Citation: 2010 TCC 275
Date: 20100603
Docket: 2006-2996(IT)G
BETWEEN:
THE TORONTO-DOMINION BANK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A.
Facts:
[1]
The Appellant is a
large corporation within the meaning of the Income Tax Act (the “Act”).
[2]
The Appellant filed
Notices of Appeal to the following Notices of Reassessment issued by the
Minister of National Revenue (the “Minister”) for its 1989 taxation year ending
October 31, 1989:
|
Notice of Reassessment Number
|
Date of Notice
|
|
3810298
|
October 7, 1994
|
|
3953034
|
February 13, 1997
|
|
-
|
February 25, 2004
|
[3]
The appeal was heard in
Toronto, Ontario from October 5 to October 9,
2009.
[4]
At the commencement of
the hearing, the parties filed a Statement of Agreed
Facts (Exhibit A-1). The Statement reads as follows:
The parties to this proceeding admit, for the purposes of this
proceeding only, the truth of the following facts, and the authenticity of the
documents cited herein:
A. The Appellant – Corporate Profile
1. The
Toronto-Dominion Bank (the “Appellant”) is a taxable Canadian
corporation and a large corporation within the meaning of the Income Tax Act
(Canada), R.S.C. 1985, c.1 (5th
Supp.) (the “Act”), as applicable to the 1989 taxation year of the
Appellant (the “1989 Taxation Year”).
2. The
Appellant is a chartered bank listed in Schedule I of the Bank Act (Canada) (the “Bank Act”).
3. In the
course of its business, the Appellant engages directly and through its
subsidiaries in four principal lines of business: Canadian personal and
commercial banking; wealth management; wholesale banking; and U.S. personal and commercial banking.
B. Oxford Development Group Ltd.
4. At all
relevant times:
(a) Oxford
Development Group Ltd. (“Oxford”) was a large commercial real estate
company involved in the development, acquisition, and management of commercial
and retail properties in Canada and the U.S.;
(b) the late
Mr. G. Donald Love (“Mr. Love”), then Chairman of the Board of Directors
and President of Oxford, was the sole beneficial shareholder of Kent Holdings
Ltd. (“Kent”);
(c) Mr. Love
and members of his family (collectively, the “Love Family”) were the
sole beneficial shareholders of Loford Properties Ltd. (“Loford”);
(d) the
Appellant did not own 50% or more of the shares of Oxford, Holdings (as defined below), Kent or Loford; and
(e) none of Mr.
Love, Oxford, Holdings, Kent or
Loford owned 50% or more of the shares of the Appellant.
5. In January
1976, the Appellant first acquired a participating interest in Oxford, then a public company, when it
purchased 82,000 Series A Preferred shares of Oxford for $902,000 (or $11.00 per share).
6. In April
1978, the Appellant purchased 205,000 common shares of Oxford for $2,562,500
(or $12.50 per share) and in November 1979, the Appellant subscribed for an
additional 50,000 Series A Preferred shares of Oxford for $804,776.25 (or
$16.10 per share), resulting in total holdings of 337,000 common and preferred
shares.
C. The Privatization of Oxford
7. In 1979,
the Love Family directly or indirectly owned less than 10% of the issued and
outstanding shares of Oxford.
The other shareholders of Oxford then included, among other members of the public, the Appellant.
8. Commencing
with the incorporation of 91922 Canada Limited on May 11, 1979, the Love Family
undertook transactions to acquire by private purchase, approximately 75% of the
issued and outstanding shares of Oxford.
9. On December
19, 1979, the Appellant agreed to participate in the privatization by making
available to 91922 Canada Limited a line of credit of $255,000,000 and by
transferring its shares of Oxford to 91922 Canada Limited.
10. On January
15, 1980, the Appellant entered into a Shareholders’ Agreement (the “Shareholders’
Agreement”) with Mr. Love,
Kent and Loford (collectively, the “Love Group”)
(a) the
Appellant subscribed for 51,200 common shares, 285,800 Class A shares and
313,000 Class B shares of 91922 Canada Limited for aggregate consideration of
$16,900,000 (or $26.00 per share), comprising a cash payment of $8,138,000 and
the 337,000 shares held by the Appellant in Oxford;
(b) Kent subscribed for 801,555 common shares
and Loford subscribed for 173,445 common shares of 91922 Canada Limited for
consideration of $20,840,430 and $4,509,570, respectively. In full satisfaction
of such consideration, Kent
transferred 801,555 common shares and Loford transferred 173,445 common shares
of Oxford to 91922 Canada
Limited.
11. Each of the
Appellant, Kent, and Loford jointly elected with 91922 Canada Limited in
prescribed form to have the provisions of subsection 85(1) of the Act apply to
the share transfer. The amounts agreed to by the Appellant and 91922 Canada
Limited in the joint election were deemed pursuant to paragraph 85(1)(a) of the
Act to be the cost to the Appellant of the three classes of shares received on
the exchange as follows:
|
Class of Shares
|
Number of Shares
|
Deemed Cost
|
|
Common
|
51,200
|
$1,331,200
|
|
Class A
|
285,800
|
$2,938,076
|
|
Class B
|
313,000
|
$8,138,000
|
|
Total
|
650,000
|
$12,407,276
|
12. Each of the
shares held by the Appellant in 91922 Canada Limited was fully participating
and ranked equally with each other share of the company with respect to the
payment of dividends and the distribution of assets on winding up.
13. The Class A
and Class B shares were convertible into common shares, at the option of the
holder, on a sale of the shares to any third party which was not a Canadian
chartered bank. The Class B shares were convertible into Class A shares at the
option of the holder. Neither the Class A nor the Class B shares had voting
rights.
14. As of
January 18, 1980, 91922 Canada Limited had acquired by private purchase from
five other shareholders, approximately 70.5% of the issued and outstanding
shares of Oxford.
15. On January
18, 1980, 91922 Canada Limited extended a cash offer to purchase from the other
public shareholders of Oxford,
the balance of the issued and outstanding shares, which offer was accepted on
or before May 20, 1980.
