Marceau
J.A.:-I
have
had
the
advantage
of
reading
the
reasons
for
judgment
prepared
by
my
brother
McDonald.
Unfortunately,
my
analysis
of
the
legal
principles
applicable
to
the
facts
of
this
case
does
not
lead
me
to
the
conclusion
which
he
has
reached.
I
cannot,
therefore,
share
his
view
and
must
respectfully
disagree
with
him.
I
have
no
doubt
that
subsection
88(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
’’Act”)
contains
a
rule
which
is
meant
to
apply
automatically.
It
is
even
expressed
to
operate
notwithstanding
any
other
provision
of
the
Act.
The
conditions
for
application
of
the
provision
are
clearly
set
out
and
have
been
met.
Subsection
88(1)
is
certainly
applicable
here.
I
also
accept
that
subsection
245(1)
of
the
Act,
concerning
artificial
transactions,
has
no
role
to
play
in
the
factual
context
of
this
case.
The
series
of
operations
by
which
the
respondent
acquired
the
Maple
Ridge
property
does
not
constitute
a
sham,
whatever
may
be
the
ulterior
economic
motive
of
the
scheme.
The
transactions
were
real
and
nothing
was
hidden
behind
them.
Even
if
subsection
88(1)
operates
to
allow
the
respondent
to
consider
the
difference
between
the
deemed
cost
and
the
actual
proceeds
of
Sale
as
a
loss
sustained
in
the
course
of
its
business,
this
loss
could
not
be
said
to
be
"artificial’’
or
"undue"
as
it
would
arise
by
specific
operation
of
the
Act.
Where
I
respectfully
disagree
with
my
colleague
is
in
my
reading
of
Subsection
88(1)
and
the
view
I
take
of
the
limited
effect
of
the
rule
it
establishes.
For
convenience,
I
reproduce
again
the
relevant
and
significant
words
of
subsection
88(1):
88(1)
Where
a
taxable
Canadian
corporation
(in
this
subsection
referred
to
as
the
’’subsidiary”)
has
been
wound
up
after
May
6,
1974...notwithstanding
any
other
provision
of
this
Act,
the
following
rules
apply:
(a)...each
property
of
the
subsidiary
that
was
distributed
to
the
parent
on
the
winding-up
shall
be
deemed
to
have
been
disposed
of
by
the
subsidiary
for
proceeds
equal
to
(iii)...the
cost
amount
to
the
subsidiary
of
the
property
immediately
before
the
winding-up;
(c)
the
cost
to
the
parent
of
each
property
of
the
subsidiary
distributed
to
the
parent
on
the
winding-up
shall
be
deemed
to
be
the
amount
deemed
by
paragraph
(a)
to
be
the
proceeds
of
disposition
of
the
property....
As
I
understand
the
rule
enacted
in
that
provision,
it
is
to
the
effect
that
on
the
winding-up
of
a
subsidiary,
there
shall
be
a
deemed
disposition
by
the
subsidiary
of
each
of
its
properties
at
the
cost
amount
to
it
and
a
deemed
acquisition
of
the
property
by
the
parent
at
the
same
cost.
I
cannot
read
anything
else
in
that
provision.
More
particularly,
I
cannot
read
the
provision
as
saying
that,
if
the
property
was
part
of
the
inventory
of
the
subsidiary,
it
will
become
part
of
the
inventory
of
the
parent;
nor
does
it
specify
that
unrealized
losses
of
the
subsidiary
become
business
losses
for
the
parent.
It
does
not
say
that
the
parent
will
be
considered
for
tax
purposes
to
be
in
the
same
situation
as
the
subsidiary
was
with
regard
to
the
property.
It
determines
a
deemed
cost
of
acquisition
but
it
does
not
determine,
as
I
read
it,
whether
that
deemed
cost
and
the
actual
proceeds
of
sale
of
the
property
will
enter
into
the
calculation
of
the
parent’s
income
from
its
business.
That
determination
must
be
made
according
to
section
9
of
the
Act
which
defines
business
income.
In
order
to
satisfy
the
requirements
of
that
provision,
the
parent
must
demonstrate
that
the
property
has
become
part
of
its
own
inventory.
It
is
true
that
the
parent’s
business
in
our
case
is
the
development
and
sale
of
real
property,
the
same
as
that
carried
on
by
the
subsidiary.
It
is
this
feature
of
the
case
which
renders
the
analysis
so
difficult.
Had
the
respondent’s
business
been
different
than
what
it
is,
the
scheme
would
have
been
unthinkable,
as
the
acquisition
of
the
land
would
obviously
not
be
a
transaction
done
in
the
course
of
business,
nor
could
it
ever
have
been
considered,
in
the
circumstances,
an
adventure
in
the
nature
of
trade
(cf.
the
decision
of
this
Court
in
Canada
v.
