Citation: 2016 TCC 288
Date: 20161215
Docket: 2013-4033(IT)G
BETWEEN:
594710
BRITISH COLUMBIA LTD.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
Rossiter C.J.
[1]
This case concerns a tax plan allegedly straddling
the line between astute and abusive tax avoidance.
[2]
This tax plan involved a host of players. At the
bottom was a partnership engaged in the business of real estate. The
partnership had four corporate limited partners and one general partner. Each limited
partner was wholly owned by a different holding corporation. The holding
corporations in turn were wholly owned, each by a different member of the De
Cotiis family. The Appellant is one of these holding corporations.
[3]
In the absence of any planning, the
partnership’s income would have been allocated to its corporate partners, who
would have paid tax thereon. Instead, the plan allowed the cash from the partnership
to be extracted tax-free to the holding corporations, while for tax purposes
the partnership’s income was allocated almost entirely to an arm’s length
corporation. This arm’s length corporation had accumulated losses and resource
expenses sufficient to reduce the tax payable on that income.
[4]
In deciding the outcome of this case, I have to
determine the correctness of two applications by the Minister of the general anti-avoidance
rule (“GAAR”), contained in section 245 of the Income Tax Act (“the Act”). The first application occurred
at the limited partner level, where the Minister applied the GAAR on the basis
that the tax plan abused a general policy in the Act against “reverse
loss trading” or “reverse resource deduction trading”. As a result, the
Minister allocated the partnership income back to the limited partners. On the
basis of the consequent tax debt arising in the hands of the limited partners,
the Minister applied the GAAR at the holding corporation level, reassessing the
Appellant under the GAAR on the basis that the Appellant circumvented and
abused section 160 of the Act, which, had it applied, would have caused
the Appellant to be jointly and severally liable for the tax debt of its wholly
owned subsidiary (who was a limited partner). As a result, the Minister applied
the GAAR to hold the Appellant so liable under section 160 of the Act.
[5]
The Appellant’s tax liability under its GAAR
reassessment is predicated on the GAAR having been applied correctly in the reassessment
of the limited partner, of which it was the owner. The correctness of both
reassessments is at issue. The Respondent must win on both in order for the
appeal to be dismissed.
[6]
For the reasons that follow, I would allow the
appeal and vacate the assessment of the Appellant.
[7]
The parties filed an Agreed Statement of Facts
on April 28, 2016, which was supplemented during the course of the trial by
brief viva voce evidence and a few discovery read-ins.
[8]
Onni Halifax Development Limited Partnership (“HLP”)
was a limited partnership created on July 16, 2003, to carry out a strata
development project called the Marquis Grande.
[9]
The Marquis Grande was a project of the Onni Group,
a group of companies in business of real estate development. The principals of
the Onni Group are the four De Cotiis siblings and their father. One of the siblings,
Rossano De Cotiis, wholly owned the Appellant, a Canadian-controlled private
corporation (“CCPC”) incorporated in 1999. The Appellant in turn wholly owned
671705 British Columbia Ltd., incorporated on June 17, 2003. 671705 British
Columbia Ltd. held a 24.975 percent limited partnership interest in HLP,
entitling it to a corresponding percent of HLP’s income or loss. It had three
other limited partners, each indirectly owned by another sibling using an
analogous ownership structure to Rossano’s. The sole business of each of the
partner corporations was participation in HLP.
[10]
The general partner of HLP was Onni Development
(Halifax) Corp (“GPCo”). GPCo was wholly owned by Rossano and held a 0.1 percent
general partnership interest in HLP.
[11]
In summary, there were four separate limited
partners, each owning a 24.975 percent limited partnership interest in HLP. “Partnercos”
in the plural refers to these limited partners collectively, while “Partnerco”
in the singular refers to 671705 British Columbia Ltd. Each of the Partnercos
was wholly owned by a separate holding corporation, one of which was the
Appellant. “Holdcos” in the plural refers to these holding corporations collectively.
The ownership structure may be described as follows:
|
Ownership structure
|
|
Individual owners
|
Sibling 1
↓
|
Sibling 2
↓
|
Sibling 3
↓
|
Sibling 4
↓
|
|
Holding corporations (“Holdcos”)
|
594710 BC Ltd. (Appellant)
↓
|
↓
|
594702 BC Ltd
↓
|
594705 BC Ltd
↓
|
594708 BC Ltd
↓
|
|
Partner corporations
(“Partnercos”)
|
671705 BC Ltd. (Partnerco)
 ↓
|
GPCo
↓
Onni Deal
|
671711 BC Ltd
↓
|
671709 BC Ltd
↓
|
671706 BC Ltd
↓
|
|
Limited partnership
|
HLP
|
[12]
0757588 B.C. Ltd. (“Onni Newco”) was
incorporated on May 12, 2006 and its shares were held equally by the Holdcos.
[13]
Nuinsco Resources Limited (“Nuinsco”) is a
Canadian public corporation that eventually purchased all the shares of the Partnercos.
Nuinsco’s business was mining. The parties are agreed that it dealt at arm’s
length with the Holdcos at all material times. At the beginning of its taxation
year ending December 31, 2006, Nuinsco had non-capital losses of approximately
$3.4 million and resource‑related deductions of approximately $18.85
million available from prior taxation years. Nuinsco’s resource-related deductions
were from Canadian exploration expenses (“CEE”) and Canadian development
expenses (“CDE”). During its 2006 taxation year, Nuinsco incurred additional
CEE of $3.6 million. These amounts are collectively referred to as the “tax
pools”.
[14]
The fiscal year ends of the entities involved
were as follows:
Holdcos December
31
Partnercos April
30
HLP May
31
Nuinsco December
31
[15]
As of May 25, 2006, six of the strata units
developed in the Marquis Grande remained unsold. HLP’s income for the 2006
fiscal period as of May 25, 2006 was projected to be $12,999,076. These
projections were made up of accrued income of $12,136,180, plus projected
income of at least $863,546 from the sale of six remaining units. If this
income was allocated directly to the Partnercos at HLP’s fiscal year end, then
each Partnerco would have realized $3,246,694 of income, resulting in tax
payable of $1,107,772. In other words, net of tax, each Partnerco would have received
$2,138,922.
[16]
Instead, the following transactions were
undertaken:
Step 1: On May 25, 2006 the Appellant subscribed for ten additional common
shares of Partnerco for $15,391, paid for by set-off against a debt owed by
Partnerco to the Appellant.
Additional common shares issued in payment of debt
owing $15,931
But for the application of the GAAR, the tax
consequence arising from the capitalization of the $15,931 debt owing by Partnerco
to the Appellant would have been to increase the ACB of the common shares held
by the Appellant in Partnerco by $15,931.
Step 2: On May 25, 2006, HLP lent $2,118,510 in cash to each Partnerco
(the “Partnerco Loan”). The four Partnerco Loans totalled $8,474,040.
Step 3: Partnerco declared and paid a series of sequential stock dividends
to the Appellant, totalling 2,118,510 Class A Preferred Shares to the
Appellant, each with paid-up capital and redemption amount of $1.00 per share (the
“First Stock Dividend”).
The aggregate
amount of the First Stock Dividend ($2,118,510) represented the estimated
after-tax value of the issued shares of Partnerco and was approximately equal
to Partnerco’s after-tax share of HLP’s projected income.
The parties agree that
the Partnerco Loan was made before the First Stock Dividend was issued. The parties also agree that at
the time the assessment of the Appellant, the Minister accepted that the fair
market value of the First Stock Dividend was $2,118,510, which was equivalent
to the estimated fair market value of the issued common shares of each
Partnerco as of May 25, 2006.
Before After
p/s c/s p/s
But for the
application of the GAAR, the tax consequences arising
on the payment of the First Stock Dividend were as follows:
a) the
issuance of Class A Preferred Shares resulted in a dividend to the Appellant of
$2,118,510;
b) the amount
of the dividend was includable in the taxable income of the Appellant, but also
deductible in computing taxable income as an intercorporate dividend;
c) the
Appellant was deemed to have acquired the Class A Preferred Shares at an ACB of
$2,118,510.
Step 4: On
May 25, 2006 Partnerco used the proceeds from the Partnerco Loan to redeem the Class
A Preferred Shares issued in the First Stock Dividend for $2,118,510.
Before After
Redemption of 2,118,510
Class A shares by payment of
$2,118,510
c/s
p/s c/s
Loan of $2,118,510
But for the application of GAAR, the tax
consequences of redemption of the Class A Preferred shares were as follows:
a) there was
no deemed dividend received by the Appellant;
b) the
Appellant disposed of its Class A Preferred shares with ACB of $2,118,510 for
proceeds of disposition of $2,118,510, resulting in no gain or loss.
Step
5: The following additional transactions
were undertaken:
a) On
May 25, 2006, Onni Development loaned $3,051,400 to HLP (the “ODC Loan”). The
unsold strata units held by HLP were provided as security for the ODC Loan.
b) On
May 25, 2006, HLP entered into a management agreement with Onni Property
Management, a member of the Onni Group, under which Onni Property Management would
provide certain marketing and management services to HLP relating to, inter
alia, the sale of the unsold strata units and remedial work.
c) On May 29, 2006, HLP entered into a Put Agreement (the “Put
Agreement”) with Onni Newco, under which HLP acquired an option to sell its
remaining inventory of strata units to Onni Newco at an aggregate price of
$3,051,400.
Step
6: On May 26, 2006, Partnerco declared a
stock dividend to the Appellant, paid by issuing 851,863 Class A Preferred
Shares with aggregate paid-up capital and a redemption amount of $851,863 (the
“Second Stock Dividend”).
Similar to the
issuance of the First Stock Dividend, the tax consequences but for the
application of the GAAR were as follows:
a) the issuance of the Second Stock Dividend resulted in a
dividend to the Appellant of $851,863. This amount was includable in the income
of the Appellant, but also deductible in computing taxable income as an intercorporate
dividend;
b) the Appellant was deemed to have acquired the Class A
Preferred Shares at an ACB of $851,863.
Step
7: The Nuinsco Acquisition
On May 29, 2006, each
Holdco (including the Appellant) sold all of the shares of its respective
Partnerco to Nuinsco (the “Nuinsco Acquisition”). In particular, each Holdco
sold its Class A Preferred Shares received from the Second Stock Dividend for
$851,863 and the common shares of its Partnerco for $15,391. Concurrently, Nuinsco
acquired all of the shares of GPco for $1.