16. On October
29, 1980, Oxford amalgamated with 91922 Canada Limited pursuant to the
provisions of the Companies Act (Alberta) and continued its operations as “Oxford”. The shares then held by the Appellant in 91922 Canada Limited
were replaced by an equivalent number of shares with identical share attributes
in the amalgamated entity.
17. Following
the privatization of Oxford,
and at all relevant times thereafter:
(a) Oxford was a private corporation for
purposes of the Act;
(b) the
Appellant held 40% of the total issued and outstanding shares of Oxford, but
its voting interest in Oxford never exceeded 5% to ensure compliance with the
Bank Act;
(c) the shares
were beneficially held by the Appellant through a nominee corporation (called
“Bantor Company”) as agent, and were held on capital account;
(d) the balance
(60%) of the issued and outstanding shares of Oxford were held directly or indirectly by the Love Group; and
(e) the
Appellant had two representatives (out of at least five but no more than six)
on the Board of Directors of Oxford, namely, Messrs. Ernest C. Mercier and
Ronald E. Ruest.
D. Dividend Payments & Reinvestments: 1982-1988
18. This
paragraph summarizes the transactions described more particularly in paragraphs
19 to 32 below. Between 1982 and 1988, the Appellant and the Love Group
received dividends from Oxford.
Apart from the dividend payment on May 5, 1988, the Appellant reinvested
between 77 and 100 percent of each of the other dividend payments ($78,600,000
in aggregate), by subscribing for a total of 241,666 Class E shares of Oxford for a total subscription price of
$72,499,800. The Love Group similarly reinvested between 77 and 100 percent of
each of the other dividend payments ($117,900,024 in aggregate), by subscribing
for a total of 362,500 Class D shares of Oxford at a total subscription price of $108,750,000. The Appellant and
the Love Group maintained their respective 40 and 60 percent proportionate
share ownership of Oxford at
all relevant times.
19. On July 29,
1982, Oxford declared and paid
dividends of $22,000,000 (or $13.538 per share) from earnings on the common,
Class A and Class B shares outstanding at that time. Oxford elected under subsection 83(2) of the Act that the dividends on the
common shares be capital dividends. The portion of the dividend paid to the
Appellant was $8,800,000 (or 40%), in respect of its 51,200 common shares,
285,800 Class A shares and 313,000 Class B shares. The portion of the
dividend paid to the Love Group was $13,200,000 (or 60%), in respect of its
common shares.
20. On July 29,
1982, by way of a Special Resolution of the shareholders of Oxford, two new classes of shares were
authorized for issuance, namely the Class D and Class E shares. The Class D and
Class E shares were non‑voting par value shares. They were fully
participating and had the same rights as to dividends and distribution on
winding up as the common, Class A and Class B shares.
21. The Board of
Directors of Oxford set the subscription price of the Class D and Class E
shares at $300.00 per share and assigned a par value of $1.00 to each share.
22. On July 29,
1982:
(a) the
Appellant subscribed for 22,667 Class E shares of Oxford at a subscription price of $6,800,100. Accordingly, Oxford credited $22,667 (or $1.00 per Class
E share) to its share capital, and the balance of the subscription price ($6,777,433
or $299.00 per share) was credited to its contributed surplus account; and
(b) the Love
Group subscribed for 34,000 Class D shares of Oxford at a subscription price of $10,200,000. Accordingly, Oxford credited $34,000 (or $1.00 per Class
D share) to its share capital, and the balance of the subscription price
($10,166,000 or $299.00 per share) was credited to its contributed surplus
account.
23. On April 15, 1983:
(a) Oxford declared and paid dividends of
$27,000,000 (or $16.615 per share) from earnings on the common, Class A and
Class B shares. Oxford elected
under subsection 83(2) of the Act that the dividends on the common shares be
capital dividends. The portion of the dividend paid to the Appellant was
$10,800,000 (or 40%), in respect of its 51,200 common, 285,800 Class A and
313,000 Class B shares. The portion of the dividend paid to the Love Group was
$16,200,000 (or 60%), in respect of its common shares;
(b) the
Appellant subscribed for 30,667 Class E shares of Oxford having a par value of $1.00 each, at a subscription price of
$9,200,100 (or $300.00 per share). Accordingly, Oxford credited $30,667 (or $1.00 per Class E share) to its share capital,
and the balance of the subscription price ($9,169,433 or $299.00 per share) was
credited to its contributed surplus account; and
(c) the Love
Group subscribed for 46,000 Class D shares of Oxford having a par value of $1.00 each, at a subscription price of
$13,800,000 (or $300.00 per share).
Accordingly, Oxford
credited $46,000 (or $1.00 per Class D share) to its share capital, and the
balance of the subscription price ($13,754,000 or $299.00 per share) was
credited to its contributed surplus account.
24. On December 28, 1983:
(a) Oxford declared and paid dividends of
$10,000,013 (or $5.152 per share) from earnings on the common, Class A, Class
B, Class D and Class E shares. Oxford elected under subsection 83(2) of the Act that the dividends on the
common and Class D shares be capital dividends. The portion of the dividend
paid to the Appellant was $4,000,005 (or 40%), in respect of its 51,200 common,
285,800 Class A, 313,000 Class B and 53,334 Class E shares. The portion of the
dividend paid to the Love Group was $6,000,008 (or 60%), in respect of its
common Class D shares;
(b) the
Appellant subscribed for 12,000 Class E shares of Oxford having a par value of $1.00 each, at a subscription price of
$3,600,000 (or $300.00 per share). Accordingly, Oxford credited $12,000 (or $1.00 per Class E share) to its share capital,
and the balance of the subscription price ($3,588,000 or $299.00 per share) was
credited to its contributed surplus account; and
(c) the Love
Group subscribed for 18,000 Class D shares of Oxford having a par value of $1.00 each, at a subscription price of
$5,400,000 (or $300.00 per share). Accordingly, Oxford credited $18,000 (or $1.00 per Class D share) to its share capital,
and the balance of the subscription price ($5,382,000 or $299.00 per share) was
credited to its contributed surplus account.
