Date:
20090430
Docket: A-8-08
Citation: 2009 FCA 135
CORAM: NADON
J.A.
BLAIS
J.A.
PELLETIER
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
CASCADES INC.
Respondent
REASONS FOR JUDGMENT
NADON J.A.
[1]
This is an appeal of a
decision of Justice Lucie Lamarre of the Tax Court of Canada, 2007 TCC 730,
dated December 6, 2007, allowing the respondent’s appeal from a
determination of loss made under subsections 40(3.3), 40(3.4) and 40(3.5)
of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the “Act”) for
the 2000 taxation year. The judge held that the respondent Cascades Inc.
(“Cascades”) was entitled to claim a capital loss of $15,941,608 during its
2000 taxation year, as this loss was not deemed to be nil pursuant to
subsection 40(3.4) of the Act.
[2]
The only
issue raised by the appeal is the interpretation of subsections 40(3.3),
40(3.4) and 40(3.5) of the Act. We must consider whether paragraph 40(3.5)(c)
applies if one of the conditions set out at paragraphs 40(3.3)(a),
40(3.3)(b) and 40(3.3)(c) has not been met. More specifically,
the issue is to determine the meaning of “apply” at paragraph 40(3.5)(c).
[3]
Since
those provisions are at the heart of the matter, I reproduce them immediately
for convenience:
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40. (3.3) Subsection 40(3.4) applies when
(a) a corporation, trust or partnership (in
this subsection and subsection 40(3.4) referred to as the “transferor”)
disposes of a particular capital property (other than depreciable property of
a prescribed class) otherwise than in a disposition described in any of
paragraphs (c) to (g) of the definition “superficial loss” in
section 54;
(b) during the period that begins 30 days
before and ends 30 days after the disposition, the transferor or a person
affiliated with the transferor acquires a property (in this subsection and
subsection 40(3.4) referred to as the “substituted property”) that is,
or is identical to, the particular property; and
(c) at the end of the period, the
transferor or a person affiliated with the transferor owns the substituted
property.
[Emphasis added]
(3.4) If this subsection applies because of subsection 40(3.3) to a
disposition of a particular property,
(a) the transferor’s loss, if any, from
the disposition is deemed to be nil
. . .
[Emphasis added]
(3.5) For the purposes of subsections 40(3.3) and 40(3.4),
(a) right to acquire a property (other than a
right, as security only, derived from a mortgage, hypothec, agreement for
sale or similar obligation) is deemed to be a property that is identical to
the property;
(b) a share of the capital stock of a
corporation that is acquired in exchange for another share in a transaction
to which section 51, 85.1, 86 or 87 applies is deemed to be a property that
is identical to the other share;
(c) where subsections 40(3.3) and 40(3.4)
apply to the disposition by a transferor of a share of the capital stock of a
corporation, and after the disposition the corporation is merged with one or
more other corporations, otherwise than in a transaction in respect of
which paragraph 40(3.5)(b) applies to the share, or is wound up
in a winding-up to which subsection 88(1) applies, the corporation formed
on the merger or the parent (within the meaning assigned by subsection
88(1)), as the case may be, is deemed to own the share while it is
affiliated with the transferor; and
(d) where subsections 40(3.3) and 40(3.4)
apply to the disposition by a transferor of a share of the capital stock of a
corporation, and after the disposition the share is redeemed, acquired or
cancelled by the corporation, otherwise than in a transaction in respect of
which paragraph 40(3.5)(b) or 40(3.5)(c) applies to the share,
the transferor is deemed to own the share while the corporation is affiliated
with the transferor.
[Emphasis added]
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40. (3.3) Le paragraphe (3.4) s’applique lorsque les
conditions suivantes sont réunies:
a)
une société, une fiducie ou une société de personnes (appelées « cédant » au
présent paragraphe et au paragraphe (3.4)) dispose d’une immobilisation, sauf
un bien amortissable d’une catégorie prescrite, en dehors du cadre d’une
disposition visée à l’un des alinéas c) à g) de la définition
de «perte apparente » à l’article 54;
b)
au cours de la période qui commence 30 jours avant la disposition et
se termine 30 jours après cette disposition, le cédant ou une
personne affiliée à celui-ci acquiert le même bien ou un bien identique
(appelés « bien de remplacement » au présent paragraphe et au
paragraphe (3.4));
c)
à la fin de cette période, le cédant ou une personne affiliée à celui-ci
est propriétaire du bien de remplacement.
