In a November 21, 2025 decision, HMK v. Quebecor Inc., 2025 FCA 207, the Federal Court of Appeal (FCA) dismissed an appeal by the CRA, upholding a Tax Court of Canada (TCC) decision that found the General Anti-Avoidance Rule (GAAR) did not apply to a series of corporate transactions.
The case reinforces the principle that taxpayers may structure their affairs within the technical rules of the Income Tax Act (ITA) to utilize economic losses, provided they do not frustrate the object, spirit, and purpose of the provisions invoked.
Overview – A Strategic Use of Corporate Losses
The taxpayer, Quebecor Inc. (“Quebecor”), and an indirectly controlled subsidiary, 3662527 Canada Inc. (“366”), found themselves in “inverse situations” during the tax years in the 2000’s. In particular, Quebecor held shares in Abitibi Consolidated Inc. (“Abitibi”) with a low tax cost ($1) and high market value, representing an unrealized capital gain of approximately $191.8 million. Conversely, 366 held shares in Videotron Telecom Ltd. (“Videotron”) with a high tax cost but low market value, representing an unrealized capital loss of roughly $200.5 million.
To avoid paying tax on the Abitibi gain, Quebecor implemented a series of transactions designed to “step up” the cost base of the Abitibi shares using the losses available within the corporate group. The strategy involved:
- Transfer of Shares: Quebecor transferred its Abitibi shares to 366 in exchange for preferred shares, electing a nominal proceed of disposition ($1) under subsection 85(1) of the ITA to avoid immediate gain.
- Cost Step-Up: 366 immediately repurchased for cancellation those preferred shares in exchange for a demand note of $191.8 million. While this triggered a deemed dividend, it was deductible as an intercorporate dividend. Quebecor then exchanged the note to re-acquire the Abitibi shares at a cost equal to their fair market value—$191.8 million—effectively eliminating the future tax liability on that gain.
- Avoiding Tax-Free Winding-Up: To ensure the losses in 366 were realized rather than “suspended,” Quebecor structured the ownership of 366 using a new corporation, 9101-0827 Quebec Inc. (“9101”) so that it would not meet the 90% ownership threshold required for a tax-free winding-up under subsection 88(1) of the ITA.
- Offsetting Gains: By triggering a “taxable” winding-up, 366 realized its capital loss on the Videotron shares. This loss was used to offset the gain it had triggered when it transferred the Abitibi shares back to Quebecor, allowing 366 to be wound up without paying income tax.
The CRA’s Challenge under GAAR
The CRA issued notices of determination denying the increased tax cost of the Abitibi shares, relying on GAAR. The experienced Canadian tax lawyers at the CRA argued that the series of transactions was abusive because it allowed Quebecor to benefit from an artificial cost increase without any corresponding tax being paid, essentially “recycling” a loss to create a “phantom” cost.
The Tax Court allowed Quebecor’s appeal, finding that the CRA failed to discharge its burden of proof that the transactions were abusive. The CRA subsequently appealed to the Federal Court of Appeal.
Federal Court of Appeal Upholds Taxpayer’s Position
The objective of the appellate review was to determine whether the Tax Court erred in its GAAR analysis—specifically, whether the transactions frustrated the object, spirit, and purpose of the winding-up or capital gains schemes of the ITA.
No Abuse of the Winding-Up Scheme
The seasoned Canadian tax lawyers at the CRA argued that the winding-up scheme was intended to allow for only a “single loss” for a single economic interest. They contended that by avoiding the tax-free rules of subsection 88(1), the group benefited from “two levels of losses”: one at the subsidiary level (366) from the existing economic losses and one at the shareholder level (Quebecor) from the taxable winding-up.
The Federal Court of Appeal rejected this “matching” principle. The Court noted:
- Separate Legal Entities: Under corporate and tax law, a corporation and its shareholders are separate entities. A gain or loss can be realized simultaneously by a shareholder on their shares and by the corporation on its property.
- Legislative Silence: The Federal Court found no principle in the ITA that mandates the consolidation or matching of these transactions unless specifically stated.
- Legitimate Choice: There is no evidence that Parliament intended to prevent taxpayers from deliberately failing the requirements of subsection 88(1) to access the taxable winding-up rules.
No Abuse of the Capital Gains Scheme
The knowledgeable Canadian tax lawyers at the CRA also alleged an abuse of the capital gains scheme, arguing that Quebecor received an “artificial” increase in the cost of its shares. However, the Federal Court upheld the finding that the increase in cost was the result of specific provisions (including those governing intercorporate dividends and share exchanges) that Parliament enacted to facilitate such adjustments. The Federal Court noted that the loss utilized was a “real” economic loss resulting from a business slowdown, not a manufactured one.
Pro Tax Tips – Burden of Proof and Taxpayer Certainty
This case is a reminder that the burden is on the CRA to clearly establish the “object, spirit, and purpose” (OSP) of the law before a transaction can be declared abusive under GAAR. The Federal Court emphasized that if the CRA cannot provide clear evidence of a legislative policy that was violated, GAAR cannot be used to override the technical application of the ITA.
The decision underscores that a taxpayer’s choice to use one of two available regimes (for example, taxable vs. tax-free winding-up) is not inherently abusive. Where the ITA provides a choice, a taxpayer is generally free to choose the most tax-efficient path, provided the economic reality of the loss is genuine.
FAQ
Can a corporation intentionally avoid “tax-free” rules to trigger a loss?
Yes. Corporate restructuring for the purpose of deliberately failing to meet the 90% ownership threshold under subsection 88(1) of the ITA was a legitimate way to access the taxable winding-up rules and realize capital losses.
Does GAAR apply every time a taxpayer receives a tax benefit?
No. For GAAR to apply, there must be a tax benefit, an avoidance transaction, and the avoidance must be abusive. If the transaction does not frustrate the underlying policy of the ITA, it is not considered abusive, even if it results in significant tax savings.
Who bears the burden of proof in a GAAR case?
While the taxpayer must show there was no tax benefit or avoidance transaction, the CRA bears the burden of proving that the avoidance was “abusive” by identifying the specific legislative policy that was frustrated.
DISCLAIMER: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out-of-date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.