25. On April 30, 1984:
(a) Oxford declared and paid dividends of
$12,500,008 (or $6.990 per share) from earnings on the common, Class A, Class
B, Class D and Class E shares. Oxford elected under subsection 83(2) of the Act that the dividends on the
common and Class D shares be capital dividends. The portion of the dividend
paid to the Appellant was $5,000,003 (or 40%), in respect of its 51,200 common,
285,800 Class A, 313,000 Class B and 65,334 Class E shares. The portion of the
dividend paid to the Love Group was $7,500,005 (or 60%), in respect of its
common and Class D shares;
(b) the
Appellant subscribed for 15,000 Class E shares of Oxford having a par value of $1.00 each, at a subscription price of
$4,500,000 (or $300.00 per share). Accordingly, Oxford credited $15,000 (or $1.00 per Class E share) to its share capital,
and the balance of the subscription price ($4,485,000 or $299.00 per share) was
credited to its contributed surplus account; and
(c) the Love
Group subscribed for 22,500 Class D shares of Oxford having a par value of $1.00 each, at a subscription price of
$6,750,000 (or $300.00 per share). Accordingly, Oxford credited $22,500 (or $1.00 per Class D share) to its share capital,
and the balance of the subscription price ($6,727,500 or $299.00 per share) was
credited to its contributed surplus account.
26. On July 30, 1984:
(a) Oxford declared and paid dividends of
$10,000,003 (or $5.477 per share) from earnings on the common, Class A, Class
B, Class D and Class E shares. Oxford elected under subsection 83(2) of the Act that the dividends on the
common and Class D shares be capital dividends. The portion of the dividend
paid to the Appellant was $4,000,001 (or 40%), in respect of its 51,200 common,
285,800 Class A, 313,000 Class B and 80,334 Class E shares. The portion of the
dividend paid to the Love Group was $6,000,002 (or 60%), in respect of its
common and Class D shares;
(b) the
Appellant subscribed for 10,666 Class E shares of Oxford having a par value of $1.00 each, at a subscription price of
$3,199,800 (or $300.00 per share). Accordingly, Oxford credited $10,666 (or $1.00 per Class E share) to its share capital,
and the balance of the subscription price ($3,189,134 or $299.00 per share) was
credited to its contributed surplus account; and
(c) the Love
Group subscribed for 16,000 Class D shares of Oxford having a par value of $1.00 each, at a subscription price of
$4,800,000 (or $300.00 per share). Accordingly, Oxford credited $16,000 (or $1.00 per Class D share) to its share capital,
and the balance of the subscription price ($4,784,000 or $299.00 per share) was
credited to its contributed surplus account.
27. On October 31, 1984:
(a) Oxford declared and paid dividends of
$10,000,000 (or $5.398 per share) from earnings on the common, Class A, Class
B, Class D and Class E shares. Oxford elected under subsection 83(2) of the Act that the dividends on the
common and Class D shares be capital dividends. The portion of the dividend
paid to the Appellant was $4,000,000 (or 40%), in respect of its 51,200 common,
285,800 Class A, 313,000 Class B and 91,000 Class E shares. The portion of the
dividend paid to the Love Group was $6,000,000 (or 60%), in respect of its
common and Class D shares;
(b) the
Appellant subscribed for 10,667 Class E shares of Oxford having a par value of $1.00 each, at a subscription price of
$3,200,100 (or $300.00 per share). Accordingly, Oxford credited $10,667 (or $1.00 per Class E share) to its share capital,
and the balance of the subscription price ($3,189,433 or $299.00 per share) was
credited to its contributed surplus account; and
(c) the Love
Group subscribed for 16,000 Class D shares of Oxford having a par value of $1.00 each, at a subscription price of
$4,800,000 (or $300.00 per share). Accordingly, Oxford credited $16,000 (or $1.00 per Class D share) to its share capital,
and the balance of the subscription price ($4,784,000 or $299.00 per share) was
credited to its contributed surplus account.
28. On May 23, 1985:
(a) Oxford declared dividends of $20,000,000
(or $10.643 per share) from earnings on the common, Class A, Class B, Class D
and Class E shares. In respect of the Class A, Class B and Class E shares, the
dividends were paid on November 29, 1985. Oxford elected under subsection 83(2) of the Act that the dividends on the
common and Class D shares be capital dividends. The portion of the dividend
paid to the Appellant was $8,000,000 (or 40%), in respect of its 51,200 common,
285,800 Class A, 313,000 Class B and 101,667 Class E shares. The portion of the
dividend paid to the Love Group was $12,000,000 (or 60%), in respect of its
common and Class D shares;
(b) the
Appellant subscribed for 1,816 Class E shares of Oxford having a par value of $1.00 each, at a subscription price of
$544,800 (or $300.00 per share). Accordingly, Oxford credited $1,816 (or $1.00 per Class E share) to its share capital,
and the balance of the subscription price ($542,984 or $299.00 per share) was
credited to its contributed surplus account; and
(c) the Love
Group subscribed for 40,000 Class D shares of Oxford having a par value of $1.00 each, at a subscription price of
$12,000,000 (or $300.00 per share). Accordingly, Oxford credited $40,000 (or $1.00 per Class D share) to its share capital,
and the balance of the subscription price ($11,960,000 or $299.00 per share)
was credited to its contributed surplus account.
29. On November
29, 1985, the Appellant subscribed for 24,850 Class E shares of Oxford having a par value of $1.00 each, at
a subscription price of $7,455,000 (or $300.00 per share). Accordingly, Oxford credited $24,850 (or $1.00 per Class
E share) to its share capital, and the balance of the subscription price
($7,430,150 or $299.00 per share) was credited to its contributed surplus
account.
