Husky Oil Ltd. v. The Queen, 95 DTC 316, [1995] 1 CTC 2184 (TCC), aff'd 95 DTC 5244 (FCA)

Kempo J.T.C.C.:-This appeal concerns an inclusion into the appellant’s income by the respondent, acting through the Minister of National Revenue (the ’’Minister"), of a purported taxable benefit pursuant to subsection 245(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

In a nutshell, during 1986 the appellant (hereafter sometimes also called "Husky") entered into two separate transactions with two non-related corporations concerning the acquisition of their unrealized capital losses which Husky then carried back to its 1984 taxation year the result of which entitled it to a tax refund which the Minister paid and subsequently included (less the outlays) into the appellant’s income for its 1986 taxation year as a benefit under subsection 245(2) of the Act. The appellant says inter alia no benefit was conferred upon it in 1986 or at any other time and therefore subsection 245(2) is not applicable.

The facts

With the exception of evidentiary matters introduced concerning the applicability of subsection 245(3), the case proceeded on the facts as outlined in the agreed statement of facts, filed:

Agreed statement of facts

For the purposes of this appeal, the parties admit the following facts but reserve the right to adduce evidence not inconsistent with these facts.

1. At all times material to this appeal:

(a) the appellant, Carma Ltd. ("Carma") and Consolidated Brinco Ltd. ("Brinco") were "public corporations" as defined in section 89 of the Income Tax Act;

(b) the Bank of Nova Scotia (the "bank") was a Canadian chartered bank; and

(c) the appellant was not a "related person" within the meaning of section 251 of the Act relative to Carma, Brinco or the bank.

2. The transactions described herein were not shams and were legally effective.

Carma transactions

3. On June 26, 1986:

(a) Carma’s assets consisted of:

(i) all of the issued shares of Carma Developers Ltd. ("CDL"),

(ii) ali of the issued shares of 348840 Alberta Ltd. ("840"), and

(iii) certain other property.

(b) CDL owned all of the Series A 11 per cent Cumulative Redeemable Retractable preferred shares (the "Allarco preferred shares”) of Allarco Group Ltd. ("Allarco '); and

(c) 840 owned all of the issued shares of 348841 Alberta Ltd. ("841”) which owned, among other property, the sole issued shares of 348843 Alberta Ltd. ("843"). Each of corporations 840, 841 and 843 were incorporated on May 22, 1986.

4. CDL’s adjusted cost base of the Allarco preferred shares at that time was $68,500,000. The value of Allarco’s assets did not exceed the amount of its liabilities so the Allarco preferred shares had a fair market value of nil.

5. On June 27, 1986, CDL sold the Allarco preferred shares to 843 for $1. Upon acquiring the Allarco preferred shares, 843 pledged them to the bank as collateral security for a limited recourse guarantee of Allarco’s debts to the bank given by Carma. By virtue of paragraph 53(1 )(f. 1 ) and subsection 85(4) of the Act, 843’s adjusted cost base of the Allarco preferred shares was $68,500,000.

6. Shortly before October 22, 1986, the shareholder’s of Allarco, including Carma (owner of the common shares), 841 and 843 (owner of the Allarco preferred shares), entered into a shareholders’ agreement which provided, among other things, that any holder of preferred shares of Allarco was obliged to offer to sell them to the bank prior to selling those preferred shares to any other person. As partial consideration for receiving this right of first refusal, the bank released the pledge of the Allarco preferred shares given by 843. The agreement was executed on October 22, 1986.

7. In early October 1986, the appellant agreed to purchase the sole share of 843 from Carma for $5,137,500 and to sell the Allarco preferred shares to the Bank of Nova Scotia for nominal consideration. Both parties understood that the appellant would acquire the Allarco preferred shares by liquidating 843.

8. The appellant did not direct and was not a party to any of the transactions described in paragraphs 5 and 6, but before completing the purchase of the sole issued share of 843 the appellant reviewed all of the documentation relating to those transactions and satisfied itself that the transactions had occurred, that 843 owned the Allarco preferred shares and that the adjusted cost base of the Allarco preferred shares was $68,500,000.

9. The only assets of 843 at all material times were the Allarco preferred shares. The only value of the Allarco preferred shares to the appellant derived from the fact that the adjusted cost base of those shares exceeded their fair market value by $68,500,000 and from the fact that the appellant had realized large capital gains in 1984 which could be reduced by a carryback of 1986 capital losses. The appellant’s sole purpose in acquiring the share of 843 was to avail itself of the capital loss inherent in the Allarco preferred shares.

10. The purchase price of the share of 843 was determined in arm’s length negotiations between Carma and the appellant, with Carma attempting to maximize its receipt and the appellant attempting to minimize its payment. In arriving at the amount paid for the share of 843 the appellant took into account the following factors as understood at the time.

(a) The amount of the tax refund which would result from the application of the net capital loss arising from the transaction to its 1984 taxation year.

