Survivance v. Canada, 2007 DTC 5096, 2006 FCA 129

 

                                                                                           

 

 

Date: 20060331

 

Docket: A-230-05

 

Citation: 2006 FCA 129

 

CORAM:       DÉCARY J.A.

                        NOËL J.A.

                        PELLETIER J.A.

 

 

BETWEEN:

 

LA SURVIVANCE

 

Appellant

 

and

 

HER MAJESTY THE QUEEN

 

Respondent

 

 

 

Hearing held at Montréal, Quebec, March 1, 2006.

 

Judgment delivered at Ottawa, Ontario, March 31, 2006.

 

 

 

REASONS FOR JUDGMENT:                                                                                         NOËL J.A.

 

CONCURRING:                                                                                                          DÉCARY J.A.

                                                                                                                                 PELLETIER J.A.

 

 

Date: 20060331

 

Docket: A-230-05

 

Citation: 2006 FCA 129

 

CORAM:       DÉCARY J.A.

                        NOËL J.A.

                        PELLETIER J.A.

 

 

BETWEEN:

 

LA SURVIVANCE

 

Appellant

 

and

 

HER MAJESTY THE QUEEN

 

Respondent

 

 

 

REASONS FOR JUDGMENT

 

 

NOËL J.A.

 

[1]        La Survivance (the appellant) appeals from a decision rendered by Mr. Justice Dussault of the Tax Court of Canada (2005 DTC 689) confirming the validity of an assessment made in regard to its 1998 taxation year. This assessment disallowed the carryover of a non-capital loss allegedly resulting from a business investment loss (BIL) suffered in 1994. The assessment recognized this loss as being a simple capital loss.

 

The facts

[2]        The appellant is a public corporation within the meaning of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1 (the Act). In 1994, it sold all of the shares held in a subsidiary to a private corporation in an arm’s length transaction. This disposition resulted in a loss, the carryover of which was disallowed in 1998.

 

[3]        The transaction in question is described in the context of an agreed statement of facts filed by the parties in the Tax Court of Canada. It states that the appellant operates a life insurance undertaking while its subsidiary, Les Clairvoyants, Compagnie d’Assurance Générale Inc. (Les Clairvoyants) and the purchaser, Société Nationale d’Assurance Inc. (Société Nationale) both operate a property insurance undertaking.

 

[4]        On May 3, 1994, an agreement was reached between the appellant and Société Nationale (the Agreement) by which Société Nationale offered to purchase and the appellant agreed to sell at $0.15 per share the shares it held in Les Clairvoyants in a public share offering (PSO) covering all of the common shares issued and outstanding of the latter company.

 

[5]        Under the Agreement, on June 8, 1994, Société Nationale issued a PSO for cash subject to the provisions of the Quebec Securities Act, R.S.Q., c. V-1.1 (SA). On June 16, 1994, the appellant deposited irrevocably all of the shares it held in the capital stock of Les Clairvoyants pursuant to the terms of the PSO and clause 6 of the Agreement.

 

[6]        The PSO provided, in paragraph 4, that [translation] “if on June 30, 1994, all of the conditions of this offer are fulfilled, [Société Nationale] will take up and pay for all of the shares deposited under [the PSO...] no later than July 11, 1994” (Appeal Book, tab 6D).

 

[7]        All of the conditions were in fact met and on July 5, 1994, during business hours, Société Nationale took delivery upon payment of all the shares deposited by the appellant pursuant to the PSO. The register of shareholders of Les Clairvoyants was amended that same day to enter Société Nationale and delete the appellant.

 

[8]        The sale resulted in a loss of about $2,654,372 and the issue in this appeal is raised by the fact that a BIL is deductible against any income, while a simple capital loss is deductible only against taxable capital gains, if any.

 

[9]        Under the Act, this loss is a simple capital loss if, at the time of disposition, Les Clairvoyants remained under the control of a public corporation (i.e., the appellant’s). However, if the control was held by Société Nationale (a private corporation), the loss qualifies as a BIL.

 

[10]      Such control would undoubtedly be in the appellant’s hands were it not for the fact that subsection 256(9) of the Act creates a legal fiction concerning the specific time when the control of a corporation is acquired, by decreeing that, for the purposes of the Act, “where control of a corporation is acquired by a person or group of persons at a particular time on a day, control of the corporation shall be deemed to have been acquired by the person or group of persons, as the case may be, at the commencement of that day....”