Loewen,
[1994]
2
C.T.C.
75,
94
D.T.C.
6265).
But
does
the
fact
that
both
parent
and
subsidiary
were
in
the
same
business,
in
itself,
impose
a
finding
that
the
property
necessarily
became
part
of
the
inventory
of
the
parent
since
it
was
part
of
the
inventory
of
the
subsidiary?
In
my
view,
it
could
be
so
only
if
the
transaction
or
series
of
transactions
by
which
the
land
was
acquired
was
entered
into
by
the
parent
in
the
course
of,
within
the
ambit
of,
or
for
the
purposes
of
its
business.
It
is
well
established,
in
the
jurisprudence,
that
a
transaction
which
is
devoid
of
the
ordinary
characteristics
of
trade,
especially
if
devoid
of
any
possibility
of
yielding
some
direct
or
indirect,
immediate
or
eventual
profit,
is
not
a
trading
transaction
and
any
property
so
acquired
cannot
be
regarded
as
stock-in-trade
(see:
Bishop
(Inspector
of
Taxes)
v.
Finsbury
Securities
Ltd.,
[1966]
3
All
E.R.
105
(H.L.);
FA
&
AB
Ltd.
v.
Lupton
(Inspector
of
Taxes),
[1971]
3
All
E.R.
948
(H.L.);
Québec
(Deputy
Minister
of
Revenue)
v.
Lipson,
[1979]
1
S.C.R.
833,
[1979]
C.T.C.
247).
It
is
well
established
also
that
the
mere
seeking
of
a
fiscal
benefit
does
not
give
a
non
trading
transaction
the
character
of
a
trading
one
(Moloney
(M.)
v.
Canada,
[1992],
2
C.
T.C.
227,
92
D.T.C.
6570
(F.C.A.);
Canada
v.
Loewen,
supra))
That
the
transaction
here
was
devoid
of
the
ordinary
characteristics
of
trade
is
indisputable.
This
is
made
clear
in
the
following
passage
from
the
judgment
of
the
learned
trial
judge:
These
series
of
transactions
were
motivated
solely
for
the
purpose
of
reducing
tax.
Appellant’s
counsel’s
words
cut
to
the
core:
Now
let’s
be
clear,
Your
Honour.
We
make
no
bones
about
the
fact
that
this
was
an
entirely
tax-motivated
transaction.
We
make
no
bones
about
the
fact
that
there
was
no
reasonable
expectation
of
profit
in
property
where
we
acquired
it
at
noon
and
sold
it
by
dusk
for
a
loss
of
four
an
a
half
million
dollars.
That
this
was
factually
correct
was
elicited
from
Mr.
Ralph
Schmidtke,
an
officer
of
the
appellant.
He
also
confirmed
that
although
the
land
had
in
the
past
been
considered
for
acquisition
and
development
as
part
of
the
appellant’s
regular
business,
it
was
only
an
idea
which
was
dropped.
It
is
true
also
that,
by
winding
up
its
subsidiary,
the
respondent
was
assuming
all
of
Fraserview’s
debts.
One
may
try
to
see
there
a
compelling
indication
that
the
respondent
intended
to
blend
the
subsidiary’s
business
with
its
own
and
carry
on
the
subsidiary’s
business
with
no
change
whatsoever.
I
do
not
see
it
this
way.
For
the
scheme
to
be
carried
out,
it
was
of
course
necessary
that
the
respondent
take
this
route,
and
this
it
did
wilfully,
and
very
wisely,
only
after
having
’’parked"
the
debts
in
the
hands
of
a
partnership
controlled
by
its
principal
shareholder.
But
I
do
not
see
how
that
fact
alone
could
have
any
bearing
on
the
determination
of
the
nature
of
the
transaction
and
the
status
of
the
land
during
the
short
time
while
it
was
owned
by
the
respondent
before
being
transferred
pursuant
to
a
prearranged
sale.
Counsel
for
the
respondent
tried
to
dispute
the
appellant’s
position
by
characterizing
it
as
the
latest
version
of
the
"business
purpose
test"
discredited
in
Canadian
law
since
the
Supreme
Court
decision
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
1
S.C.R.
536,
[1984]
C.T.C.
294,
84
D.T.C.
6305.
I
do
not
agree.
The
question
is
not
whether
the
transaction
or
series
of
transactions
should
be
ignored
as
in
Stubart.
It
is
a
real
transaction,
as
I
said,
which
produced
ostensible
legal
effects
and
to
which,
undoubtedly,
the
rule
established
by
subsection
88(1)
applied.
