Total Energy – Tax Court of Canada finds that an acquisition of an insolvent public company with losses by a SIFT trust was an abuse of s. 111(5)

In September, 2007, most of the equity of an insolvent public corporation (“Biomerge”) was acquired by the company (“Nexia”) of two individuals involved in acquiring and selling loss companies, resulting in Nexia holding all of non-voting common shares of Biomerge (representing 80% of its equity) and 45% of its voting common shares. The individuals then identified an income fund (“Total”) which was becoming subject to tax under the “SIFT” rules. In May 2009, a plan of arrangement was implemented under which the Total units were exchanged for new common shares of Biomerge, the existing voting common shares of Biomerge were largely cashed-out, and Total was wound-up into Biomerge (now, “New Total”) pursuant to s. 88.1(2). The former Total unitholders held 99.8% of the New Total equity.

In following Deans Knight in finding that these transactions were an abuse of s. 111(5), Pizzitelli J stated:

[T]he reality of what happened here is that a willing seller in the business of selling tax attributes of failed companies takes the reins of such a company and markets and sells them to a willing unrelated buyer for use against their income. If these are not the type of transactions Parliament sought to stop by the enactment of the loss streaming rules in s.111(5) and parallel provisions, I don’t know what are.

In rejecting the New Total position based on there being no rules, similar to the corporate loss-streaming rules in s. 111(5), relating to the streaming of losses of trusts, he noted inter alia that the transaction entailed the acquisition of a corporate lossco that effectively was merged with the corporate operating subsidiary of Total and that the subsequent introduction of s. 256(7)(c.1) “serves to clarify the policy as well as provide automatic denial of such losses rather than resorting to the GAAR.”

Neal Armstrong. Summaries of Total Energy Services Inc. v. The King, 2024 TCC 12 under s. 245(4) and s. 248(10).