30. On December
31, 1985:
(a) Oxford declared and paid dividends of
$85,000,000 (or $43.683 per share) from contributed surplus on the common,
Class A, Class B, Class D and Class E shares. Oxford elected under subsection 83(2) of the Act that the dividends on the
common and Class D shares be capital dividends. The portion of the dividend
paid to the Appellant was $33,999,991 (or 40%), in respect of its 51,200
common, 285,800 Class A, 313,000 Class B and 128,333 Class E shares. The
portion of the dividend paid to the Love Group was $51,000,009 (or 60%), in
respect of its common and Class D shares;
(b) the
Appellant subscribed for 113,333 Class E shares of Oxford having a par value of $1.00 each, at a subscription price of
$33,999,900 (or $300.00 per share). Accordingly, Oxford credited $113,333 (or $1.00 per Class E share) to its share
capital, and the balance of the subscription price ($33,886,567 or $299.00 per
share) was credited to its contributed surplus account; and
(c) the Love
Group subscribed for 170,000 Class D shares of Oxford having a par value of $1.00 each, at a subscription price of
$51,000,000 (or $300.00 per share). Accordingly, Oxford credited $170,000 (or $1.00 per Class D share) to its share
capital, and the balance of the subscription price ($50,830,000 or $299.00 per
share) was credited to its contributed surplus account.
31. On May 5,
1988, Oxford, declared and paid
dividends of $2,000,000 (or $0.897 per share) from contributed surplus on the
common, Class A, Class B, Class D and Class E shares. Oxford elected under subsection 83(2) of the Act that the dividends on all
these classes of shares be capital dividends. The portion of the dividend paid
to the Appellant was $800,000 (or 40%), in respect of its 51,200 common,
285,800 Class A, 313,000 Class B and 241,666 Class E shares. The portion of the
dividend paid to the Love Group was $1,200,000 (or 60%), in respect of its
common and Class D shares.
32. Summarized
in Appendix I are the dividend payments made by Oxford to the Appellant between
the years of 1982 and 1988 (each a “Dividend Payment” and collectively,
the “Dividend Payments”), and the reinvestments by the Appellant in the
Class E shares of Oxford (the “Reinvestments”).
A shorter summary follows:
|
Oxford
Fiscal Year Ended
|
Dividend Payment
|
Portion Reinvested
|
Portion Retained
|
|
|
($ millions)
|
($ millions)
|
%
|
($ millions)
|
%
|
|
March 31, 1983
|
8.8
|
6.8
|
77.3
|
2.0
|
22.7
|
|
March 31, 1984
|
10.8
|
9.2
|
85.2
|
1.6
|
14.8
|
|
|
4.0
|
3.6
|
90
|
0.4
|
10
|
|
December 31, 1984
|
5.0
|
4.5
|
90
|
0.5
|
10
|
|
|
4.0
|
3.2
|
80
|
0.8
|
20
|
|
|
4.0
|
3.2
|
80
|
0.8
|
20
|
|
December 31, 1985
|
8.0
|
0.5 + 7.5
|
100
|
0.0
|
0
|
|
|
34.0
|
34.0
|
100
|
0.0
|
0
|
|
December 31, 1988
|
0.8
|
0.0
|
0
|
0.8
|
100
|
|
|
$79.4
|
$72.5
|
91.3%
|
$6.9
|
8.7%
|
E. Accounting & Tax Treatment of the Dividend Payments
33. Each of the
Dividend Payments was made out of either the current or retained earnings of Oxford, except for the final two payments
on December 31, 1985 and May 5, 1988, which were made out of the contributed
surplus account of Oxford.
34. In computing
its income for financial accounting purposes and in accordance with generally
accepted accounting principles, the Appellant included in its earnings, the
full amount of the Dividend Payments received by it from Oxford, other than the December 31, 1985
and May 5, 1988 Dividend Payments.
35. Other than
the dividends which were elected to be capital dividends (that is, the Dividend
Payments on the common shares and the May 5, 1988 Dividend Payment), the
Appellant included in computing its income under Part I of the Act, the full
amount of the Dividend Payments received by it on the Class A, Class B and
Class E shares of Oxford pursuant to subsection 82(1) and paragraph 12(1)(j),
and deducted such amount pursuant to subsection 112(1) in computing its taxable
income.
F. The 1988 Disposition
36. On February
21, 1987, the Appellant exchanged its shareholdings in Oxford for identical
shares in Oxford Holdings Ltd. (“Holdings”), the successor corporation
to Oxford. This exchange was
effected on a tax-deferred basis pursuant to the provisions of section 85.1 of
the Act.
37. On December
1, 1988, the Appellant and Loford terminated the Shareholders’ Agreement. On
the same date, the Appellant disposed of its shares of Holdings in the
following manner (the “Disposition”):
(a) Holdings
redeemed the 51,200 common, 285,800 Class A and 313,000 Class B shares held by
the Appellant at a price of $46.809 per share, for an aggregate purchase price
of $30,425,850, payable in cash. Of the aggregate purchase price, $14,522,860
was deemed by subsection 84(3) to be a dividend for purposes of the Act (the “Deemed
Dividend”), and the balance ($15,902,990) represented proceeds of
disposition in accordance with the definition of “proceeds of disposition” in
paragraph 54(h). Holdings elected under subsection 83(2) to have Deemed
Dividend treated as a capital dividend for the purposes of the Act; and
(b) Loford
acquired the 241,666 Class E shares of Holdings held by the Appellant at a
price of $46.809 per share, for an aggregate purchase price of $11,312,150,
paid in cash.
38. Following
the disposition of its shares of Holdings, the Appellant acquired the following
shares in Oxford Properties Canada Ltd. (an Oxford affiliate):
(a) 2,000,000
common shares for cash consideration of $3,200,000; and
(b) 1,792,000
First Preferred Shares (with a face value of $44,800,000) for cash
consideration of $36,288,000.
G. The Tax Consequences
39. The
Appellant allocated the total proceeds received on the Disposition
($41,738,000) among the common, Class A, Class B, and Class E shares pro rata
based upon the number of shares.
