Tax planning for possible future events does not attract GAAR: MIL (Investments) S.A. v. The Queen.

AuthorInnes, William I.
PositionGeneral Anti-Avoidance Rule

Introduction

Jean-Raymond Boulle is a very lucky man who became a very rich man. In 1993, while he was a resident of Belize in Central America, (2) he began to acquire shares of Diamond Field Resources Ltd. (DFR), a public company incorporated in Canada and traded on the Toronto Stock Exchange. On March 10, 1993 he transferred those shares to MIL (Investments), a corporation that he had caused to be incorporated under the laws of the Cayman Islands and of which he was the sole shareholder. Before November 1994, DFR acquired, explored, and developed diamond properties. In November, 1994 DFR hit the Mother Lode--it discovered a major deposit of nickel, copper, and cobalt near Voisey's Bay, Labrador. From that point on DFR attracted the attention of mining companies from all over the world and its stock was the subject of huge price increases and much speculation.

While all of this was going on, Boulle took a number of steps to protect his own position. On June 28, 1995, MIL exchanged, under section 85.1 of the Income Tax Act of Canada (3) 703,000 DFR shares for 1,401,218 common shares of Inco: (4) Before June 28, 1995, MIL had held 3,252,273 common shares and Boulle had held 132,500 common shares of DFR representing 11.90 percent and 0.485 percent interest in that company respectively. After June 28, 1995, MIL held 2,549,273 and Boulle held 132,500 shares of DFR representing 9.332 percent and 0.485 percent interest in that company. The combined interest of MIL and Boulle was 9.817 percent.

Next, on July 17, 1995, Boulle caused MIL to be continued to Luxemburg. There was no dispute that at all material times thereafter MIL was a resident of Luxembourg.

Once MIL had acquired residence in Luxembourg, it began to dispose of some shares. Between August 14, 1995, and August 17, 1995, MIL disposed of the 1,401,218 common shares of Inco previously acquired on June 28, 1995 for proceeds of $65,466,895 (Canadian). MIL claimed an exemption from Canadian tax on the resulting capital gain of $64,982,713 (Canadian). MIL was not reassessed in Canada with respect to the gain.

On September 14, 1995, MIL disposed of 50,000 shares of DFR to three individuals for services rendered to the Holdcos. MIL reported proceeds of disposition of $4,525,000 (Canadian) and an ACB of $32,444 (Canadian) and claimed an exemption from Canadian tax on the resulting capital gain of $4,492,556 (Canadian). MIL was not reassessed in Canada with respect to the gain and did not pay tax in Luxembourg. In both cases, the exemption from tax was based on Article 13 of the Convention Between Canada and The Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital ("the Convention"). (5)

Were it not for the exchange of DFR shares by Boulle and MIL on June 28, 1995, MIL would not have been able to claim an exemption under Article 13 on the sale of DFR shares in September of 1995 since the combined ownership of Boulle and MIL in DFR would have been exceeded 10 percent. (6) Be that as it may, the Canada Revenue Agency (CRA) never challenged the exemption claimed by MIL in 1995 on this sale.

From the summer of 1995 into the spring of 1996, the shares of DFR continued to spiral up in value and the company was the subject of much take-over speculation. After a protracted series of offers and counter-offers, on May 22, 1996, the shareholders of DFR finally approved the acquisition of the outstanding shares of DFR by Inco to take effect on August 21, 1996.

MIL received proceeds of disposition in the amount of $427,475,645 (Canadian) for its DFR shares. This resulted in a capital gain of $425,853,942 (Canadian). MIL claimed an exemption on that gain, again under Article 13 of the Treaty. CRA denied that exemption and the heart of this case is whether CRA was entitled to deny MIL the exemption.

The Crown's attack was two-fold. First, it argued that the events starting in June 28, 1995, and ending with the disposition of the DFR shares on August 21, 1995, constituted a...

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