Loss Consolidation Under GAAR: When Interpretation and Judgement Decide the Outcome

Key Takeaways 

• Loss consolidation transactions attract CRA scrutiny even when they align with Parliament’s design.
• The mechanical structure rarely drives the dispute – the interpretive record does. 
• Business leaders who account for the time and cost of a multi-year CRA challenge reach clearer conclusions about a transaction’s value.

The Situation 

Quebecor Inc. and its indirect subsidiary, 3662527 Canada Inc., held offsetting tax positions: Quebec faced a $191.8M unrealized gain related to shares it held in Abitibi Consolidated Inc., while 366 had a $200.5M unrealized loss. A series of transactions increased Quebecor’s cost base in its Abitibi shares and moved the loss within its corporate group. 

CRA applied GAAR, arguing the series produced multiple losses from the same economic interest and undermined the capital-loss and winding-up rules. 

After years of audit, objection, and appeals, the Federal Court of Appeal upheld the Tax Court’s decision and rejected the CRA’s theory, confirming that the result aligned with Parliament’s intention for related-party loss consolidation. 

What Made the Difference  

The planners executed the structural steps, but the dispute turned on the taxpayer’s case theory and credibility. The Court evaluated the taxpayer’s account of how the loss actually moved through the group in economic substance and found that the framing aligned with the Act’s underlying design.

The CRA advanced a broad GAAR theory, but the taxpayer’s case theory offered a clear explanation of how the transactions fit within Parliament’s intended treatment of related-party groups. The taxpayer’s success flowed from interpretive credibility – not mechanics. 

Interpretative Framework 

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Where the Income Tax Act Shifts from Mechanics to Meaning 

Provision	Mechanical Requirement	Interpretive Requirement	Relevance to Quebecor v. HMK
ss.40(3.4) (Stop-loss rules)	Limits the ability to realize losses on transfers of property between affiliated persons unless the property leaves the group	Interpreted to determine when a loss should be deferred because the property remains within the same economic group	The loss arose on a taxable winding-up, which ss. 40(3.4) does not apply to.
Para. 69(5)(d) (Taxable wind-up exception)	Allows a corporation to realize a loss on a taxable winding-up even when the property remains within an affiliated group	Interpreted to clarify when the exception permits loss recognition despite continued group ownership	The FCA accepted the taxpayer’s reliance on the wind-up exception to realize the losses as functioning as intended and found no misuse of the provision.
s.245 (GAAR)	Authorizes reassessment when an avoidance transaction misuses or abuses the Act’s provisions	Interpreted purposively to test whether a transaction’s outcome aligns with the Act’s object, spirit, and purpose	GAAR became the interpretive bridge – converting a mechanically compliant series into an intention test

The Signal for Business Leaders 

Reorganizations often present clear financial benefits but also attract CRA scrutiny. Reorganizations often present clear financial benefits but also attract CRA scrutiny. When that scrutiny arrives, a familiar pattern follows: the mechanics set the structure, and the interpretation drives how the CRA and the courts assess the arrangement. CRA frequently grounds its case theory in economic-substance narratives, while courts assess whether the taxpayer’s documented economic rationale aligns with Parliament’s design. 

Organizations that advance a credible economic case theory see the dispute revolve around interpretation rather than the mechanics – a dynamic that often meaningfully shifts outcomes. 

Case Reference 

Quebecor Inc. v. HMK, 2025 FCA 207