The
question,
again,
is
whether
the
land
acquired
became
part
of
the
respondent’s
inventory
so
as
to
allow
the
notional
loss
incurred
on
its
disposal
to
be
considered
a
business
loss
and
used
in
calculating
the
profit
from
the
respondent’s
business.
With
the
greatest
respect
for
the
contrary
opinion
of
the
learned
trial
judge
and
my
brother,
I
believe
that,
according
to
the
provisions
of
the
Act,
the
answer
to
the
question
must
be
no.
I
would
allow
the
appeal,
set
aside
the
decision
of
the
Tax
Court
of
Canada
dated
October
27,
1993,
and
reinstate
the
assessments
of
the
Minister
as
set
out
in
notices
of
reassessment
dated
July
16,
1991
with
respect
to
the
appellant’s
taxation
years
ended
November
30,
1982,
November
30,
1983,
November
30,
1987
and
November
30,
1988.
McDonald
J.A.:-This
is
an
appeal
from
the
Tax
Court
of
Canada
dated
October
27,
1993
in
which
the
trial
judge
decided
that
the
respondent
could
claim
a
loss
arising
from
the
sale
of
a
property
that
had
been
acquired
as
a
result
of
a
purchase
and
winding-up
of
a
subsidiary
company.
The
sole
issue
before
the
Tax
Court
was
whether
that
loss
could
be
claimed
against
the
appellant’s
income.
The
acquired
loss
from
the
subsidiary
was
claimed
against
revenues
of
the
appellant
for
the
1982
taxation
year
and
for
subsequent
years
resulting
in
a
total
avoidance
of
tax
payable
for
these
years.
The
facts
The
respondent,
Mara
Properties
Ltd.
("Mara")
is
a
taxable
Canadian
corporation
having
its
principal
place
of
business
in
Vancouver,
British
Columbia.
The
appellant’s
business
was
managed
by
its
principal
shareholder,
Mr.
Werner
Paulus,
a
resident
of
the
United
States.
Mara
is
in
the
business
of
locating,
developing
and
selling
real
property
and
any
profits
from
property
sales
were
reported
as
business
income
and
not
as
Capital
gains.
The
transaction
which
is
the
subject
of
this
appeal
began
on
November
30,
1982
when
Mara
acquired
all
of
the
outstanding
shares
of
another
taxable
Canadian
corporation,
Fraserview
Development
Ltd.
("Fraserview").
The
purchase
price
of
these
shares
was
$69,998.
Fraserview
thus
became
a
wholly
owned
subsidiary
of
Mara.
Fraserview’s
sole
asset
at
the
time
of
acquisition
was
a
parcel
of
land
("land")
originally
purchased
for
approximately
six
million
dollars
and
partially
developed
by
Fraserview
for
an
additional
$1.577
million.
On
the
same
day
that
Mara
acquired
control
of
Fraserview
it
proceeded
to
wind
up
the
company
which
resulted
in
Fraserview’s
land
"rolling
over"
to
Mara
pursuant
to
subsection
88(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
88(1)
Winding-up.-Where
a
taxable
Canadian
corporation
(in
this
subsection
referred
to
as
the
"subsidiary")
has
been
wound
up
after
May
6,
1974...notwithstanding
any
other
provision
of
this
Act,
the
following
rules
apply:
(a)...each
property
of
the
subsidiary
that
was
distributed
to
the
parent
on
the
winding-up
shall
be
deemed
to
have
been
disposed
of
by
the
subsidiary
for
proceeds
equal
to,
(iii)...the
cost
amount
to
the
subsidiary
of
the
property
immediately
before
the
winding-up;
(c)
the
cost
to
the
parent
of
each
property
of
the
subsidiary
distributed
to
the
parent
on
the
winding-up
shall
be
deemed
to
be
the
amount
deemed
by
paragraph
(a)
to
be
the
proceeds
of
disposition
of
the
property.
At
the
time
of
the
winding-up
the
fair
market
value
of
Fraserview’s
land
had
dropped
to
three
million
dollars.
The
loss
in
land
value
was
described
by
witnesses
before
the
trial
judge
as
a
’’pregnant
loss"
which
is
a
vernacular
term
to
depict
the
failure
to
give
birth
to
the
loss
by
way
of
sale
or
otherwise,
while
in
the
hands
of
the
subsidiary.
To
continue
in
the
vernacular,
the
birth
of
the
loss
took
place
when
the
land
was
sold
by
the
parent
Mara
to
an
arm’s
length
third
party
purchaser.
Mara
then
claimed
the
loss
from
this
disposition
of
land
against
its
revenues
but
the
claim
was
disallowed
by
the
Minister
giving
rise
to
the
appeal
to
the
Tax
Court
of
Canada.
