Citation: 2011 TCC 507
Date: 20111221
Docket: 2007-4998(IT)G
BETWEEN:
GLOBAL EQUITY FUND LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
(The reasons are amended solely to reformat the appendix
so that the electronic version is legible. No changes to the text have been
made.)
Woods J.
Introduction
[1]
In its 2001 taxation
year, Global Equity Fund Ltd. (“Global”) undertook a series of transactions that
produced a loss of approximately $5,600,000. The loss was applied to eliminate
most of Global’s tax payable under the Income Tax Act for the 1999, 2000
and 2001 taxation years. The question is whether the general anti-avoidance
rule (the GAAR) should be applied in respect of these transactions.
[2]
The summary below describes some
of the steps in the series and it demonstrates how the loss was produced.
a)
Global subscribed for
common shares of a new subsidiary (“Newco”) for a consideration of $5,600,250.
b)
Newco issued preferred
shares to Global by way of a stock dividend. The preferred shares were redeemable
and retractable for $5,600,250 and had a paid-up capital of $56. The stock
dividend resulted in an income inclusion to Global in the amount of $56.
c)
The stock dividend had
the effect of reducing the fair market value of the common shares of Newco to a
nominal amount, but it did not affect the adjusted cost base. Global then
disposed of the common shares of Newco at a loss in the amount of $5,600,250.
[3]
Global was reassessed
for the 1999, 2000 and 2001 taxation years to deny the loss from the sale of
the shares of Newco in the amount of $5,600,250.
[4]
It is evident that the
loss created from the series is highly
artificial. Essentially the loss was a created from a shuffle of paper; no real
economic loss was suffered.
[5]
Similar strategies
using stock dividends have been used by other taxpayers to create losses. In
two recent decisions of this Court, it was determined that the GAAR should be
applied to similar transactions that created capital losses: Triad Gestco
Ltd. v The Queen, 2011 TCC 259 and 1207192 Ontario Inc. v The Queen,
2011 TCC 383. These decisions are currently under appeal.
[6]
Counsel for the Crown
advised that Global’s plan had a unique twist in that the loss was reported as
a business rather than capital loss. The Crown takes no issue with
characterizing the loss in this manner, and it is not appropriate for me to
question it.
[7]
Global submits that the
GAAR does not apply because it undertook the transactions primarily for
creditor protection. It also submits that in any event the transactions do not
amount to abusive tax avoidance because there is no general policy in the Act
which prevents the deduction of artificial business losses.
[8]
For
the reasons below, I have concluded that Global should succeed on the GAAR
issue. The Crown has the burden to establish an abuse of the Act, and
that burden has not been satisfied, in my view.
[9]
Notwithstanding
the result in this appeal, readers should be cautious before concluding that
the GAAR does not apply to transactions of this type. If different arguments
had been raised by the Crown, perhaps the result would have be similar to that
reached in Triad Gestco and 1207192 Ontario.
[10]
Global’s notice of
appeal also raises other issues which were resolved by the
parties prior to the hearing.
Overview
[11]
Global was incorporated
on January 29, 1999 for the purpose of investing in credit facilities and
private placements. It was founded by Riaz Mamdani, a businessman in Calgary with interests in real estate and start up ventures.
[12]
The sole shareholder of
Global is a trust whose beneficiaries include Mr. Mamdani, his spouse, their
children, grandchildren, parents, siblings, nieces and nephews (the “Family
Trust”). At the time of the transactions, Mr. Mamdani and his wife, Zainool Mamdani,
had two very young children.
[13]
In 2000, Mr. Mamdani retained
Kim Moody, an accountant who is a tax specialist. Mr. Mamdani needed assistance
regarding court orders that required him to file overdue personal tax returns. The
relationship flourished, and Mr. Moody became a close tax and business adviser
to Mr. Mamdani. The two men began to meet on a weekly basis.
[14]
At some point, Mr.
Mamdani asked Mr. Moody to recommend strategies for Global to defer tax. General
proposals to shelter capital gains, including plans involving stock dividends, were
presented to Mr. Mamdani on July 24, 2001. After Mr. Mamdani and Mr. Moody met
on August 21, 2001, a lawyer with commercial and tax expertise, Dennis Nerland,
was brought in to assist with the planning and implementation of a plan.
[15]
The plan was
implemented just prior to September 30, 2001, which was Global’s taxation year
end.
[16]
A more complete summary
of the plan is set out below.
a)
A new corporation,
953565 Alberta Ltd. (“Newco”), was incorporated, and Global subscribed for
common shares of this corporation for amounts totalling $5,600,250. Bank
financing was arranged to facilitate this transaction.
b)
Newco paid a stock
dividend on the common shares held by Global by issuing to Global preferred
shares which were redeemable and retractable for $5,600,250 and had a paid-up
capital of $56.
c)
Newco issued additional
common shares to Global for a consideration of $200,000. It was acknowledged
that this step was inserted as window dressing in order to give the common
shares some value.
d)
The common shares of
Global were sold for a consideration of $200,000. The purchaser was a new trust
whose beneficiaries were Mr. Mamdani’s children and grandchildren (the
“Children’s Trust”).
e)
Global borrowed
$5,600,000 from Newco. The loan bore interest at prime plus 2 percent and
contained an equity participation of 25 percent of the increase in fair market
value of Global’s assets while any part of the loan remained outstanding. An
amendment to the loan was made a few months later which deleted the interest
and increased the equity participation to 50 percent.
f)
Global granted a
security interest in its property to Newco as security for the above loan. The
security interest was registered in accordance with Alberta
legislation.
[17]
All of the above transactions,
except possibly f), were undertaken near the end of September, 2001.
[18]
At the time that the
plan was implemented, it was contemplated that the loss might be a business
loss for tax purposes because Global’s business involved the trading of
securities (Ex. A-2, Tab 4).
[19]
In the income statement and
balance sheet that were included with Global’s corporate tax return for 2001,
the above transactions were reported as increasing Global’s loss from
operations. In particular, $56 was recorded as revenue from the stock dividend,
and the subscription price for the common shares of Newco was deducted as part
of the cost of sales. The overall result was that Global’s loss from operations
included a net loss of $5,600,194. This produced significant negative retained
earnings which were recorded on Global’s balance sheet.
[20]
Mr. Mamdani testified that he was
aware that the plan might give rise to a tax benefit, but he stated that his
overarching motive was creditor protection.
[21]
Sometime in 2000, a lawsuit was
launched in the United States against Jaws Technologies Inc. (“Jaws”). Mr. Mamdani
was a director of Jaws and was active in its affairs. Global was involved in
Jaws as an investor.