(b) The risk that the transaction would not succeed because Revenue Canada successfully challenged the transactions on the basis that:

(i) the transaction could be upset on the basis of the doctrine of substance over form;

(ii) the capital loss could be denied on the basis of subsection 55(1) of the Act;

(iii) the tax avoidance provisions of the Act, including subsection 245(2), would apply to the transaction; and

(iv) the historic adjusted cost base of the Allarco preferred shares was not available to the appellant.

(c) The likelihood of the appellant finding an alternative seller or Carma finding an alternative buyer.

11. On October 22, 1986, the appellant purchased the share of 843. On October 24, 1986, the appellant commenced the winding-up of 843, then its wholly-owned subsidiary, and on that day the Allarco preferred shares were transferred to the appellant. By subparagraph 88(l)(a)(ii) and paragraph 88(1 )(c) of the Act, the appellant’s adjusted cost base of the Allarco preferred shares was $68,500,000. On October 30, 1986, the appellant offered to sell the Allarco preferred shares to the bank for $1. On November 19, 1986, such sale was completed. By virtue of subsections 40(1) and 39(1) of the Act, the appellant’s capital loss from the disposition of the Allarco preferred shares was $68,499,999.

12. The appellant recorded the transaction as an $11,284,000 credit to current tax expense in its tax calculation for 1986.

Brinco transactions

13. At the end of 1985, Brinco and the appellant first discussed a sale by Brinco to the appellant of shares having a high adjusted cost base and nominal fair market value. At that time, Brinco was a 70 per cent shareholder of Brinco Ltd., a public company, which owned the shares of Dorset Energy Corporation ("Dorset") and Cassiar Mining Corporation ("Cassiar”).

14. On May 26, 1986, Brinco caused the amalgamation (the "amalgamation squeeze-out”) of its wholly-owned subsidiary, Brinex Holdings Ltd., with Brinco Ltd. The newly amalgamated company was a private corporation named Brinex Holdings Ltd. ("Brinex"). After the amalgamation, Brinco had 100 per cent of the voting shares of Brinex.

15. On June 29, 1986, the assets of Brinex consisted of:

(a) common and preferred shares of Dorset (the ’’Dorset shares") having an aggregate adjusted cost base of $56,573,745 and a fair market value of $1,606,000;

(b) common and preferred shares of Cassiar (the "Cassiar shares") having an aggregate adjusted cost base of $48,150,635 and a fair market value of $13,618,000; and

(c) certain other property.

16. Between June 30 and July 24, 1986, Brinex transferred all of its assets, other than the Cassiar and Dorset shares, to other related companies.

17. On July 24, 1986, Brinex reduced the paid-up capital of its shares from $74,000,000 to $20,700,000 in order to avoid the capital gain which would otherwise result to a purchaser of Brinex upon the winding up of Brinex.

18. On July 28, 1986, the appellant and Brinco agreed that the appellant would purchase all of the Brinex shares for $22,224,000 and that the appellant would sell the Dorset shares and Cassiar shares back to Brinco for $1,606,000 and $13,618,000 respectively, for a total of $15,224,000. Both parties understood that the appellant would acquire the Dorset shares and Cassiar shares by liquidating Brinex.

19. Both the appellant and Brinco understood that unless the transactions referred to in paragraphs 14, 16 and 17 occurred, the appellant would not purchase the Brinex shares. The appellant was not a party to and could not compel Brinco to complete any of those transactions, but before completing the purchase of the Brinex shares the appellant reviewed all of the documents relating to those transactions and satisfied itself that the transactions had occurred, that Brinex owned the Dorset shares and the Cassiar shares, that the adjusted cost base of those shares was $56,573,745 and $48,150,635 respectively, and that Brinex could be wound up without tax cost.

20. The only assets of Brinex at all material times were the Dorset shares and the Cassiar shares. The only value of those shares to the appellant derived from the fact that the adjusted cost base of those shares exceeded their fair market value by $89,500,380 and from the fact that the appellant had realized large capital gains in 1984 which could be reduced by a carryback of 1986 capital losses. The appellant’s sole purpose in acquiring the shares of Brinex was to avail itself of the capital loss inherent in the Dorset shares and Cassiar shares.

21. The purchase price of the shares of Brinex was determined in arm’s length negotiations between Brinco and the appellant, with Brinco attempting to maximize its receipt and the appellant attempting to minimize its payment. In arriving at the amount paid for the shares of Brinex the appellant took into account the following factors as understood at the time.

(a) The amount of the tax refund which would result from the application of the net capital loss arising from the transaction to its 1984 taxation year.

(b) The risk that the transaction would not succeed because Revenue Canada successfully challenged the transaction on the basis that:

(i) the transaction could be upset on the basis of the doctrine of substance over form;

(ii) the capital loss could be denied on the basis of subsection 55(1) of the Act;

(iii) the tax avoidance provisions of the Act, including subsection 245(2), would apply to the transaction; and

(iv) the historic adjusted cost base of the Dorset and Cassiar shares was not available to the appellant.