It
is
important
to
note
that
all
of
these
transactions
were
motivated
solely
for
the
purpose
of
avoiding
tax.
The
trial
judge
quoted
the
appellant’s
counsel
as
follows:
Now
let’s
be
clear,
Your
Honour.
We
make
no
bones
about
the
fact
that
this
was
an
entirely
tax-motivated
transaction.
We
make
no
bones
about
the
fact
that
there
was
no
reasonable
expectation
of
profit
in
property
where
we
acquired
it
at
noon
and
sold
it
by
dusk
for
a
loss
of
four
and
half
million
dollars.
The
decision
under
appeal
The
trial
judge
described
subsection
88(1)
as
a
rollover
provision
which
deems
a
disposition
and
acquisition
of
a
subsidiary’s
property
to
have
accrued
at
the
subsidiary’s
cost,
and
to
defer
its
fiscal
consequences
until
the
parent
actually
disposes
the
property
by
sale
or
otherwise.
She
found
that
this
provision
operates
automatically
upon
all
of
its
conditions
being
met,
which
is
the
situation
here.
She
also
ventured
the
opinion
that
the
rationale
behind
subsection
88(1)
is
a
recognition
that
before
being
wound
up
a
subsidiary
may
have
accrued
unrealized
losses
on
non
capital
property.
The
trial
judge
rejected
the
Minister’s
argument
that
subsection
9(1
)
and
paragraph
18(
1
)(a)
of
the
Act
precluded
deductibility
of
the
cost
of
the
land
because
the
respondent
did
not
acquire
the
land
for
the
purpose
of
profit
from
a
business
that
it
intended
to
carry
on.
Specifically
she
rejected
the
paragraph
18(1
)(a)
argument
by
finding
that
the
land
in
question
was
inventory
in
the
hands
of
both
companies
and
not
an
"outlay
or
expense"
made
or
incurred
that
is
a
"deduction
in
the
computation
of
income".
She
found
that
the
respondent
did
not
make
or
incur
any
outlay
or
expense,
it
simply
inherited
the
deemed
cost
of
the
land.
With
respect
to
subsection
9(1)
the
Minister
argued
that
the
deemed
cost
amount
is
fallacious
since
the
income
therefrom
could
not
conceivably
produce
a
profit
when
the
pre-arranged
sale
took
place.
Again
the
trial
judge
rejected
this
argument
when
she
held
that
the
definition
of
income
in
subsection
9(1)
does
not
affect
a
deduction
based
on
subsection
88(1)
because,
by
its
own
terms,
subsection
88(1)
operates
’’notwithstanding"
any
other
provision
of
the
Act.
Finally
the
trial
judge
also
rejected
the
Minister’s
claim
that
the
purchase
of
Fraserview
was
an
artificial
transaction
that
was
caught
by
subsection
245
of
the
Act.
This
she
said
was
a
similar
provision
to
paragraph
18(l)(a)
in
that
it
only
applies
to
"deductions"
or
"disbursements
or
expenses
made
or
incurred".
She
stated
that
the
deemed
cost
of
the
land
here
is
not
a
"deduction"
or
a
"disbursement
or
expense
made
or
incurred".
In
fact,
far
from
being
artificial,
the
amount
of
loss
is
the
product
of
a
statutory
deeming
provision
to
which
effect
must
be
given.
In
her
conclusion
the
trial
judge
stated
that
until
1987
Parliament,
by
way
of
subparagraph
88(
1
)(a)(iii)
presumably
had
a
policy
whereby
a
parent
company
had
the
ability
to
utilize
a
subsidiary’s
unrealized
noncapital
losses
following
its
wind-up
into
the
parent.
The
purpose
of
the
1987
amendments
discussed
below
was
clearly
to
block
the
transfer
of
losses
and
thus
preclude
the
very
situation
that
existed
here.
Issues
under
appeal
The
following
issues
arise.
1.
Did
the
trial
judge
err
in
holding
that
the
difference
between
the
cost
of
the
land
deemed
by
subsection
88(1),
and
the
proceeds
of
disposition
from
the
sale
of
the
land
constituted
a
result
which
properly
entered
into
the
computation
of
the
respondent’s
profits
for
the
1982
taxation
year?
2.
Did
the
trial
judge
err
in
holding
that
the
cost
of
the
land
deemed
by
subsection
88(1)
was
relevant
in
computing
the
respondent’s
income
from
business
for
the
1982
taxation
year
even
though
the
respondent
did
not
use
the
land
in
its
business
nor
acquire
it
with
the
intention
of
using
it
in
the
business?