[22]
Mr. Mamdani was added as a
defendant in the Jaws litigation in May 2001, and Global was named as a
defendant (but not served) on August 1, 2001.
[23]
Mr. Mamdani ceased to be a
director of Jaws early in 2001, and he resigned as a trustee of the Family
Trust on August 1, 2001. He also ceased to be a director of Global and Newco on
September 26, 2001.
Interpretive
principles re the GAAR
[24]
The general principles to be
applied in interpreting the GAAR were established by the Supreme Court of
Canada in Canada Trustco Mortgage Co. v The Queen, 2005 SCC 54, 2005 DTC
5523 (“Trustco”). It is useful to reproduce the Court’s summary from
that case:
[66] The
approach to s. 245 of the Income Tax Act may be summarized as follows.
1. Three
requirements must be established to permit application of the GAAR:
(1) A tax benefit resulting from a transaction or part of a
series of transactions (s. 245(1) and (2));
(2) that the transaction is an avoidance transaction in the
sense that it cannot be said to have been reasonably undertaken or arranged
primarily for a bona fide purpose other than to obtain a tax benefit;
and
(3) that there was abusive tax avoidance in the sense that it
cannot be reasonably concluded that a tax benefit would be consistent with the
object, spirit or purpose of the provisions relied upon by the taxpayer.
2. The burden is on the taxpayer to refute (1) and (2), and on the
Minister to establish (3).
3. If the existence of abusive tax avoidance is unclear, the benefit
of the doubt goes to the taxpayer.
4. The courts proceed by conducting a unified textual, contextual
and purposive analysis of the provisions giving rise to the tax benefit in
order to determine why they were put in place and why the benefit was
conferred. The goal is to arrive at a purposive interpretation that is
harmonious with the provisions of the Act that confer the tax benefit, read in
the context of the whole Act.
5. Whether the transactions were motivated by any economic,
commercial, family or other non-tax purpose may form part of the factual
context that the courts may consider in the analysis of abusive tax avoidance
allegations under s. 245(4). However, any finding in this respect would form
only one part of the underlying facts of a case, and would be insufficient by
itself to establish abusive tax avoidance. The central issue is the proper
interpretation of the relevant provisions in light of their context and
purpose.
6. Abusive tax avoidance may be found where the relationships and
transactions as expressed in the relevant documentation lack a proper basis
relative to the object, spirit or purpose of the provisions that are purported
to confer the tax benefit, or where they are wholly dissimilar to the
relationships or transactions that are contemplated by the provisions.
7. Where the Tax Court judge has proceeded on a proper construction
of the provisions of the Income Tax Act and on findings supported by the
evidence, appellate tribunals should not interfere, absent a palpable and
overriding error.
[25]
It is also useful to reproduce the
Court’s expanded discussion of a taxpayer’s burden to refute the existence of a
tax benefit and avoidance transaction. At paragraph 63 of Trustco, the
Court makes it clear that this burden is not absolute; the usual considerations
with respect to the burden on factual matters apply.
[63] The determination of the existence of a tax benefit and an
avoidance transaction under s. 245(1), (2) and (3) involves factual decisions.
As such, the burden of proof is the same as in any tax proceeding where the
taxpayer disputes the Minister’s assessment and its underlying assumptions of
facts. The initial obligation is on the taxpayer to “refute” or challenge the
Minister’s factual assumptions by contesting the existence of a tax benefit or
by showing that a bona fide non-tax purpose primarily drove the transaction:
see Hickman Motors Ltd. v. Canada, [97 DTC 5363] [1997] 2 S.C.R. 336, at
para. 92. It is not unfair to impose this burden, as the taxpayer would
presumably have knowledge of the factual background of the transaction.
Preliminary matters - tax
benefit and series
[26]
Two of the three elements of the
GAAR recognized in Trustco are at issue in this appeal: avoidance
transaction and abusive tax avoidance. Before discussing these, I should first
identify a tax benefit and an appropriate series of transactions.
[27]
The Crown submits that the tax benefit
is the tax that would have been payable under the Act by Global for its
1999, 2000 and 2001 taxation years if the tax had not been eliminated, or
almost eliminated, by the loss incurred on the sale of the shares of Newco,
subject to the GAAR. This submission is not in dispute and the analysis below
proceeds on this basis.
[28]
Strictly speaking, I would have
thought that the tax benefit is the benefit derived from the entire series, and
not simply the sale of shares. The focus on series seems to be contemplated by
the relevant provision, s. 245(3)(b). I will not discuss this further as
the difference is not likely to be material in this particular case.
[29]
As for the relevant series of
transactions, the parties had differing views as to an appropriate series, but
neither counsel pressed the point in argument. Global submits that the series
includes all of the transactions described above. The Crown submits that it is
appropriate to look at a smaller subset of transactions, namely, only those
transactions which produced the tax benefit. In particular, the Crown would
exclude from the series the loan to Global and the security interest.
[30]
It is not necessary for me to wade
into this debate, and I do not propose to do so as it does not affect my
conclusion. Without deciding the point, the analysis below generally refers to
the series of transactions suggested by Global, which includes all of the
transactions above. I will refer to it as the “Series.”
[31]
Notwithstanding the above, I am
alive to the fact that the Crown’s view of series is relevant to the analysis
because it was used in the Minister’s assumptions. Therefore the Crown’s view
of series affects the burden of proof. I discuss this further below.
[32]
I now turn to the main issues.
Is there an avoidance
transaction?
(a) Introduction
[33]
The second requirement of the GAAR,
as formulated in Trustco, is an “avoidance transaction,” as that term is
defined in s. 245(3) of the Act. Paragraph 245(3)(b), which is
relevant to this appeal, provides that any transaction within the series will
be an avoidance transaction unless the transaction has been undertaken
primarily for bona fide purposes other than to obtain the tax benefit.
245. (3) An avoidance transaction means any transaction
[…]
(b) that is part of a series of transactions, which series, but
for this section, would result, directly or indirectly, in a tax benefit,
unless the transaction may reasonably be considered to have been undertaken or
arranged primarily for bona fide purposes other than to obtain the tax benefit.
(b) Positions of parties
[34]
The Crown submits that there are
at least three avoidance transactions in the Series, and that these were
undertaken only to achieve the tax benefit: the payment of the stock dividend, the
creation of the Children’s Trust, and the sale of common shares of Newco by
Global to the Children’s Trust.
[35]
Counsel for the Crown acknowledges
that some creditor protection was taking place in other transactions in the
Series, and no arguments were made as to the purpose of the Series as a whole.
[36]
Global submits that the evidence
establishes that none of the transactions in the Series have a primary tax purpose.
It submits that creditor protection was the primary purpose of each transaction.
