Coupon Strips: An Easy Avoidance Of Withholding Tax No More

In Lehigh Cement Limited v. The Queen, 2010 DTC 2081 (FCA) (Lehigh), the Federal Court of Appeal considered the application of the general anti-avoidance rule (GAAR) contained in section 245 of the Income Tax Act (Canada) (Act) to a coupon stripping transaction used to avoid withholding tax on interest under the former 5/25 rule contained in subsection 212(1)(b) of the Act. Although Lehigh was decided under the 5/25 rule, the decision has broad implications relevant to current law given that non-arm's length interest (subject to a treaty override) remains statutorily subject to withholding tax following the repeal of the 5/25 regime.

The simplified facts in Lehigh involved a group of companies in the business of manufacturing cement, headed by a German public company, Heidelburger Zement. A Canadian subsidiary of the group, Lehigh Cement Limited, was debt financed by an affiliated Belgian group finance company (Finco) with a $140 million term loan (Loan). Finco