[Je souligne]
(3.4) Lorsque le présent paragraphe s’applique par l’effet du
paragraphe (3.3) à la disposition d’un bien, les présomptions suivantes
s’appliquent:
a)
la perte du cédant résultant de la disposition est réputée nulle;
[…]
[Je souligne]
(3.5) Les présomptions suivantes s’appliquent dans le cadre des
paragraphes (3.3) et (3.4):
a)
le droit d’acquérir un bien (sauf le droit servant de garantie seulement et
découlant d’une hypothèque, d’une convention de vente ou d’un titre
semblable) est réputé être un bien qui est identique au bien;
b)
l’action du capital-actions d’une société qui est acquise en échange d’une
autre action dans le cadre d’une opération à laquelle s’appliquent les
articles 51, 85.1, 86 ou 87 est réputée être un bien qui est identique à
l’autre action;
c)
lorsque les paragraphes (3.3) et (3.4) s’appliquent à la disposition par
un cédant d’une action du capital-actions d’une société et que, après cette
disposition, la société est fusionnée avec une ou plusieurs autres sociétés en
dehors du cadre d’une opération relativement à laquelle l’alinéa b)
s’applique à l’action ou fait l’objet d’une liquidation à laquelle s’applique
le paragraphe 88(1), la société issue de la fusion ou la société mère,
au sens de ce paragraphe, est réputée être propriétaire de l’action tant
qu’elle est affiliée au cédant;
d)
lorsque les paragraphes (3.3) et (3.4) s’appliquent à la disposition par un
cédant d’une action du capital-actions d’une société et que, après cette
disposition, l’action est rachetée, acquise ou annulée par la société en
dehors du cadre d’une opération relativement à laquelle les alinéas b)
ou c) s’appliquent à l’action, le cédant est réputé être propriétaire
de l’action tant que la société lui est affiliée.
[Je souligne]
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Facts
[4]
The facts
in this case are not disputed. They may be briefly summarized as follows.
[5]
At the end
of May 2000, Cascades held 71.1% of the common shares of Les Industries
Paperboard International Inc. (“PII”). The adjusted cost base of the 33,025,966
PII shares held by Cascades was at that time $68,783,154, and their fair market
value was $52,841,546.
[6]
On September
8, 2000, 3715965 Canada Inc. (the “corporation”) was incorporated, and Cascades
became the sole shareholder. The corporation is a corporation affiliated with
Cascades within the meaning of section 251.1 of the Act.
[7]
On
December 5, 2000, Cascades sold all of the shares in PII that it held to the
corporation, for consideration equal to the fair market value of those shares,
thereby realizing a capital loss of $15,941,608 (adjusted cost base of
$68,783,154 minus the proceeds of disposition of $52,841,546). The
consideration received by Cascades was 33,025,966 common shares of the
corporation.
[8]
On
December 31, 2000, that is, 26 days later, PII and the corporation merged, and
the corporation formed on the merger was 384894-9 Canada Inc. (“PII Fusionco”).
At the time of the merger, each of the common shares of the corporation held by
Cascades was converted into a common share of PII Fusionco. PII Fusionco is a
corporation affiliated with Cascades within the meaning of section 251.1
of the Act. In computing its taxable income for the 2000 taxation year, Cascades
claimed a capital loss of $15,941,608 realized on the sale of the common shares
in PII.
[9]
On January
23, 2004, the Minister of National Revenue (the “Minister”) deemed Cascades’
loss to be nil under subsections 40(3.4), 40(3.4) and 40(3.5) of the Act.
Cascades appealed that decision of the Tax Court of Canada, and that appeal was
allowed and is at issue here.