[37]
Global also challenges the
assumption relied on by the Minister relating to the purpose of these
transactions. Counsel referred to MNR v Pillsbury Holdings Ltd., 64 DTC
5184, at p 5188 for the proposition that an assumption may be challenged either
by (1) proving that the assumption is wrong in fact, (2) proving that the
assumption does not support the assessing position, or (3) proving that the
assumption was not made. Global submits that the assumption is flawed on all
three grounds. The effect, Global says, is that the burden of proof should be
shifted to the Crown.
(c) Analysis – Is the assumption
flawed?
[38]
The relevant assumption relating
to the purpose of the transactions is set out in para. 22(x) of the Amended
Reply. It reads:
22. In determining the Appellant’s tax liability for the 1999, 2000
and 2001 taxation years, the Minister made the following assumptions of fact:
[…]
x) the series of transactions as referred to in the
facts set out in subparagraphs (f) to (t) above were not undertaken or arranged
primarily for bona fide purposes other than to obtain a tax benefit for the
Appellant.
[39]
It may be useful to provide some background
to this issue.
[40]
Counsel for the Crown informed me
that the Canada Revenue Agency (CRA) changed its interpretation of the relevant
provision, s. 245(3)(b), after the assessments were issued. At the time
of the assessments, the CRA’s view was that the focus should be on the purpose of
the series as a whole and not on the purpose of individual transactions
comprising the series. This view is reflected in the above assumption. Accordingly,
during the audit, the CRA considered the purpose of individual transactions but
only in the context of determining the purpose of the series. (Read-in of
examination of Douglas Boulton, page 57 – 60.)
[41]
At some point after the
assessments were issued but before the original reply was filed, the CRA
changed its approach and considered that the focus should also be on individual
transactions. This position was confirmed in MacKay v The Queen, 2008
FCA 105, 2008 DTC 6238. The revised position is reflected as an argument in the
original and amended replies, but of course it cannot change the assumption.
[42]
With this background, I now turn
to Global’s arguments, which are based on the three propositions from Pillsbury
Holdings.
[43]
First, Global challenges the
assumption on the basis that it is wrong. It is submitted that this is
established by the evidence. Consideration of this argument requires an
evaluation of the evidence, which is discussed in the next section.
[44]
Global also challenges the
assumption on the basis that it was not made. Global’s counsel suggests that the
relevant assumption is not an assumption of fact at all. The assumption simply
parrots the wording of s. 245(3)(b) which is not sufficient, it is
submitted. Global refers to the comments of Bowie J. in an informal procedure
decision of this Court: Brampton Vee World Motors Ltd. v The Queen, 2006
TCC 453, [2006] GSTC 110, at para 6.
[45]
I disagree with this submission. Brampton
Vee does not support the broad principle that it is incorrect to frame
assumptions using the language in the legislation. The essential question is
whether the assumption can be understood. If the assumption is framed in a meaningful
way, it will be proper. The problem in Brampton Vee was that the
assumption was vague and did not meaningfully inform the taxpayer as to the
facts that the Minister relied on. There is no such flaw in the assumption
stated in paragraph 22(x) of the Amended Reply.
[46]
Global also submits that the
assumption is flawed because it does not support the assessing position. The
Minister should have assumed the purpose of individual transactions instead of
the series as a whole.
[47]
I disagree that the assumption
does not support the assessing position, for two reasons.
[48]
First, Global’s submission is not
logical. In stating that the Minister’s assumption does not support the
assessing position, Global is saying that each transaction within the series
could be undertaken primarily for non-tax purposes even though the series as a
whole is primarily undertaken for tax purposes. I cannot fathom that this is
possible.
[49]
Global’s submission is also
contrary to MacKay, at paragraph 25:
[…] If the
primary purpose of the entire series is to obtain a tax benefit, then the
entire series is an avoidance transaction. […]
[50]
The above comment from MacKay
is obiter but it makes sense that there must be at least one avoidance
transaction if the series as a whole is primarily driven by tax.
[51]
Second, in this particular case
the transactions which the Minister viewed as a series formed an integrated
series of transactions which together produced the tax result. In light of this,
it is inconceivable to me that any of the transactions within this series could
have a different primary purpose than that series as a whole.
[52]
Last, but not least, I wish to
comment that Global did not raise its challenges to the assumption in para. 22(x)
early enough in the litigation process. It is not mentioned in the pleadings,
and counsel for the Crown seemed to be taken by surprise when these arguments
were raised during closing argument. It is very unfair to raise arguments such
as these, which affect the burden of proof, during closing argument after all
the evidence has been presented.
[53]
The concern is exacerbated because
counsel for the Crown in her opening statement explained the background to the
assumption and stated that Global had the burden of proof with respect to the
purpose of individual transactions. Global’s counsel did not object to this at
the time and did not raise the issue until closing argument, which was
subsequent to the presentation of the evidence. This is too late.
[54]
In the circumstances, Global
should have the burden to refute, on a prima facie basis, that the
series as determined by the Minister was not undertaken primarily to achieve
the tax benefit, and that each transaction within that series was not
undertaken primarily to achieve the tax benefit. For completeness, I will also
comment below on whether the result would be different if the Crown had the
burden.
(d) Analysis – primary
purpose of transactions
[55]
What are the principles to be
applied in determining whether there is an avoidance transaction? The Supreme
Court of Canada had this to say in Trustco, at para. 29:
[29] Again, this is a factual inquiry. The taxpayer
cannot avoid the application of the GAAR by merely stating that the transaction
was undertaken or arranged primarily for a non-tax purpose. The Tax Court judge
must weigh the evidence to determine whether it is reasonable to conclude that
the transaction was not undertaken or arranged primarily for a non-tax purpose.
The determination invokes reasonableness, suggesting that the possibility of
different interpretations of the events must be objectively considered.
[56]
It is necessary, then, to compare
the tax and non-tax purposes viewed from an objective standpoint. I will first
consider the primary purpose of the Series and then the individual transactions
within the Series.
(i) Primary purpose
of the Series
[57]
The question is whether Global
undertook the Series primarily to achieve the tax benefit or creditor
protection.
[58]
The tax purpose of the Series is
clear from the evidence and it is acknowledged by Global. The plan was an
integrated series of steps designed to virtually eliminate tax for the 1999,
2000 and 2001 taxation years. Mr. Moody was asked to develop such a plan, he
did so, the plan was implemented and the benefit was clear. A memorandum by Mr.
Moody dated October 5, 2001 stated that offsetting taxable income was one of
the purposes, as well as estate planning for Mr. Mamdani’s children (Ex. A-2,
Tab 4).