40. In computing
its income under Part I of the Act for the 1989 Taxation Year, the Appellant
reported:
(a) a capital
loss of $61,187,650 in respect of the Class E shares, which amount was reduced
to $52,243,540, following the application of subsection 112(3) of the Act;
(b) capital losses of $78,533 and
$480,099 in respect of the common and Class B shares, respectively, which were
reduced to nil following the application of subsection 112(3); and
(c) a capital gain of $4,054,346
in respect of the Class A shares.
41. Summarized
in Appendix II are the calculations (subject to rounding) underlying the
amounts reported by the Appellant in respect of the Disposition.
42. In computing
its taxable income under Part I of the Act for the 1989 Taxation Year, the
Appellant included the two-thirds taxable capital gain reported on the Class A
shares ($2,702,897), which when offset by the two-thirds allowable capital loss
reported on the Class E shares ($34,829,027) resulted in the Appellant
reporting a net allowable capital loss of $32,126,129 (the “Capital Loss”).
H. The Reassessments
43. Pursuant to
paragraph 152(3.1)(a) of the Act, the normal reassessment period in respect of
the 1989 Taxation Year would have expired on or about January 1, 1995. Prior to
the expiry thereof, the Minister of National Revenue (the “Minister”)
asked for and the Appellant provided a waiver extending such reassessment
period as it related to the determination of the Capital Loss.
44. By way of a
reassessment, notice of which was dated October 7, 1994 (the “1994 Reassessment”),
the Minister reassessed the Appellant in respect of the 1989 Taxation Year and,
among other things, disallowed in full the Capital Loss reported in respect of
the Disposition. The Appellant duly objected to the 1994 Reassessment by way of
a Notice of Objection dated December 29, 1994.
45. The
Appellant filed a Notice of Revocation of Waiver on May 3, 2002.
46. Notices of
Reassessment dated February 13, 1997 and February 25, 2004 (the “1997 and
2004 Reassessments”) were issued by the Minister in respect of taxes
payable by the Appellant under Part I of the Act for the Taxation Year. The
1997 and 2004 Reassessments left the disallowance of the Capital Loss as
originally assessed.
47.
The Appellant duly objected to 1997 and 2004
Reassessments by way of Notices of Objection dated May 12, 1997 and March 15,
2004, respectively.
B.
Issue:
[5]
Whether the Appellant,
as a result of a series of transactions, has artificially or unduly created or
increased the amount of loss suffered on the disposition of the Class E shares
issued by Oxford to the Appellant.
C.
Analysis and
Decision:
The Appellant’s Position:
[6] Counsel for the Appellant maintains
that the cost of the shares should be determined by reference to the
consideration it paid to acquire them, and that the loss should be allowed as
deductible in full.
[7] Counsel for the Appellant admits that the
capital loss was deemed by subsection 112(3) of the Act to be
$48,189,193.
[8] Counsel for the Appellant notes that the
Minister failed to obtain a valuation of the Class E shares and that there was
an extensive delay caused by the action or inaction by the Minister’s
officials.
[9] The Appellant filed a waiver and, in my
opinion, nothing turns on the fact that the Minister did not obtain a valuation
of the Class E shares or that there was an extensive delay before the
Reassessments were issued by the Minister.
[10] At paragraph 30 of his written argument, Mr.
Meghji, counsel for the Appellant said:
The only provision regarded as potentially relevant to the denial of
the Capital Loss was subsection 245(1) of the Act, as it read prior to its
repeal…
[11] Mr. Meghji maintains that section 55(1) of the
Act was repealed and is prima facie inapplicable (paragraph 33).
I do not agree. It is clear that subsection 55(1) was in effect at the time of
this transaction.
[12] Mr. Meghji also maintains that the evidence
indicates that the disposition of the Oxford shares owned
by the Appellant was not preordained and therefore section 55(1) of the Act
is inapplicable. Note: I deal with this point later in the Reasons.
[13] At paragraph 57 of the Transcript, Mr. Meghji
referred to the subscription price of the shares ($300 per share) and asked his
witness, Robert Teskey, to comment. The evidence from Mr. Teskey was:
Q. Was it your intention, at the time that you
suggested $300 per share, to suggest fair market value as the measure? Was it
your intention to suggest the fair market value of the shares when you
suggested $300?
A. I think I was looking for a number that
could be justified as not being grossly away from fair market value. It
clearly wasn’t science. It was a number that, given the circumstances,
appeared to make sense.
(Emphasis added)
(Transcript, Examination in Chief of Mr.
Teskey, pages 86 and 87)
[14] At paragraph 73 of his argument, Mr. Meghji
says:
The Crown has gone so far as to allege that one of the driving
purposes of the Transactions, in fact the only “offensive” purpose, must
have been to enable the TD Bank to “get around” the operation of 112(3).
Subsection 152(9)
[15] Generally, subsection 152(9) of the Act
states that the Minister may advance an alternative argument in support of an
assessment at any time after the “normal reassessment period” which is a
defined term pursuant to subsection 152(3.1) of the Act. Paragraphs
152(9)(a) and 152(9)(b) provide an exception to the above rule
where the taxpayer is no longer able to adduce evidence without leave of the
court and it is not appropriate in the circumstances for the court to order the
evidence to be adduced.
[16] This provision was added to the Act in
response to the decision of the Supreme Court of Canada in Continental Bank
of Canada v. The Queen, [1998] 2 S.C.R. 358. In this case, it should be noted
that the new argument was raised for the first time at the hearing before the
Supreme Court.
[17] A number of cases, most notably The Queen
v. Loewen, 2004 D.T.C. 6321, address the ability of the Minister to
make new factual allegations after the Reassessment. In the case at hand, the
Minister is asserting a new basis for the Reassessment but is not making any
new factual allegations. Paragraphs 152(9)(a) and 152(9)(b) do
not appear to be relevant since there is no new factual basis for the
Reassessment and thus no additional evidence the Appellant needs to adduce in
response.