Tax Court of Canada decision
[10]
Justice
Lamarre began her analysis by reviewing the principles governing the
interpretation of tax statutes, as developed by the Supreme Court of Canada. Those
principles involve, among other things, the relevance of a textual
interpretation of such statutes and the importance of reading their provisions
in context, that is, within the overall scheme of the legislation. The Supreme
Court also explained that, where Parliament has specified precisely what
conditions must be satisfied to achieve a particular result, it is reasonable
to assume that Parliament intended that taxpayers would rely on such provisions
to achieve the result they prescribe.
[11]
Having
considered those principles of interpretation, Justice Lamarre concluded that it
is obvious that the conditions of subsection 40(3.3) must all be met for
subsection 40(3.4), which provides that a loss is deemed to be nil, to
apply. However, paragraph 40(3.3)(c) stipulates that, at the end of
the period referred to in the subsection, the transferor (in this case,
Cascades) or a person affiliated with the transferor must own the substituted
property (in this case, the PII shares). Consequently, when considering only
subsections 40(3.3) and 40(3.4), Cascades’ loss cannot be deemed to be
nil, since, at the end of the period in question, no entity owned the PII
shares, given that PII had been merged with the corporation and no longer
existed.
[12]
The Minister
had nevertheless claimed that subsection 40(3.5), and in particular
paragraph 40(3.5)(c), specifically allowed him to deem the loss to
be nil, since that paragraph provides that the corporation formed on the merger
(in this case, PII Fusionco) is deemed to own the share while it is affiliated
with the transferor. However, on analyzing the application of subsection 40(3.5),
the judge determined that this subsection applied only if subsections 40(3.3)
and 40(3.4) already applied, since paragraph 40(3.5)(c) states that
“where subsections 40(3.3) and 40(3.4) apply to the disposition by a
transferor of a share of the capital stock of a corporation, and after the
disposition the corporation is merged with one or more other corporations, . .
. the corporation formed on the merger . . . is deemed to own the share while
it is affiliated with the transferor” [emphasis added]. Consequently, since the
conditions of subsection 40(3.3) had not all been met, and as
subsection 40(3.4) therefore did not apply either, paragraph 40(3.5)(c)
did not apply in this case and could not provide a basis for the Minister to
deem the loss to be nil.
[13]
In her
analysis of subsection 40(3.5), the judge explained that, if Parliament
had meant to say what was argued by the Minister, it could have expressed it
more explicitly, for example by using terms such as the following at
paragraph 40(3.5)(c): “where subsections (3.3) and (3.4) [relate to
or concern] the disposition by a transferor of a share of the capital stock of
a corporation . . .”. Rather, the judge interpreted paragraph 40(3.5)(c)
as stating that the transferor may claim its loss if a merger occurred after
the 61-day period (which is the period mentioned in subsection 40(3.3)),
otherwise the entitlement to claim the loss would be lost.
[14]
Moreover, in
the judge’s opinion, the stop-loss rule in subsection 40(3.4) does not
necessarily apply to the present case. That rule is a specific anti-avoidance
measure to prevent taxpayers from immediately recognizing a latent capital loss
on non-depreciable capital property, whereas the restructuring proposed by
Cascades was not done for this purpose, according to the judge.
The appellant’s submissions
[15]
The appellant submits
that the judge erred in law in her interpretation of subsections 40(3.3), 40(3.4)
and 40(3.5) of the Act, in finding that the presumption in
paragraph 40(3.5)(c) was established to allow for the eventual
recognition of the loss in the case of a merger after the period referred to in
paragraph 40(3.3)(b), in considering Cascades’ intent in her analysis
of the provisions at issue, and in concluding that the presumption in
paragraph 40(3.5)(c) cannot be used to determine whether
subsections 40(3.3) and 40(3.4) apply.
[16]
The appellant explains
that subsection 40(3.4) is one of the stop‑loss rules in the Act, the
primary purpose of those rules being to limit the capital losses that
affiliated persons may realize. The appellant submits that paragraph 40(3.5)(c)
ensures that the loss deferral rule in subsection 40(3.4) applies even if the
share disposed of is eliminated following a merger. Without the presumption in
paragraph 40(3.5)(c), the merger would allow the transferor to
recognize the loss even if that loss remains within the group of affiliated
corporations. According to the appellant, it is obvious that subsections 40(3.3)
and 40(3.4) need not apply first before the presumption in paragraph 40(3.5)(c)
may be relied on. In fact, the word “apply” in paragraph 40(3.5)(c)
refers to the scope of subsections 40(3.3) and 40(3.4) rather than to
their implementation; that word therefore has its ordinary and plain meaning of
“are applicable to”, “concern” or “relate to”. That interpretation is also the
one most consistent with the introductory part of subsection 40(3.5), which
states that the following presumptions apply “[f]or the purposes of subsections
40(3.3) and 40(3.4)”.