3.
Did
the
trial
judge
err
in
holding
that
subsection
88(1)
itself
operates
to
produce
a
loss
from
the
business
being
the
difference
between
the
cost
of
the
land
deemed
by
subsection
88(1)
and
the
proceeds
from
the
sale
of
the
land?
4.
Did
the
trial
judge
err
in
holding
that
the
cost
of
land
deemed
by
subsection
88(1)
does
not
constitute
an
outlay
or
expense
within
the
meaning
of
paragraph
18(1
)(a)
or
a
disbursement
or
expense
within
the
meaning
of
subsection
245(1)?
Analysis
I
begin
this
analysis
by
repeating
that
the
respondent’s
sole
motivation
to
engage
in
these
transactions
was
for
the
purpose
of
reducing
tax.
That
fundamental
concept
may
initially
strike
the
judicial
mind
as
unpalatable
and
contrary
to
the
general
anti-
avoidance
rule
that
abusive
tax
avoidance,
contrary
to
the
goal
of
equity
in
the
modern
Income
Tax
Act,
is
no
longer
tolerable.
This
aversion
however
must
be
tempered
in
consideration
of
Lord
Tomlin’s
fundamental
dictum
that
"Every
man
is
entitled
if
he
can
to
order
his
affairs
so
that
the
tax
attaching
under
the
appropriate
acts
is
less
than
it
would
otherwise
be".
R.C.
v.
Duke
of
Westminister,
[1936]
A.C.
1
at
page
19
and
Wilson
J.’s
finding
in
Stubart
Investments
Ltd.,
supra
at
page
540
(C.T.C.
318).
"A
transaction
may
be
effectual
and
not
in
any
sense
a
sham
(as
in
this
case)
but
may
have
no
business
purpose
other
than
the
tax
purpose."
Additionally,
this
Court
must
assess
the
loss
on
the
sale
of
the
land
with
an
"eye
to
commercial
and
economic
realities,
rather
than
to
juristic
classification
of
form"
Notre-Dame
de
Bon
Secours
(Corp.)
v.
Québec
(Communauté
urbaine),
[1994]
3
S.C.R.
3,
[1995]
1
C.T.C.
241,
95
D.T.C.
5017
("Bon
Secours").
Before
proceeding
further
I
feel
it
would
be
wise
to
clarify
the
terminology
to
be
used
in
the
present
case.
Here,
the
respondent
acquired
the
shares
of
Fraserview
at
a
time
when
the
cost
of
the
land
exceeded
its
fair
market
value
by
approximately
$4,500,000.
By
specific
operation
of
subsection
88(1)
of
the
Act,
the
respondent
did
not
realize
any
loss
on
the
land
when
Fraserview
was
liquidated.
Conversely,
Fraserview’s
cost
of
the
land
became
the
respondent’s
cost
of
the
land.
The
respondent,
not
Fraserview,
realized
the
loss
when
the
land
was
sold.
I
have
specifically
emphasized
the
word
"loss"
to
remove
any
doubt
that
the
amount
in
question
here
is
indeed
a
loss
on
the
sale
of
the
land.
This
loss
is
not
an
"outlay",
"expense"
or
"disbursement".
The
appellant’s
objection
to
the
claimed
loss
begins
at
the
most
fundamental
level
of
the
Income
Tax
Act.
Consequently,
I
begin
my
analysis
by
investigating
whether
the
respondent
has
a
source
of
income
(or
loss)
under
which
this
loss
can
be
claimed.
Under
subsection
4(1)
of
the
Act,
a
taxpayer’s
income
or
loss
is
computed
on
a
source
by
source
basis.
The
section
reads:
A
taxpayer’s
income
or
loss
for
a
taxation
year
from
an
office,
employment,
business
property
or
other
source,
or
from
sources
in
a
particular
place,
is
the
taxpayers
income
or
loss
as
the
case
may
be....
Again,
the
appellant
correctly
asserts
that
a
taxpayer’s
income
from
a
business
is
the
profit
from
that
business
and,
in
accordance
with
generally
accepted
accounting
principles
(GAAP),
the
profit
comprises
the
revenues
earned
in
a
taxation
year
less
the
expenses
incurred
for
the
purpose
of
earning
such
revenues.
One
of
the
established
reductions
in
the
Act
is
non-capital
losses
and
it
is
widely
accepted
that
a
business
loss
is
a
noncapital
loss.
I
find
that
the
loss
on
the
sale
of
the
land
is
a
business
loss
because
the
land
is
an
item
of
inventory
in
the
hands
of
the
respondent.
At
this
juncture
I
will
address
the
appellant’s
contention
that
the
land
in
question
cannot
be
inventory.
