Wagner - Tax Court finds parties did not deal at arm's length because they worked together to share a tax benefit

The three shareholders of a corporation, which had entered into an asset sale agreement, then arranged to restructure the agreement as a share sale in which a substantial portion of the aggregate consideration was paid to them individually as a non-compete payment (which, given that draft s. 56.4 had not yet been introduced, they expected to receive free of tax).  They paid a share of their targeted tax savings to the purchaser.

Favreau J. found that the parties' allocation agreement was not an arm's length transaction, because they were "working together and had a common interest, that is, that of minimizing as much as possible the tax consequences of the transaction and to divide among them the tax saving on the projected income."  All the amounts the vendors received were share sale proceeds, and they got no deduction as a disposition expense for their payment of some of the targeted tax savings.

This case illustrates that purchase price allocations will be given scant weight if they are unreasonable and the parties were not adverse in interest with respect to the allocation.

Neal Armstrong.  Summaries of Wagner v. The Queen, 2012 TCC 8 at s. 68 and s. 251(1)(c).