Birchcliff – Tax Court of Canada finds that using a diverted private placement to avoid an acquisition of control of a lossco was abusive – and that the private placement was an avoidance transaction notwithstanding its “overarching” non-tax purpose

A newly-launched public corporation ("Birchcliff") accessed the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Private placement investors were told that they would subscribe for subscription receipts for Veracel rather than Birchcliff common shares, which was not a problem to them because Veracel was to be amalgamated with Birchcliff, with the subscription proceeds applied to the properties’ purchase. As they got a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders got a modest preferred share interest in Amalco, which was redeemed for cash.

Hogan J found that although "the overarching purpose behind…the sale of subscription receipts by Veracel was to raise equity financing for the [properties’] acquisition, this does not provide a bona fide non-tax reason for having Veracel rather than Birchcliff issue the subscription receipts," so that such issuance was an avoidance transaction. This contrasts with a Spruce Credit Union approach, which would focus on the transaction’s primary non-tax purpose.

The transaction also was abusive under s. 245(4) as "Parliament did not want amalgamations and reverse takeovers being used as techniques to avoid an acquisition of control in situations where the original Lossco shareholders do not collectively receive shares representing a Majority Voting Interest in the combined enterprise."

The Crown unsuccessfully argued that the new investors’ transitory majority share ownership of Veracel was a "sham" notwithstanding this step occurred under a Plan of Arrangement (albeit, in Alberta), and that their collective participation in the transactions (including giving proxies to two officers) constituted them as a "group of persons."

Neal Armstrong. Summaries of Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232 under s. 245(4), s. 245(3), s. 111(5)(a) and General Concepts – sham.