Respondent’s submissions
[17]
The respondent submits
that the text in paragraph 40(3.5)(c) is clear: it states that the
presumption in paragraph 40(3.5)(c) is implemented only once the conditions
set out at subsection 40(3.3) have been met. The context and purpose of
paragraph 40(3.5)(c) must therefore be interpreted in relation to
the “30 days before, 30 days after” rule that is set out at subsection 40(3.3)
and that creates a distinction in tax treatments between the events or
transactions occurring within that period and those occurring afterwards. The
respondent also claims that the Technical Notes published by the Department
of Finance clearly indicate
that, for the provisions in subsection 40(3.4) to apply and for a loss to
be deemed nil, the three conditions in subsection 40(3.3) must be present.
Issue
[18]
The issue here is
whether Justice Lamarre erred in finding that the respondent was entitled to
claim the loss and, more specifically, whether she erred in her interpretation of
subsections 40(3.3), 40(3.4) and 40(3.5) of the Act.
Analysis
A. Applicable standard of review
[19]
Even though the parties
did not submit any arguments on the standard of review, I am satisfied, in
light of the decision of the Supreme Court of Canada in Housen v. Nikolaisen,
[2002] 2 S.C.R. 235, that the applicable standard of review in this case
is that of correctness, since the
only issue here is a one of law,
that is, the interpretation of subsections 40(3.3), 40(3.4) and 40(3.5) of
the Act.
B. Principles of interpretation
[20]
The principles
governing the interpretation of tax statutes are now well known because of
several recent decisions of the Supreme Court of Canada.
[21]
In Imperial Oil Ltd.
v. Canada; Inco Ltd. v. Canada, [2006] 2 S.C.R. 447 at paragraph 27, the
Supreme Court pointed to the continuing relevance of a textual interpretation
of tax statutes while also emphasizing the importance of reading their
provisions in context, that is, within the overall scheme of the legislation,
as required by the modern approach to statutory interpretation. More
specifically, in Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R.
601, the Supreme Court stated the following at paragraph 10 of the reasons
of the Chief Justice and Justice Major:
10. It has
been long established as a matter of statutory interpretation that “the words
of an Act are to be read in their entire context and in their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of the Act,
and the intention of Parliament”: see 65302 British Columbia Ltd. v. Canada,
1999 CanLII 639 (S.C.C.), [1999] 3 S.C.R. 804, at para. 50. The interpretation
of a statutory provision must be made according to a textual, contextual and
purposive analysis to find a meaning that is harmonious with the Act as a
whole. When the words of a provision are precise and unequivocal, the ordinary
meaning of the words play a dominant role in the interpretive process. On the
other hand, where the words can support more than one reasonable meaning, the
ordinary meaning of the words plays a lesser role. The relative effects of
ordinary meaning, context and purpose on the interpretive process may vary, but
in all cases the court must seek to read the provisions of an Act as a
harmonious whole.
[Emphasis
added]
[22]
In Placer Dome
Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715, the
Supreme Court approved the comments of Justices McLachlin and Major in Trustco
Mortgage Co. v. Canada, above, as follows at paragraphs 22 and 23 of the reasons of Justice LeBel:
22. On the
other hand, where the words of a statute give rise to more than one reasonable
interpretation, the ordinary meaning of words will play a lesser role, and
greater recourse to the context and purpose of the Act may be necessary: Canada
Trustco, at para. 10. Moreover, as McLachlin C.J. noted at para. 47,
“[e]ven where the meaning of particular provisions may not appear to be
ambiguous at first glance, statutory context and purpose may reveal or resolve
latent ambiguities.” The Chief Justice went on to explain that in order to
resolve explicit and latent ambiguities in taxation legislation, “the courts
must undertake a unified textual, contextual and purposive approach to
statutory interpretation”.