[18] The leading case on subsection 152(9) is Walsh
et al. v. The Queen, 2007 D.T.C. 5441. In Walsh, the
Minister sought an Order to amend its pleadings to include sections and
arguments to uphold the assessment if the taxpayers were not residents of Canada. The Court also noted that in Anchor Pointe Energy
Ltd. v. The Queen, 2003 F.C.A. 294, it was held that there is no argument
to be made between a new basis of assessment and a new argument in support of
an assessment with respect to the scope of subsection 152(9). The Court in Walsh
then outlined the following conditions which apply when the Minister seeks
to reply on subsection 152(9):
[18]…1) the Minister cannot include transactions which did not form
the basis of the taxpayer’s reassessment;
2) the right of the Minister to present an alternative
argument in support of an assessment is subject to paragraphs 152(9)(a)
and [152(9)](b), which speak to the prejudice to the taxpayer; and
3) the Minister cannot use subsection 152(9) to reassess
outside the time limitations in subsection 152(4) of the Act, or to
collect tax exceeding the amount in the assessment under appeal.
[19] Without further discussion of the above
criteria, the Court concluded that none of these conditions apply to the facts
at hand.
[20] In RCI Environment Inc. v. The Queen,
2009 D.T.C. 5037, Justice Noël of the Federal Court of Appeal said that
subsection 152(9) allows the Minister to “advance an alternative argument
in support of an assessment at any time after the normal reassessment
period” (emphasis added). The Court held that the amendments were permissible,
as found by the Tax Court Judge, since the alternative position invoked
additional provisions of the Act but did not result in additional tax.
The Court also noted the fact that these amendments were announced well before
the trial began and the taxpayer did not argue that evidence was not available
to refute this new basis for reassessment.
[21] Counsel for the Appellant argues that
subsection 152(9) does not give the “Minister an absolute right to plead an
alternate ground”, quoting from Walsh. I think that counsel for the
Appellant is correct on this point. The Minister’s right to plead an alternate
ground is restricted by paragraphs 152(9)(a) and 152(9)(b) and by
the conditions outlined in Walsh.
[22] I have concluded that subsection 152(9) will
operate to allow the Minister to introduce the subsection 112(3) argument, even
at this late stage in the proceeding. As for procedural fairness, I have
determined that there has been no breach since the Appellant was given time to
respond to the subsection 112(3) argument through written representations.
Subsection 112(3)
[23] Subsection 112(3) of the Act is a
stop-loss rule reducing a loss from disposition of a share that is capital
property, where the taxpayer received capital dividends on that share. More
specifically, paragraph 112(3)(b) reduces the amount of a capital loss
realized on the disposition of a share by the total amount of tax free
dividends including dividends that are deductible by the corporation,
non-taxable capital dividends and life insurance capital dividends. This
provision does not apply where the dividends were received at a time when the
taxpayer and non-arm’s length persons owned five per cent or less of any class
of shares of the corporation, provided that the taxpayer owned the particular
share(s) throughout the 365 day period that ended immediately before the
disposition.
[24] Counsel for the Appellant argues that
subsection 112(3) applies to a loss determined without reference to subsection
112(3) and that this means the loss to which subsection 112(3) applies is the
loss determined after the application of subsection 55(1). The Appellant
further asserts that subsection 112(3) cannot be applied in the manner the
Minister proposes to counter alleged abuse since the loss is not artificial or
undue and the Minister has not pleaded or relied on any other anti-avoidance
provision.
The Respondent’s Position:
[25] The Respondent argued that subsection 112(3)
should apply to reduce the loss on the Class E shares. The Respondent
correctly notes the tax policy rationale for subsection 112(3) is that when a
company receives tax free dividends on shares it should not be able to claim a
loss on the disposition of the shares to the extent of the dividends received.
The Respondent argues that subsection 112(3) should be interpreted in such a
way to prevent its effect from being avoided where a taxpayer arranges to
receive new classes of shares that are identical with the old shares. More
specifically, in the case at hand, counsel for the Respondent argues that the
newly created Class E shares are virtually identical with the pre-existing
common, Class A and Class B shares, with the only difference being that the
common shares carry voting rights, a difference which the Respondent says is
not important. Counsel for the Respondent contends that the court should rely
on subsection 33(2) of the Interpretation Act, R.S.C. 1985, c. 1-21 to
find that the word “share” in the subsection 112(3) provision includes the
plural, being “shares”. Further, counsel for the Respondent asserts that
subsection 112(3) should apply where a taxpayer arranges to receive new classes
of shares that are identical to existing classes of shares. I do not find that
subsection 112(3) applies as asserted by the Respondent since the loss created
cannot be applied against a different class of shares, no matter how similar
the share attributes are.
[26] Counsel for the Respondent referred to
subsection 55(1). He said that it is a well-known fact that parties acting in
concert have been found to be at non-arm’s length. According to the
Respondent, parties acting in concert have the ability to manipulate the situation,
where they are indifferent as to a particular aspect of a transaction, but
where choosing one option over another can produce a substantial tax advantage
(i.e. the subscription price of the Class E shares). The Respondent continues
by stating that the parties in this case are in the exact same economic
position whether it is $300 per share with a par value of $1, or $30 per 10
shares with a par value of $0.10, but the tax loss is three times greater by
choosing the former over the latter.
[27] I note that this is not a case where the price
of the shares is determined by the stock market, but rather it is a case where,
to use Mr. Thomson’s words, the price was determined by a “partnership [of
two]” who enjoyed a “nice cozy relationship”. Justice Webb held in The
Toronto-Dominion Bank v. The Queen, 2008 D.T.C. 3937 that the onus
of proof with respect to the arm’s length issue rests with the Appellant to
establish that Mr. Love and his companies were dealing at arm’s length with the
Appellant. The Appellant has advanced little evidence on this point and thus I
find that Mr. Love and the Appellant were at non-arm’s length during the
relevant time period.
[28] Notwithstanding the fact that former section
55 was contained in Division B, Subdivision c, this does not mean that when
applying it, the rest of the Act may be ignored. The opening words “for
the purposes of this subdivision” simply mean that this provision is a complete
avoidance code for dealing with capital gains and losses. The Appellant advances
an ordering argument which would be tantamount to reading in the words “having
regard only to the provisions of this subdivision” into the former section 55.
