Tax Treaty Case Law around the Globe 2013

S. 241 Canada: Capital Gains Realized by an Austrian Private Foundation: Sommerer v. The Queen

David G. Duff

1. S. 243 Introduction

In recent years, Canadian courts have heard three notable tax cases in which Canadian residents have sought to avoid tax on the disposition of shares of closely held companies by transferring these shares to a non-resident trust or foundation – which realizes a substantial gain on the subsequent disposition of these shares to an arm’s length person and relies on a tax treaty with Canada to ensure that the gain is exempt from tax in Canada. In Antle v. The Queen, in which the taxpayer sought to avoid tax by transferring shares to a spousal trust resident in Barbados, the Tax Court of Canada and the Federal Court of Appeal held that the transactions were insufficient to create a common law trust and would have been caught by the Canadian general anti-avoidance rule (GAAR) even if they had. In St. Michael Trust Corp. v. The Queen, in which a trust managed by the taxpayer realized a substantial capital gain on the sale of shares that were acquired from its Canadian beneficiaries for considerably less than the ultimate sale price, the Tax Court of Canada, the Federal Co...