23. The
interpretive approach is thus informed by the level of precision and clarity
with which a taxing provision is drafted. Where such a provision admits of no
ambiguity in its meaning or in its application to the facts, it must simply be
applied. Reference to the purpose of the provision “cannot be used to create an
unexpressed exception to clear language”: see P. W. Hogg, J. E. Magee and J.
Li, Principles of Canadian Income Tax Law (5th ed. 2005), at p. 569; Shell
Canada Ltd. v. Canada, 1999 CanLII 647 (S.C.C.), [1999] 3 S.C.R. 622. Where,
as in this case, the provision admits of more than one reasonable
interpretation, greater emphasis must be placed on the context, scheme and
purpose of the Act. Thus, legislative purpose may not be used to supplant clear
statutory language, but to arrive at the most plausible interpretation of an
ambiguous statutory provision.
[Emphasis
added]
[23]
Consequently,
as I stated in Scott Paper Limited v. Canada, 2006 FCA 372; (2006), 355
N.R. 387 at paragraph 45, regarding section 68 of the Excise Tax
Act, R.S.C. 1985, c. E-15:
[45] . . . although the
textual, contextual and purposive analysis is the correct approach to
interpreting section 68, if the words of the provision are “precise and
unequivocal”, the plain meaning of the words will carry much weight in
interpreting the meaning of the provision. However, if the words of
section 68 are capable of supporting more than one reasonable meaning, the
plain meaning of the words will carry less weight.
C. Did Justice Lamarre err in finding that the
respondent was entitled to claim the loss?
[24]
With those
principles in mind, I now turn to the interpretation of subsections 40(3.3),
40(3.4) and 40(3.5) of the Act.
[25]
Subsection 40(3.4)
provides that the transferor’s loss, if any, from a disposition is deemed to be
nil if the three conditions of subsection 40(3.3) are met, that is: the
corporation (the transferor) disposes of a particular non‑depreciable
capital property, in this case, shares (paragraph 40(3.3)(a)); the
transferor or a person affiliated with the transferor acquires a property that
is, or is identical to, the particular property during the period that begins
30 days before and ends 30 days after the disposition (paragraph 40(3.3)(b));
and the transferor or a person affiliated with the transferor owns the
substituted property at the end of the period (paragraph 40(3.3)(c)).
The parties agree that the first two conditions set out at paragraph 40(3.3)(a)
and (b) have been met. As for the third condition, set out at
paragraph 40(3.3)(c), at
first blush, it has not been
met because neither the transferor nor the person affiliated with the
transferor owned the shares at issue at the end of the period in question. This
is so since those shares, i.e. those of PII, no longer exist because PII has been
merged with another company and thus no longer exists.
[26]
Were the analysis to end
there, Cascades could therefore claim its capital loss, as the three conditions
of subsection 40(3.3) have not been met to allow the Minister to deem the
loss to be nil, under subsection 40(3.4). However, subsections 40(3.3)
and (3.4) must be interpreted in relation to subsection 40(3.5), which, in
its preamble, states that the following presumptions apply “[f]or the purposes
of subsections 40(3.3) and 40(3.4)”. Subsection 40(3.5) provides four
presumptions at paragraphs 40(3.5)(a) to (d). Here, it
is paragraph 40(3.5)(c) that is at issue; it provides as follows,
and I reproduce it again for convenience:
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40. (3.5) For the purposes of subsections 40(3.3) and 40(3.4),
. . .