[59]
The creditor protection purpose is
less clear from the evidence. Mr. Moody’s October 5 memo does not mention
creditor protection. The evidence in support of this purpose relies heavily on oral
testimony, which was provided by Mr. Mamdani and the professional advisers, Mr.
Moody, and Mr. Nerland.
[60]
Four creditor protection
strategies were mentioned in the testimony: (1) reducing Global’s future value
by freezing a portion of Global’s assets in favour of the Children’s Trust, in
which Mr. Mamdani did not have an interest either as a beneficiary or as a
trustee, (2) restricting a creditor’s options on realization of Global’s assets
by giving Newco a security interest over those assets, (3) increasing the value
of the Children’s Trust by means of the tax deferral, and (4) deterring
creditors by producing a deficit on the financial statements.
[61]
I did not find the evidence to be
convincing in respect of the importance of creditor protection. I would first
comment that Mr. Mamdani, Mr. Moody and Mr. Nerland all have an interest in the
outcome of this litigation, in one way or another. Their testimony should be
viewed with this in mind.
[62]
There may well have been a
creditor protection strategy, but I question the importance that it had. There
was insufficient evidence of a detailed plan or of its effectiveness. As for
the testimony of the witnesses, overall it was not convincing on this issue. The
questions posed to the witnesses did not provide a complete picture of the
relevant events, the witnesses at times gave inconsistent answers, and some of the
testimony was too far-fetched to be believable. The impression that I was left
with was that, to the extent that creditor protection was part of the strategy
for undertaking the transactions, it may have been incorporated in order to
reduce GAAR risk. The following are several examples.
[63]
First, although Mr. Mamdani gave
extensive testimony, he did not provide detailed testimony concerning his
involvement with Global’s tax planning which Mr. Moody had undertaken at his
request. A comprehensive picture of the relevant events was not provided.
[64]
Second, Mr. Mamdani downplayed the
importance of the tax benefit in his testimony. He stated that he was aware
that a positive tax result was likely and that he liked it. However, he downplayed
the importance of the tax benefit to such an extent that the testimony was not
plausible.
[65]
One of the reasons that Mr.
Mamdani provided for downplaying the significance of the tax benefit, was that not
all of the tax analysis had been worked out at the time the transactions were
undertaken. This explanation is not plausible. The tax analysis was very
advanced at the time that the transactions were undertaken. This is clear from the
October 5 memorandum prepared by Mr. Moody.
[66]
Third, Mr. Nerland testified as to
a meeting that he had with Mr. Mamdani on April 10, 2000, which he said
concerned creditor protection strategies. His notes indicate the following discussion
points: “collar,” “monetization,” “shuffle,” and “offshore bank.” Mr. Nerland
testified that these were creditor protection strategies, but that is at odds
with his instruction that the notes of the meeting be filed in a new file
called “Tax Planning.” It is likely that the discussion points have as much or
more to do with tax planning than creditor protection.
[67]
There is also a letter following
up on that meeting in which Mr. Nerland describes a “shuffle” strategy that has
a similar tax result to the transactions at issue in this appeal. Mr. Nerland
testified that the letter correctly identifies the purposes of the plan as:
creditor protection, providing educational opportunity for children, and
freezing a portion of the estate. This explanation is not plausible.
[68]
Fourth, Mr. Nerland was asked by
Global’s counsel to describe the purpose of some of the transactions within the
Series. However, he was not asked about the purpose of each of the transactions.
In particular, Mr. Nerland was not asked why Global acquired common shares of
Newco. Since it is difficult to see any creditor protection purpose to this
transaction, it is unlikely that the failure to ask this question was an
oversight.
[69]
Fifth, Mr. Nerland’s testimony as
to the creditor protection strategy did not leave me with the impression that a
lot of thought had been put into it. For example,
a)
Mr. Nerland testified that it was
important to leave sufficient assets behind in Global to pay its potential
liability from the Jaws litigation. He said that this was accomplished by
transferring only a portion of Global’s assets to Newco. However, Mr. Nerland’s
testimony as to the fair market value of Global’s assets was vague and it
seemed to be inconsistent with Mr. Mamdani’s testimony. Further, Mr. Nerland
could not identify the amount of potential exposure that Global had from the
Jaws litigation. Mr. Nerland seemed to explain the poor recollection on the
passage of time. It is not likely that Mr. Nerland would have had such
difficulty if the strategy had been carefully thought out in the first place.
b)
Mr. Nerland had a poor explanation
for the reason for the creation of the Children’s Trust on cross-examination.
He first focused on the problem being that Mr. Mamdani was a trustee of the
Family Trust. When counsel for the Crown pointed out to him that Mr. Mamdani
was no longer a trustee, he stated that Mrs. Mamdani being a trustee was a
risk.
c)
Mr. Nerland’s explanation for why
annual interest was deleted from the loan was inconsistent with Mr. Mamdani’s
testimony. Mr. Nerland testified that it was for creditor protection purposes.
Mr. Mamdani said that there was a cash flow problem.
d)
Mr. Nerland had a poor
understanding of how inter-company receivables figured into the arrangement. He
first described that Newco’s loan to Global was carved up and assigned. He then
acknowledged that this was incorrect and that the loan had been paid down by an
assignment of inter-company receivables.
[70]
Sixth, there was very little
objective evidence that the common shares of Newco held by the Children’s Trust
have achieved significant value since the implementation of these transactions.
The common shares would have value only to the extent that Newco’s value
exceeds the redeemable amount of its preferred shares. There was evidence of a
transfer of inter-company receivables to Newco but there was no evidence that
interest on these receivables was charged. This leads me to question whether
there ever was an intent for value to accrue to the Children’s Trust.
[71]
Seventh, Mr. Moody testified that
the tax deferral itself was part of the creditor protection strategy. It was
difficult for me to follow the testimony. Mr. Moody seems to suggest that if
Global’s assets were increased through tax deferral, this would allow greater
wealth to be transferred to the Children’s Trust. The idea seems to be that
wealth creation for the children by saving tax is a creditor protection
strategy. I do not accept that this is a non-tax purpose for purposes of s.
245(3)(b) of the Act.
[72]
Eighth, Mr. Mamdani testified that
creditor protection was also achieved because the Series produced a deficit on
Global’s financial statements. This would only be a relevant factor if the
deficit had been identified as a creditor protection strategy prior to the
implementation of the transactions. I am not satisfied that this was the case.
[73]
Ninth, Mr. Nerland suggested that
the secured loan given by Newco to Global was a key part of the creditor
protection strategy. I am not satisfied as to the evidence on this. First, the loan
appears to be an integral part of the tax plan because it allows the funds to
circle so that the bank financing is no longer necessary. As for the security
interest, the evidence is weak that the security interest was part of the
strategy when the main transactions were implemented. The security agreement
was executed on an “as of” basis and the registration verification statement
suggests that the registration took place more than two months later. This
suggests that the security was an after-thought.