Subsection
248(1)
of
the
Act
reads:
inventory
means
a
description
of
property
the
cost
or
value
of
which
is
relevant
in
computing
a
taxpayers
income
from
a
business
for
a
taxation
year....
The
appellant
claims
the
respondent
did
not
acquire
Fraseview
for
use
in
its
ordinary
course
of
business
and
therefore
the
land
that
rolled
over
to
the
respondent
under
subsection
88(1)
is
not
inventory
and
ought
not
to
form
a
part
of
the
computation
of
profit
from
that
business.
Furthermore,
since
the
respondent
never
intended
to
gain
or
produce
income
on
the
Fraserview
purchase
and
the
subsequent
sale
of
the
land,
and
knowing
that
the
whole
undertaking
had
no
reasonable
expectation
of
profit,
the
land
is
not
a
source
of
income
and
does
not
constitute
inventory
in
the
respondent’s
business.
To
simplify
these
claims,
I
consider
the
appellant
to
mean
that
the
loss
on
the
land
is
not
relevant
in
computing
the
respondent’s
income.
To
address
the
first
claim,
the
respondent
is
a
corporation
in
the
business
of
buying,
developing
and
selling
real
estate.
Consequently
the
respondent
reports
profits
or
losses
realized
from
this
activity
as
income
(or
loss)
for
tax
purposes.
Here
the
respondent
purchased
all
of
the
shares
of
Fraserview,
a
corporation
in
the
business
of
developing
and
selling
real
estate
that
claims
its
land
holdings
as
inventory.
There
is
no
dispute
that
the
parties
here
were
at
arm’s
length
and
that
the
price
paid
for
the
shares
was
at
fair
market
value.
I
emphasis
these
points
in
order
to
distinguish
this
situation
from
that
of
J.
Bert
MacDonald
and
Sons
Ltd.
v.
M.N.R.,
[1970]
C.T.C.
17,
70
D.T.C.
6032
(Ex.
Ct).
There
the
appellant
company
claimed
a
$3,000
per
acre
cost
of
acquiring
land
that
consisted
of
$1,000
per
acre
paid
in
cash
plus
a
gift
of
$2,000
per
acre
made
by
the
principal
shareholder.
The
fair
market
value
of
the
land
at
the
time
of
sale
was
$2,200
per
acre.
The
appellant
company
quickly
sold
the
land
for
$3,000
per
acre
and
claimed
no
profit
on
the
basis
that
the
cost
to
them
was
$3,000.
Thurlow
J.
found
that
the
appellant
did
not
acquire
land
in
the
course
of
trade
because
the
original
transaction
’’was
not
carried
out
in
the
same
way,
as
transactions
that
are
characteristic
of
ordinary
trading
in
land".
Specifically,
the
original
transaction
was
a
non-arm’s
length
transaction
that
established
an
acquisition
cost
of
the
land
at
cost
price
higher
then
the
fair
market
value
of
the
land
at
the
time.
Without
question,
the
acquisition
of
the
land
in
MacDonald
was
not
in
the
ordinary
course
of
trading
in
land.
However,
as
I
stated
above,
the
sale
of
all
the
shares
of
Fraserview
was
at
arm’s
length
and
in
a
manner
that
is
characteristic
of
an
ordinary
acquisition
of
corporations.
Consequently,
on
the
winding
up
of
Fraserview,
its
inventory
rolled
over
to
the
respondent’s
inventory.
Although
counsel
for
the
appellant
urged
this
Court
not
to
deem
the
rolled
over
property
as
inventory,
he
could
not
assist
the
Court
in
determining
how
this
land
should
be
defined
for
income
tax
purposes.
I
believe
that
the
land
did
roll
over
into
the
inventory
of
the
respondent.
Fraserview
was
in
the
business
of
developing
and
selling
land
and
the
land
in
question
was
a
part
of
its
inventory.
Upon
winding
up,
a
subsidiary
automatically
distributes
its
assets
to
its
parent
(subsection
88(1))
and
those
assets
should
be
grouped
with
assets
of
the
parent
of
the
same
character.
Here,
both
companies
are
in
the
same
business
and
consider
land
as
an
item
of
inventory.
Consequently,
on
the
winding
up
of
a
Fraserview,
its
inventory
should
have
merged
with
Mara’s
inventory
for
income
tax
purposes.
The
second
prong
of
the
appellant’s
argument
is
that
since
the
purpose
of
respondent’s
purchase
of
Fraserview
was
not
to
gain
or
produce
income
and
because
the
purchase
had
no
reasonable
expectation
of
profit,
the
land
did
not
create
a
source
of
income
and
it
therefore
cannot
constitute
inventory
in
the
respondent’s
business.