(c) where subsections 40(3.3) and
40(3.4) apply to the disposition by a transferor of a share of the capital
stock of a corporation, and after the disposition the corporation is merged
with one or more other corporations, otherwise than in a transaction in
respect of which paragraph 40(3.5)(b) applies to the share, or is
wound up in a winding-up to which subsection 88(1) applies, the corporation
formed on the merger or the parent (within the meaning assigned by subsection
88(1)), as the case may be, is deemed to own the share while it is affiliated
with the transferor;
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40. (3.5) Les présomptions suivantes s’appliquent dans le cadre des
paragraphes (3.3) et (3.4):
[…]
c) lorsque
les paragraphes (3.3) et (3.4) s’appliquent à la disposition par un cédant
d’une action du capital-actions d’une société et que, après cette
disposition, la société est fusionnée avec une ou plusieurs autres sociétés
en dehors du cadre d’une opération relativement à laquelle l’alinéa b)
s’applique à l’action ou fait l’objet d’une liquidation à laquelle s’applique
le paragraphe 88(1), la société issue de la fusion ou la société mère, au
sens de ce paragraphe, est réputée être propriétaire de l’action tant qu’elle
est affiliée au cédant.
|
[27]
On the basis of the
phrase “where subsections 40(3.3) and 40(3.4) apply” in paragraph 40(3.5)(c),
Justice Lamarre concluded that the three conditions of subsection 40(3.3) had
to be met before paragraph 40(3.5)(c) could apply. With respect, I am of the opinion that the judge
misinterpreted the text of paragraph 40(3.5)(c). In my view, that
paragraph does not require that the three conditions of subsection 40(3.3)
be met before the presumption within may apply. If Parliament had intended to
give paragraph 40(3.5)(c) the meaning the judge attributes to it,
the paragraph could have been written as follows, with a comma, in particular: “where
subsections 40(3.3) and 40(3.4) apply, and where there is a disposition
by a transferor of a share . . .”.
[28]
My interpretation of
paragraph 40(3.5)(c) is consistent with the preamble of subsection 40(3.5),
which states that the following presumptions apply “[f]or the purposes of
subsections 40(3.3) and 40(3.4)”. Following this preamble, only
paragraphs 40(3.5)(c) and (d) begin with the words
“where subsections 40(3.3) and 40(3.4) apply”. Consequently, it must be
understood that the four paragraphs of subsection 40(3.5) contain
presumptions that apply, as stated in the preamble, for the purposes of
subsections 40(3.3) and 40(3.4), but that paragraphs 40(3.5)(c) and (d)
provide additional clarifications: these paragraphs apply only where
subsections 40(3.3) and 40(3.4) “apply to” a particular situation, that
is, the disposition of shares of the capital stock of a corporation, and after
the disposition (in the case of paragraph 40(3.5)(c)), the
corporation is merged with one or more other corporations.
[29]
In my
opinion, the words “s’appliquer à” have the meaning given by Le Nouveau
Petit Robert, 2004 to the verb “s’appliquer”: “[être] applicable à”, “concerner”,
or “viser”. Consequently, the presumption stated at paragraph 40(3.5)(c)
applies where subsections 40(3.3) and 40(3.4) “visent”, “concernent”, or “sont
applicables à” the situation described in paragraph 40(3.5)(c).
[30]
A reading
of the English wording of paragraph 40(3.5)(c) leads me to the same
conclusion. According to the Oxford Compact Thesaurus, 2005, the word “apply”
means “pertain”, “relate”, “concern”, “deal with”. Therefore, it must be
understood that the presumption in paragraph 40(3.5)(c) applies
where subsections 40(3.3) and 40(3.4) “pertain to”, “relate to”, “concern”,
or “deal with” the case described at paragraph 40(3.5)(c).
[31]
Without that interpretation
of “apply to”, the introductory part of paragraphs 40(3.5)(c) and (d)
would be redundant, given the preamble of subsection 40(3.5). As regards
paragraph 40(3.5)(c), it therefore provides a presumption that
applies not only for the purposes of subsections 40(3.3) and 40(3.4), but
specifically for the purposes of those subsections where there is a disposition
by a transferor of a share of the capital stock of a corporation, and after the
disposition the corporation is merged.
[32]
A reading
of the other paragraphs of subsection 40(3.5), and in particular
paragraphs (a) and (b), further confirms my opinion
that it is not necessary that subsections (3.3) and (3.4) already apply
before the presumptions of subsection (3.5) may be relied on. In fact, paragraphs 40(3.5)(a)
and (b) must be consulted to understand the meaning of a “property that is
identical”, a phrase that is mentioned but not defined at paragraph 40(3.3)(b).