The aggregate cost to
Nuinsco of the share purchases was $3,469,017.
Step 8: At the
time of the Nuinsco Acquisition, Halifax LP had cash on hand of $4,443,957. On
May 29, 2006, HLP agreed to loan this amount to Nuinsco, and on May 30, 2006,
advanced such amount (the “Nuinsco Loan”).
At all material times,
Nuinsco was not related to, and dealt at arm’s length with, the Holdcos for the
purposes of the Act.
Before After
$851,863
+ $15,391
Sale of
common and Class A
Preferred Shares
$4,443,397 cash on hand $4,443,397
cash on hand
6 strata units 6
strata units
But for the application of the
GAAR, the following tax consequences arose:
a) The Appellant
realized proceeds of $851,863 for its Class A Preferred Shares of Partnerco and
proceeds of $15,931 for its common shares of Partnerco, but no gain or loss was
realized since the ACB equaled the proceeds of disposition for both classes of
shares;
b) There was an
acquisition of control of Partnerco by Nuinsco on May 29, 2006 such that
Partnerco had a deemed year end on May 28, 2006; and,
c) No
income from HLP was allocable to Partnerco for its taxation year now ending May
28, 2006.
Step 9: On
May 30, 2006, each Partnerco was wound up into Nuinsco. Consequently, Nuinsco
assumed the liabilities of each Partnerco and was admitted as the sole limited
partner of HLP. Nuinsco’s indebtedness to HLP totalled $12,917,997.
Step 10: On
May 31, 2006, HLP allocated its net income of $12,136,180 to Nuinsco and GPCo
in accordance with their partnership interests.
But for the application
of GAAR, the tax consequences would be as follows:
a) $12,124,045 or 99.9% would be
allocated to Nuinsco;
b) Nuinsco would be entitled to
deduct CEE of $9,198,443 when determining income and also entitled to deduct
available non-capital losses of $3,398,699 when computing taxable income for its
2006 year.
c) $12,136 or 0.1% would be
allocated to GPCo.
a) May 30 Wind up of Partnercos into Nuinsco
99.9%
b)
May 31 Nuinsco is
allocated
HLP income:
$12,124,045 (99.9% of $12,136,180)
Step 11: On June
1, 2006 each Partnerco was dissolved.
Step 12: On June 1, 2006, HLP declared distributions to Nuinsco and GPCo as
follows:
•
$12,041,997
was distributed to Nuinsco, satisfied by set-off against the debt owing by
Nuinsco to HLP, which would reduce the debt to $876,000; and,
•
$12,054
was distributed to GPCo, satisfied by assigning a portion of Nuinsco’s indebtedness
to GPCo (this would further reduce Nuinsco’s indebtedness to HLP to $863,946)
Step 13: Between June 14 and 16, 2006, HLP sold its remaining six units by
transferring one unit to an arm’s length purchaser and exercising its option to
sell the other five units to Onni Newco. Consequently, HLP realized net income
of $863,546, as projected, in its fiscal year starting June 1, 2006.
HLP allocated the
net income of $863,546 to Nuinsco and GPCo in accordance with their partnership
interests (99.9% to Nuinsco and 0.1% to GPCo).
Step 14: On June 26, 2006, HLP declared the following distributions:
•
$400
to Nuinsco as a return of capital contribution
•
$862,683
to Nuinsco, satisfied by set-off against Nuinsco’s indebtedness to the HLP
•
$863
to GPCo, satisfied by assigning to GPCo Nuinsco’s indebtedness to HLP.
The result of these
distributions was to reduce Nuinsco’s debt to HLP to nil, and to increase Nuinsco’s
debt to GPCo to $12,917.
Step 15: On June 28, 2006, GPCo declared a dividend to Nuinsco of $8,483,
paid by set-off against Nuinsco’s debt of $12,917. The remaining $4,434 owed to
GPCo represented GPCo’s estimated tax liability on its 0.1% share of the HLP
income.
Step 16: On June 28, 2006, HLP
was dissolved.
[17]
The Minister assumed that these transactions
formed a pre-ordained series of transactions. Additionally, the Minister
assumed that all of the aforementioned steps were avoidance transactions. The parties agree that the
following steps formed a series of transactions for the purposes of the GAAR:
steps 1, 2, 3, 4, 5a, 5b, 5c, 6, 7, 8, 9, 10, 11, the exercise of the Put
Agreement and the allocation of HLP’s income from the sale of its remaining
inventory in step 13, 14, and 16.
[18]
Evidence was given by Mr. Les Fovenyi, the current
Chief Operating Officer of the Onni Group, in relation to the strategies of the
Onni Group before 2000 and after 2011, those being the periods of time during
which he was involved with the Onni Group. He was not employed by the Onni
Group during the period of time during which the transactions occurred.
[19]
Based on his testimony and supporting
documentary evidence, it appears that the limited partnership structure was
adopted from the beginning and throughout the years in question for several
reasons:
A. The use of a corporation instead of a partnership in the past was
problematic because dissenting shareholders could cause severe financial problems;
B. There was a desire to mitigate the risk as to which parties would
participate in which project;
C. A general Partnerco could exercise a fair degree of control over the
development and ensure the project was finished.
D. There were nuances put into the limited partnership agreement, since
the partners were family. There was a provision regarding excess capital, whereby
any partner who refused to put up additional capital that might be required for
a project, agreed to allow other partners to contribute that capital for them
and to earn a 20 percent return on that excess capital injection. There was a
provision prohibiting any partner from placing any lien on the project at any
time for any reason prior to its completion.
E. The individual principals held shares of the Partnercos through a
holding corporation to mitigate risk, since the principals were very hands-on
throughout their participation in various development projects.
F. Capital preservation, financing, and flexibility was important. There
were multiple risks involved in projects, from market risk to financing risk,
so there was a need for a structure known in secondary lending markets in case
capital needed to be raised quickly.
[20]
As the Appellant has sought to argue that both
the reassessment of Partnerco and the assessment of the Appellant were
statute-barred, I will set out the facts relating to both reassessments.
[21]
The parties agree that there was an acquisition
of control of Partnerco by Nuinsco on May 29, 2006. But for the application of the
GAAR, Partnerco would have had a shortened taxation year from May 1, 2006 to
May 28, 2006 (the “Initial Period”) pursuant to subsection 249(4) of the Act.
[22]
Partnerco duly filed a tax return for the
Initial Period, reporting no income. The Minister initially assessed this
fiscal period on December 21, 2006. The parties agree that, but for the
application of GAAR, the normal reassessment period for this fiscal period
expired on December 21, 2009.
[23]
As Partnerco was dissolved on June 1, 2006, a
tax return was also filed for the period from May 29, 2006 to June 1, 2006 (the
“Second Period”), in which no income was reported. The Minister initially assessed
this fiscal period on February 27, 2007.
[24]
Throughout the Second Period, Partnerco was no
longer a CCPC, as it was owned by Nuinsco, a public corporation.
[25]
The Minister reassessed Partnerco on February
23, 2011 (the “Partnerco Reassessment”). In it, the Minister applied GAAR to
include what would have been Partnerco’s share of HLP’s income had the tax plan
not been carried out. This income inclusion totalled $3,246,694. This income
was included for a notional taxation period purporting to span from May 1, 2006
to June 1, 2006.
[26]
In its tax return for the year ending December
31, 2006, the Appellant reported nil income from the First and Second Stock
Dividends and from the disposition of its shares of Partnerco to Nuinsco.
[27]
The Appellant was initially assessed on August
15, 2007. Consequently, the normal reassessment period expired on August 15,
2010.
[28]
On August 3, 2010, the Appellant filed a waiver
of the normal reassessment period pursuant to subparagraph 152(4)(a)(ii) of the
Act.
[29]
On November 7, 2011, the Appellant filed a
notice of revocation of waiver, and the Minister acknowledged receipt of such
notice on November 14, 2011. Pursuant to subsection 152(4.1) of the Act,
the revocation became effective on May 7, 2012.
[30]
The Minister assessed the Appellant again on
July 11, 2013 (the “Holdco Assessment”). It is this assessment that is under
appeal. In it, the Minister applied GAAR on the basis that the Appellant abused
section 160 of the Act. In the result, section 160 was applied to the
Appellant to hold it jointly and severally liable for Partnerco’s
tax debt under the Partnerco Reassessment. The Appellant’s Reassessment
assessed an aggregate amount of $1,801,406.62 of tax, interest, and penalties.
[31]
The Appellant filed a Notice of Objection on
July 23, 2013. The Appellant was a large corporation during its 2006 taxation
year.
[32]
The issues that I must decide are:
•
Whether
the Appellant’s failure to raise the issue of the validity of the Partnerco
Reassessment or the Holdco Assessment in its Notice of Objection precludes it
from raising this issue before the Court;
•
If
not, whether the Partnerco Reassessment or the Holdco Assessment is
statute-barred;
•
Whether
the GAAR was applied properly in the Partnerco Reassessment to include $3,246,694
in Partnerco’s income; and,
•
If
so, whether the GAAR was applied properly in the Holdco Assessment to cause the
Appellant to be liable under subsection 160(1) for Partnerco’s tax liability.
[33]
If the Appellant wins on any of the last three issues, the appeal must be allowed
and the Holdco Assessment vacated.
[34]
The Appellant has raised the question of whether
the Partnerco and Holdco assessments were issued outside the normal
reassessment period for their respective taxpayers. If so, the Appellant
submits that they would be void absent compliance with subsection 152(4).
[35]
The Respondent has objected to the Appellant’s raising
this argument on the basis that it did not form part of the issues raised in
its Notice of Objection. As the issue in question was not provided for in the
manner stipulated by subsection 165(1.11) of the Act, the Appellant is alleged
to be precluded from raising on appeal whether the reassessments were
statute-barred, pursuant to subsection 169(2.1).