(c) The likelihood of the appellant finding an alternative seller or Brinco finding an alternative buyer.

22. On July 28, 1986, the appellant acquired the Brinex shares from Brinco for $22,224,000, wound up Brinex thus acquiring the Dorset shares and Cassiar shares, and sold the Dorset shares and Cassiar shares back to Brinco for $1,606,000 and $13,618,000 respectively, an aggregate amount of $15,224,000. By subparagraph 88( 1 )(a)(ii) and paragraph 88(1 )(c) of the Act, the appellant’s adjusted cost base of the Dorset shares and the Cassiar shares was $56,573,745 and $48,150,635 respectively. By virtue of subsections 39(1) and 40(1) of the Act, the appellant’s capital losses from the disposition of the Dorset shares and the Cassiar shares was $54,967,745 and $34,532,635 respectively.

23. The appellant recorded the transaction as a $14,485,000 credit to current tax expense in its tax calculation for 1986.

Appellant’s tax returns and assessment

24. The appellant’s allowable capital losses for 1986 attributable to the disposition of the Allarco preferred shares, the Dorset shares and the Cassiar shares were as follows:

25. (a) The appellant did not have taxable capital gains in the 1986 taxation year, and so its 1986 allowable capital losses of $79,000,190 became a part of the appellant’s 1986 net capital loss.

(b) The appellant had taxable capital gains in 1984 in excess of its 1986 net capital loss, and so pursuant to paragraph 111(1)(b) of the Act, the appellant was entitled to deduct its 1986 net capital loss from its 1984 income in computing its 1984 taxable income.

(c) In accordance with paragraph 152(6)(c) of the Act the appellant, when filing its 1986 tax return on February 27, 1987, also filed a prescribed form requesting that its 1986 net capital loss be applied in 1984 pursuant to paragraph 111(1 )(b) of the Act.

(d) On March 8, 1990 the Minister of National Revenue reassessed the appellant for the 1984 taxation year, allowing the deduction of the 1986 net capital loss from the appellant’s income to determine its taxable income, and refunded to the appellant taxes in the amount of $37,879,011.

(e) The Minister had initially assessed the appellant’s income tax for the 1984 taxation year pursuant to subsection 152(1) of the Act on November 6, 1985. By virtue of subsection 152(4)(b)(i) of the Act, the last day on which the Minister could have reassessed the appellant’s tax for the 1984 taxation year to deny the deduction of the 1986 net capital losses in computing its 1984 taxable income was November 6, 1991.

26. By the reassessment which is the subject of this appeal, the Minister reassessed the appellant pursuant to paragraph 245(2)(a) of the Act to include $25,741,645 in the appellant’s 1986 income, on the basis that a person or persons had conferred a benefit on the appellant in that year and in that amount, being:

(a) the amount by which the federal and provincial taxes payable for the appellant’s 1984 taxation year were reduced by virtue of deducting the appellant’s 1986 net capital loss from its 1984 income in computing its 1984 taxable income, less

(b) the net cost to the appellant of the 843 share and the Brinex shares.

The said reassessment of tax was based upon the premise that the appellant’s allowable capital losses from the Brinco and Carma transactions arose in respect of its 1986 taxation year and that the net capital losses arising therefrom are deductible in computing the appellant’s taxable income for the 1984 taxation year.

27. When issuing the reassessment, the respondent was of the view that the transactions were ones to which paragraph 245(2)(a) of the Act applied, and was also of the view that the capital loss could have been disallowed either on the basis of the doctrine of substance over form, or on the basis of the application of subsection 55(1) of the Act. A reassessment on the basis of subsection 55(1) or substance over form would deny the loss in the 1986 taxation year, but would not have added anything to the appellant’s income for the 1986 taxation year. Because the loss was carried back to the 1984 taxation year and because, by March 3, 1993, the date of reassessment, the 1984 taxation year was statute barred, Revenue Canada proceeded to reassess only under paragraph 245(2)(a).

The respondent’s counsel introduced additional evidence through reading in portions of the examination for discovery of Husky’s employee, J. Michael Pannett, who has been its tax manager since 1984. As he was Husky’s ongoing advisor concerning both of the Carma and Brinco transactions, he was able to provide information with respect to the times, nature and frequency of meetings held between the respective parties and of any notes thereof being made and maintained or destroyed. He confirmed Husky had a written policy respecting retention of only those documents of a formal nature which served to establish a particular transaction but that internal memos and notes of an informal nature were not part of that policy.

Appellant’s counsel raised objections concerning the relevancy of this line of evidence on the basis that no reliance was being placed by the appellant on the arm’s length exculpation provided by subsection 245(3) of the Act, infra. Relying on the submission of respondent’s counsel that he intended to advance the arguments that the arm’s length and bona fide provisions of 245(3) are of impact in an interpretative approach to be brought to subsection 245(2), I ruled that any evidence on those matters would be relevant and therefore admissible.

