis, the Tax Court noted that “…its primary purpose may still be a non-tax purpose when assessed with reference to the overall series where the facts support that the dominant aim is to achieve a commercially reasonable deal in a tax-effective manner.”

The Tax Court concluded that “... obtaining tax losses was not the primary purpose of any of the transactions” and that “The Appellants commercial purpose of acquiring the Shopping Centre to carry out its Business Plan was the primary purpose of each transaction.” The conclusion was that the GAAR did not apply.

This case is particularly interesting because, on the evidence, the transaction was not structured to obtain tax benefits. Once the deal was agreed, tax benefits were considered and advantage was taken of them. If this transaction had been “marketed” as a tax loss utilization plan, the result may have been different. This was a commercial transaction, later structured to obtain tax benefits.

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