[36]
The relevant provisions of the Act read
as follows:
Assessment and reassessment
152(4) The
Minister may at any time make an assessment, reassessment or additional
assessment of tax for a taxation year, interest or penalties, if any, payable
under this Part by a taxpayer or notify in writing any person by whom a return
of income for a taxation year has been filed that no tax is payable for the
year, except that an assessment, reassessment or additional assessment may be
made after the taxpayer’s normal reassessment period in respect of the year
only if
(a) the taxpayer
or person filing the return
(i) has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing the return or in supplying any
information under this Act, or
(ii) has filed
with the Minister a waiver in prescribed form within the normal reassessment
period for the taxpayer in respect of the year; or
(b) the
assessment, reassessment or additional assessment is made before the day that
is 3 years after the end of the normal reassessment period for the taxpayer in
respect of the year and
(i) is required pursuant
to subsection (6) or would be so required if the taxpayer had claimed an amount
by filing the prescribed form referred to in that subsection on or before the
day referred to therein,
(ii) is made as
a consequence of the assessment or reassessment pursuant to this paragraph or
subsection (6) of tax payable by another taxpayer,
(iii) is made as
a consequence of a transaction involving the taxpayer and a non-resident person
with whom the taxpayer was not dealing at arm’s length,
(iii.1) is made,
if the taxpayer is non-resident and carries on a business in Canada, as a
consequence of
(A) an
allocation by the taxpayer of revenues or expenses as amounts in respect of the
Canadian business (other than revenues and expenses that relate solely to the
Canadian business, that are recorded in the books of account of the Canadian
business, and the documentation in support of which is kept in Canada), or
(B) a notional
transaction between the taxpayer and its Canadian business, where the
transaction is recognized for the purposes of the computation of an amount
under this Act or an applicable tax treaty.
(iv) is made as
a consequence of a payment or reimbursement of any income or profits tax to or
by the government of a country other than Canada or a government of a state,
province or other political subdivision of any such country,
(v) is made as a
consequence of a reduction under subsection 66(12.73) of an amount purported to
be renounced under section 66, or
(vi) is made in
order to give effect to the application of subsection 118.1(15) or (16).
…
Objections by large corporations
165(1.11)
Where a corporation that was a large corporation in a taxation year (within the
meaning assigned by subsection 225.1(8)) objects to an assessment under this
Part for the year, the notice of objection shall
(a) reasonably describe each issue to be
decided;
(b) specify in respect of each issue, the
relief sought, expressed as the amount of a change in a balance (within the
meaning assigned by subsection 152(4.4)) or a balance of undeducted outlays,
expenses or other amounts of the corporation; and
(c) provide facts and reasons relied on by
the corporation in respect of each issue.
…
Limitation on appeals by large
corporations
169(2.1)
Notwithstanding subsections (1) and (2), where a corporation that was a large
corporation in a taxation year (within the meaning assigned by subsection
225.1(8)) served a notice of objection to an assessment under this Part for the
year, the corporation may appeal to the Tax Court of Canada to have the
assessment vacated or varied only with respect to
(a) an issue in respect of which the
corporation has complied with subsection 165(1.11) in the notice, or
(b) an issue described in subsection
165(1.14) where the corporation did not, because of subsection 165(7), serve a
notice of objection to the assessment that gave rise to the issue
and, in the case of an issue described in
paragraph (a), the corporation may so appeal only with respect to the relief
sought in respect of the issue as specified by the corporation in the notice.
[37]
In Blackburn Radio and in Canadian
Marconi
the FCA confirms that an out of time assessment is void. Section 169.1 is only
aimed at precluding the TCC from doing anything but vacating or varying an
assessment or reassessment. The TCC cannot vary or vacate an assessment or
reassessment if it is void because it is void from the beginning and does not
exist – the assessment or reassessment is simply not given effect.
[38]
Also subsection 152(8) does not apply to an out
of time assessment as per Lornport Investments.
[39]
The Appellant would contend that the Partnerco
reassessment is statute‑barred. The issue is a relatively
straight-forward matter of statutory interpretation and its application to the
facts.
[40]
The Appellant’s position on this issue is that
subsection 152(4) limits the Minister’s power to raise a reassessment “after
the taxpayer’s normal reassessment period in respect of the year”. The
Appellant submits that the Partnerco reassessment is in respect of Partnerco’s
two taxation periods up to June 1, 2006. While the Appellant’s arguments seek
to interpret the phrase “in respect of” so as to show that the Partnerco
reassessment is in respect of the Initial Period, this approaches the question
without the full context of subsection 152(4).
[41]
Subsection 152(4) reads as follows:
Assessment and reassessment
(4) The Minister may at any time make an
assessment, reassessment or additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a taxpayer or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s normal
reassessment period in respect of the year only if
(a) the taxpayer
or person filing the return
(i) has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing the return or in supplying any
information under this Act, or
(ii) has filed
with the Minister a waiver in prescribed form within the normal reassessment
period for the taxpayer in respect of the year; or
(b) the
assessment, reassessment or additional assessment is made before the day that
is 3 years after the end of the normal reassessment period for the taxpayer in
respect of the year and
(i) is required pursuant
to subsection (6) or would be so required if the taxpayer had claimed an amount
by filing the prescribed form referred to in that subsection on or before the
day referred to therein,
(ii) is made as
a consequence of the assessment or reassessment pursuant to this paragraph or
subsection (6) of tax payable by another taxpayer,
(iii) is made as
a consequence of a transaction involving the taxpayer and a non-resident person
with whom the taxpayer was not dealing at arm’s length,
(iii.1) is made,
if the taxpayer is non-resident and carries on a business in Canada, as a
consequence of
(A) an
allocation by the taxpayer of revenues or expenses as amounts in respect of the
Canadian business (other than revenues and expenses that relate solely to the
Canadian business, that are recorded in the books of account of the Canadian
business, and the documentation in support of which is kept in Canada), or
(B) a notional
transaction between the taxpayer and its Canadian business, where the
transaction is recognized for the purposes of the computation of an amount
under this Act or an applicable tax treaty.
(iv) is made as
a consequence of a payment or reimbursement of any income or profits tax to or
by the government of a country other than Canada or a government of a state,
province or other political subdivision of any such country,
(v) is made as a
consequence of a reduction under subsection 66(12.73) of an amount purported to
be renounced under section 66, or
(vi) is made in order to give effect to
the application of subsection 118.1(15) or (16).
[42]
The numerous references to "the year"
in this provision all refer to the same year; specifically, "the
year" takes its meaning from the beginning of the subsection, which refers
to the "taxation year" for which the Minister may otherwise "at
any time make an assessment, reassessment […, etc.]". Thus, when the
subsection refers to a “year” in respect of which the Minister may be precluded
from assessing after the normal reassessment period, it is referring to this
taxation year (in our case, the Partnerco taxation year ending June 1, 2006).
[43]
The question then becomes whether the Partnerco
reassessment is also a reassessment for the Initial Period. The language “in
respect of” may only be of use to the Appellant if it is first demonstrated
that the Partnerco reassessment amounts to a reassessment of both the Initial Period
and the Notional Period.
[44]
The Partnerco reassessment is unquestionably a
reassessment for Partnerco’s taxation year ending June 1, 2006. In invoking the
GAAR to determine the tax consequences to Partnerco as if that taxation year
had begun on May 1, 2006, was the Minister assessing for a different taxation
year than that assessed on February 27, 2007?
[45]
The Partnerco reassessment is a reassessment for
the taxation year ending June 1, 2006, and this is not altered by the fact that
the Minister has reassessed Partnerco to include the tax consequences of
transactions that would have otherwise fallen outside of the taxation year.
[46]
The Partnerco reassessment is not a reassessment
of Partnerco’s taxation year ending May 28, 2006. As a result, the issuance of
the Partnerco reassessment, if it is a reassessment for the year ending June 1,
2006, and not an additional assessment, nullifies the assessment dated February
27, 2007.
It does not have the effect of nullifying the assessment of Partnerco made
December 21, 2006, for the taxation year ending May 28, 2006. As there was no
income declared by Partnerco in that period, it is not necessary to consider
how the Minister ought to take into account taxes owing under another
assessment in determining the reasonable tax consequences of a proper GAAR
reassessment.
[47]
I would have therefore concluded that the
Partnerco reassessment was valid and timely.
[48]
The Appellant also contends that the Holdco
Assessment was a reassessment of its 2006 taxation year and not an assessment
under section 160. As such, the Appellant submits that it was issued outside of
the normal reassessment period, which it submits is contained in section 152.
For reasons elaborated in the next section, I find this argument linked to the
“stacking” of GAAR assessments on top of each other, and I deal with it below.
[49]
The Appellant has submitted that the
reassessment made of it is invalid for several additional reasons. Among other
reasons, it has submitted that it cannot be assessed for liability under GAAR
as a consequence of an amount of tax owing due to the invocation of the GAAR
against another taxpayer.
[50]
More specifically, the Appellant points to the
wording of subsection 245(2) of the Act, noting that the tax
consequences to be determined as a result of its operation should deny a tax
benefit that, “but for this section, would result, directly or indirectly, from
that [avoidance] transaction or from a series of transactions that includes
that transaction.” The Appellant is of the view that this mandates the Court to
apply the GAAR to it in a manner that ignores the application of section 245 to
Partnerco (or, presumably, any other taxpayer).
[51]
I disagree. The Appellant overlooks the fact
that the Minister is to assess or reassess each taxpayer separately under the Act,
even related parties. While the Minister cannot stack GAAR assessments with
respect to the same taxpayer, the Appellant’s interpretation would require the
Court to take notice of how the Act applies to a third party to the
proceeding in interpreting how the Act applies to the taxpayer before
the Court without any explicit mandate to do so. Simply because the Appellant
is entitled in this derivative liability assessment to contest the validity of
the Partnerco reassessment does not mean that the Appellant is thereby entitled
to conflate the two assessments in interpreting the Act.
[52]
The Supreme Court of Canada, in Copthorne,
identified the framework through which the GAAR should be applied, as follows:
72 The
analysis will then lead to a finding of abusive tax avoidance: (1) where
the transaction achieves an outcome the statutory provision was intended to
prevent; (2) where the transaction defeats the underlying rationale of the
provision; or (3) where the transaction circumvents the provision in a manner
that frustrates or defeats its object, spirit or purpose (Trustco, at
para. 45; Lipson, at para. 40). These considerations are not
independent of one another and may overlap. At this stage, the Minister must
clearly demonstrate that the transaction is an abuse of the Act, and the
benefit of the doubt is given to the taxpayer.
[53]
The question is therefore whether, read without
reference to subsection 245(2) of the Act, there would be a tax benefit
accruing to the Appellant as a result of an avoidance transaction or as a
result of a series of transactions of which an avoidance transaction is part.