The following represents the occurrence of events as disclosed by Mr. Pannett.

The transaction idea was first raised during a casual discussion which occurred during the summer of 1985 between Mr. Burgess an employee of Brinco, and Mr. McNair an employee of Husky. Apparently they had been long time friends. At first Husky was not interested, but then in late fall it expressed an interest and informal discussions ensued between Mr. Burgess and Mr. McNair. The first meeting of a formal nature was held on January 9, 1986, between Husky and its legal advisors with minutes thereof being prepared and retained (Exhibit R-1, tab #1). During that meeting matters were listed which had to be addressed if the transactions were to proceed.

At this juncture it is appropriate to mention that in complex corporate share transactions check lists of matters to be inquired into and to be done are normally made by competent, experienced professional advisors on behalf of their clients. These are called "due diligence reviews" which are detailed lists of all aspects underlying share/asset transactions. Counsel for the appellant described them as "shopping lists of anything that could go wrong" and that normally they get longer as a transaction progress. In my opinion the aforenoted minute appears to be a typical example of that due diligence investigative approach as Husky’s lawyers were understandably under a professional duty to ensure that what their client was acquiring was what was intended to be purchased.

Mr. Pannett’s evidence was that ad hoc meetings had likely occurred every two weeks after January 9, 1986 between different people but that Brinco undertook its own reorganizations without any participation by Husky so as to put itself in a position to approach them to negotiate a deal.

After the due diligence reviews had been done for Husky many meetings ensued during June and July 1986 between it and Brinco and their respective professional advisors concerning the particulars raised in these reviews. Meetings occurred to ensure the right information was obtained to support values. No records of a formal nature were kept of these meetings, however, Mr. Pannett’s practice for the ones he attended was to make an informal memo as to what had transpired. July 1986 was said to be the first point of time that the negotiated terms, particularly the price, were completed thus enabling approval of the deal to be sought and obtained. By a letter dated July 18, 1986 (Exhibit R-2), Husky confirmed it was not interested in buying if the paid-up capital was not reduced from $74 million to $20.7 million. [I note this was done on July 24 as per item 17 in the agreed facts.] Thereafter Mr. Miller, Husky’s vice-president and chief negotiator, approved the terms and the price and the transactions were completed on July 28, 1986.

During the fall of 1986 all notes of an informal nature made by Messrs. McNair and Pannett respecting the Brinco transactions were culled and destroyed pursuant to the advice of Husky’s legal advisor that they were redundant. Mr. Pannett opined that none of the materials removed from the files and destroyed were of the kind required to be retained under the provisions of the Act.

The financial result of the transaction was recorded in Husky’s records as a $14,485,000 credit to current (1986) tax expense, being the tax refund amount of $21,485,000 arising out of the loss carryback to 1984 less the cost of the investment of $7,000,000.

With respect to the Carma transactions, Mr. Pannett’s evidence was that in August or September 1986 Husky was advised by a representative of its major shareholder, Nova, (’’Nova") an Alberta corporation that a transaction respecting the Allarco shares was being considered. Seven to eight meetings were held between Nova and Husky to discuss the matter and its ramifications. Mr. Pannett attended most of these meetings as well as those which included Carma and he made his own informal notes. Approximately one to one and one-half years after the Carma transactions were completed (i.e., somewhere between late fall of 1987 and late spring of 1988) he removed and destroyed these notes. A lawyer attended in July 1990 to review the files and documents, removing duplicates and legal opinions of a privileged nature.

Mr. Pannett confirmed Husky’s view that the Allarco shares had no value to it other than their tax loss value, that in entering into the arrangement of purchasing the shares it was binding itself to the terms of the unanimous shareholder agreement on wind-up (so expressed in Exhibits R-5 and R-6) requiring it to sell the Allarco shares to the Bank of Nova Scotia for $1, and that this sale back to the bank formed part of the overall transaction agreed to between it and Carma. The financial result of this transaction was recorded in Husky’s records in the same manner as the Brinco transaction, that is, as a $11,284,000 credit to current (1986) tax expense, being the refund amount of $16,421,500 which arose out of the loss carryback to 1984 less the $5,137,500 cost of the investment.

Exhibits R-1 to R-26 were introduced in a bound book of documents format corresponding to tabs 1 through 26 thereof. The first nine exhibits were marked as they arose out of the reading in the examination for discovery of Mr. Pannett, and Exhibits R-10 to R-26 inclusive were put in by consent simply to form part of the record. In general terms, the documentation and correspondence concerning the Carma transaction were marked as Exhibits R-1, 5, 6, 7, 9, 10, 24, 25, 26 and for the Brinco transaction were Exhibits R-2, 3, 8, 11 to 23 inclusive, 25 and 26.

