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Stubart Investments Ltd v The Queen, [1984] 1 SCR 536 (Link)


There was a parent corporation and 2 sister subsidiaries: Stubart and Grover. Stubart was profitable (food flavouring business). Grover had significant accumulated losses (different type of business).
** Note: losses can be carried forward or backwards. If you had losses in certain year, you could apply those losses against income earned in other years (before or after)
The assets of Stubart were transferred to Grover. Grover then carried on the food flavouring business (assets transfered to Grover). Grover entered into contract with Stubart to manage the food flavouring business. Grover then earned profits from the food flavouring business, and applied its losses against that profit.

Crown argues:
**1. This is a sham.
**2.Even if not a sham, it is an incomplete transaction (when assets were transferred to Grover, the licence to carry on business of food flavor was not transfered).
**3. Even if not sham or incomplete, there was no purpose to the transaction (no business purpose) except to avoid tax.

The Crown won at all previous levels of court.


Does a transaction undertaken to decrease the amount of taxes payable need to have a business purpose?


There is no jurisprudential principle that there must be a business purpose (to a transaction that results in a decrease in taxes payable).


Court stated that:
**1. No sham: because legal rights and obligations created were those intended.
**2. Not incomplete transactions: all assets necessary to carry on business were transferred.
**3. No jurisprudential principle that there has to be a business purpose to a transaction before it is recognized.


Decision in favour of Stubart.


Led to statutory General Anti-Avoidance Rules (GAAR).

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