Page 733 - SAIT Compendium 2016 Volume1

CASE DIGEST 2011–2012
Background
The appellant had disposed of certain shares in a private company, thereby giving rise to a dispute with the South African Revenue Service regarding the tax consequences of the transaction.
Facts
In the 2005 tax year, the appellant had disposed of certain shares in FG (Pty) Ltd in terms of a transaction involving associated expenditure and the giving of an indemnity.
Issue
Whether the proceeds of the disposal by the appellant of certain shares in FG (Pty) Ltd in the 2005 year of assessment were of a capital or a revenue nature. If those proceeds were of a capital nature, the further issues to be determined were, rstly, whether the expenditure of R45 123 050 actually incurred and paid by the appellant as a so-called ‘equity kicker’ in respect of certain loans was to be excluded from the capital gain made by the appellant on the sale of the shares, in that this amount formed part of their base cost. If the gain in question were properly classi ed as of a revenue nature, then the question arose as to whether expenditure in respect of an indemnity obligation, associated with the purchase of the FG shares, ought to be excluded from the capital gain made by the appellant and whether the expenditures of R45 123 050 and R55 million were deductible from the revenue gain. The nal question related to interest levied in respect of the additional assessment.
Decision
It was held that the 2005 assessment in respect of the assessment must be set aside and revised to re ect that the proceeds of the disposal of shares were a receipt or accrual of a capital nature, that certain speci ed amounts were deductible from the appellant’s taxable income, and that interest on the tax found to be payable was to be remitted.
14. Whether the Crown could, in the appeal, rely on new arguments not raised in the assessment nor in the Tax Court?
[Her Majesty the Queen vs Global Equity (Canada) 2012 FCA 272]
Background
This matter was an appeal by the Crown from a judgment of the Tax Court of Canada (case 2011 TCC 507), allowing the appeal of Global Equity Fund Ltd (‘Global’) with respect to reassessments for the 1999, 2000 and 2001 taxation years issued by the Minister of National Revenue (the ‘Minister’). The Minister, relying on the general anti-avoidance rule (the ‘GAAR’) set out in s 245 of the Income Tax Act (the ‘Act’), had disallowed a business loss in the amount of $5,600,194 claimed by Global following the disposition of shares it held in 953565 Alberta Ltd. That loss arose from the implementation of a planning technique known in the tax community as a ‘value shift’.
Issues:
The principal issues to be determined were as follows:
1. Can the Crown rely in this appeal on new arguments which were not raised by the Minister in assessing the taxpayer
nor relied upon by the Crown in the Tax Court of Canada?
2. Do the transactions in issue result in a misuse or abuse of the provisions relied upon by the taxpayer within the
meaning of s 245(4) of the Act?
Facts
Global was incorporated in 1999 for the purpose of investing in credit facilities and private placements. Its sole shareholder is a trust whose bene ciaries include Mr Riaz Mamdani, his spouse, their children, grandchildren, parents, siblings, nieces and nephews. At the time the transactions in question were entered into, Mr Mamdani and his wife had two very young children.
Mr Mandani sought professional advice to implement a plan to defer tax. The plan, in essence a ‘value shift’, entailed the following:
1. a new corporation, 953565 Alberta Ltd. (‘Newco’) was incorporated;
2. a new trust was set up whose bene ciaries were Mr Mandami’s children and grandchildren (the ‘Children’s Trust’); 3. Global subscribed to common shares of Newco for a consideration of $5,600,250;
4. Newco declared a dividend on the common shares held by Global in the form of non-voting preferred shares which were redeemable and retractable for $5,600,250 and which had a paid-up capital of $56;
5. Newco issued additional common shares to Global for a consideration of $200,000; however, it was acknowledged in the Tax Court that this step was inserted as window-dressing in order to give the common shares some value;
6. Global sold all the common shares it held in Newco to the Children’s Trust for a consideration of $200,000; it was as a result of this sale that Global claimed a loss of $5,600,194;
7. a loan was made by Newco to Global for $5,600,000; the loan bore interest at prime plus 2% and the loan agreement provided for an equity participation of 25% of the increase in fair market value of Global’s assets while any part of the loan remained outstanding; an amendment to the loan agreement was made a few months later which deleted the interest and increased the equity participation to 50%;
8. Global granted an interest in its property to Newco to secure the loan.
At the time the plan was implemented, it was contemplated that the loss resulting from the sale of the common shares of Newco to the Children’s Trust might be a business loss for tax purposes since Global itself was involved in the business of trading securities. Consequently, in the income statement and balance sheet led with Global’s corporate tax return for 2001, the transactions were reported as increasing its losses from operations. $56 was recorded as revenue from the
SAIT CompendIum oF TAx LegISLATIon VoLume 1 725
CASE DIGEST 2011-2012