The Appellant’s interpretation could result in the Minister being unable to
prevent abusive tax avoidance so long as it is subsidiary to and arising out of
another abusive tax avoidance transaction.
[54]
The phrase “but for this section” contained in
section 245 provides that the assessment of any tax benefit is done without
factoring in the automatic application of subsection 245(2). This avoids the
internal contradiction that would otherwise arise.
[55]
Furthermore, I accept that the tax consequences
of the application of the GAAR to the Appellant may only be determined through
the methods cited in subsection 245(7) of the Act. One of them can
conceivably be an assessment under subsection 160(2) of the Act. By
invoking the GAAR, the Minister is able to ensure that the Appellant is
rendered liable under subsection 160(1) for the tax debt of Partnerco as part
of the reasonable tax consequences designed to prevent the abusive tax
avoidance in question. Following the recognition of this liability, the
Minister may properly assess the Appellant under subsection 160(2). This is
what the Minister did in this case.
[56]
One of the most recent concise summaries of the
applicable principles involving the GAAR is contained in the decision of the
Ontario Court of Appeal in Inter-Leasing:
49 For the GAAR to apply, there must be:
(1) a tax
benefit resulting from a transaction or part of a series of transactions;
(2) an
avoidance transaction in the sense that the transaction cannot be said to have
been reasonably undertaken or arranged primarily for a bona fide purpose
other than to obtain a tax benefit and
(3) abusive
tax avoidance in the sense that it cannot be reasonably concluded that a tax
benefit would be consistent with the object, spirit or purpose of the
provisions relied on by the taxpayer.
50 The onus is on the Respondent to establish
that the tax avoidance was abusive. If the existence of abusive tax avoidance
is unclear, the benefit of the doubt goes to the taxpayer.
51 As explained at para. 66 of Canada
Trustco, courts must apply a purposive approach in interpreting the
provisions giving rise to the tax benefit:
4. The
courts proceed by conducting a unified textual, contextual and purposive
analysis of the provisions giving rise to the tax benefit in order to determine
why they were put in place and why the benefit was conferred. The goal is to
arrive at a purposive interpretation that is harmonious with the provisions of
the Act that confer the tax benefit, read in the context of the whole Act.
52 After the object, spirit or purpose of a
section is determined, a transaction may be found to be abusive in one of three
ways described in Lipson, at para. 40:
where the result of the avoidance
transaction (a) is an outcome that the provisions relied on seek to prevent;
(b) defeats the underlying rationale of the provisions relied on; or (c)
circumvents certain provisions in a manner that frustrates the object, spirit
or purpose of those provisions. [Citations omitted.]
[57]
In Canada Trustco, McLachlin C.J. and
Major J. emphasized that the GAAR is to be used as a provision of last resort. Since non-tax purposes to a
transaction may exist in what may otherwise appear to be an avoidance transaction,
the Court must weigh the totality of the evidence with a
view to making an objective finding of which purposes were primary based on the
reasonableness of that evidence. The mere assertion however by the taxpayer
that non-tax purposes were of primary concern is insufficient to discharge the evidentiary
burden on that taxpayer.
[58]
As held by the Supreme Court in Copthorne,
“it is necessary to determine if there was a series, which transactions make up
the series, and whether the tax benefit resulted from the series” if the
Minister assumes that the tax benefit resulted from a series of transactions. A series of transactions
resulting in a tax benefit “will be caught by s. 245(3) unless each transaction
within the series could ‘reasonably be considered to have been undertaken or
arranged primarily for bona fide purposes other than to obtain
[a] tax benefit’. If any transaction within the series is not undertaken
primarily for a bona fide non-tax purpose, that transaction will
be an avoidance transaction.”
[59]
In Triad Gestco TCC, the taxpayer, which was
directed and controlled by one Mr. Cohen and which had realized a capital gain
of approximately $8 million, transferred $8 million of assets to a
newly-incorporated subsidiary in consideration for the issuance of common
shares. This subsidiary declared a stock dividend of $1 on its common shares,
which was payable through the issuance of 80,000 non-voting preferred shares
with an aggregate redemption price of $8,000,000. An unrelated individual
settled, with $100, a trust of which Mr. Cohen was a beneficiary, so that under
the "affiliate" definition then in effect it was an un-affiliated
trust. The taxpayer then sold its common shares of the subsidiary to the trust
for $65 and claimed a capital loss of $7,999,935, which permitted it to offset
the realized capital gain through a loss carry-back.
[60]
The Tax Court found that the declaration by the
subsidiary of a stock dividend payable in preferred shares was an avoidance
transaction undertaken to shift the value of the subsidiary out of the common
shares and into the preferred shares. This would allow for a latent capital
loss that could be claimed on the disposition of the common shares later in the
series of transactions. The Court also concluded that the settlement of the
trust and the subsequent sale of the common shares to the trust were both
avoidance transactions designed to realize a capital loss on the sale of the
common shares while avoiding the application of the stop loss rules in
subparagraph 40(2)(g)(i) of the Act.
On appeal, Noël JA (as he then was) noted that the parties had conceded that
the Tax Court had correctly concluded on the existence of an avoidance
transaction.
[61]
In Global Equity, the taxpayer subscribed for
common shares of a new subsidiary for approximately $5.6 million, which then
declared a stock dividend in the form of preferred shares having $56 of paid-up
capital and a $5.6 million redemption price. Consequently, the value of the
common shares was largely eliminated. The taxpayer's subscription for an
additional $200,000 was acknowledged to be "window dressing" to give
the common shares some value. The taxpayer, which was involved in the business
of trading securities, disposed of the common shares in consideration for their
depleted value and reported a loss. The Tax Court concluded that these were
avoidance transactions, despite the assertions of the taxpayer that creditor
protection was the primary motivation.
While Mainville JA reversed the Tax Court on its conclusion as to the application
of the GAAR, he noted that the taxpayer had not contested the existence of the
avoidance transactions and that there was ample evidence on the nature of the
transactions in question.
[62]
In 1207192 Ontario, the Federal Court of
Appeal gave further instruction on the identification of an avoidance
transaction. It noted that subsection “245(3) requires a determination of the
primary purpose of the transaction or series of transactions that is alleged to
comprise the avoidance transaction. […] The burden is on the taxpayer to
establish that a particular transaction or series of transactions was
undertaken or arranged primarily for bona fide purposes other than to obtain a
tax benefit [Canada Trustco] at paragraph 66).” This Court must determine “the
purpose of the series of transactions on an objective basis - that is, by
ascertaining objectively the purpose of each step by reference to its
consequences - rather than on the basis of the subjective motivation of” the
parties or their subjective understanding of what may or may not have been
required to achieve a given bona fide non-tax purpose.
[63]
An established principle arising out of Canada
Trustco is that in cases other than a reduction in taxable income, the
existence of a tax benefit can be established by comparison with an alternative
arrangement. The magnitude of any such benefit is irrelevant at this stage of
the analysis.
The burden is on the taxpayer to refute the Minister’s assumption of a tax
benefit.
[64]
A tax benefit may be found even if no reduction
in tax payable occurs during the year under appeal. For instance, the taxpayer
in Triad was benefited insofar as it could carry back the capital loss incurred
to a previous tax year.
[65]
The Supreme Court in Copthorne held that
the analysis must be linked to alternative arrangements that would have been
reasonable to carry out:
35 As found in Trustco, the
existence of a tax benefit can be established by comparison of the taxpayer's
situation with an alternative arrangement (para. 20). If a comparison approach
is used, the alternative arrangement must be one that "might reasonably
have been carried out but for the existence of the tax benefit" (D. G.
Duff, et al., Canadian Income Tax Law (3rd ed. 2009), at
p. 187). By considering what a corporation would have done if it did not
stand to gain from the tax benefit, this test attempts to isolate the effect of
the tax benefit from the non-tax purpose of the taxpayer.
[66]
I will deal with the Partnerco Assessment first,
since the Holdco Assessment is predicated on the GAAR having been properly
applied in the Partnerco Assessment to cause Partnerco to have a tax debt. If
Partnerco did not properly have a tax debt, then the Holdco Assessment cannot
give rise to a tax liability for the Appellant.
[67]
The Appellant submits that this Court should
conduct the analysis of whether a tax benefit arose on the facts by comparing
this situation to one in which Nuinsco had acquired Partnerco without being
able to utilize its tax attributes to shelter the income received from HLP. It
submits that the tax benefit arising out of the Transactions accrued to Nuinsco
insofar as it would have been unable to shelter the income received from HLP
without winding up the Partnercos before June 1.
[68]
The Respondent submits that the comparison
should be made with the alternative in which Nuinsco never acquired Partnerco.
In such a situation, Partnerco would have received and paid tax on the
distributions from HLP. The Respondent states that the only net benefit
received by Nuinsco was the deal fees paid to it by the Appellant.
[69]
Furthermore, the Respondent submits that
Partnerco would have been liable for the tax payable on amounts received from HLP,
making Partnerco a tax debtor during the tax period in which it would have
received such amounts. As a result, the Appellant would have been liable for
this unpaid tax debt up to and including the amounts transferred to it from
Partnerco during that same or a following tax period. As a result, the
Respondent submits that the Appellant avoided the application of section 160 of
the Act by engaging in a series of transactions leading to the change of
control of Partnerco and the consequent deemed year end prior to the
distribution of income from HLP.
[70]
I note the wording of “tax benefit” in
subsection 245(1) of the Act, as well as the wording of subsection
245(2). In neither provision does it explicitly require that the “tax benefit”
in question accrue to the person to whom the tax consequences are re-determined
by virtue of the invocation of the GAAR.
[71]
I also note the decision of Justice Bell in Univar.
In that case, the taxpayer incorporated a Barbados subsidiary using borrowed
money to subscribe for the shares of that subsidiary, which in turn used the
proceeds to purchase from the American parent of the taxpayer an
interest-bearing note owing to that parent by one of its wholly-owned European
subsidiaries. Bell J. accepted evidence of the taxpayer's officers that there
was never any intent for the taxpayer to itself acquire the note. Accordingly,
there was no tax avoided through the incorporation of the Barbados subsidiary
and the receipt of tax-free dividends by the taxpayer from that subsidiary,
funded out of the interest payments made on the note.