[74]
Finally, Mr. Mamdani became a
director of Newco for a short period of time. This action seems inconsistent
with the testimony that Mr. Mamdani was extremely fearful of the consequences
of the Jaws litigation. If Mr. Mamdani was as fearful as he suggested in his
testimony, it is very unlikely that he would have agreed to become a director
of Newco at all, even for a short period.
[75]
Counsel for Global suggests that
the timing of events is strong evidence that the transactions were driven by
creditor protection objectives. It was suggested that similar strategies were
presented to Mr. Mamdani earlier but he chose not to implement them until the
Jaws litigation became more serious. Another interpretation of the timing,
which seems more plausible in light of Mr. Moody’s testimony, is that the
transactions were undertaken to coincide with Global’s 2001 taxation year end.
Counsel suggested that there was no tax benefit to undertaking the transactions
at this time. I do not find this bald assertion by counsel to be persuasive.
[76]
When the evidence is viewed objectively,
it reveals that the tax benefit was the driving force and primary purpose for
undertaking the Series. As mentioned earlier, it may have been that creditor
protection was inserted to reduce the GAAR risk because of the fortuitous
timing of the Jaws litigation. Even if creditor protection was a genuine
purpose for entering into the Series, it was much less important than the tax
objective.
(ii) Purpose of individual
transactions
[77]
In this section, the question that
is considered is whether there is any individual transaction within the Series
that has a primary tax purpose or whether each transaction in the Series was
driven mainly by creditor protection.
[78]
Based on the conclusions above as
to the purpose of the Series, it follows that transactions that were integral
to the tax plan were undertaken primarily for the tax benefit.
[79]
In particular, the incorporation
of Newco, the acquisition by Global of common shares of Newco, the stock
dividend, and the sale of the common shares to the Children’s Trust were
central transactions designed to achieve the tax benefit. They each played a
key part in the loss being created or realized. Each of these transactions are
avoidance transactions with the meaning of s. 245(3)(b).
[80]
Before concluding this part of the
reasons, I would comment on the burden of proof. For the reasons stated above,
I have concluded that Global has the burden to show that the series as
determined by the Minister, and each transaction within it, was undertaken
primarily for bona fide purposes other than to achieve the tax benefit.
[81]
If I am wrong in this conclusion,
the burden would fall on the Crown.
[82]
Global points to the failure of
the Crown to lead evidence as to the purpose of any particular transaction, and
it suggests that the burden has not been satisfied.
[83]
I do not agree with Global’s
submission. In considering whether the Crown has satisfied the burden, one must
look at the evidence as a whole. In this case, the Crown did undertake
effective cross-examination, although it was extremely brief. But even if the
Crown did not lead any evidence at all, the Crown has satisfied the burden because
the evidence as a whole establishes that at least one of the transactions was
undertaken primarily to achieve the tax benefit. The failure of the Crown to
lead more evidence does not affect this result.
Is there abusive tax
avoidance?
(a) Introduction
[84]
The third GAAR requirement is that
the avoidance transaction be abusive. The relevant provision is s. 245(4) of
the Act.
245.(4)
Subsection (2) applies to a transaction only if it may reasonably be considered
that the transaction
(a) would, if this Act were read without reference to this
section, result directly or indirectly in a misuse of the provisions of any one
or more of
(i) this Act,
(ii) the Income
Tax Regulations,
(iii) the Income
Tax Application Rules,
(iv) a tax
treaty, or
(v) any other enactment that is relevant in computing tax or any other
amount payable by or refundable to a person under this Act or in determining
any amount that is relevant for the purposes of that computation; or
(b) would result directly or indirectly in an abuse having
regard to those provisions, other than this section, read as a whole.
[85]
Pursuant to Trustco, an avoidance
transaction is considered to be abusive if it not consistent with the object,
spirit and purpose of the provisions of the Act that were relied on to
achieve the tax benefit. A two step analysis is required: first to identify the
object and spirit of those provisions, and second to determine whether the
object and spirit has been frustrated by the avoidance transactions. Trustco,
para. 55.
[86]
It is considered that the Minister
is in a better position than the taxpayer to make submissions as to the object
and spirit of legislative provisions. The burden, therefore, has been placed on
the Crown. Further, doubt is to be resolved in favour of the taxpayer. Trustco,
para. 65, 66.
[87]
In this case, Global states that
it has relied on sections 3, 4, 9 and 111 of the Act to achieve the tax
benefit. The Crown does not take issue with this.
[88]
As mentioned earlier in these
reasons, I am not satisfied that the Crown has satisfied the burden with
respect to this element of the GAAR. The Crown submits that the object and
spirit of the Act is to permit losses to be deducted only if they are
not artificially created losses. This appears to be eminently reasonable from a
policy standpoint, and yet I am not satisfied that this is the intent of the
legislative provisions relied on based on the arguments that the Crown has
made. If burden is to have real meaning, the Crown must do more than allege an
object and spirit – it must provide a reasonable basis for it. The Crown has
not done this, in my view.
(b) The position of the Crown
[89]
In light of the importance that I
have placed on the Crown’s argument relating to the object and spirit of the
provisions relied on, I will reproduce the relevant part of the written
submissions.
2) First
step: the object, spirit and purpose of the provisions giving rise to the tax benefit
46.
The Minister has not alleged that a specific provision has been misused
in this arrangement. Rather, the transactions in the Series of Transactions
resulted directly or indirectly in an abuse having regard to the provisions of
the Act read as a whole, all within the meaning of subsection 245(4) of
the Act. The Minister argues that the object and purpose of the
provisions of the Act read as a whole is to permit only bona fide
losses as deductions from income or capital gains.
47.
Notwithstanding the above, sections 3 and 9 inform us as to the object
and purpose of reporting income for taxation purposes. Section 3 provides for
the reporting of income from all sources inside or outside Canada. Section 9
identifies business income as a source of income and subsection 9(2) permits a
loss from a business to offset income from that business.
48.
Furthermore, the Act contains numerous provisions concerning
losses. The object and spirit of the Act is to restrict the
deductibility of losses to those losses that are bona fide economic
losses and not mere paper losses.
49.
In 1972, Parliament enacted major tax reforms including the inclusion of
taxable capital gains in the calculation of income and the ability to offset
those gains by deductible capital losses realized in the year.
50.
Concurrent with the introduction of s. 3, 38, 39 and 40, dealing
generally with the computation of capital gains and losses, specific
anti-avoidance provisions relating to capital losses were enacted. The
provisions include former sections 55, 40(2)(g) and 54 of the Act.
