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The facts were established partly by two agreed statement of facts and partly by the Tax Court Judge. With a loan from the Royal Bank of Canada (“RBC”), the Respondent bought $120 million worth of trailers from Transamerica Leasing Inc. (“TLI”), a corporation resident in the United States. The total expenditure was $123.6 million. On closing, the trailers were circuitously leased back to TLI, which immediately prepaid its obligations under the sub-lease agreement. Trailers are exempt from the leasing property rules, so the lessor can claim the full amount of capital cost allowance (“CCA”) which, in this case, amounted to approximately $31 million.

The Respondent and TLI entered into an equipment purchase agreement for the trailers in December 1996. Under that agreement, the Respondent purchased the trailers absolutely; title was transferred on the closing date, but was held in trust by TLI for administrative convenience. The Respondent used approximately $24.98 million of its own funds and borrowed the balance from RBC. As of the closing date, the trailers were leased to Maple Assets Investments Limited (“MAIL”), a limited liability company incorporated under the laws of England. MAIL then sub-leased the trailers to TLI, also effective on the closing date. TLI was required to prepay all amounts that are or may become due under the sub-lease on the date of closing. The Respondent entered into a co-ordination agreement with MAIL and TLI. On the closing date, TLI in fact pre-paid its obligations under the sub-lease to MAIL. MAIL placed on deposit with the RBC an amount equal to the loan and paid the balance to Royal Bank of Canada Trust Company (Jersey) to purchase a bond, which was pledged as security for the lease. The rent was assigned to RBC to be applied to the loan.

In the 1996 and 1997 taxation years, the Respondent deducted CCA in respect of its leasing assets. The CCA claims were made only against leasing income realized by the Respondent in the relevant year. In 2002, the Minister of National Revenue reassessed the Respondent in respect of its 1997 tax year. The general anti-avoidance rule (“GAAR”) was applied on the grounds that the Respondent had failed to acquire title to the trailers and, as a result, the CCA claim of $31,196,700 was denied. The Minister has since abandoned that argument and now seeks to sustain the reassessment only on the basis of the GAAR. It is not asserted that the transaction was a sham or legally ineffective, that the fair market value of the equipment at the time of purchase was not $120 million, that the rental rate between the Respondent and MAIL was not at market rate, or that the loan from the Royal Bank was not at a market interest rate. A standard sale-leaseback agreement would have resulted in identical CCA treatment.

The Tax Court Judge allowed the appeal, finding that the transaction did not fall afoul of the GAAR. The Federal Court of Appeal dismissed the Appellant’s appeal.