[72]
I conclude, like he did, that the “only
alternate arrangement that can be considered is the possibility of the alleged
avoidance transaction not having occurred.” The Appellant has failed to demonstrate how the scenario in which
Nuinsco acquires the Partnercos and does not utilize its tax attributes to
shelter the income from HLP is a reasonable one on the facts. It is likely that
the deal fees would have been much higher in such an eventuality in order to
compensate Nuinsco for the tax debt arising out of the tax payable on the Partnercos’
HLP income. If such were the case, then this presumably would have affected at
a certain point the willingness of the Appellant to enter into the transaction.
Absent the potential access to Nuinsco’s tax attributes to shelter the income
from HLP, there is insufficient evidence before me to conclude that the
Appellant and Nuinsco would have conducted the transactions at issue.
[73]
If the alleged avoidance transaction had not
occurred, the distributions from HLP would have been taxable in the hands of
Partnerco. The taxation of these amounts in the hands of Nuinsco created a tax
benefit. As a result, I conclude that a tax benefit arose out of these
transactions.
[74]
As set out earlier, the parties agree that many
of the transactions form a series of transactions for the purposes of the GAAR.
[75]
The avoidance transaction requirement will be
met if the series resulted in a tax benefit and if even one of the transactions
in this series cannot reasonably be considered to have been undertaken for a bona
fide non-tax purpose.
[76]
The Minister has assumed that every transaction
in the series was not carried out for a bona fide non-tax purpose. The
Appellant does not appear to argue otherwise, but instead submits that the series
of transactions did not result in a tax benefit. Since I have already found
that there was a tax benefit, this argument is accordingly rejected as well.
[77]
Apart from this, the Appellant does single out
one aspect of the series. According to the Appellant, the Respondent asserts that
the selection of May 29, 2006 as a closing date was an avoidance transaction,
an assertion that must be rejected because the choice of date on which a
transaction is completed is not a “transaction” at all. However, this mischaracterizes
the Respondent’s argument. The Respondent’s actual argument is that, among the
other transactions in the series, the sale of the shares of Partnerco by the
Appellant to Nuinsco was an avoidance transaction, and that the timing of that
share sale supports this argument. I would agree. On the evidence, I cannot
conclude that Nuinsco and the Appellant would have undertaken the share sale
but for the possibility of using Nuinsco's tax attributes, nor has the
Appellant argued otherwise.
[78]
As outlined earlier, this step proceeds in two
parts: first, the provisions giving rise to the tax benefit are interpreted
textually, contextually and purposively in order to determine their object,
spirit or purpose. Next, I am to determine whether that object, spirit or
purpose has been abused in this case.
[79]
Here, the Respondent bears the onus.
[80]
The Respondent alleges that there is a general
policy in the Act aimed at preventing loss sharing between unrelated
taxpayers, and that the transactions at issue circumvent this policy. In the
course of laying out this argument, the Respondent analyzes several statutory
provisions, which I will in turn outline.
[81]
However, I note at the outset a fatal shortcoming
of the Respondent's argument; it fails to fully analyze the provisions associated
with the obtaining of the tax benefit. It is those provisions that must be
interpreted textually, contextually and purposively. As held in Copthorne,
"[w]hat is not permissible is basing a finding of abuse on some broad
statement of policy, such as anti-surplus stripping, which is not attached to
the provisions at issue."
LeBel J. in Lipson emphasized again the importance of identifying the
provisions associated with the tax benefit and to consider whether those
provisions were abused.
[82]
As a starting point, the Respondent refers to
subsections 66.7(10) and 111(5).
[83]
I will analyze only subsection 111(5), a more
general loss streaming provision, as subsection 66.7(10) is an analogous
provision dealing with resource expenses.
[84]
Subsections 111(1) and 111(5) of the Act
read as follows:
111(1) Losses
deductible - For the purpose of computing the taxable income of a taxpayer
for a taxation year, there may be deducted such portion as the taxpayer may
claim of the taxpayer’s
(a) non-capital
losses - non-capital losses for the 20 taxation years immediately preceding
and the 3 taxation years immediately following the year;
(b) net
capital losses - net capital losses for taxation years preceding and the
three taxation years immediately following the year;
(c) restricted
farm losses - restricted farm losses for the 20 taxation years immediately
preceding and the 3 taxation years immediately following the year, but no
amount is deductible for the year in respect of restricted farm losses except
to the extent of the taxpayer’s incomes for the year from all farming
businesses carried on by the taxpayer;
(d) farm
losses - farm losses for the 20 taxation years immediately preceding and
the 3 taxation years immediately following the year; and
(e) limited
partnership losses - limited partnership losses in respect of a partnership
for taxation years preceding the year, but no amount is deductible for the year
in respect of a limited partnership loss except to the extent of the amount by
which
(i) the
taxpayer’s at-risk amount in respect of the partnership (within the meaning
assigned by subsection 96(2.2)) at the end of the last fiscal period of the
partnership ending in the taxation year
exceeds
(ii) the total
of all amounts each of which is
(A) the amount
required by subsection 127(8) in respect of the partnership to be added in
computing the investment tax credit of the taxpayer for the taxation year,
(B) the
taxpayer’s share of any losses of the partnership for that fiscal period from a
business or property, or
(C) the
taxpayer’s share of
(I) the foreign
resource pool expenses, if any, incurred by the partnership in that fiscal
period,
(II) the
Canadian exploration expense, if any, incurred by the partnership in that
fiscal period,
(III) the Canadian
development expense, if any, incurred by the partnership in that fiscal period,
and
(IV) the
Canadian oil and gas property expense, if any, incurred by the partnership in
that fiscal period.
…
111(5) Idem
[business or property losses] - Where, at any time, control of a
corporation has been acquired by a person or group of persons, no amount in
respect of its non-capital loss or farm loss for a taxation year ending before
that time is deductible by the corporation for a taxation year ending after that
time and no amount in respect of its non‑capital loss or farm loss for a
taxation year ending after that time is deductible by the corporation for a
taxation year ending before that time except that
(a) such portion
of the corporation’s non-capital loss or farm loss, as the case may be, for a
taxation year ending before that time as may reasonably be regarded as its loss
from carrying on a business and, where a business was carried on by the
corporation in that year, such portion of the non‑capital loss as may
reasonably be regarded as being in respect of an amount deductible under
paragraph 110(1)(k) in computing its taxable income for the year is deductible
by the corporation for a particular taxation year ending after that time
(i) only if that
business was carried on by the corporation for profit or with a reasonable
expectation of profit throughout the particular year, and
(ii) only to the
extent of the total of the corporation’s income for the particular year from
that business and, where properties were sold, leased, rented or developed or
services rendered in the course of carrying on that business before that time,
from any other business substantially all the income of which was derived from
the sale, leasing, rental or development, as the case may be, of similar
properties or the rendering of similar services; and
(b) such portion
of the corporation’s non-capital loss or farm loss, as the case may be, for a
taxation year ending after that time as may reasonably be regarded as its loss
from carrying on a business and, where a business was carried on by the
corporation in that year, such portion of the non‑capital loss as may
reasonably be regarded as being in respect of an amount deductible under
paragraph 110(1)(k) in computing its taxable income for the year is deductible
by the corporation for a particular year ending before that time
(i) only if
throughout the taxation year and in the particular year that business was
carried on by the corporation for profit or with a reasonable expectation of
profit, and
(ii) only to the extent of the
corporation’s income for the particular year from that business and, where
properties were sold, leased, rented or developed or services rendered in the
course of carrying on that business before that time, from any other business
substantially all the income of which was derived from the sale, leasing,
rental or development, as the case may be, of similar properties or the
rendering of similar services.
[85]
Losses can be carried forward or backward under
paragraph 111(1)(a). The ability to do so is limited by subsection 111(5) where
there is a change of control. Specifically, non-capital losses may not be
carried forward following an acquisition of control unless the business in
which the losses were incurred continues to be carried on for profit or with a
reasonable expectation of profit, and then only to the extent of income from
that particular business or a similar business. The relevant portion of the
definition of "loss restriction event", found in subsection 251.2(2),
refers to the situation where "the taxpayer is a corporation and at that
time control of the corporation is acquired by a person or group of
persons".
[86]
The Respondent provides a textual, contextual
and purposive analysis of subsection 111(5). The Respondent is of the view that
the application of subsection 111(5) was circumvented in circumstances where it
should have applied. My review of that analysis leads me to conclude that subsection
111(5) was not relied on in the transactions in question and was not
circumvented. As a result, I cannot accord to it the primary importance
ascribed to it in the Respondent’s arguments.
[87]
Subsection 111(5) was never contemplated to
apply to a situation where it is the entity with accrued losses (Nuinsco) that
acquires another entity. To put it another way, I am unconvinced that
subsection 111(5) applies to profit trading with a loss corporation acquirer
such that it can even be said that the parties relied on subsection 111(5) in transacting
as they did.
[88]
Subsection 111(5) restricts the loss
carryforward of a target corporation's pre-acquisition losses to offset the
same corporation's post-acquisition income, or the carryback of the target
corporation's post-acquisition losses to offset its pre‑acquisition
income. These appear to me to be specific circumstances in which the
corporation being acquired cannot use its own losses to offset its own income.
In our case, Nuinsco carried forward its losses from before it acquired
Partnerco to offset its later income, allocated to itself by virtue of it
becoming a partner of HLP after acquiring and winding up Partnerco. Nuinsco is
the acquiring corporation rather than the target corporation—it did not undergo
a loss restriction event. The application of subsection 111(5) is entirely predicated
on finding such an event to have occurred.
[89]
Partnerco did undergo a loss restriction event,
but there is no indication in subsection 111(5) that it was meant to prevent the
acquiring party from using its own losses against post-acquisition income allocable
to that acquiring corporation indirectly due to its acquisition of the target
corporation. The attribution of the income from HLP to Nuinsco and its
utilization of its prior non-capital losses against such income did not circumvent
subsection 111(5), and Partnerco complied with the wording of the subsection
but did not rely on its effect.
[90]
While I admit that the distinction is a fine one
between a transaction that offends the purpose or rationale of a provision in a
manner that circumvents it and a transaction that falls outside the scope of
that provision altogether, the representations of both parties have convinced
me that this is the latter case. Briefly said, subsection 111(5) precludes
certain forms of loss trading. It does not deal with profit or gain trading,
except insofar as it generally precludes the target’s own post-acquisition
losses from offsetting pre-acquisition income. As a result, this is
distinguishable from the situation in which a taxpayer unexpectedly relies on a
loophole contained in a provision so as to circumvent the provision’s attempt
to implement the policy that Parliament intended, either by its enactment or by
that of the wider legislative scheme of which it is a component.