51.
Former s. 55 was enacted to prevent capital losses from being
artificially created to offset capital gains. Any capital loss realized on a
disposition, in circumstances that could reasonably be considered to have
artificially or unduly created that loss, was deemed to be nil. Accordingly,
along with the right to deduct realised capital losses, there was the
requirement that such losses not be ‘artificial’.
52.
Subsections 18(13), 18(14), 18(15), 40(3.3) and 40(3.4) address losses
on certain properties transferred within affiliated groups. The purpose of
these provisions is to prevent transactions among affiliated persons from being
used to trigger losses that would not otherwise be available to a taxpayer. (An affiliated person is defined in subsection 251.1 and includes, inter
alia, individuals and corporations but does not include a trust. Thus, in
this case, there was no disposition of property to an affiliated person because
the Children’s Trust, to whom the common shares were disposed, was not an
affiliated person.)
53.
Further provisions that allow us to discern the object and spirit of the
Act with respect to losses include subsections 111(3), 111(4) and 111(5)
which restrict trading in losses by limiting access to non-capital losses and
capital losses. In the case of non-capital losses the deductibility of those
losses is restricted to the persons who realized the loss or the persons who
are carrying on the business in which the losses were incurred.
54.
A contextual and purposive interpretation of the provisions relied on by
the appellant to obtain the Tax Benefit discloses that their object, spirit and
purpose was to allow the recognition of real losses realized outside of
the same economic unit.
(c) Analysis
[90]
It is important to note that the
Crown does not allege that any of the provisions relied on for the tax benefit (s.
3, 4, 9, 111) have been misused. Section 9 appears to be a key provision relied
on by Global as it brings in commercial principles in calculating income and
loss. The Crown acknowledges that this provision, read alone, permits the deduction
of the loss claimed by Global.
[91]
The essence of the Crown’s
argument is that the object and spirit of the provisions relied upon by Global
are influenced by other provisions in the Act. These provisions all
restrict the deduction of losses in one way or another. It is submitted that,
as a result of these other provisions, the object and spirit of the provisions relied
on is disclosed. As a result, only real losses realized outside the economic
unit may be deducted.
[92]
The problem that I have with the Crown’s
argument is that the provisions referred to by the Crown are limited in scope. None
of them, either separately or together, in my view, are suggestive of the broad
object and spirit that business losses are limited to real losses realized
outside the economic unit.
[93]
The provisions relied on by the
Crown are s. 18(13), 18(14), 18(15), 40(3.3), 40(3.4), 54, former section 55,
and s. 111(3), 111(4) and 111(5). They are reproduced in an appendix.
[94]
Only one of these provisions deals
with artificial losses in general. It is former section 55(1), which was
repealed when the GAAR was introduced. When it was in force, it only applied to
transactions on capital account.
[95]
The Crown acknowledges that some
of the other provisions are also targeted to capital losses. They are s.
40(3.3), 40(3.4), 54 and 111(4).
[96]
In the case of provisions which
target capital losses, I do not believe that Parliament intended that they
inform as to the object and spirit of the provisions relied on by Global. The
legislative schemes relating to business and capital transactions are generally
distinct.
[97]
As for provisions that apply to business
losses, the Crown relies on s. 18(13), 18(14), 18(15), 111(3) and 111(5). The
problem that I have with relying on these provisions is that each of them has a
narrow focus.
[98]
Subsections 18(13), 18(14) and
18(15) are restricted to losses from a money lending business and adventures in
the nature of trade. Subsection 111(3) narrowly targets a double deduction of
losses. Subsection 111(5) restricts the deduction of losses on a change of
control.
[99]
I am unable to discern a general
policy from these provisions, separately or together, that restricts business
losses in the manner that the Crown suggests. The provisions are too narrowly
drawn to disclose an intention by Parliament of a general restriction against
the deduction of artificially-created business losses.
[100]
For this reason, I have concluded
that the first step of the abuse analysis has not been satisfied by the Crown.
In particular, the Crown has failed to establish that the object and spirit of
the provisions relied upon for the tax benefit is to restrict business losses
to “real losses realized outside the economic unit.”
[101]
I have concluded, therefore, that Global’s
appeal with respect to the GAAR issue should succeed because abusive tax
avoidance has not been established.
[102]
In light of this conclusion, it is
not necessary for me to consider the second step in the abuse test, that is,
whether the transactions at issue frustrate the object and spirit of the
provisions relied on. I would comment, though, that had I agreed with the Crown’s
position on the first step, I would have no hesitation in concluding that the second
step is satisfied. The transactions undertaken by Global are clearly so vacuous
that they would frustrate the object and spirit suggested by the Crown.
Conclusion
[103]
The appeal will be allowed with
respect to the GAAR issue.
[104]
As for costs, Global has requested
the opportunity to make submissions. Its submissions should be received within
two weeks, the Crown will have a further two weeks to reply, and Global a
further two weeks to respond.
These
Amended Reasons for Judgment are issued in substitution for the Reasons for
Judgment dated October 28, 2011.
Signed at Ottawa, Ontario this 21st
day of December 2011.
“J. M. Woods”
Appendix
Loss provisions as of 2001
except for former subsection 55(1)
18.(13)
Subsection (15) applies, subject to subsection 142.6(7), when
(a) a taxpayer (in this subsection and subsection (15) referred
to as the “transferor”) disposes of a particular property;
(b) the disposition is not described in any of paragraphs (c)
to (g) of the definition “superficial loss” in section 54;
(c) the transferor is not an insurer;
(d) the ordinary business of the transferor includes the lending
of money and the particular property was used or held in the ordinary course of
that business;
(e) the particular property is a share, or a loan, bond,
debenture, mortgage, hypothecary claim, note, agreement for sale or any other
indebtedness;
(f) the particular property was, immediately before the
disposition, not a capital property of the transferor;
(g) during the period that begins 30 days before and ends 30
days after the disposition, the transferor or a person affiliated with the
transferor acquires a property (in this subsection and subsection (15) referred
to as the “substituted property”) that is, or is identical to, the particular
property; and
(h) at the end of the period, the transferor or a person
affiliated with the transferor owns the substituted property.
18.(14)
Subsection (15) applies where
(a) a person (in this subsection and subsection (15) referred to
as the “transferor”) disposes of a particular property;
(b) the particular property is described in an inventory of a
business that is an adventure or concern in the nature of trade;
(c) the disposition is not a disposition that is deemed to have
occurred by section 70, subsection 104(4), section 128.1, paragraph 132.2(1)(f)
or subsection 138(11.3) or 149(10);
(d) during the period that begins 30 days before and ends 30
days after the disposition, the transferor or a person affiliated with the
transferor acquires property (in this subsection and subsection (15) referred
to as the “substituted property”) that is, or is identical to, the particular
property; and
(e) at the end of the period, the transferor or a person
affiliated with the transferor owns the substituted property.