 

[11]      Relying on this presumption, the appellant argues that, at the time of disposition of the shares it held in its subsidiary, during business hours on July 5, 1994, the subsidiary was no longer under its control but rather under the control of Société Nationale, which means it is entitled to the loss that is claimed.

 

[12]      By notice of assessment issued July 20, 2000, the Minister disallowed the loss. This assessment was subsequently ratified and the appeal to the Tax Court of Canada ensued.

 

[13]      On April 26, 2005, the Tax Court of Canada dismissed the appeal and upheld the assessment.

 

Statutory provisions

[14]      The appellant is a private corporation but it is considered a public corporation for the purposes of the Act because it is carrying on a life insurance business and it is resident in Canada:

 

 

 

[Emphasis added.]

 

[15]      A company cannot be qualified as a “Canadian-controlled private corporation” (CCPC) as long as it remains under the control of a public corporation:

 

[Emphasis added.]

 

[16]      Paragraphs 39(1)(b) and (c) of the Act define what is meant by a capital loss and a business investment loss, respectively. In the case of a BIL, the legislation specifies the nature of the property that can produce this type of loss, in this case the capital stock of a “small business corporation” (SBC):

 

[Emphasis added.]

 

[17]      As long as it remained under the control of the appellant, Les Clairvoyants did not meet the definition of a CCPC and thus was not an SBC under the Act:

 

[Emphasis added.]

 

[18]      However, Société Nationale was at all relevant times a “private corporation”, so that after it acquired control of Les Clairvoyants the latter became a CCPC and an SBC:

 

 

[Emphasis added.]

 

[19]      Finally, before quoting subsection 256(9), which is at the heart of this litigation, I think it is useful to quote subsection 249(4), which suggests its rationale:

 

[20]      Subsection 256(9) reads as follows:

 

[Emphasis added.]

            Needless to add, the election mentioned in subsection 256(9) was not exercised.

 

Decision under appeal

[21]      Dussault J. summarized the appellant’s argument as follows:

[7]   ... given the deeming provision, the irrefutable presumption contained in subsection 256(9) of the Act, control that is acquired at a given moment is deemed to be acquired at the commencement of the day in which this moment occurs or, in the instant case, at the commencement of the day of July 5, 1994. Thus, according to Counsel for the Appellant, at the moment where the shares in Les Clairvoyants were disposed of and acquired, Les Clairvoyants was no longer controlled by La Survivance, a public corporation, but by Société Nationale, a private corporation. Les Clairvoyants was accordingly a CCPC from the start of the day on July 5, 1994. ...

 

[22]      Before discussing this question, Dussault J. considered the issue relating to the date of disposition of the shares. In doing so, he answered the preliminary argument by the Minister to the effect that the disposition of the shares and the acquisition of control had occurred on June 30 and July 5, 1994, respectively, so subsection 256(9) cannot have the meaning attributed to it by the appellant, irrespective of how it is construed.

 

[23]      Dussault J. first noted that, under the Act, there is a disposition when the vendor is entitled to the sale price of the assets sold (section 54 of the Act). After explaining that the appellant could not have this right before there was a sale, under the governing private law (Hewlett Packard (Canada) Ltd. v. Canada, [2004] F.C.J. No. 1084 (QL)) (reasons, para. 22), he held that the disposition occurred on July 5, 1994. As he put it (reasons, para. 23):

Everything that occurred before July 5, 1994 constituted a promise of sale and no effect of the sale itself can have been created, since the promise of sale was not accompanied by delivery and possession (1710 C.C.Q.).

 

[24]      In drawing this conclusion, Dussault J. relied essentially on the intention of the parties as established by their conduct and the circumstances surrounding the PSO. He referred to a legal opinion by the law firm of Ogilvy Renault that was communicated to the shareholders of Les Clairvoyants in a memorandum accompanying the PSO, an opinion that is expressed in the following terms (Appeal Book, tab 6, p. 10):

[translation] The shareholder will not be considered to have disposed of his shares at the time of deposit of the shares in response to the offer, but he will instead be considered to have disposed of his shares at the time when the shares are delivered in return for payment.

 

[25]      After noting that this opinion was not determinative of the precise question he had to decide, Dussault J. nevertheless considered it when he sought the intention of the parties. He stresses that it is a clear opinion that was conveyed on behalf of Société Nationale to all the shareholders at the same time as the offer (reasons, para. 23). There is no indication that the shareholders held a different view of the effects of the transaction.