[91]
I am reinforced in this conclusion by
considering the purpose of subsection 111(5), as outlined in the parties’
submissions and in the caselaw. In noting the broadest ambit of that with which
subsection 111(5) could be said to deal, the SCC stated that “the general
purpose of s. 111(5) may be to prevent the transfer of non-capital losses
from one corporation to another”.
To draw the net of subsection 111(5) wider still would be to expand subsection
111(5) to cover both the transfer of losses and of income from one corporation
to another. Justice Campbell in Loyens rejected a similar overbroad
interpretation of the purpose of subsection 111(5).
[92]
The Respondent refers to OSFC Holdings,
where the FCA found that a general policy against loss trading among
corporations had been abused.
However, our case does not involve loss trading like that seen in OSFC
Holdings. In OSFC Holdings, a corporation transferred accrued
losses on a portfolio to another corporation, and this latter corporation used
those losses to offset its own income. In our case, a corporation with accrued
losses acquired a corporation in order to become a partner and be allocated
partnership income, against which it deducted those accrued losses. Our
situation is a case of profit trading rather than loss trading. While, as noted
above, subsection 111(5) is important to the broader GAAR analysis, the
transactions in question do not rely on that provision. The Supreme Court has
been clear, most recently in Copthorne, that the GAAR analysis seeks to
interpret the provisions actually relied on by the taxpayer with a view to
discerning their underlying purpose.
[93]
Therefore, the usefulness of subsection 111(5)
to the Respondent's position is limited to showing the broader context of the Act
together with the provisions actually relied on by Partnerco, and that
subsection 111(5) is evidence of a general policy against loss trading that was
abused by the transactions at issue.
[94]
The Respondent also refers to subsections 69(11)
and 83(2.1).
[95]
Subsection 69(11) prevents the tax-deferred
transfer of property to an unaffiliated person where that transfer is made for
the purpose of having accrued gains on the property sheltered by deductions
available to the unaffiliated person. Subsection 69(11) is specific in its
application, requiring an initial disposition of property at less than fair
market value and a subsequent disposition within three years of that property
or substituted property. Subsection 83(2.1) is an anti‑avoidance rule
targeting situations where shares of a corporation are acquired for the purpose
of receiving a capital dividend.
[96]
I do not find these provisions relevant
to the case at bar. These provisions were not relied upon by Partnerco or
Nuinsco to obtain the tax benefit, nor has the Respondent convinced me that
they form part of the context in the textual, contextual, and purposive
analysis of the provisions relied on in any meaningful way. As stated in Copthorne,
"not every other section of the Act will be
relevant in understanding the context of the provision at issue. Rather,
relevant provisions are related 'because they are grouped together' or because
they “work together to give effect to a plausible and coherent plan”.
[97]
The Respondent also referred to subsections
103(1) and 103(1.1). These are anti-avoidance provisions allowing the Minister
to reallocate partnership income or losses (or other relevant amounts) in a
manner different than that set out in the partnership agreement. Looking at
subsection 103(1), the Minister is permitted to do this where “the principal
reason for the agreement may reasonably be considered to be the reduction or
postponement of the tax that might otherwise have been or become payable under
this Act”. These provisions also were not relied upon in obtaining the
tax benefit, but they clearly do form part of the context of the partnership
provisions.
[98]
These provisions target partnership agreements
that are tax-motivated or that are unreasonable. This Court refused to apply
subsection 103(1) to a situation where the allocation initially specified in
the partnership agreement was not tax-motivated but a subsequent acquisition of
a partnership interest was tax‑motivated. On the other hand, this Court has also found that upon the entry of
a new member to a partnership, the reasonableness of an allocation scheme
should be determined based on how the members at that time use the scheme, even
if the allocation scheme was the same before and after the entry.
[99]
In this case, the allocation scheme in the HLP
partnership agreement had not changed since the creation of the partnership.
According to the scheme, profit and losses would be allocated according to the
capital contributions of the partners. There is no indication that this scheme
was chosen for tax purposes or that it was unreasonable.
[100] After Nuinsco became a limited partner of HLP, the membership at
that time consisted of Nuinsco as a 99.9% limited partner and GPCo (who was
wholly owned by Nuinsco) as a 0.1% general partner. Income was allocated in
proportion to the parties’ interests in the partnerships. There is no
indication that, as between Nuinsco and GPCo, this would have been
unreasonable.
[101] Where the problem would potentially lie is the allocation scheme as
between new and former partners. The partnership’s cash ended up in the hands of
a former partner’s parent (the Appellant), while the partnership’s income was
allocated to the new member. Is section 103 indicative of a general policy
against allocating profit in this way? The Appellant argues that section 103
does not concern allocation to former members. I note however paragraph
96(1.01)(a), which deems a partner who ceases to be a member of a partnership
partway through a fiscal period to be a member of the partnership at the end of
the fiscal period for the purposes of several sections, one of which is 103. To
date, paragraph 96(1.01)(a) has not received judicial consideration. It was
open to the Respondent to argue that the combination of paragraph 96(1.01)(a)
and section 103 demonstrate a general policy against profit trading between new
and former members; having failed to do so, it is not for me to expand the lis
of the parties.
[102] I conclude that subsections 103(1) and 103(1.1) do not help the
Respondent establish a general policy against profit trading.
[103] I now turn to the provisions that, in my view, actually were relied
on to obtain the tax benefit. The transactions directly relied on the operation
of subsections 96(1) and 111(1), as well as the related provisions in section
66.7 permitting the carryover of Canadian exploration expenses and Canadian
development expenses. The onus was on the Respondent to show that the object,
spirit or purpose of these provisions was abused. The Respondent has failed to
do so and therefore has failed to justify the Partnerco reassessment.
[104] Subsection 96(1) was used to allocate the partnership income to
Nuinsco at HLP’s fiscal year end. The Respondent did not provide an analysis of
the subsection so as to establish the object, spirit or purpose of this
provision. While this would end my inquiry, I would also note my own view that
the object, spirit, or purpose of section 96 was not abused.
[105] Subsection 96(1) sets out the flow-through structure of
partnerships. The income of the partnership is computed as if the partnership
were a separate person
and as if its taxation year was its fiscal period. The partnership's income or
loss is flowed through to its partners in accordance with their share of the
partnership, and a partner includes his or her portion of the partnership's
income or loss in his or her taxation year containing the partnership's fiscal
year end.
[106] Generally, the partnership's income is allocated according to the
partnership agreement. This means that, as in this case, the partnership regime
allows the partnership's income to be allocated to an entity that becomes a
partner partway through the fiscal period. In other words, the identity of the
partners may change throughout the fiscal year through the purchase and sale of
partnership interests, but the allocation of income can be made at the fiscal
year end based on membership of the partnership at that time, provided the
partnership agreement specifies this.
[107] Textually, this treatment arises from paragraph 96(1)(f), which
provides that a partner's income will be computed as if
"the
amount of the income of the partnership for a taxation year from any source or
from sources in a particular place were the income of the taxpayer from that
source or from sources in that particular place, as the case may be, for the
taxation year of the taxpayer in which the partnership’s taxation year ends, to
the extent of the taxpayer’s share thereof;
[Emphasis added]
[108] "The taxpayer's share thereof" would be determined in
accordance with the partnership agreement.
[109] The context of the partnership regime supports this. Apart from
certain provisions governing allocations made to former partners and the
anti-avoidance rules in section 103 (previously discussed), nothing in the
partnership regime prevents a partnership agreement from basing its allocation of
income on the membership at its fiscal year-end. An example of a provision
dealing with income allocation to a former member is subsection 96(1.01).
Paragraph 96(1.01)(a) deems a taxpayer who ceases to be a member of a
partnership during a fiscal period to be a member of the partnership at the end
of that fiscal period. However, though deemed to be a partner, the former
member's allocation of partnership income would still be calculated in
accordance with the partnership agreement, subject to the potential application
of section 103.
[110] The purpose of the partnership provisions was canvassed in Mathew,
where McLachlin C.J. and Major J. stated that the partnership provisions permit
loss sharing among partners in order to promote an organizational structure that
allows partners to carry on a business in common. This reasoning would presumably apply to profit sharing as well.
However, this neither supports nor negates the notion that the partnership
provisions intend that partnership income can be allocated based on membership
at the fiscal year end.
[111] The tax plan in Mathew was the same as the one in OSFC
Holdings. The plan used the partnership rules in section 96 in conjunction
with subsection 18(13), a stop-loss rule that allowed a portfolio of loans with
accrued losses to be transferred to a partnership at cost. McLachlin C.J. and
Major J. found that both provisions had been abused. They grounded the abuse on
the premise that subsection 18(13) intends those accrued losses to be realized
by a non-arm’s length transferee, while they had in fact been transferred to an
arm's length party. A partnership structure was used as a vehicle to transfer
these losses in a way that was wholly unintended by subsection 18(13). They
held that, "Parliament could
not have intended that the combined effect of the partnership rules and s.
18(13) would preserve and transfer a loss to be realized by a taxpayer who
deals at arm's length with the transferor. To use these provisions to preserve
and sell an unrealized loss to an arm's length party results in abusive tax
avoidance under s. 245(4). Such transactions do not fall within the spirit and
purpose of s. 18(13) and s. 96, properly construed."
[112] The abuse in Mathew of the partnership rules was linked to the
abuse of subsection 18(13) and identified in light of the acknowledged general
legislative policy of prohibiting loss transfers between taxpayers, subject to
specific exceptions. In our case, section 96 for the most part stands alone and
the legislative context highlighted by the Respondent does not clearly evidence
a policy against profit trading. The partnership provisions and subsection
111(1) were relied on by the parties to the transaction, but I am unconvinced
that either set of provisions, acting alone or in concert, has been abused.
This distinguishes our case quite clearly from Mathew.
[113] Subsection 111(1) permitted Nuinsco to offset the partnership income
with previous losses. Paragraph 111(1)(a) itself contains no restrictions on
the sources of income against which previous losses can be offset. Nuinsco
using existing non-capital losses to offset the partnership income does not
offend paragraph 111(1)(a). Subsection 111(5) does restrict the use of prior
losses where there is an acquisition of control of the corporation that has accrued
(or will accrue) those losses, but subsection 111(5) contains specific
conditions to its application and, as noted above, it does not evidence a
general policy in the Act against profit trading.