18.(15)
If this subsection applies because of subsection (13) or (14) to a disposition
of a particular property,
(a) the transferor’s loss, if any, from the disposition is
deemed to be nil, and
(b) the amount of the transferor’s loss, if any, from the
disposition (determined without reference to this subsection) is deemed to be a
loss of the transferor from a disposition of the particular property at the
first time, after the disposition,
(i) at which a 30-day period begins throughout which neither the
transferor nor a person affiliated with the transferor owns
(A) the substituted property, or
(B) a property that is identical to the substituted property and that
was acquired after the day that is 31 days before the period begins,
(ii) at which the substituted property would, if it were owned by the
transferor, be deemed by section 128.1 or subsection 149(10) to have been
disposed of by the transferor,
(iii) that is immediately before control of the transferor is acquired
by a person or group of persons, where the transferor is a corporation, or
(iv) at which the winding-up of the transferor begins (other than a
winding-up to which subsection 88(1) applies), where the transferor is a
corporation,
and for the
purpose of paragraph (b), where a partnership otherwise ceases to exist
at any time after the disposition, the partnership is deemed not to have ceased
to exist, and each person who was a member of the partnership immediately
before the partnership would, but for this subsection, have ceased to exist is
deemed to remain a member of the partnership, until the time that is
immediately after the first time described in subparagraphs (b)(i) to
(iv).
40.(2)(g)
a taxpayer’s loss, if any, from the disposition of a property, to the extent
that it is
(i) a superficial loss,
(ii) a loss from the disposition of a debt or other right to receive an
amount, unless the debt or right, as the case may be, was acquired by the
taxpayer for the purpose of gaining or producing income from a business or
property (other than exempt income) or as consideration for the disposition of
capital property to a person with whom the taxpayer was dealing at arm’s
length,
(iii) a loss from the disposition of any personal-use property of the
taxpayer (other than listed personal property or a debt referred to in
subsection 50(2)), or
(iv) a loss from the disposition of property to
(A) a trust governed by a plan or fund referred to in any of
subparagraphs (e)(ii) to (iv) of the definition “disposition” in section
54 under which the taxpayer is a beneficiary or immediately after the
disposition becomes a beneficiary, or
(B) a trust governed by a registered retirement savings plan under
which the taxpayer or the taxpayer’s spouse or common-law partner is an
annuitant or becomes, within 60 days after the end of the taxation year, an
annuitant,
is nil;
40.(3.3)
Subsection (3.4) applies when
(a) a corporation, trust or partnership (in this subsection and
subsection (3.4) referred to as the “transferor”) disposes of a particular
capital property (other than depreciable property of a prescribed class)
otherwise than in a disposition described in any of paragraphs (c) to (g)
of the definition “superficial loss” in section 54;
(b) during the period that begins 30 days before and ends 30
days after the disposition, the transferor or a person affiliated with the
transferor acquires a property (in this subsection and subsection (3.4)
referred to as the “substituted property”) that is, or is identical to, the
particular property; and
(c) at
the end of the period, the transferor or a person affiliated with the
transferor owns the substituted property.
40.(3.4)
If this subsection applies because of subsection (3.3) to a disposition of a
particular property,
(a) the transferor’s loss, if any, from the disposition is
deemed to be nil, and
(b) the amount of the transferor’s loss, if any, from the
disposition (determined without reference to paragraph (2)(g) and this
subsection) is deemed to be a loss of the transferor from a disposition of the
particular property at the time that is immediately before the first time,
after the disposition,
(i) at which a 30-day period begins throughout which neither the
transferor nor a person affiliated with the transferor owns
(A) the substituted property, or
(B) property that is identical to the substituted property and that was
acquired after the day that is 31 days before the period begins,
(ii) at which the property would, if it were owned by the transferor,
be deemed by section 128.1 or subsection 149(10) to have been disposed of by
the transferor,
(iii) that is immediately before control of the transferor is acquired
by a person or group of persons, where the transferor is a corporation,
(iv) at which the transferor or a person affiliated with the transferor
is deemed by section 50 to have disposed of the property, where the substituted
property is a debt or a share of the capital stock of a corporation, or
(v) at which the winding-up of the transferor begins (other than a
winding-up to which subsection 88(1) applies), where the transferor is a
corporation,
and, for the
purpose of paragraph (b), where a partnership otherwise ceases to exist
at any time after the disposition, the partnership is deemed not to have ceased
to exist, and each person who was a member of the partnership immediately
before the partnership would, but for this subsection, have ceased to exist is
deemed to remain a member of the partnership, until the time that is
immediately after the first time described in subparagraphs (b)(i) to
(v).
54. “superficial
loss” — “superficial loss” of a taxpayer means the taxpayer’s loss from the
disposition of a particular property where
(a) during the period that begins 30 days before and ends 30
days after the disposition, the taxpayer or a person affiliated with the
taxpayer acquires a property (in this definition referred to as the
“substituted property”) that is, or is identical to, the particular property,
and
(b) at the end of that period, the taxpayer or a person
affiliated with the taxpayer owns or had a right to acquire the substituted
property,
except where the disposition was
(c) a disposition deemed by paragraph 33.1(11)(a),
subsection 45(1), section 48 as it read in its application before 1993, section
50 or 70, subsection 104(4), section 128.1, paragraph 132.2(1)(f),
subsection 138(11.3) or 142.5(2), paragraph 142.6(1)(b) or subsection
144(4.1) or (4.2) or 149(10) to have been made,
(d) the expiry of an option,
(e) a disposition to which paragraph 40(2)(e.1) applies,
(f) a disposition by a corporation the control of which was
acquired by a person or group of persons within 30 days after the disposition,
(g) a disposition by a person that, within 30 days after the
disposition, became or ceased to be exempt from tax under this Part on its
taxable income, or
(h) a disposition to which subsection 40(3.4) or 69(5) applies,
and, for the
purpose of this definition, a right to acquire a property (other than a right,
as security only, derived from a mortgage, agreement for sale or similar
obligation) is deemed to be a property that is identical to the property.
55.(1)
For the purposes of this subdivision, where the result of one or more sales,
exchanges, declarations of trust, or other transactions of any kind whatever is
that a taxpayer has disposed of property under circumstances such that he may
reasonably be considered to have artificially or unduly
(a) reduced the amount of his gain from the disposition,
(b) created a loss from the disposition, or
(c) increased the amount of his loss from the disposition,
the taxpayer’s
gain or loss, as the case may be, from the disposition of the property shall be
computed as if such reduction, creation or increase, as the case may be, had
not occurred.
