Hedge Fund Investments Survive Section 94.1 Challenge

Although based in low-tax jurisdictions, Tax Court finds business reasons for investments overshadowed their tax benefits.

Section 94.1 of the Income Tax Act (Canada) is an anti-avoidance rule aimed at attempts to divert investment income to an offshore entity in a low (or no) tax jurisdiction. In Gerbro Holdings Company v. The Queen ¹, the Tax Court of Canada considered, for the first time, the application of this rule to investments in offshore hedge funds.²The Court concluded that the underlying assets of such funds may be "portfolio investments" for purposes of section 94.1, but the section did not apply in Gerbro because none of the main reasons for investing in the hedge funds was to defer or avoid Canadian taxes.