For rebuttal purposes in anticipation of adverse inferences that respondent’s counsel may be advancing with respect to the culling of informal notes and memos, the appellant’s counsel, through the discovery testimony of one Mr. Gordon Lawrence who occupied the position in Revenue Canada as manager of its tax avoidance group in Calgary, introduced evidence that frequent meetings had occurred between one or more members of that group and Husky’s representatives over a period of one and one-half years after November 1991. The appellant’s demand for full discovery of respondent’s documents pursuant to the rules of the Court, specifically including notes and internal memoranda, had failed to gain information as to any such notes or memoranda. Mr. Lawrence opined during his discovery that taxpayers were fiscally required to retain all handwritten notes and memoranda as records and claimed to be unaware if any of the Minister’s officials made those kinds of notes at those meetings. Mr. James Pearson, an official of the Minister, was called and cross- examined by appellant’s counsel as an adverse witness pursuant to the rules of the Court. He said that a series of meetings had happened, that he did not make any of those kind of notes and he also claimed to be unaware as to whether any of the other Revenue participants had taken any.

Continuing with Mr. Pannett’s discovery evidence, a letter dated July 24, 1991 (Exhibit R-4) to Husky outlined the facts as understood by the Minister’s tax avoidance officials which Mr. Pannett agreed was an accurate representation by them of what had occurred. The letter also confirmed that the capital losses claimed as a result of the Carma and Brinco transactions had resulted, in their opinion, in taxable benefits being conferred upon Husky by Carma and Brinco in 1986, the value of which was a taxable benefit under paragraph 245(2)(a) of the Act.

With respect to matters of timing, I note that according to clause 25(e) of the agreed statement of facts the November 6, 1991 was the last day the 1984 taxation year could have been reassessed to deny the deduction of the 1986 loss carryback. Accordingly there was in excess of three months after the July 24 letter for the Minister to have applied any avoidance provision or provisions of the Act, including subsection 55(1), before the appellant’s 1984 taxation year became statute-barred. However, as explained by appellant’s counsel, any reassessment made after November 6, 1991 invoking only subsection 55(1) would not have added anything to income because it operates simply to disallow losses and therefore would have produced a "dry” assessment. The reassessment invoking only subsection 245(2) giving rise to his appeal is dated April 26, 1993.

The following succinctly portrays the financial situation (in rounded- out amounts):

In other words, Husky paid around $12 million to gain a tax refund of $38 million, the difference being added by the Minister into the appellant’s 1986 income as a benefit conferred on Husky resulting from these transactions pursuant to subsection 245(2) of the Act.

The law

The issues advanced by counsel concerned the meaning and effect of the following provisions as they read in 1986 of application to the two transactions: they appear under Part XVI of the Act eponymized generally as tax avoidance, and specifically as "artificial transactions", thusly:

Part XVI Tax Avoidance

245(2) Artificial transactions.-Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purpose of Part I,

(3) Where it is established that a sale, exchange or other transaction was entered into by persons dealing at arm’s length, bona fide and not pursuant to, or as part of, any other transaction and not to effect payment, in whole or in part, of an existing or future obligation, no party thereto shall be regarded, for the purpose of this section, as having conferred a benefit on a party with whom he was so dealing.

Since it has been raised, subsection 55(1) is also included. It appears in subdivision (c) of Division B within Part I of the Act eponymized as "avoidance”. It reads:

55(1) Avoidance.—For the purposes of this subdivision, where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a taxpayer has disposed of property under circumstances such that he may reasonably be considered to have artificially or unduly

(a) reduced the amount of his gain from the disposition,

(b) created a loss from the disposition, or

(c) increased the amount of his loss from the disposition,

the taxpayer’s gain or loss, as the case may be, from the disposition of the property shall be computed as if such reduction, creation or increase, as the case may be, had not occurred.

Positions advanced by the parties

Both counsel advised no issues were being put forth as to whether paragraph 245(2)(a) is to be considered as a charging or a characterizing provision. While this subject is raised in the pleadings, counsel elected not to pursue it now, indicating it may be reactivated at a later time.

For the appellant. As the vendors and Husky, being at arm’s length, each acting in their own economic self-interest, hard bargained over the price with full regard to the then known risks and rewards, and as Husky paid fair market value for the shares, there cannot, by definition, either by conferral or in the result, be a benefit to Husky, in 1986, within the purview of subsection 245(2), or otherwise. In this shell game, that is the pea to be watched.

The extent of the inherent risks associated with these admittedly tax avoidance transactions known by Husky in 1986 renders no tangible or quantifiable value being assignable to any purported benefit being conferred on it during that year. Fair market value was determined and paid in 1986. The Minister’s assessed value of the benefit (1.e., the tax refund amount for 1984 less Husky’s outlays) rests upon hindsight which totally ignores the risks known, considered and acted upon in 1986 by the vendors and Husky.