 

[26]      Dussault J. also quotes the decision of the Quebec Court of Appeal in Raschella v. 3633713 Canada Inc., [2003] J.Q. No. 23 (QL), where Rochon J.A. explains (reasons, para. 23):

[translation]

The agreement between the parties constitutes a synallagmatic promise which is not equivalent to a sale since the parties have agreed to postpone the conclusion of the contract of sale and the transfer of ownership (1396 C.C.Q.). Recently, in Amiska Corporation Immobilière Inc. v. Alain Bellerive, [[2001] R.J.Q. 1495 (C.A.)], Forget J. writes:

 

[translation]

On this point also, I am of the opinion that the trial judge did not err in concluding that the promise of sale of December 16, 1994 did not constitute a sale.

 

It is true that, under the old Act, there was some controversy over whether a synallagmatic promise of sale was the equivalent to a sale. The case law nonetheless resolved that such a promise could not be the equivalent to a sale when the transfer of the property was delayed to the moment of the contract of sale, which is the case here.

 

The situation would be the same even if one were to apply, as the trial judge did, the new law which was in effect at the time the promise of sale was signed. It would also be necessary to conclude that there was no sale (1396 C.C.Q.) [id.. p. 1499].

 

[27]      Applying the same reasoning, Dussault J. concluded that the effects of the sale were deferred to July 5, 1994. It was not until that date that the ownership of the shares changed hands and the right of the appellant to be registered as shareholder was acquired (reasons, para. 24).

 

[28]      Dussault J. then turned to the issue relating to the effect of subsection 256(9). After a lengthy analysis, he held that the presumption established in subsection 256(9) does not have the effect suggested by the appellant. In his view, the purpose of the presumption is to ensure that the new taxation year triggered by a change in control is retroactive to the commencement of the day in the course of which control is acquired. Subsection 256(9) does not otherwise change the actual situation that must prevail.

 

[29]      The presumption only has a retroactive effect as to the time when Société Nationale is deemed to have acquired control of Les Clairvoyants, nothing more. It does not entail that the person who held control simultaneously ceased to exercise it. It is similar to the presumption in paragraph 69(1)(a) of the Act in that it is effective only in regard to the purchaser.

 

[30]      Dussault J. adds that there is no prohibition on the contemporaneous coexistence of actual control (as exercised by the appellant) and deemed control (as exercised by Société Nationale) of the same corporation. In this regard, he draws on the decision of Jackett P. of the Exchequer Court in Viking Food Products Ltd. v. M.N.R., 67 DTC 5067 (Viking Food).

 

[31]      Dussault J. concludes that, notwithstanding subsection 256(9), the appellant still had control of Les Clairvoyants at the moment of the disposition of the shares in the course of the day of July 5, 1994, and accordingly it is not entitled to the loss that is claimed.

 

Parties’ submissions

[32]      In this Court, the parties essentially reiterated the arguments they had made before the Tax Court of Canada.

 

[33]      The Minister argues that the acquisition of control occurred on July 5, 1994, but that the sale of the shares occurred on June 30, 1994. In his opinion, the PSO constitutes a true offer to contract within the meaning of article 1388 of the Civil Code of Québec (C.C.Q.), which was accepted on June 16, 1994, when the appellant irrevocably deposited all of its shares with the designated depositary. This acceptance was conditional on the realization of certain events provided for in the PSO, all of which were realized as of June 30, 1994. Therefore, Société Nationale acquired ownership of the shares at that date.

 

[34]      The period given to Société Nationale under the PSO in which to take up the shares and pay the price thereof constitutes a term under article 1508 C.C.Q., which in no way affects the enforceability of the sale as of June 30.

 

[35]      Since the acquisition of control occurred only five days later, when Société Nationale was entered in the register of shareholders of Les Clairvoyants (Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795, at pp. 815 and 817), subsection 256(9) cannot have the effect read into it by the appellant.

 

[36]      Assuming that the sale occurred on July 5, the Minister submits that the trial judge rightly held that the presumption in subsection 256(9) is not effective in regard to the appellant. The clear language of the Act shows unequivocally that a public corporation cannot benefit from a BIL. It would be extraordinary if a legislative intention so clearly expressed could be defeated by a mere legal fiction.

 

[37]      The appellant, for its part, argues that the sale did indeed occur on July 5. It stresses the distinction between a contract of sale (Art. 1708 C.C.Q.) and the bilateral or synallagmatic promise to sell by which a party undertakes to sell a property and the contracting party undertakes to purchase it:

[translation] Concerning, first, the bilateral promise, the new version of article 1396, para. 2 of the Civil Code of Québec seems clear: it does not constitute a sale, but a pre-contract by which the parties mutually undertake to execute the sale at some later point.... In principle, the promise itself does not give rise to any of the effects of the sale; for example, it does not transfer the ownership of the property or confer on the promisor-purchaser any right in rem that would warrant registration. (Pierre-Gabriel Jobin, La Vente, 2^nd ed., (Cowansville, Que.: Éditions Yvon Blais, 2001), at para. 44).