111.(3)
For the purposes of subsection (1),
(a) an amount in respect of a non-capital loss, restricted farm
loss, farm loss or limited partnership loss, as the case may be, for a taxation
year is deductible, and an amount in respect of a net capital loss for a
taxation year may be claimed, in computing the taxable income of a taxpayer for
a particular taxation year only to the extent that it exceeds the total of
(i) amounts deducted under this section in respect of that non-capital
loss, restricted farm loss, farm loss or limited partnership loss in computing
taxable income for taxation years preceding the particular taxation year,
(i.1) the amount that was claimed under paragraph (1)(b) in
respect of that net capital loss for taxation years preceding the particular
taxation year, and
(ii) amounts claimed in respect of that loss under paragraph 186(1)(c)
for the year in which the loss was incurred or under paragraph 186(1)(d)
for the particular taxation year and taxation years preceding the particular
taxation year, and
(b) no amount is deductible in respect of a non-capital loss,
net capital loss, restricted farm loss, farm loss or limited partnership loss,
as the case may be, for a taxation year until
(i) in the case of a non-capital loss, the deductible non-capital
losses,
(ii) in the case of a net capital loss, the deductible net capital
losses,
(iii) in the case of a restricted farm loss, the deductible restricted
farm losses,
(iv) in the case of a farm loss, the deductible farm losses, and
(v) in the case of a limited partnership loss, the deductible limited
partnership losses,
for preceding
taxation years have been deducted.
111.(4)
Notwithstanding subsection (1), where, at any time (in this subsection referred
to as “that time”), control of a corporation has been acquired by a person or
group of persons
(a) no amount in respect of a net capital loss for a taxation
year ending before that time is deductible in computing the corporation’s
taxable income for a taxation year ending after that time, and
(b) no amount in respect of a net capital loss for a taxation
year ending after that time is deductible in computing the corporation’s
taxable income for a taxation year ending before that time,
and where, at
that time, the corporation neither became nor ceased to be exempt from tax
under this Part on its taxable income,
(c) in computing the adjusted cost base to the corporation at
and after that time of each capital property, other than a depreciable
property, owned by the corporation immediately before that time, there shall be
deducted the amount, if any, by which the adjusted cost base to the corporation
of the property immediately before that time exceeds its fair market value
immediately before that time,
(d) each amount required by paragraph (c) to be deducted
in computing the adjusted cost base to the corporation of a property shall be
deemed to be a capital loss of the corporation for the taxation year that ended
immediately before that time from the disposition of the property,
(e) each capital property owned by the corporation immediately
before that time (other than a property in respect of which an amount would,
but for this paragraph, be required by paragraph (c) to be deducted in
computing its adjusted cost base to the corporation or a depreciable property
of a prescribed class to which, but for this paragraph, subsection (5.1) would
apply) as is designated by the corporation in its return of income under this
Part for the taxation year that ended immediately before that time or in a
prescribed form filed with the Minister on or before the day that is 90 days
after the day on which a notice of assessment of tax payable for the year or
notification that no tax is payable for the year is mailed to the corporation,
shall be deemed to have been disposed of by the corporation immediately before
the time that is immediately before that time for proceeds of disposition equal
to the lesser of
(i) the fair market value of the property immediately before that time,
and
(ii) the greater of the adjusted cost base to the corporation of the
property immediately before the disposition and such amount as is designated by
the corporation in respect of the property,
and shall be
deemed to have been reacquired by it at that time at a cost equal to the
proceeds of disposition thereof, except that, where the property is depreciable
property of the corporation the capital cost of which to the corporation
immediately before the disposition time exceeds those proceeds of disposition,
for the purposes of sections 13 and 20 and any regulations made for the purpose
of paragraph 20(1)(a),
(iii) the capital cost of the property to the corporation at that time
shall be deemed to be the amount that was its capital cost immediately before
the disposition, and
(iv) the excess shall be deemed to have been allowed to the corporation
in respect of the property under regulations made for the purpose of paragraph
20(1)(a) in computing its income for taxation years ending before that
time, and
(f) each amount that by virtue of paragraph (d) or (e)
is a capital loss or gain of the corporation from a disposition of a property
for the taxation year that ended immediately before that time shall, for the
purposes of the definition “capital dividend account” in subsection 89(1), be
deemed to be a capital loss or gain, as the case may be, of the corporation
from the disposition of the property immediately before the time that a capital
property of the corporation in respect of which paragraph (e) would be
applicable would be deemed by that paragraph to have been disposed of by the
corporation.
111.(5)
Where, at any time, control of a corporation has been acquired by a person or
group of persons, no amount in respect of its non-capital loss or farm loss for
a taxation year ending before that time is deductible by the corporation for a
taxation year ending after that time and no amount in respect of its
non-capital loss or farm loss for a taxation year ending after that time is
deductible by the corporation for a taxation year ending before that time
except that
(a) such portion of the corporation’s non-capital loss or farm
loss, as the case may be, for a taxation year ending before that time as may
reasonably be regarded as its loss from carrying on a business and, where a
business was carried on by the corporation in that year, such portion of the
non-capital loss as may reasonably be regarded as being in respect of an amount
deductible under paragraph 110(1)(k) in computing its taxable income for
the year is deductible by the corporation for a particular taxation year ending
after that time
(i) only if that business was carried on by the corporation for profit
or with a reasonable expectation of profit throughout the particular year, and
(ii) only to the extent of the total of the corporation’s income for
the particular year from that business and, where properties were sold, leased,
rented or developed or services rendered in the course of carrying on that
business before that time, from any other business substantially all the income
of which was derived from the sale, leasing, rental or development, as the case
may be, of similar properties or the rendering of similar services; and
(b) such portion of the corporation’s non-capital loss or farm
loss, as the case may be, for a taxation year ending after that time as may
reasonably be regarded as its loss from carrying on a business and, where a
business was carried on by the corporation in that year, such portion of the
non-capital loss as may reasonably be regarded as being in respect of an amount
deductible under paragraph 110(1)(k) in computing its taxable income for
the year is deductible by the corporation for a particular year ending before
that time
(i) only if throughout the taxation year and in the particular year
that business was carried on by the corporation for profit or with a reasonable
expectation of profit, and
(ii) only to the extent of the corporation’s income for the particular
year from that business and, where properties were sold, leased, rented or
developed or services rendered in the course of carrying on that business
before that time, from any other business substantially all the income of which
was derived from the sale, leasing, rental or development, as the case may be,
of similar properties or the rendering of similar services.
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