There is no merit in the Appellant’s ordering argument as the Court cannot read
words into a section.
[29] I wish to note that there are two possible
variations of this subsection which could be applied, subsection 55(1) as it
read before its repeal and the version of this subsection that existed during
the transitional period. It appears that for subsection 55(1) to be
invoked, one needs to have a sale or other disposition of property, so in the
case at bar the transitional provision has to apply since the sale occurred
during the period in which the transitional provision was in effect.
[30] The word “series” is the subject of much
debate in this case. Counsel for the Appellant said that the Minister had
(prior to written arguments) always proceeded on the basis that the former
subsection 55(1) would be engaged only if the disposition was part of a single
series of transactions that commenced prior to September 13, 1988 and was
completed before 1989.
[31] It is noted that the word “series” does not
appear in subsection 55(1) as it read before the transitional provision came
into effect. Counsel for the Respondent argued that the word “series” that was
used in the transitional provision is used in its ordinary sense, as an English
word, and does not encompass the requirement of preordination. It is asserted
that the requirement of preordination is a judicial gloss added to the word by
the House of Lords when dealing with a series of step transactions in a
substantive tax avoidance context. Counsel for the Respondent said that it is
not conceivable that Parliament would have intended the word “series” in the
three month transitional provision to have the meaning of subsection 55(1) plus
the requirement of a preordained common law series, without the benefit of
subsection 248(10).
[32] Counsel for the Appellant disagrees on this
point, saying that the transitional provision does not create a distinct régime
and that the subsection applies only to a common law series of transactions.
[33] I have concluded that the ordinary meaning
should be given to the word “series” and, therefore, it is not necessary to
consider whether there was an element of preordination.
[34] Counsel for the Respondent made the following
argument:
The operative words in former s. 55(1) in
relation to a disposition of property are that “artificially or unduly…created
a loss”. They are similar to the words in former s. 245(1) in relation to an
expense that would “unduly or artificially reduce the income”. Therefore cases
dealing with the interpretation of former s. 245 are relevant in interpreting
former s. 55. The major factual difference will usually be timing. Some sales
take a long time to happen, so there will likely be a shorter time between the
avoidance facts and the challenged expense, than between the avoidance facts
and the challenged disposition.
In Novopharm, 2003 DTC 5195,
Justice Rothstein resolved a lingering debate when he said at paragraphs 28 and
34 that “the Fording Coal Ltd. approach should be followed” in
interpreting former s. 245. At paragraph 24, he listed the following factors
established by Fording Coal to assess whether a deduction unduly or
artificially reduced income for the purposes of s. 245(1): (1) would the
deduction, if permitted, be contrary to the object and spirit of the Income
Tax Act; (2) are the transactions giving rise to the deductions made in
accordance with normal business practice; and (3) were the transactions entered
into for bona fide business purposes?
The Appellant takes the view that these
factors are cumulative, in the sense that all must exist to reach the
conclusion that the avoidance provision applies. The Respondent takes the
opposite view, and says that where the object and spirit of the Act has been
sufficiently affronted, some business practice or purpose will not save the
day. This approach is more consistent with Justice Strayer’s decision in Fording
Coal, 95 DTC 5672 (FCA), where in paragraph 49 he spoke of “one indicator”
that a deduction artificially reduced income. It suggests that what he had in
mind were non-cumulative criteria.
[35] One of the leading decisions on subsection
55(1) is The Queen v. Nova Corporation of Alberta, 97 D.T.C. 5229, where
the Federal Court of Appeal held that the provision did not apply. In that
case, Nova, through a series of transactions, acquired shares with an adjusted
cost base of $42 million and nominal fair market value. Subsequently, Nova disposed
of these shares and claimed a capital loss of nearly $42 million. There
were two sets of shares that were acquired by Nova. An arm’s length third
party, Carma, held preferred shares of Allarco that had an adjusted cost base
of $16.5 million, but nil market value. Allarco created three tiers of subsidiaries
to facilitate this transaction. Carma then caused the Allarco shares to be sold
to the third tier subsidiary for $1 and this company acquired the adjusted cost
base of the shares. Nova bought from the second tier subsidiary the only issued
and outstanding share of the third tier subsidiary which owned the loss shares.
The third tier subsidiary was liquidated causing Nova to acquire the loss
shares with the high adjusted cost base. Nova sold these shares to an arm’s
length third party for $1 and claimed the loss.
[36] Justice McDonald, who wrote a concurring Judgment,
made the following comment at page 5234 regarding subsection 55(1):
…there is a precondition to the application of the subsection: the
taxpayer must have done something to artificially or unduly increase his losses
from disposition. That is, it is not enough that there be a loss, or that a
loss be artificially or unduly increased in amount. For the subsection to
apply, it requires that “he” – the taxpayer - have increased the amount of his
loss from disposition.
The term “loss from disposition” is defined in subparagraph 40(1)(b)(i)
of the Act as the amount by which the adjusted cost base (ACB) exceeds
the taxpayer’s proceeds of disposition of the property. On a plain reading of
subsection 55(1), then, the taxpayer must have done something to influence
either the adjusted cost base or the proceeds of disposition in order to have
artificially or unduly increased his losses.
[…]
…The ACB’s of the shares were inherited by the taxpayer, and the
shares were disposed of for their market value, which was nothing. The losses
claimed by the taxpayer came about through the inheritance of ACB’s, and this
inheritance came about through operation of the Act. The taxpayer did nothing
but avail himself of the provisions as they then existed.
[37] The Court in Nova noted that a loss
cannot be artificial or undue if it arises by specific operation of the Act.
The Court held that there was no indication that the provisions of the Act
causing the loss to essentially be transferred to an arm’s length party were
stretched beyond their plain meaning. While it was clear that the tax loss claimed
by the Appellant was in excess of its actual loss on the transaction, a
restricted scope was given to the interpretation of subsection 55(1). The Court
held that subsection 55(1) is not a broad anti-avoidance provision and its
scope cannot be expanded beyond its plain meaning where there is no ambiguity. The
dissent focused on the fact that there was a deviation of the rollover
provisions caused by the Appellant which means that the Appellant may reasonably
be considered to have unduly or artificially increased the adjusted cost base.