 

[38]      To determine whether an agreement is a contract of sale or a bilateral promise, it is necessary to look for the common intention of the parties (Art. 1425 C.C.Q.) taking into the account the nature of the contract, the circumstances in which it was formed, the conduct of the parties and usage (Art. 1426 C.C.Q.).

 

[39]      Referring to the commercial usage relating to the PSO and its implementation, the appellant argues that the parties by common intention deferred the effects of the sale to July 5, 1994, that is, until Société Nationale took up the shares and paid the price thereof.

 

[40]      Since the disposition of the shares and the change in control occurred in the course of the same day, the appellant submits that the specific and unavoidable effect of the legal fiction created by subsection 256(9) was to postpone to the first moment of the day of July 5, 1994 the acquisition of control by Société Nationale. Thus, the trial judge was wrong to find that Société Nationale did not control Les Clairvoyants when the appellant disposed of the shares later in the course of the same day.

 

Analysis and Decision

1^st issue: date of disposition

[41]      Under section 54 of the Act, the expression “disposition of property” includes “any transaction or event entitling a taxpayer to proceeds of disposition of property”. In the case of a sale, the expression “proceeds of disposition” is defined in the same section as “the sale price of property that has been sold”.

 

[42]      As Dussault J. says, this Court recently had an opportunity to rule on the scope of these definitions in the case of a sale (Hewlett Packard, supra). The principle that was upheld is that there can be no disposition unless there is a sale according to the governing private law, in this case according to the C.C.Q. (Hewlett Packard, supra, at paras. 45 to 51).

 

[43]      Applying this principle, I am of the opinion, like Dussault J., that the disposition of the shares of Les Clairvoyants occurred on July 5, 1994. That is the date on which the parties agreed that the ownership of the shares would be transferred, and not before.

 

[44]    The Agreement of May 3, 1994 is a promise of sale within the meaning of the Civil Code of Québec. A promise of sale is a contract, in that it creates mutual obligations, but it is not tantamount to a sale (Pierre-Gabriel Jobin, La Vente, 2^nd ed. (Cowansville, Que.: Éditions Yvon Blais, 2001), at para. 44, cited by the Superior Court in Fonds de placement immobilier Cominar (fiduciaire de) v. Constructions Myo inc., [2000] J.Q. No. 2129, at paras. 42 and 47. See also, Jacques Deslauriers, Le droit commun de la vente, Collections de droit 2003-2005, volume 5, “Obligations et contrats”, at p. 161, cited by the Superior Court in Larabie v. 3917592 Canada inc., [2004] J.Q. No. 11574, at para. 152.)

 

[45]      Under the Agreement, Société Nationale offered to purchase and the appellant agreed to sell the shares of Les Clairvoyants that it held [Translation] “in the context of a [PSO] in accordance with the governing laws of Quebec and involving all of the common shares issued and outstanding of the Company” (Appeal Book, tab 6B, clause 1 of the Agreement). The fact that the sale was made in the context of a PSO subject to the SA is one of the circumstances that must be considered in analyzing the intention of the parties.

 

[46]      The SA provides that a person contemplating to make a purchase of an interest of 20% or more of a class of voting securities in a corporation shall proceed by way of a PSO (SA, section 110). The PSO issued on June 8, 1994 under the Agreement targeted all of the outstanding shares of Les Clairvoyants. It was therefore subject to the provisions of the SA, including those concerning the duration of the offer, the mode of acceptance, the right of withdrawal, the time when Société Nationale could and should take up the shares that were deposited and pay the price thereof, etc. (SA, sections 147.3 and 147.5 to 147.7). The appellant eventually accepted the PSO in accordance with the terms and conditions therein provided, by making an irrevocable deposit with the depositary, on June 16, 1994, of the shares that it held.

 

[47]      Such deposit agreements (“lock-up agreements”) are common practice when the targeted corporation is held by one or more large shareholders:

 

[translation]

Where a large block (10% or more) of the outstanding shares of a targeted corporation is held by a large shareholder, the potential offeror seeking to ensure the success of the public offer or other type of change of control transaction he proposes will require that the large shareholder undertake as follows:

 

(a) In the context of a public offer, to deposit irrevocably the shares he holds in the targeted company unless the board of directors withdraws, in accordance with the terms of the support agreement, its support to the transaction proposed by this initiator; ...

