Stripped Interest Coupon Planning not Subject to GAAR

On May 17, 2010, the Federal Court of Appeal allowed the taxpayer's appeal in Lehigh Cement Limited v. The Queen, holding that the general anti-avoidance rule ("GAAR") did not apply to a series of transactions through which Lehigh's interest payments on debt held by a related non-resident corporation were paid free of withholding tax to an arm's length non-resident bank. The debt restructuring was carried out to access the "5/25" withholding tax exemption for interest paid at arm's length on corporate debt formerly provided under subparagraph 212(1)(b)(vii) of the Income Tax Act (Canada). The 5/25 exemption was replaced in 2008 with a much broader withholding tax exemption for non-participating interest paid to an arm's length person.