[38] Hollinger Inc. v. The Queen, [1998] 4
C.T.C. 2424, followed Nova since the transaction at issue was similar, i.e.,
a transfer of losses between arm’s length parties. However, in this case, the
loss was from a U.S. company to a Canadian taxpayer.
[39] In Les Industries S.L.M. Inc. v. Her
Majesty The Queen, 2000 D.T.C. 6648, the Federal Court, Trial
Division, hearing an appeal from the Tax Court of Canada, held that subsection
55(1) applied to one of the two transactions at issue. A wholly-owned
subsidiary of the Appellant, Manufacture St-Laurent Inc. (“St‑Laurent”),
was to be sold for $1 to one of the shareholders of the Appellant but before
the sale, St-Laurent declared a $1 million dollar stock dividend which caused
the shares to increase by this amount. When the shares were sold as intended, the
Appellant realized a capital loss of $1 million. The Nova decision
referred to above was distinguished on the basis that the declaration of the
$1 million dollar share dividend by St-Laurent has to be attributed to the
Appellant because of the degree of control exercised by the latter over the
subsidiary. Further, the declaration of the dividend “had the direct consequence
of increasing the ACB of the Appellant’s shares which led to the loss in
question”. The Court held that the Appellant artificially created a loss within
the meaning of subsection 55(1).
[40] Subsection 55(1) was also considered by
Justice Mogan in 216663 Ontario Limited v. The Queen, 98 D.T.C. 1628.
Justice Mogan held that creating, subscribing for, issuing and redeeming the
Class B shares were transactions which brought the taxpayer within the scope of
subsection 55(1). After considering the phrase “artificially or unduly” as per
the Nova decision, Justice Mogan held that the taxpayer did
something to affect its loss by removing $4.9 million from the subsidiary for
the sole purpose of reducing the fair market value of the common and Class A
shares of the subsidiary.
[29] I cannot resist the conclusion that the loss created by the
Appellant on the disposition of the common and Class A shares of [the
subsidiary] was both artificial and undue. It was artificial (i.e., simulated
or fictitious) in the sense that the sale of the common and Class A shares of
[the subsidiary] on February 1, 1988, when joined with the issue and redemption
of the Class B shares, did not result in a loss at all but in a significant
financial gain to the Appellant. It was undue (i.e., excessive) in the sense
that the Appellant was permitted to report a big loss when the Appellant had in
fact realized a big gain.
[41] The case at hand most closely resembles that
of 216663 Ontario. The Appellant “did something” to trigger
or increase the loss by subscribing for Class E shares at an inflated
price of $300 per share.
[42] I have used the word inflated in the above
paragraph because I have concluded that the Appellant paid too much when it
purchased the Class E shares at $300 per share.
[43] I have reached the conclusion that the price
of $300 per share was inflated for the following reasons:
(a) In paragraph [13]
above I quoted Mr. Teskey when he explained why he picked $300 per share for
the Class E shares. Mr. Teskey said that picking the number of $300 per
share was not science and it was not fair market value. Mr. Teskey said:
"It was a number that, given the circumstances, appeared to
make sense."
(Transcript Volume 1, page 87, lines 1-2)
(b) In his written
argument counsel for the Respondent said at paragraph 51:
This is not a case where the “price” of the Class D and Class E
shares was determined in the open market. It is a case where, to use Mr.
Thompson’s word, the price was determined by a “partnership [of two],” and
those who enjoyed “a nice cozy relationship”.
I agree with this comment.
(c)
Counsel for the
Appellant argued that the price paid by the Appellant for the class E shares
did not matter because Oxford and the Appellant (the only two
shareholders involved) each paid the same price for similar shares. While this
point may be correct “qua shareholder,” the overpayment paid for the shares by
the Appellant increases the price of the Class E shares for the purpose of
determining the cost base of the shares acquired by the
Appellant.
(d)
I also note that during
his testimony Mr. Teskey said:
The difference was that PriceWaterhouse [the Appellant’s accounting
firm] introduced what they called a blockage factor of 45 per cent. The result
of that was that rather than getting my number [Note $300 per share], you
got a number of about half. [… ] it was about $142 per share.
(Transcript Volume II, page
319, lines 11-16)
(e) I also wish to note
that the Class E shares of Oxford were acquired over several years and it is
likely that the fair market value of the shares of Oxford
fluctuated during this period.
[44] In paragraph [40] above, I referred to Justice
Mogan’s decision in 216663 Ontario, where
Justice Mogan held that the taxpayer did something to affect its loss. In my
opinion, the Appellant also “did something” when it arranged to have Holdings
redeem the Class A and Class B shares, instead of redeeming these shares
directly, thus causing the gain on the shares to arise separately.
[45] In this connection, I refer to paragraphs 11
and 12 of the Respondent’s written argument where he said:
11. Accordingly, the Appellant further stretched the capital loss on
disposition by having the common, Class A and Class B shares redeemed, which
triggered a deemed dividend which was tax free for the Appellant. This deemed
dividend at redemption ultimately resulted in a small capital loss on the
common and Class B shares that was reduced to nil after the application of s.
112(3), and in a small capital gain on the Class A shares. The disposition of
the Class E shares resulted in a substantial loss affected by a limited grind
and a small gain on the Class A shares.
12. The loss was also achieved by the allocation of the proceeds of
disposition on a pro rata basis at $46.81 per share on all of the shares held
by the Appellant, notwithstanding the difference in subscription price of $26
(common, Class A and Class B shares) versus $300 for the “special” Class E
shares.
I agree with the comments of counsel for the
Respondent.
[46] Based upon the reasons as outlined above, the
appeal is dismissed with costs.
Signed at Ottawa, Canada, this 3rd day of June 2010.
"L.M. Little"
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