 

(Francis R. Legault, “Offres publique d’achat et d’échange (fusions et acquisitions)”, in Développements récents sur les valeurs mobilières, Formation permanente du Barreau du Québec, vol. 164 (Cowansville: Éditions Yvon Blais, 2002), pp. 113 to 137. See also, J.G. MacIntosh and C.C. Nicholls, Securities Law, (Toronto: Irwin Law, 2002), p. 303).

 

[48]      The SA provides that if the terms of the bid are met, the offeror is bound to take up and pay for the securities within the time prescribed. In accordance with the SA, the PSO provided that Société Nationale would take up and pay for all the shares deposited, and not withdrawn, after June 30, 1994, but no later than July 11, 1994. Any share deposited in acceptance of the offer could be withdrawn before 5:00 p.m. on June 30, 1994 and at any time after July 25, 1994, should Société Nationale not have taken up the shares or paid for them (Appeal Book, tab 6D, clause 5 of the PSO).

 

[49]      The expression “take up and pay for” (“prendre livraison et régler”) has a specific meaning in the field of PSO takeovers:

“Taking up” is the process whereby the offeror accepts the securities tendered pursuant to the TOB [Takeover Bid] (David Johnston and Kathleen Doyle Rockwell, Canadian Securities Regulation, 2^nd  ed. (Toronto: Butterworths, 1998), at p. 160).

 

 

[50]      In my view, all of the steps provided in the Agreement, including those from the opening of the PSO to the taking up and payment for the shares, had to be taken before there was a transfer of ownership. It would clearly be contrary to the purpose of the legislation governing PSOs, and contrary to the intention of the parties, if the offeror was to be entitled to the fruits and income from the shares before he paid the price thereof.

 

[51]      This finding is consistent with the summary of tax effects sent to the shareholders in connection with the PSO (see para. 24, above). It is also consistent with what the appellant represented as the generally accepted opinion in such matters, without being challenged in any way by the Minister:

The date on which the acquirer “takes up and pays for” deposited target shares is generally regarded as the date on which the vendor disposes of his target shares (J. George Vesely and Robert A. Roberts, “Takeover Bids: Selected Tax, Corporate, and Securities Law Considerations”, Report of Proceedings of the Forty-Third Tax Conference, 1991 Conference Report (Toronto: Canadian Tax Foundation, 1992), 11:1‑47, n. 42. See also, Dr. Arthur W. Nauss, et al. v. MNR, 78 DTC 1796.

 

[52]      Considering that the transaction pertains to the specific field of the sale of securities, and considering the particular terms of this PSO, it is clear that the parties agreed that the transfer of ownership should coincide with the taking of possession of the shares in return for payment. Dussault J. concluded, rightly in my view, that the sale of the shares occurred on July 5, 1994, and not before.

 

2^nd issue: The effect of the subsection 256(9) fiction

[53]      In The Queen v. Verrette, [1978] 2 S.C.R. 838, at p. 845, Beetz J. explained as follows the meaning of a deeming provision:

A deeming provision is a statutory fiction; as a rule it implicitly admits that a thing is not what it is deemed to be but decrees that for some particular purpose it shall be taken as if it were that thing although it is not....

 

[54]      More recently, this Court, in Canada v. Loreto Scarola, 2003 FCA 157, quoted the following passage from a French doctrinal work that clearly illustrates how a statutory fiction is used (para. 19):

Fiction is a process that is part of the pragmatics of law. It consists first in misrepresenting the facts, stating them to be other than what they really are and extracting from that very adulteration and that false supposition the legal consequences that would flow from the dissembled truth, if that truth existed beyond the cloak of external appearances. (Yan Thomas, “Fictio Legis. L’empire de la fiction romaine et ses limites médiévales”, (1995) 21-22 Droits - Revue française de théorie juridique)

 

[55]      Insofar as subsection 256(9) effectively alters reality, its meaning should be limited to what is clearly expressed. A deeming provision cannot otherwise modify the actual situation that obtains. Before considering the meaning of subsection 256(9), it is necessary to investigate its rationale.

 

[56]      Subsection 256(9) is one of several provisions (including subsections 111(4) and (5) and 249(4) of the Act) the purpose of which is to limit the inappropriate distribution of losses that might result from takeovers of companies with accumulated losses by well-endowed companies that are able to absorb those losses (“stop loss rules”). In order to clearly delineate losses incurred prior to a takeover, subsection 249(4) provides that the taxation year of the targeted corporation is deemed to have ended immediately before the precise moment in a given day when the takeover occurred.

