One such case is Copthorne Holdings Ltd. v. Canada. Decided last December, Copthorne is about the Income Tax Act’s General Anti-Avoidance Rule, known to tax aficionados and legal geeks as GAAR. (Please try to stay awake.) GAAR is intended to stop abusive tax-driven transactions technically permitted by the Income Tax Act but whose primary purpose is to avoid taxation. Bad boy Copthorne Holdings had engaged in naughty transactions of this sort, but the tax department wasn’t having any of it, invoked GAAR, and denied Copthorne the tax benefits it had anticipated. Copthorne challenged the ruling, but lost in the courts below. The Supreme Court affirmed the lower courts in a unanimous and clear judgment delivered by Justice Marshall Rothstein on behalf of a nine-member panel.
The director of the Canada Revenue Agency has said the decision will not have much of an effect on how the CRA goes about its business. Most tax practitioners are skeptical and expect beefed-up CRA use of GAAR. After all, although recognizing GAAR’s limitations, in Copthorne the Supreme Court strongly endorsed the rule and its application. Tax probity was affirmed. You can bet that the CRA will be vigorously using all the tools at its disposal, including this one.
Copthorne is quite different from Lipson v. Canada, a GAAR case decided by the Supreme Court in 2009. When Lipson was handed down, Canadian tax guru Vern Krishna called it “the most significant tax decision in 70 years.” In a 4-3 decision, petulant judges divided philosophically over tax policy and took bad-tempered swipes at each other. Some judges (the bare majority) favoured GAAR and the government. The rest did not apply the rule and stood in solidarity with the taxpayer. But now, in Copthorne, the Supreme Court seems to have got its act together. The judges are all rowing in the same direction. The philosophical divide has magically disappeared.
Copthorne, unanimous, clear, andbalanced, trumped Lipson. Reaction to the decision was favourable. The Supreme Court seemed attuned to reasonable business practice and gave clear guidance to the financial and tax community. But good feelings about the court lasted less than a week. That was because Reference re Securities Act, another unanimous nine-judge decision, released a few days after Copthorne, was as bad a decision as Copthorne was good. Nine judges got it right in Copthorne. The same nine got it wrong in the reference.
For a long time, those involved in Canada’s capital market have yearned for a single national securities regulator to replace the absurd patchwork quilt of 13 sets of rules administered by 13 separate regulators, one for each province and territory. In 2006, the federal government produced a draft Canadian Securities Act intended to establish a single regulator. The draft act did not unilaterally impose a unified system, but allowed provinces and territories to opt in. The expectation was that, sooner or later, they would all embrace a national system, driven by irresistible logic and by the imperative of an increasingly international capital market.
There was, of course, the inevitable whingeing from some of the provinces, particularly Quebec and Alberta. For political cover, the government of Canada asked the Supreme Court for an advisory opinion on whether the proposed act fell within Parliament’s general power to regulate trade and commerce. The government argued that the securities market had evolved from a provincial matter to a national matter affecting the country as a whole. As a consequence, it said, the federal trade and commerce power now gave Parliament legislative authority over all aspects of securities regulation. Alberta, Quebec, Manitoba, and New Brunswick argued that the proposed scheme infringed the provincial power over property and civil rights.
Most observers thought the Supreme Court reference was pretty much pro forma. A national securities regulator was obviously an idea whose time had come. Surely a few provincial politicians playing to the gallery couldn’t derail a scheme endorsed by everybody who knew something about finance and business. The Supreme Court, it was widely assumed, would recognize reality.
But it didn’t. In an awkward unanimous judgment, the court decided that the draft Securities Act was unconstitutional. It agreed that “what the Act seeks is comprehensive national securities regulation, with the aim of fostering fair and efficient capital markets and contributing to the stability of Canada’s financial system.” But, said the court: “federalism demands that a balance be struck, a balance that allows both the federal Parliament and the provincial legislatures to act effectively in their respective spheres. Accepting Canada’s interpretation of the general trade and commerce power would disrupt rather than maintain that balance. Parliament cannot regulate the whole of the securities system simply because aspects of it have a national dimension.”
To reach this conclusion, the court used an antiquated division-of-powers approach and applied hoary precedent (it cites a case from 1881, the Parsons decision, as a leading relevant authority on the scope of the trade and commerce power). As for the argument that the securities market has been so transformed as to make the day-to-day regulation of all aspects of trading in securities a matter of national concern, the court simply rejected it.
What a bad decision! It doesn’t reflect modern business and fiscal reality. It doesn’t deal with crucial policy issues. It used a very traditional form of constitutional analysis when other approaches were available that could have led to a better result. Just when things were looking good, out comes the rug from under our feet.
Philip Slayton has been dean of a law school and senior partner of a major Canadian law firm. His latest book is Mighty Judgment: How the Supreme Court of Canada Runs Your Life. Visit him online at philipslayton.com.