In
essence,
the
appellant’s
claim
that
the
sale
of
Fraserview
to
the
respondent
fails
to
meet
a
’’business
purpose
test".
This
leads
the
Court
to
another
question.
Is
it
relevant
that
the
taxpayer’s
sole
purpose
for
entering
the
transaction
was
to
obtain
a
tax
advantage?
The
following
quote
from
Wilson
J.’s
concurring
decision
in
Stubart
best
answers
this
question:
I
am
also
of
the
view
that
the
business
purpose
test
and
the
sham
test
are
two
distinct
tests.
A
transaction
may
be
effectual
and
not
in
any
sense
a
sham
(as
in
this
case)
but
may
have
no
business
purpose
other
than
the
tax
purpose.
The
question
then
is
whether
the
Minister
is
entitled
to
ignore
it
on
that
ground
alone.
If
he
is,
then
a
massive
inroad
is
made
into
Lord
Tomlin’s
dictum
that
’’Every
man
is
entitled
if
he
can
to
order
his
affairs
so
that
the
tax
attaching
under
the
appropriate
Acts
is
less
than
it
would
otherwise
be”
.I.R.C.
v.
Duke
of
Westminister,
[1936]
A.C.
1
at
page
19.
Indeed,
it
seems
to
me
that
the
business
purpose
test
is
a
complete
rejection
of
Lord
Tomlin’s
principle.
I
believe
this
quote
is
as
applicable
to
transactions
that
fall
within
Division
B,
as
it
is
to
transactions
that
fall
within
Division
C
of
the
Act.
Therefore,
I
find
that
subsection
9(1)
of
the
Act
does
not
block
the
inclusion
of
the
respondent’s
loss
on
the
sale
of
the
inventory
in
the
calculation
of
business
income.
Consequently,
I
see
no
need
to
comment
on
whether
subsection
88(1
)’s
"notwithstanding
clause"
overrides
the
operation
of
subsection
9(1).
Application
of
subsection
245(1)
The
appellant’s
alternative
argument
claims
that
the
trial
judge
erred
in
holding
that
subsection
245(1)
does
not
preclude
the
respondent
from
deducting
the
deemed
cost
of
the
land
in
calculating
its
income
from
business.
The
applicable
part
of
subsection
245(1)
reads:
245(1)
Artificial
transactions.-\n
computing
income
for
the
purposes
of
this
Act,
no
deduction
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
income.
In
my
view
the
trial
judge
was
correct
when
she
states
that
the
inherited
deemed
cost
amount
here
is
not
in
respect
of
a
"disbursement
or
expense
made
or
incurred".
Furthermore
I
agree
that
the
claimed
loss
on
the
sale
of
the
land
cannot
be
artificial
because
the
loss
is
the
product
of
a
statutory
deeming
provision
(subsection
88(1))
to
which
effect
must
be
given.
I
have
read
and
considered
with
interest
the
following
quote
from
C.ZR.
v.
Challenge
Corp.
(1986),
N.Z.T.C.
5219
(P.C.)
at
pages
5225-26
(and
cited
with
approval
in
Ensign
Tankers
(Leasing)
Ltd.
v.
Stokes
(H.M.I.T.),
[1992]
B.T.C.
110
(H.L.)
at
page
123):
Income
tax
is
mitigated
by
a
taxpayer
who
reduces
his
income
or
incurs
expenditures
in
circumstances
which
reduce
his
assessable
income
or
entitle
him
to
reduction
in
his
tax
liability....
Income
tax
is
avoided...when
a
taxpayer
reduces
his
liability
to
tax
without
involving
him
in
the
loss
or
expenditure
which
entitles
him
to
that
deduction.
The
taxpayer
engaged
in
tax
avoidance
does
not
reduce
his
income
or
suffer
a
loss
or
incur
expenditure
but
nevertheless
obtains
a
reduction
in
his
liability
to
tax
as
if
he
had.
I
believe
this
quote
should
be
read
in
conjunction
with
the
following
statement
by
Estey
J.
in
Stubart,
at
page
575
(C.T.C.
314-15):
Income
tax
legislation,
such
as
the
federal
Act
in
our
country,
is
no
longer
a
simple
device
to
raise
revenue
to
meet
the
cost
of
governing
the
community.
In
come
taxation
is
also
employed
by
government
to
attain
selected
economic
policy
objectives.
Thus,
the
statute
is
a
mix
of
fiscal
and
economic
policy.
The
economic
policy
element
of
the
Act
sometimes
takes
the
form
of
an
inducement
to
the
taxpayer
to
undertake
or
redirect
a
specific
activity.
