Supreme Court Applies GAAR In Copthorne

In a unanimous decision, released on December 16, 2011, the Supreme Court of Canada ruled in Copthorne Holdings Ltd. v Canada,¹ that the general anti-avoidance rule (GAAR) applied to deny the taxpayer the benefits arising from a paid-up capital (PUC) preservation transaction. Copthorne is the fourth GAAR case heard by the Supreme Court.² While the decision, delivered by Justice Rothstein, follows the approach to GAAR established in its prior decisions, particularly Canada Trustco (see our Osler Update dated October 27, 2005), the decision will be scrutinized for further insight into the approach of the Supreme Court to the application of GAAR.

At issue in Copthorne was the redemption for $142 million of shares of a Canadian corporation wholly owned by a non-resident. The redemption of shares held by the non-resident would give rise to a deemed dividend subject to Canadian withholding tax, to the extent the redemption price exceeded the PUC of the shares redeemed.