The exculpatory provisions of subsection 245(3) are not being relied upon, there being no "benefit" within the purview of subsection 245(2) of the Act.

As an ancillary submission, it would be contrary to the scheme of the Act to assess a benefit arising out of a rollover transaction; that is, in a transaction in which the specific provisions of the Act are designed to defer recognition of gains or losses in intercorporate or ^organizational trans- actions; cf, subsections 88(1), 85(1), 97(2) and section 87 of the Act. The Minister’s position in this case amounts to a collateral attack on the Act’s rollover provisions and would destroy their integrity. For the Minister to claim a benefit would never be assessed in the case of an ordinary or simple rollover situation amounts to a system of administrative or discretionary taxation which is not sustainable by law; Vestey v. C.I.R., [1979] 54 T.C. 503 (H.L.) at pages 581-82.

For the respondent. In keeping with the appellant counsel’s metaphor, the pea in the shell game is that by these transactions the vendors placed Husky in a position of entitling it to deduct capital losses not incurred by it. That is the benefit here within the purview of subsection 245(2) of the Act.

The word ’’benefit” connotes something in addition to what a recipient already has; The Queen v. Langille, [1977] C.T.C. 144, 77 D.T.C. 5086 (F.C.T.D.) at page 147 (D.T.C. 5089). It also signifies an advantage. The nature of the benefit or advantage resulting from these transactions was that Husky was put in a position of being entitled to deduct capital losses it never incurred which enabled it to achieve tax relief on losses it did not itself incur. The vendors, through these transactions, had conferred this ability upon Husky as the capital losses sold were otherwise valueless. Subsection 245(2) is ’’results” focused; The Queen v. Kieboom, [1992] 2 C.T.C. 59, 92 D.T.C. 6382 (F.C.A.), M.N.R. v. Dufresne, [1967] C.T.C. 153, 67 D.T.C. 5105 (Ex. Ct.), and Craddock and Atkinson v. M.N.R., [1968] C.T.C. 379, 68 D.T.C. 5254 (Ex. Ct.) aff'd on different grounds [1969] C.T.C. 566, 69 D.T.C. 5369 (S.C.C.); and it encompasses tax savings; C.LR. v. Challenge Corp. (P.C.), [1987] 1 A.C. 155, David v. The Queen, [1975] C.T.C. 197, 75 D.T.C. 5136 (F.C.T.D.), and The Queen v. Immobiliare Canada Ltd., [1977] C.T.C. 481, 77 D.T.C. 5332 (F.C.T.D.). Tax avoidance motivation, or the lack thereof, is irrelevant to the applicability of subsection 245(2); M.N.R. v. Dufresne, supra, at page 161 (D.T.C. 5109).

The amount or value of the benefit to Husky is its 1984 tax saving in excess of the amount paid for it which is tangible and quantifiable; Conrad David v. The Queen, supra, and The Queen v. Immobiliare Canada Ltd., supra. There was no hindsight employed to determine value. Liability to tax arises at year end as a result of the operation of the Act and the benefit from the transactions originated in Husky’s 1986 taxation year as its entitlement to deduct the vendors’ capital losses and their carryback to 1984 arose during 1986.

A reading of subsection 245(3) provides guidance to the proper interpretation of 245(2) which itself does not impliedly exempt ordinary commercial transactions. These are specifically recognized and protected by subsection 245(3). The two subsections ought to be read together; M.N.R. v. Dufresne, supra, at page 161 (D.T.C. 5109). Subsection 245(3) obviates the conferral of a benefit in situations of arm’s length bona fide business transactions. The transactions here were not bona fide business transactions and were achieved through accommodative practices or arrangements amounting to something less than arm’s length dealings. The only exception to the operation of subsection 245(2) is subsection 245(3), not some unduly restricted notion of benefit in subsection 245(2) of the Act.

With respect to the ancillary submissions of appellant’s counsel, the benefit here did not arise as a result of a rollover but rather arose as a result of being entitled to fiscally utilize another’s capital losses through the acquisition of its shares. The fiscal rollover provisions are merely a part of the transactions.

Analysis

The diverse approaches of each party centres around the appropriate meaning to be ascribed to the subsection 245(2) phraseology.

Where the result of...transactions...is that a person confers a benefit on a taxpayer....

I concur with appellant counsel’s submission that an essential precondition to the applicability of subsection 245(2) is that there must firstly be a benefit, and that any question concerning the applicability of subsection 245(3) remains subservient to that precondition. By its own terms the latter specifically contemplates the existence of a benefit which it purports to obviate under certain circumstances. Additionally, the value ascribed to the benefit must be greater than zero otherwise the whole exercise is academic.