Without
the
inducement
offered
by
the
statute,
the
activity
may
not
be
undertaken
by
the
taxpayer
for
whom
the
induced
action
would
otherwise
have
no
bona
fide
business
purpose.
Intention
of
Parliament
The
Supreme
Court
of
Canada
in
Bon-Secours
emphasized
the
need
for
courts
to
review
Parliament’s
intent
in
creating
and
amending
sections
of
the
Income
Tax
Act.
In
1971
the
Parliament
enacted
subsection
88(1)
which
deems
assets
of
a
liquidated
wholly-owned
subsidiary
corporation
to
be
sold
at
cost
and
acquired
by
the
parent
at
cost.
The
result
is
to
defer
any
gain
or
loss
on
those
assets
until
they
are
disposed
of
by
the
parent.
In
1981
Parliament
amended
the
Act
so
that
on
the
change
of
control
of
a
corporation
the
undepreciated
capital
cost
of
the
corporation’s
depreciable
property
was
reduced
to
one-half
of
the
fair
market
value
of
the
corporation’s
eligible
capital
property.
In
1987
Parliament
again
amended
the
Act
to
add
subsection
249(4)
and
Regulation
1801.
These
new
additions
effectively
compelled
recognition
of
accrued
losses
on
inventory
at
the
time
of
a
change
of
control.
These
1987
amendments
prevent
the
transfer
of
accrued
trading
losses
such
as
the
one
claimed
by
the
respondent
here.
For
convenience
and
simplicity
I
adopt
as
my
own
reasons
the
words
of
the
trial
judge
in
the
decision
below
at
page
11:
I
do
not
agree
that
the
1987
amendments
merely
clarified
what
was
otherwise
the
state
of
the
law
in
1982
as
argued
by
respondent’s
(appellant’s)
counsel.
They
go
much
farther
in
that
if
the
subject
transaction
had
occurred
thereafter
the
subsidiary’s
inventory
must
be
valued
at
fair
market
value.
Accordingly
after
1987,
accrued
and
unrealized
losses
on
inventory
could
not
pass
up
to
the
parent
on
wind
up
but
rather
remained
with
the
subsidiary.
The
1987
amendments
were
substantive.
They
went
beyond
mere
clarification
or
codification
of
the
existing
state
of
the
law
by
materially
changing
its
impact
on
the
subsidiary
and
on
the
parent.
These
were
known
as
the
new
stop
loss
or
anti-avoidance
rules
and
were
publicly
touted
to
preclude
the
results
of
the
very
situation
at
hand.
Conclusion
Subparagraph
88(
1
)(a)(iii)
of
the
Act
entitled
the
respondent
to
deduct
the
deemed
cost
amount
of
$7,577,175
respecting
the
land
from
its
proceeds
on
disposition
of
$3,022,970.
Such
a
result
is
not
repugnant
or
inconsistent
with
the
object
and
spirit
of
the
Act
as
a
whole
nor
with
Parliament’s
intent.
I
would
dismiss
this
appeal
with
costs.
Appeal
allowed.
Donna
Cardinal,
Dihla
Catherwood,
Shona
Chamberlin,
[Indexed
as:
Cardinal
(D.)
et
al.
v.
M.N.R.]
Federal
Court-Trial
Division
(Tremblay-Lamer
J.),
on
a
motion
to
certify
a
class
for
a
class
action
suit,
June
19,
1995
(Court
File
No.
T-1678-94).
Income
tax-Federal-Income
Tax
Act,
R.S.C.
1985,
c.
1
(5th
Supp)—Practice
The
case
involved
a
motion
to
certify
a
class
for
a
class
action
suit.
The
action
was
commenced
to
recover
taxes
paid
under
the
provisions
of
the
Income
Tax
Act
which
were
struck
down
by
the
Federal
Court
of
Appeal
in
Thibaudeau.
HELD:
The
decision
of
the
Supreme
Court
of
Canada
which
allowed
the
appeal
from
the
F.C.A.
decision
in
Thibaudeau
effectively
ended
the
litigation
between
the
parties.
Moreover,
the
alleged
class
no
longer
had
the
commonalities
alleged
because
of
the
decision
of
the
Supreme
Court.
Motion
dismissed.
E.F.
Anthony
Merchant
for
the
plaintiffs.
Mark
Kindrachuk
for
the
defendants.
Cases
referred
to:
Thibaudeau
v.
Canada.
[1995]
1
C.T.C.
382,
95
D.T.C.
5273
(S.C.C.);
rev’ing
[1994]
2
C.T.C.
4,
94
D.T.C.
6230
(F.C.A.);
[1992]
2
C.T.C.
2497,
92
D.T.C.
2098.
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