 

[57]      It is this initial fiction that is altered by the fiction created by subsection 256(9). Indeed, the essence of Mr. Justice Dussault’s reasoning in limiting the scope of subsection 256(9) is based on what he perceives to be the limited purpose of this provision:

[33]         The aim of subsection 256(9) is to establish the acquisition of control of a corporation during a given day at a moment which is the commencement of that day rather than at the actual moment at which control is acquired (subject to the exercise of an option to the contrary) such that the taxation year of that corporation ending immediately prior to the acquisition of control may end at the close of the day preceding the day in the course of which control is actually acquired, rather than a given moment during the course of the day during which control is acquired, in other words, at the moment during that day which immediately precedes the actual moment at which control is acquired. For the corporation, this means that a new taxation year then also begins at the commencement of the day in the course of which control is acquired. This rule avoids a situation where one taxation year ends and another begins in the middle of a day, with all the complications that that might entail, specifically with respect to the calculations required by the Act under such circumstances.

 

Dussault J. concludes, at paragraphs 34 and 36:

[34]         In my view, subsection 256(9) does not otherwise change the actual situation that must prevail. This subsection does not include a corollary for the other party to the transaction, ...

 

...

 

[35]         ... In the instant case, Société Nationale acquired control of Les Clairvoyants during the day of July 5, 1994. Subsection 256(9) establishes that such control is deemed to have been acquired at the commencement of that day of July 5, 1994, nothing more. It does not establish that the person who held legal or effective control of Les Clairvoyants, namely La Survivance, simultaneously ceased to possess such control. ...

 

[Emphasis added.]

 

[58]      According to the trial judge, while the corporation that acquires control is deemed to acquire it at the commencement of the day when this takeover occurred, the corporation that abandons control is not affected by the fiction and maintains its control until the sale of the relevant controlling shares.

 

[59]      It is clear that Parliament, in creating the subsection 256(9) fiction, intended to ease the difficulties in calculation engendered by taxation years that end through the effect of subsection 249(4), at the precise moment at which an acquisition of control occurs. However, before inferring from this that subsection 256(9) has no effect on the appellant, it is necessary to take a closer look at its language.

 

[60]      Subsection 256(9) carries back in time the triggering event of a taxation year (i.e. the acquisition of control), “for the purposes of this Act”. This expression is used throughout the Act. It appears more than 160 times. It is a formula that is consistently used for the same purpose, that is, to identity a rule of general application subject to any express provision to the contrary.

 

[61]      Subsection 256(9) is consistent with this scheme. The rule enunciated therein purports to be of general application but some express provisions serve to counteract it. For example, paragraph 88(1)(c.6) provides that, for the purpose of paragraph 88(1)(c.3) “and notwithstanding subsection 256(9)”, the control of a corporation, in the circumstances provided, is deemed to have been acquired at the end of the day. Similarly, subsection 6204(4) of the Income Tax Regulations, C.R.C. c. 945, provides that “For the purposes of subsection (3), the Act shall be read without reference to subsection 256(9) of the Act.”

 

[62]      It is not necessary to say more about the effects of these exceptions. I mention them for the sole purpose of demonstrating that subsection 256(9) states a rule of general application as to the time at which control is acquired, and this rule applies for the purposes of the Act unless it is expressly overridden. I have found no provision that would shield the appellant from the application of this rule.

 

[63]      With respect, I am of the opinion that subsection 256(9) applies to both the corporation acquiring control and the corporation disposing of control.

 

[64]      As persuasive evidence of this, suffice it to note that, under this subsection, the initial tax return of Les Clairvoyants under the control of Société Nationale must cover the period commencing at the very beginning of the day of July 5, 1994, just as the final return filed under the appellant’s control must cover the period ending at that very moment (see, respectively, paragraphs 249(4)(a) and (b)). None of the corporations involved in the acquisition of control avoids being covered by the fiction.

 

[65]      Subsection 256(9), notwithstanding its special features, must be construed in its entire context, in accordance with the grammatical and ordinary sense of its words, harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament (see, for example, Ludco Enterprises Ltd. v. Her Majesty the Queen, [2001] 2 S.C.R. 1082, at paras. 36-37).