I also concur with respondent counsel’s submissions that the case law has established that subsection 245(2) is results focused. In Kieboom, supra, and in Dufresne, supra, the individual taxpayers were unsuccessful because it was found the result emanating out of the transactions was that a benefit had been conferred upon their children. However in both cases the paramount issue raised was not whether the children had benefitted by being placed in a position of being able to obtain corporate shares at only a nominal price. Rather, it was directed to whether the benefits arose by virtue of the corporations having conferred them rather than the taxpayer.

Dufresne involved a redistribution of corporate surplus which was accomplished by a family corporation, of which Mr. Dufresne was the controlling shareholder, granting options to all the family shareholders to acquire new shares at their $100 par value at a time when they each had a book value of $1,421. The Dufresne children took up the options but Mr. Dufresne and his wife did not and he was held liable under the gift tax provisions of the Act as it then read. Jackett P. noted at page 5109 the benefit did not arise out of the conferral of the options by the company on all its shareholders of the right to acquire additional shares at par but rather arose out of the subsequent exercise of this right by the children together with the decision of their parents not to exercise it for themselves.

Similarly, Kieboom involved corporate issuance of additional treasury shares which effectively caused the value of the taxpayer’s shares to be diminished (the benefit of the diminution being available to the children), thus enabling the children to obtain the new shares at only a nominal price. The Court’s analysis respecting the benefit and its conferral was expressed thusly at page 63 (D.T.C. 6385):

It is not disputed that the acquisition of the shares at less than the market value was a benefit to the children.... By the issuance of these additional shares, the value of the shares held by the taxpayer was diminished. The amount of this decrease in value was, in effect, given to the new shareholders at the nominal purchase price of the shares. The fact that this was done by the taxpayer directing the company he controlled to issue new shares to the recipients, rather than issuing new shares to himself and then giving them to his family, made no difference at all. The result was the same…

The Court also noted that subsection 245(2) effectively stipulates that it is the substance of any transactions that must be examined irrespective of their particular form or legal effect. Therefore the taxpayer’s position, that it was the company and not he that did the conferring, failed.

The facts and issues in Immobiliare Canada were not concerned with whether the price paid for the interest portion of the debt arose from self-motivated negotiation practices having been exercised between the vendor and the purchaser. Accordingly there is no legal analysis in the case pertaining to fair market value principles as they may impact on the purported subsection 245(2) benefit. This case does confirm however that the benefit can include a tax saving.

None of the authorities relied upon by respondent’s counsel encompass an analysis as to whether the benefit contemplated by subsection 245(2) includes an advantage acquired by payment therefor at a fair market value price. What the authorities have recognized is that there are three essential elements extant within this provision, the principal one being whether there has been a "benefit” to the taxpayer. This benefit must have been "conferred” on the taxpayer by a person (and not simply to have been received), and this conferment must have "resulted" from any kind of transactions.

The broadness of the word "benefit" does not necessarily mean every benefit, however gained, is contemplated by subsection 245(2). If that were so the benefit enjoyed by one party, arising or resulting from having negotiated a good bargain or trade would, upon that outcome alone, always be at risk. It would in my view take much clearer language than as expressed in subsection 245(2) to reach all such economic advantages or benefits. Counsel for the Minister did not argue that subsection 245(2) was all encompassing. Rather the position was the provision catches transactions not made bona fide at arm’s length for business purposes which is the function of subsection 245(3). However as previously noted, there must first be a benefit that was conferred.

The now firmly established meaning respecting "fair market value" is that it reflects the highest price available in an open and unrestricted market between informed and prudent parties, each acting at arm’s length and under no compulsion to act, expressed in terms of cash. Value is to be determined as at a specific point of time and is a function of facts known, and forecasts made, only as at that point of time.

Clauses 10 and 21 of the agreed facts provide that the parties to the transactions had arrived at the respective purchase price through arm’s length negotiations, each vendor attempting to maximize its own receipts with Husky attempting to minimize its payment having due regard to the stated benefits and perceived risks known that time.

In my opinion the approach and assessment in 1993 by the Minister unjustifiably diminished the risks as perceived in 1986 and overly emphasized the hoped-for benefits to Husky. Had the actual outcome been known to the parties in 1986 then common sense infers the vendors might have demanded a higher price. This was tacitly recognized by the respondent’s counsel during his submission concerning the amount of benefit being only the net amount of the tax saved, and that there would have been no benefit to Husky from a fiscal perspective if it had paid $38 million for the shares rather than only $12 million. Inherent therein is the current knowledge of fiscal non-impeachment of the transactions themselves which ignores the 1986 reality that all of the stated risks and benefits had driven the price negotiations as they then occurred between the vendors and Husky. During 1986 Husky’s risks were reasonably founded and well grounded in reality, and the purported benefit must be examined as at the time of the finalization of the transactions which is late 1986; Guilder News Co. v. M.N.R., [1973] C.T.C. 1, 73 D.T.C. 5048 (F.C.A.), at page 7 (D.T.C. 5053). It is inappropriate to apply subsequently gained knowledge in the determination of value, especially if it differs from the information known and the value established by the parties in arm’s length negotiation.

