Page 734 - SAIT Compendium 2016 Volume1

CASE DIGEST 2011–2012
stock dividend, and the subscription price for the common shares of Newco was deducted as part of the cost of sales. The overall result was that Global claimed a net business loss of $5,600,194. The claimed loss gave rise to a signi cant tax bene t through the elimination, or near elimination, of tax payable under the Act for Global’s 2001, 2000 and 1999 taxation years.
The Minister, applying the GAAR, reassessed Global to deny this loss in its 2001 taxation year and the carry-back of the loss from the 2001 taxation year to the 1999 and 2000 taxation years. Global appealed to the Tax Court of Canada.
The Tax Court judge allowed the appeal on the GAAR issue even though she found that the transactions were ‘highly arti cial’ and that the loss resulted ‘from a shuf e of paper’ by which ‘no real economic loss was suffered’. She also noted that she may well have upheld the reassessments under the GAAR had the Crown raised different arguments.
The submissions made by the Crown in its appeal were substantially different from those it made in the Tax Court. The Crown now relied on speci c provisions of the Act for the GAAR analysis whereas previously, in the Tax Court, it did not allege that any speci c provision of the Act had been misused or abused, but rather that the transactions resulted in an abuse having regard to the Act as a whole.
In addition, the Crown also relied on the former s 245(1), which disallowed a deduction where income is ‘unduly or arti cially’ reduced. Furthermore, the Crown added that the Newco shares were not inventory, but capital property.
Decision
Section 152(9) of the Act governs the right of the Minister to advance an alternative argument in support of an assessment. The Minister cannot include transactions which did not form the basis of the taxpayer’s reassessment and the right of the Minister to present an alternative argument in support of an assessment is subject to paras (a) and (b) of s 152(9), which speak to the prejudice to the taxpayer.
It was held that Global was prejudiced by two of the new arguments submitted for the rst time during the appeal and that the Crown was therefore precluded from raising these arguments and these arguments must therefore be disregarded. The other arguments raised by the Crown are all legal arguments made on the basis of the existing evidentiary record and were therefore allowed.
The FCA held that the loss generated by Global as a result of the transactions resulted from a value shift between one of the classes of shares held by Global to another class of shares it held. This is simply a paper loss. The fundamentals of the transactions are simple: the inherent value of the common shares in Newco held by Global was moved to the preferred shares issued to Global, with the result that the common shares were left with little value but still with a high cost associated to them, while the preferred shares issued as a dividend had a high value but a low associated cost. Nothing was gained or lost, however, in selling the common shares to the Children’s Trust; Global technically realised a large loss on paper.
There is no air of economic or business reality associated with the loss. The appeal was allowed with respect to the GAAR issue. It was, however, held that Global be entitled to its costs in both the FCA and the Tax Court.
2012–2013
1. Whether the proceeds on the disposal of certain shares were of a capital or revenue nature?
[A (Pty) Ltd v CSARS (Case No 13003: Tax Court Cape Town – 13 June 2013)]
Introduction
This appeal concerned the question as to whether the proceeds on the disposal by the appellant of certain shares (‘FG shares’) were of a capital or revenue nature. The respondent, being the Commissioner for SARS, had included the proceeds of the disposal of the shares in the appellant’s gross income on the basis that the proceeds were not of a capital nature. The appellant objected to this assessment on the grounds that the proceeds were indeed of a capital nature, and that its liabilities formed part of the base cost of the shares disposed of, for the purposes of CGT. However, the respondent argued that the payments made in regard to the ‘equity kicker’ did not stand to have been incurred by the appellant.
Facts
The appellant, a special purpose vehicle, had the sole purpose of acquiring and holding the FG shares. No other business was transacted, no physical directors’ meetings were held and the appellant’s only other obligations were those associated with the funding obtained to acquire the FG shares and the normal statutory obligations such as ling tax returns and the preparations of nancial statements. The appellant disposed of certain FG shares in the 2005 year of assessment. The appellant alleged that the proceeds on the disposal of these shares stood to be classi ed as of a capital nature and the expenditure actually incurred and paid by the appellant to KL (Pty) Ltd (‘KL’) and by KL to D Limited (‘D Ltd’) as a so-called ‘equity kicker’ in respect of loans from D Ltd to KL and from KL to the appellant were to be excluded from the capital gain made by the appellant on the sale of the FG shares.
Held
It was held that the test arising in this case was to establish the intention of the taxpayer both at the point of acquisition and at the sale of the shares in issue. The appellant did not have to show that the shares were ‘held for keeps’ but that did not relieve it of the burden of proving that the purchase was intended to be an investment of some signi cant duration. In the present case the shares in issue were not part of an investment share portfolio which may need more rapid responses to protect the overall investment but a one-off transaction. The evidence did not discount the possibility of an early realisation and it could not be concluded on the strength of the available evidence that the probabilities were in favour of the shares being initially acquired as a capital asset.
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