 

[66]      If this approach is faithfully adhered to, it must be concluded that, for the purposes of the Act, and subject to the exceptions provided, Société Nationale is deemed to have acquired control of Les Clairvoyants and the appellant is deemed to have surrendered it at the first moment of the day of July 5, 1994. That is what flows from the ordinary sense of the words, read in their context, and from the statutory objective.

 

[67]      The two situations on which Dussault J. relied in limiting the effect of the presumption to the purchaser are quite different. In regard to the first, Dussault J. rightly noted that the presumption in paragraph 69(1)(a) of the Act applies when determining the tax consequences for one of the parties to a transaction (the purchaser), without altering the tax liability of the other (the vendor). However, this asymmetry results from the clear language of paragraph 69(1)(a), which reduces the sale price of the purchaser by deeming it equal to the fair market value of the property sold, and clearly intentionally, lets the vendor suffer the tax consequences resulting from the higher amount actually received (see, for example, Colubriale v. The Queen, 2005 FCA 329, at para. 28).

 

[68]      As to the decision of the Exchequer Court in Viking Food, supra, Dussault J. notes, first, that the context of this case is different. However, he refers to it in order to demonstrate that the coexistence of control (deemed and effective) of the same corporation is not precluded. Once again, this decision is explained by the particular provision that was at issue.

 

[69]      In that case, the Court had to interpret an anti-avoidance provision, one of the purposes of which was to prevent the by-passing of certain restrictions on corporations subject to the same control (the so-called “associated” corporations). To extend the scope of these rules, the former paragraph 139(5d)(b) (now paragraph 251(5)(b)) provided that a person who had a right to acquire shares in a corporation was deemed to have had “the same position in relation to the control of the corporation as if he owned the shares”.

 

[70]      In the Exchequer Court, Viking Food cited this fiction to argue that it was no longer under the control of the owners of its shares, but was under the control of their grandchildren, to whom they had granted the right to acquire their shares. It is worth explaining that, in contrast to the grandparents, the grandchildren did not control any other company, so the argument, if adopted, would “dissociate” Viking Food from the other companies controlled by the grandparents. The issue was therefore whether the deemed control based on the presumption effectively ousted the control exercised by the grandparents.

 

[71]      President Jackett ruled that it did not. The fact that an individual is deemed to occupy the same position in relation to the control of a corporation as if he owned the shares did not give rise to the additional presumption that the owner of the shares ceased to be the owner and to exercise the control based on that ownership. In expanding the notion of control, Parliament clearly did not intend to limit it by excluding the control exercised by the owner of the shares (Viking Food, supra, at p. 5072 in fine).

 

[72]      After the judgment was rendered, counsel for Viking Food notified the Court that according to this reasoning, neither the owners of the shares nor their grandchildren controlled Viking Food, since both groups of individuals, by the effect of the Act, held an equal position in regard to it. Counsel asked that the judgment be corrected accordingly.

 

[73]      In an addendum to the judgment (Viking Food, supra, at p. 5072), Jackett P. stated that counsel had misunderstood the provision at issue. Inasmuch as the holders of the right to acquire the shares were in the same position as those who were the owners of the shares in regard  to the right to exercise the control (i.e. as to de jure control), the Court had to determine which of these two groups exercised this control de facto. In this instance, the control was exercised by the owners of the shares and not by their grandchildren.

 

[74]      The issue in the case at bar is quite different. It is limited to determining whether the rule laid down by subsection 256(9) is of general application or whether the party who surrenders control falls outside its purview. The answer is in my opinion inescapable. Control cannot be acquired without there being concomitantly an abandonment of control.

 

[75]      That in fact was how the Minister read subsection 256(9) in a technical opinion issued in regard to a transaction similar to this one (Minister of National Revenue, Technical Interpretation 9525315, “Associated Corporations” (February 26, 1996), (eC: Taxnetpro)). It is not necessary to quote, in detail, the request [which led to the issuance] of the opinion. Suffice it to say for our purposes that the company that made the request (A Inc.) intended to surrender control of its subsidiary (Opco) to a third-party purchaser (B Inc.). It wanted to know whether subsection 256(9) would apply to it. It feared that, if it did not, it would continue to be associated with its subsidiary during the few hours between the commencement of the day of the transaction and the particular time when the transaction was to be consummated, with the negative consequences that this would entail. (Under the Act, a corporation is associated to another for the year if it is associated “at any time” during the year.)

 

[76]      The Minister, in an unambiguous answer, said that, in his opinion, the presumption applied in regard to each of the parties to the transaction:

[Translation] ... the Department’s position is to consider that although the shares were in fact disposed of as of 5:00 p.m. on July 1, A Inc. surrendered its control of Opco immediately prior to the time when B Inc. is deemed to have acquired control of Opco....