[114] To sum up, I do not find in the section 96 partnership provisions,
subsection 111(1), subsection 111(5), or any of the other provisions, the
general policy proposed by the Respondent. As I have found that the policy
alleged to be abused has not been made out, it follows that the requisite abuse
has also not been made out. This is especially so once one remembers that the
Respondent bears the onus of proving abuse, and that "if the existence of
abusive tax avoidance is unclear, the benefit of the doubt goes to the
taxpayer". The
Respondent has failed to discharge that onus, so the taxpayer is certainly
entitled to the benefit of the doubt.
[115] Given that I am of the view that the general policy put forwarded by
the Respondent is unable to be demonstrated, I find it of little use to go on
to consider whether the transactions at issue offended the hypothetical policy proposed
by the Respondent. The absence of evidence of such a policy being my primary
concern, it would be improper of me to speculate as to what I would have done
had such evidence been before me.
[116] I would however like to address one more area of disagreement
between the parties regarding the Partnerco Reassessment. The Appellant argues
that if the three requirements of the GAAR are met, then the Minister still
erred by failing to determine reasonable tax consequences, contrary to
subsection 245(2).
[117] Specifically, the Appellant argues that it was not reasonable for
the Minister to ignore the deemed year end arising from Partnerco’s acquisition
by Nuinsco, since the Minister could have denied the tax benefit obtained by
Partnerco without doing so. The Minister could have either (1) assessed Nuinsco
to deny the deductions it claimed against the partnership income, or (2)
included HLP's income in Partnerco’s stub period from May 29 to June 1, 2006,
rather than ignoring the deemed year end and including the partnership income
in a notional period spanning May 1, 2006 to June 1, 2006. According to the
Appellant, the Minister sought to ignore the deemed year end for the purpose of
being able to generate a factual foundation for assessing the Appellant under
the GAAR and section 160.
[118] The first proposed alternative would be dependent on my finding that
the tax benefit accrued to Nuinsco rather than Partnerco. As I have found that
Partnerco received a tax benefit, I accordingly reject this argument.
[119] I find the second alternative compelling. According to subsection
245(2), the Minister is to determine the tax consequences that are reasonable
in the circumstances in order to deny the tax benefit resulting from the
abusive series of transactions. The broad definition of “tax consequences” in
subsection 245(1), combined with paragraph 245(5)(d), would allow the Minister
to ignore the deemed year end in the proper circumstances. Chief Justice Bowman
in XCO Investments held that what is reasonable must depend on all of
the circumstances, but that the Minister’s determination is not to be afforded
the deference attributable to a discretionary decision.
[120] In responding to this question, I must keep in mind the goal of the
redetermination as being the denial, in whole or in part, of the tax benefit at
issue. The reasonableness of each determination by the Minister must be
evaluated with a view to the end goal in pursuit of which the action is made. From
the text of subsection 245(2), it becomes clear what is reasonable is based on the
circumstances giving rise to the tax benefit, since the inquiry looks at the
actions that would have been reasonable to deny that tax benefit. I previously
found that the tax benefit was the diversion of income from Partnerco to
Nuinsco, ultimately reducing the amount of tax paid on the partnership income.
[121] I agree with the Appellant that the Minister could have denied this
tax benefit by allocating the partnership income back to Partnerco without
ignoring the deemed year end. Ignoring the deemed year end had no effect on the
particular tax benefit identified in the GAAR assessment of Partnerco. The
income reallocated to Partnerco through GAAR did not change from ignoring the deemed
year end. Viewed from the lens of the tax benefit as contemplated in the
Partnerco reassessment, there was no reason to ignore the deemed year end.
Therefore, I find that doing so was unreasonable.
[122] This is strengthened by the notion that the Minister could have
acknowledged the deemed year end without being prevented adopting a different
treatment in the Holdco Assessment. The deemed year end could be ignored as a
reasonable tax consequence in applying GAAR to the Appellant, thus
paving the way for section 160 to also be applied as a result of GAAR. This is
because the tax benefit obtained by the Appellant was the avoidance of section
160, such avoidance being made possible because of the deemed year end.
Therefore, it would be reasonable for the Minister to ignore the deemed year
end as a reasonable tax consequence in denying the Appellant’s tax benefit.
[123] Therefore, the Holdco Assessment could still have been maintained if
the GAAR had been properly applied to Partnerco so as to create the tax debt in
question.
[124] The Appellant has been further assessed under the GAAR on the basis
that the transactions in question constitute an abuse of section 160 of the Act.
[125] The Appellant disputes whether a tax benefit arose to it a result of
the alleged avoidance transactions. In so doing, it highlighted the
transactions involving the Appellant and Partnerco that are submitted by the
Respondent to be avoidance transactions:
1. The issuance of stock dividends to the Appellant by Partnerco;
2. The redemption in cash of the preferred shares distributed to the
Appellant by Partnerco; and,
3. The agreement to lend funds to Nuinsco sufficient to purchase the
outstanding shares of Partnerco, the purchase of the shares of Partnerco by
Nuinsco, and the Nuinsco Loan.
[126] The Appellant maintains that none of these transactions gave rise
to a tax benefit. With respect to the issuance of the stock dividend, the
Appellant maintains that the law is clear that a stock dividend does not give
rise to a transfer of property within the meaning of subsection 160(1). Insofar as the Appellant had
its preferred shares redeemed by Partnerco, the Appellant says it provided FMV
for the cash received for the surrender of its preferred shares.
[127]
With respect to the loaning of funds, the
Appellant denied that that any such transaction took place. In addition, any
such loan would not be a transfer of property to Nuinsco given the issuance of
a promissory note for that amount by Nuinsco, while the sale of the shares of
Partnerco held by the Appellant was for fair market value. The loaning of funds
by HLP to Nuinsco was therefore not a transfer of property from Partnerco to
it.
[128] The stock dividend must constitute a transfer of property in common
law in order for section 160 to have a hope of otherwise applying to this
particular aspect of the series of transactions (but for the deemed year end).
I agree with the holding of Rip J. in Algoa Trust on whether the
issuance of a stock dividend is a transfer of property. I would further note
that the Federal Court of Appeal dealt with a similar issue in Biderman.
[129] In Biderman, a tax debtor was both the executor of the estate
and entitled to a share in the estate under the Will of his wife, the deceased.
He formally executed a disclaimer of his interest in the estate and transferred
property out of the estate to the other beneficiaries (their children). The
Minister assessed the children under subsection 160(1), alleging that the
disclaimer of his interest in the estate acted as a “transfer” of his share to
the other beneficiaries.
[130] The Federal Court of Appeal dismissed the taxpayer’s appeal on the
basis that the tax debtor had not validly disclaimed his interest. After having
provided extracts from the leading jurisprudence on section 160, the Court
stated that it “is clear that, in all these cases, the transferor owned the
property that was the subject of the transfer and that a transfer of property
under subsection 160(1) requires that the transferred asset be the
"property" of the transferor. […] However, the situation is different
in the case of a valid disclaimer of a gift.”
[131] As in the case of Algoa Trust and stock dividends, a “disclaimer
does not involve a vesting and divesting of property. Consequently, where there
is a valid disclaimer, there is, in my view, no transfer of property, direct or
indirect, and paragraph 160(1)(c) cannot apply to the person who so disclaims.”
[132] In order for subsection 160(1) to apply on this point, the stock
dividend must therefore constitute a divesting of property. As in Algoa
Trust, I conclude that Partnerco did not divest itself of its property when
it issued the preferred shares to the Appellant.
[133] The share redemptions did involve a transfer of property from the
Partnerco to the Appellant but the FMV of those shares was equivalent to the
cash paid for them. I find that the Appellant has demonstrated that the
Minister’s assumption that Partnerco did not receive fair market consideration
for redeeming the preference shares is incorrect. I would consider the tax
attributes of those shares as agreed to by the parties, the assets of Partnerco
at the time of the redemption insofar as they support the likelihood that
Partnerco would be able to pay the redemption value, and the ability of
Partnerco to satisfy the tax liability that could arise as of the end of HLP’s
year-end without rendering it unable to redeem the shares. These facts lead me
to conclude that the shares issued in the First Stock Dividend were redeemed
for fair market consideration. As a result, no liability would be established
under subsection 160(1) due to this redemption.
[134]
The Respondent has submitted that I should
interpret the phrase “fair market value […] of the consideration given for the
property [transferred from the tax debtor]” in a nuanced way that would render
nominal the surrender of the shares arising out of a stock dividend. The
Respondent has however failed to show how the text, context and purpose of
section 160 lead to such a conclusion. Submissions dealing with this point were
limited in their scope except in respect of the purpose of section 160. If I
may characterize the Respondent’s submissions on this point, they would be
frustration at the notion that a benefit may be conferred on a related party
without a transfer of property that could give rise to liability under section
160. The purposive argument of the Respondent seems concerned with convincing
the Court that a purposive interpretation of these two concepts should make
them identical regardless of the text used by Parliament.
[135]
To take another example, say we were in a
similar fact scenario to that in Biderman. If the interest that the executor
disclaimed and which therefore was conferred on his children consisted of
redeemable preference shares in a company in which the debtor held a residual
interest, it may be that subsequent action involving those shares could change
the form of the property held by the children (say the redemption of the shares
for cash) but not its fair market value.
It could also effect a reduction in the value of the interest of the tax
debtor. Must I therefore conclude that the surrender of the old property for
the new property deems the old property to have no fair market value because of
the circumstances in which it was originally acquired? I do not accept the
Respondent’s proposed interpretation of the phrase in question. I conclude that
the redemption price of the shares in question represents their fair market
value when considered en bloc with the control exercised by the
Appellant over Partnerco.
[136] The purchase by Nuinsco of the common shares and the preference
shares issued in the Second Stock Dividend is, in my view, an indirect transfer
of property from Partnerco to the Appellant, when considered in conjunction
with the steps leading to and including the Nuinsco Loan.