In Immobiliare Canada the taxpayer paid its American-based parent company the full face-value price for the interest portion of the debentures purchased, totally ignoring inter alia the inherent tax consequences therewith which were seen to be identifiable, measurable and tangible, thus enabling it to be found to have been a benefit within the meaning of subsection 245(2). The Husky transactions, however, stand in stark contrast because upon finalization of the transactions in 1986 there was and remained in operation the known distinct risk that all could have been lost and that this had played a dynamic part in arriving at the price paid. If the fiscal integrity of the transactions was controvertible in 1986 then it follows that their ostensible benefits must, similarly, be controvertible in 1986. This situation did not exist in /mmobiliare Canada.

With respect to the impact of subsection 245(3) upon subsection 245(2), respondent’s counsel submitted that, apart from the price negotiations, the parties’ mutually accommodative conduct amounted to their having acted in concert, akin to collusion, to the disadvantage of the fisc, thus reducing their overall conduct to something less than arm’s length. Particularly, by paying Brinco fair market value for the Brinex shares with the knowledge it would be shortly reselling the Dorset and Cassiar shares it had acquired through the Brinex liquidation back to Brinco for fair market value as well, and being contractually required to sell the Allarco preferred shares to the bank for $1, shows these transactions lacked the quality of arm’s length dealings.

It is well settled law that issues pertaining to arm’s length dealings are determinable on their facts based on all of the evidence. There is little doubt that in the case here all parties were and remained self-focused in their desire to benefit from the best possible financial deal obtainable. Within that framework the vendors had to ensure their buyer maintained its interest and willingness to purchase the underlying losses which were fiscally valueless to them, and Husky had to ensure it was acquiring something of value to itself. This kind of commonality or mutuality of interest and their conduct does not support a finding that a common mind was directing or dictating the terms for both sides of the transactions thus demonstrating a lack of independent judgment or interest, or of subordination of one to the other, or that de facto control was in play, directly or indirectly, by one of the parties over the other. That Husky’s officials remained involved as described, particularly with respect to the Brinco transactions, and that their professionals had performed due diligence reviews on a timely basis, amounted to no more than what any prudent purchaser would normally and responsibly do in similar situations. The complexities inherent within each step of the Brinco transactions demanded due and diligent attention so that Husky was sure it was in fact buying the property intended to be purchased and, as already noted, it always remained in Brinco’s self-interest to ensure this was so. Also, in my opinion, there is no basis within the evidence calling for any material adverse inferences to be drawn against Husky with respect to the culling and destruction of its employees’ informally made notes and, in any event, all the Carma preliminary steps were already in place before Husky had even entered the picture. The conclusion which follows from the evidence is that the Brinco and the Carma transactions were indeed bona fide and at arm’s length as between the parties.

I return to respondent-counsel’s ’’pea’’ in the shell game which is that the substantive benefit attracting taxability under subsection 245(2) was Husky’s ability or entitlement to deduct capital losses it had not incurred. As I see it this position suffers from tunnel vision as it ignores or sidesteps the undisputed fact that what Husky had acquired was obtained by it under contract for fair market value and not through wholly artificial devices or means or through simple acquiescence. The vendors here neither bestowed nor conferred anything upon Husky, and any ostensible benefit gained by Husky arose out of a legitimate quid pro quo as between Husky and the vendors.

This brings the analysis back to appellant-counsel’s thesis which is that there cannot be a "benefit" where fair market value has been paid, that 1s, one is the antithesis of the other. I agree that this is so respecting the reach of subsection 245(2) into the Brinco and Carma transactions. Having found there was no such benefit here, the function and applicability of the subsection 245(3) provisions remain moot.

With respect to the ancillary argument raised by appellant’s counsel, I believe it would not be appropriate to pursue it at this time. Not only is it now superfluous but more importantly its analysis comes precariously close to inviting a review as to whether subsection 245(2) is merely a categorizing provision rather than a charging one, with counsel having decided to defer this question. The broader issue arising is, notwithstanding strict compliance with both the form and substance of the fiscal provisions specifically applicable to each step of the transactions, whether the general avoidance provisions of subsection 245(2) could still apply in an overarching way. This has been examined recently in an article, brought to the Court’s attention by counsel, entitled "Corporate Reorganizations and Other Transfers of Tax Attributes: A Question of Taxable Benefits", Wertschek R., co-edited by Ewens D.S. and Spindler R.J. and published in the Canadian Tax Journal (1994), Vol. 42, No. 1 at page 268.

Conclusion

The appeal is allowed and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no benefit had been conferred by Carma Ltd. nor Consolidated Brinco Ltd. on the appellant in its 1986 taxation year pursuant to subsection 245(2) of the Income Tax Act.

The appellant will have its costs on a party-to-party basis.

Appeal allowed.