Taxation law

MMV Capital : GAAR Does Not Apply to Abuse of General Policy Against Loss-Trading

Oct 1st, 2020

By Hyacinthe Huguet

In MMV Capital Partners Inc. v. The Queen, (2020 TCC 82) the Tax Court of Canada reaffirmed that the de jure[1] bright-line test is to be applied under subsection 111(5) of the Income Tax Act (the “ITA”) and emphasized that GAAR does not apply to an avoidance transaction which merely violates a general fiscal policy.

In short, the facts of the case are the following:

  • In 2002, MMV Capital, a company in the business of voice over internet protocol applications, was facing financial hardship and was showing important losses;
  • That same year, MMV Finance was incorporated;
  • In 2004 MMV Financial was incorporated. MMV Financial owned indirectly all of the non-voting stock and 45% of the common shares of MMV Finance. At that point, neither MMV Financial nor MMV Finance owned shares in MMV Capital;
  • In 2009, MMV Capital was put under receivership and ceased to carry its business operations;
  • The following year, MMV Financial indirectly acquired all of the outstanding non-voting shares of MMV Capital and 17 of its 35 voting shares;
  • In 2011, MMV Financial and MMV Finance transferred to MMV Capital loan portfolios totaling a fair-market value of approximately 109 million dollars.
  • From that point on, MMV Capital carried on a venture lending business;
  • From 2011 to 2015 MMV Capital applied non-capital losses from prior years in the amount of approximately 23,5 million dollars.

The parties agreed that MMV Capital realized a tax benefit and that the series of transactions outlined above constituted avoidance transactions. Hence, the court only had to determine whether MMV Capital had misused or abused the provisions set out at section 111 of the ITA, and in particular subsection 111(5) of the ITA, which prevents a taxpayer from using non-capital losses from prior years when that taxpayer has been subject to a change of control.

While acknowledging that there is a general policy against loss-trading, the court found that GAAR did not apply, mainly because MMV Capital had not been subject to a change of control. In coming to that conclusion, the court reaffirmed the principle according to which the bright-line de jure control test rather than a de facto control[2] test is to be applied under subsection 111(5) of the ITA. Unsurprisingly, the court’s reasoning relied heavily on the Supreme Court of Canada’s decision in Duha Printers (Western) Ltd. v. Canada ([1998] 1 SCR 795).

Applying the bright-line de jure control test, the court found that MMV Capital had not been subject to an acquisition of control under the meaning of subsection 111(5) of the ITA and that, consequently, MMV Capital had not misused or abused section 111 of the ITA.

Further, the court posited that, if Parliament had intended courts to apply de facto control under subsection 111(5), it would have explicitly referred to de facto control in the provision as is the case in other provisions of the ITA. Finally, the court noted that the 2013 amendments of the ITA extended the restrictions on loss-trading by deeming de jure control to have been acquired under certain circumstances but noticeably did not expand the notion of control to that of de facto control under subsection 111(5) of the ITA.

While the court’s findings in this case are not surprising as they closely follow the precedent set by the Supreme Court of Canada, the court’s decision serves as a useful reminder that GAAR does not apply to the abuse of a general fiscal policy not codified in the ITA.  

[1] De jure control means having enough votes to elect the board of directors, that is 50% +1 of the voting shares of a corporation.

[2] De facto control refers to a much broader conception of control than de jure control. De facto control can refer to the influence that an entity or individual can exert on a corporation to control it and is assessed on a case-by-case basis by tax authorities.