Paragraphs 40(3.5)(a) and (b) indicate, first, that a right
to acquire a property is deemed to be a property that is identical to the
property itself and, second, that a share of a corporation that is acquired in exchange for another share is deemed to be a
property that is identical to the other share.
[33]
Accordingly, it is
clear that subsection 40(3.5) contributes to a better interpretation of
the scope of subsections 40(3.3) and (3.4). The conditions that must be
met for paragraph 40(3.5)(c) to apply are the disposition by a
transferor of a share of the capital stock of a corporation and, after the
disposition, the merger of the corporation with one or more other corporations.
If these conditions are met, the presumption applies: in analyzing
subsections 40(3.3) and (3.4), one must bear in mind that the corporation
formed on the merger is deemed to own the share while it is affiliated with the
transferor.
[34]
In this case, a textual
interpretation of subsections 40(3.3), (3.4) and (3.5) therefore leads to
the conclusion that it is not necessary that the conditions set out at
paragraphs 40(3.3)(a) and (b) all be met and,
consequently, that subsections 40(3.3) and (3.4) apply before
subsection (3.5) may apply. Moreover, in light of the overall scheme of
the legislation and of the provisions in question, they should be seen as
establishing a stop-loss rule. As Gerald D. Courage points out in his article Utilization
of Tax Losses and Debt Restructuring, 2006 Ontario Tax Conference,
(Toronto; Canadian Tax Foundation, 2006), 9:1-86, at page 2:
. . . the Act contains a number of so
called “stop-loss rules” where there has been a transfer of property with an
accrued loss within a statutorily defined closely held group. While the
transfer might otherwise be treated as a sufficient realization so as to permit
recognition of the loss, nevertheless the loss is denied until the property
(or, in some cases, property received in exchange on the transfer) is
transferred out of the group, at which point there is effectively a “true”
realization by the group of the loss for tax purposes.
[35]
As the appellant suggests
in her memorandum of fact and law, the judge’s decision leads to an illogical
result: where there is, such as in this case, a disposition of shares followed
by a merger during the period ending 30 days after the disposition, the rule
would not apply, and taxpayers could deduct their loss for the year of
disposition, even if that loss was not actually realized by the group of
affiliated corporations. However, where a merger occurs after the period ending
30 days after the disposition, subsection 40(3.4) would apply, and
the loss would be deemed to be nil until it was actually realized by the group
of affiliated corporations.
[36]
For these
reasons, I therefore conclude that the presumption set out at subsection 40(3.5)(c)
applies and, consequently, that the third condition of subsection 40(3.3),
that is, the one stated at paragraph 40(3.3)(c), has been met: at
the end of the period referred to in paragraph 40(3.3)(b), PII
Fusionco, which is a corporation affiliated with Cascades, is deemed to own the
shares of PII, despite the fact that PII has been merged and no longer exists.
Subsection 40(3.4) therefore applies, by virtue of subsection 40(3.3),
and Cascades’ loss from the disposition of the shares in PII is deemed to be
nil.
[37]
Lastly, I can only conclude that the judged erred in
considering Cascades’ intent
in her analysis of the provisions at issue. In fact, the judge indicated at
paragraph 36 of her reasons that the restructuring proposed by Cascades
was not done with the intent to prematurely realize a loss. The judge explains
at paragraph 34 of her reasons that the aim of the restructuring was to
improve Cascades’ worth on the financial markets and to support its future
growth. However, as the appellant points out, Cascades’ intent is not relevant to
an analysis of subsections 40(3.3), (3.4) and (3.5). The stop‑loss
rule in those subsections contains no test of intent. If the conditions of
subsection 40(3.3) are met, the rule must apply, regardless of the
taxpayer’s intent.
Disposition
[38]
For these
reasons, I would allow the
appeal with costs,
set aside the decision of the Tax Court of Canada and, rendering the judgment
that should have been rendered, dismiss with costs the respondent’s appeal from a determination of loss made by
the Minister reducing
the capital loss claimed by the respondent for the 2000 taxation year by
$15,941,608.
“M. Nadon”
“I agree.
Pierre Blais J.A.”
“I agree.
J.D. Denis Pelletier J.A.”
Certified true
translation
Tu-Quynh Trinh
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