 

[Emphasis added]

 

[77]      At the end of the day, the only reason why the Minister refuses to give effect to the fiction in the present case is that he does not like the result to which it leads. Dussault J. echoes this concern when he concludes (reasons, para. 40):

... [it would be] incongruous [if the appellant] would be able to claim a BIL following the disposition of shares in a corporation deemed to be a CCPC and COSB for the reason that Société Nationale, which acquired control, was a private corporation, whereas it could neither hold nor dispose of such shares since it was itself, at all relevant times, a corporation deemed to be a public corporation which was controlling that corporation.

 

[78]      The result seems incongruous only if we choose to ignore the fiction. It is not if we treat the fiction as truth. If that is done, it is not the appellant but Société Nationale that controlled Les Clairvoyants at the time when the appellant disposed of its shares, and there is nothing incongruous in Les Clairvoyants being thereby treated as a CCPC and a COSB since such was its status under the Act.

 

[79]      There would be a risk of creating intolerable uncertainty if the courts could override a deeming provision of general application solely because the result it produces in a particular case seemed undesirable to them. Parliament is well aware of the effect of the presumptions it enacts, and it is up to Parliament to set limits on their scope. In this case, it has made subsection 256(9) a rule of general application and it is the role of the courts to enforce it.

 

[80]      For these reasons, I would allow the appeal, set aside the judgment of the Tax Court of Canada and refer the assessment to the Minister for him to issue a new one on the basis that the appellant was entitled to the deduction of the loss carried forward for its 1998 taxation year as claimed, with costs in this Court and in the Tax Court of Canada.

 

 

“Marc Noël”

 

“I concur.

   Robert Décary J.A.”

 

“I concur.

   J.D.Denis Pelletier J.A.”

 

 

 

Certified true translation

François Brunet, LL.B., B.C.L.

 

FEDERAL COURT OF APPEAL

 

SOLICITORS OF RECORD

 

 

DOCKET:                                                       A-230-05

 

APPEAL FROM A JUDGMENT OF THE HONOURABLE MR. JUSTICE PIERRE R. DUSSAULT OF THE TAX COURT OF CANADA DATED APRIL 26, 2005, DOCKET NO. 2001-4281 (IT)G

 

STYLE:                                                           La Survivance v. Her Majesty the Queen

 

 

PLACE OF HEARING:                                 Montréal, Quebec

 

DATE OF HEARING:                                   March 1, 2006

 

REASONS FOR JUDGMENT:                   NOËL J.A.

 

CONCURRING:                                           DÉCARY J.A.

                                                                        PELLETIER J.A.

 

DATE OF REASONS:                                   March 31, 2006                      

 

 

APPEARANCES:

 

MR. ROBERT COUZIN MS BRENDA DIDIY	FOR THE APPELLANT
MR YANICK HOULE MS JANE MEAGHER	FOR THE RESPONDENT

 

SOLICITORS OF RECORD:

 

COUZIN TAYLOR LLP TORONTO, ONTARIO	FOR THE APPELLANT
JOHN H. SIMS OTTAWA, ONTARIO	FOR THE RESPONDENT

 

 

Docket: A-230-05

 

Ottawa, Ontario, March 31, 2006

 

CORAM:       DÉCARY J.A.

                        NOËL J.A.

                        PELLETIER J.A.

 

 

BETWEEN:

 

LA SURVIVANCE

 

Appellant

 

and

 

HER MAJESTY THE QUEEN

 

Respondent

 

 

 

JUDGMENT

 

            The appeal is dismissed with costs.

 

 

“Robert Décary”

 

 

Certified true translation

François Brunet, LL.B., B.C.L.

 

Date: 20060331

 

Docket: A-230-05

 

Ottawa, Ontario, April 3, 2006

 

CORAM:       DÉCARY J.A.

                        NOËL J.A.

                        PELLETIER J.A.

 

 

BETWEEN:

 

LA SURVIVANCE

 

Appellant

 

and

 

HER MAJESTY THE QUEEN

 

Respondent

 

 

AMENDED JUDGMENT

            The appeal is allowed.

            The judgment of the Tax Court of Canada is set aside.

            The assessment is referred to the Minister for him to issue a new one on the basis that the appellant was entitled to the deduction of the loss carried forward for its 1998 taxation year as claimed.

            With costs in this Court and in the Tax Court of Canada.

 

“Robert Décary”

 

Certified true translation

François Brunet, LL.B., B.C.L.