[137] HLP loaned an amount in question to Nuinsco that would have been
otherwise able to be distributed to Partnerco and its fellow partners. As a
result, the Partnercos indirectly transferred property to Nuinsco and then on
to the Appellant and the other Holdcos. I accept that the use of an
intermediary does not make this any less an indirect transfer of property, “by
any other means whatever”, from Partnerco to the Appellant. I recall the
decision in Strachan, wherein Chief Justice Rip (as he then was) held
that a transfer of property made by the private corporation of a tax debtor
would still be a transfer in any manner whatever by that tax debtor under
section 160.
Similarly, that HLP transferred the funds to Nuinsco so as to purchase the
Partnerco shares does not avoid the fact that it resulted in a transfer of
property to the Appellant from Partnerco.
[138] The question is therefore whether Partnerco transferred this
property for less than FMV. The direct result of the transfer for Partnerco was
that HLP received a promissory note from Nuinsco for the amount of the loan. Unquestionably,
the end result of this set of transactions was that the purchase price for the Partnerco
shares exceeded the amount by which the value of the assets still held by
Partnerco exceeded the full amount of its latent tax liability.
[139] The Minister had assumed that the fair market value of the Partnerco
shares, being both the redeemable preference shares and the common shares sold
as a bloc, was nominal as of May 29, 2006. This was so because of the embedded
tax liability associated with those shares due to Partnerco’s status as a
limited member of HLP. While HLP held either cash on hand of $4.4 million or
the promissory note from Nuinsco for that amount at the relevant time, it
cannot be ignored that ownership of a partnership interest in HLP as of its
year-end carried with it tax consequences on amounts allocable at that
year-end.
[140] Caselaw in both the tax context and in the context of determining
“fair value” under the Canada Business Corporations Act has accepted the
notion that it can be appropriate to include embedded tax liabilities in
certain circumstances.
[141] In the VIH Logging case, Woods J. (as she then was) was faced
with a case where the shares of a wholly-owned and profitable private
corporation (“Old VIH”) were exchanged for shares of a newly incorporated
private corporation (“VIH”). Old VIH then sold all of its assets to its parent,
VIH, retaining only enough funds to pay its anticipated tax liability on its
profits. Old VIH then paid cash and stock dividends to its parent. Old VIH
would then go on to buy seismic data in a transaction that allowed it to defer
the tax liability to another year.
[142] Woods J. accepted the uncontradicted expert valuation of the shares
of Old VIH between the time of the dividends and the time of the seismic data
purchase (two days). She found that the value of the shares of Old VIH was
nominal because its cash on hand exactly corresponded to its anticipated tax
liability.
[143] In another case, the deceased taxpayer was the sole shareholder of a
holding company that in turn held a 50% share in a Canadian operating company
and a 33% share in an American operating company. Campbell J. concluded that
the imbedded capital gains that would arise on a distribution by the holding
company of its shares in the operating companies should be taken into account
in valuing the FMV of the holding company’s shares.
[144] I view it as appropriate for the Minister to have factored in the
tax liability arising out of the allocation of the partnership income to the
partners at HLP’s year-end. In so doing, the Minister assumed that the FMV of
the Partnerco shares (both the common and the preferred shares) purchased by
Nuinsco was nominal. This can be contrasted from the situation where solely the
preference shares were sold to an arm’s-length purchaser. The Appellant has not
demolished the Minister’s assumption.
[145] Furthermore, it would seem that this is one of those instances in
which common sense, when confronted with the redemption value of the preferred
shares, would suggest that a sale to any other third party would require a sale
of both the common and preferred shares as a bloc to maximize the sale price. The absence of the control
granted by the common shares would have been keenly felt by the buyer of the
preference shares, who would be presumably hard pressed to convince Partnerco
to redeem the preferred shares in light of the tax liability. The lack of any
assets to satisfy the return of capital of those common shares after satisfying
the preference shares also suggests that the transfer would have not been for
FMV. As I have concluded that the Minister’s assumption has not been rebutted,
the Respondent was not absolutely required to address this.
[146] While these points go to determining the fair market value of the Partnerco
shares transferred from the Appellant, they do not go to assessing the value of
the promissory note issued by Nuinsco in favour of HLP. The fact is that HLP
replaced cash on hand with indebtedness of equal value. The Minister did not
assume that the FMV of the promissory note held by HLP was less than the
Nuinsco loan itself. Whether or not Nuinsco in turn overpaid the Appellant for
its shares is irrelevant to the assessment of the fair market value of the
consideration for the loan, since the value of the promissory note was not
dependent on the value of the Partnerco shares but rather on the funds borrowed
by Nuinsco.
[147] I conclude that Partnerco transferred $867,254 to the
Appellant indirectly by way of the loan to Nuinsco on the understanding that it
would, at the very least, replace funds used by Nuinsco to purchase the
outstanding shares of Partnerco for more than their fair market value. The
Appellant has failed to rebut the Ministerial assumption on this point. However,
this is not decisive and does not demonstrate that section 160 would have
otherwise applied. The Appellant has shown that at the end of this series of
transactions, Partnerco was left none the poorer. It remained a limited partner
in HLP right upon until its winding-up, while the assets of HLP changed from
cash to a promissory note of the same value. As a result, I cannot conclude
that there would have been an underlying liability under section 160.
[148] Without Nuinsco’s purchase of Partnerco, there would have been no
deemed year end for Partnerco and no winding-up, so that the partnership income
would have been allocated to Partnerco as of June 1, 2006. While this would
have made Partnerco a tax debtor (albeit potentially one able to meet its
liabilities), the Appellant has demonstrated that there was no transfer of
property from Partnerco to the Appellant for less than FMV.
[149] While I have concluded that there was no tax benefit arising to the
Appellant, I will go on to consider the rest of the GAAR analysis on this
matter in the event that I have erred. For this purpose, I will assume that the
transactions produced a tax benefit within the meaning of the GAAR that was
occasioned by the on-loaning of funds to Nuinsco and its use by Nuinsco to either
purchase the Appellant’s shares or to replace funds used for that purchase.
[150]
Given the above-stated analysis of the series of
transactions, which are covered in the Agreed Statement of Facts, it is clear
that an avoidance transaction existed. In particular, the sale of the
Appellant’s interest in Partnerco is one of the avoidance transactions featured
in the analysis of the Partnerco assessment. It also demonstrates the existence
of an avoidance transaction here.
[151] The Respondent has provided a detailed legislative history of
section 160 of the Act, beginning with its enactment in 1951. It submits
that its main purpose is to enable the Minister to collect the tax debt of one
person from another.
[152] It is undisputed between the parties that section 160 is part of the
powers provided to the Minister to collect taxes owed that would otherwise not
be obtainable in situations where tax debtors evade their creditors. The purpose of section 160 is
to protect the integrity of a tax debtor's assets against a transfer of that
person's property to non-arm's length persons where that transfer thwarts, or
could thwart, collection of a tax debt. The concepts of “transfer” and of
“property”, when read in conjunction with the phrase “either directly or
indirectly, by means of a trust or by any other means whatever”, in section 160
are of wide ambit,
which reflects the jurisprudential recognition of this purpose. The statement
in Addison & Leyen that long delays before the Minister assesses
under section 160 do not in of themselves warrant judicial intervention
reflects in part the significance of Parliament having provided no limitation
period on a section 160 assessment.
[153] The Federal Court of Appeal in Livingston stated that the “very
purpose of subsection 160(1) is to preserve the value of the existing assets in
the taxpayer for collection by the CRA. Where those assets are entirely
divested, subsection 160(1) provides that the CRA's rights to those assets can
be exercised against the transferee of the property.” This purpose is reflected in
the limitation of joint and severable liability in section 160 to the amount
the transferor is liable to pay under the Act in or in respect of the
taxation year (or any preceding taxation year) in which the property was
transferred.
[154] As part of the explanation of the legislative history of section
160, the Respondent has noted that prior to 1983 the relevant date for making a
determination as to whether the transferor was a tax debtor was at the time of
transfer. Amendments made to the Act in 1983 would henceforth provide
that section 160 would apply to transfers occurring in the same taxation year
as the moment where the transferor incurs the tax liability.
[155] Furthermore, the Respondent correctly notes that both before and
after the 1983 amendment, the Act imposes liability for income tax the
moment the income in question is earned. As noted by C. Noël ACJ in Simard-Beaudry:
20 As to his second argument, namely that the
debt arising from re‑assessment of the taxpayer dates only from the time
that the taxpayer is assessed, and that it did not, accordingly, exist at the
time the agreement was made, it seems to me that the answer to this is that
the general scheme of the Income Tax Act indicates that the taxpayer's debt is
created by his taxable income, not by an assessment or re-assessment. In fact, the
taxpayer's liability results from the Act and not from the assessment. In
principle, the debt comes into existence the moment the income is earned, and
even if the assessment is made one or more years after the taxable income is
earned, the debt is supposed to originate at that point. Here the
re-assessments issued on August 14, 1969, for income earned in previous years
seem to me to be at most a confirmation or acknowledgment of the amounts owing
for these earlier years. Indeed, in my opinion, the assessment does not
create the debt, but is at most a confirmation of its existence. It also
seems to me that the Court must assume that Simard & Frères Cie Ltée owes
the amounts for which it was assessed, since these amounts have not been
challenged by the taxpayer, nor, moreover, by the defendant in this action, who
could, however, have done so, since copies of the re-assessments in respect of
the mise en cause were supplied to defendant the same day as they were
delivered to the mise en cause. The amounts so assessed, which were not
challenged, are thus debts owed by the taxpayer as from the end of each of the
years in question.
[Emphasis added]
[156] In the context of section 160 as it now reads, I note the decision
of Justice Lamarre Proulx in Jurak, where she held that it “is a
recognized principle in tax law that it is not the assessment that creates a
tax liability, but the application of the Act. The assessment merely
recognizes the debt.”
The example of Heavyside, in which the Federal Court of Appeal concluded
that section 160 applies to a transfer from a husband to a wife where the
husband was liable to pay tax even if the husband went bankrupt before either
he or his wife were assessed, further demonstrates this point.
[157] The Respondent has made submissions on the fact that Parliament has
limited the ambit of section 160, speculating that it may exist since, in
respect of subsequent taxation years, a connection between a transfer of
property for inadequate consideration and the transferor’s tax liability is weaker.
[158] It submits that the definition of “fiscal period” contained in
section 249.1 of the Act has existed, in one form or another, since the
enactment of what is now section 160. It is argued that this definition was
taken into account when converting the underlying policy concerns driving the
enactment of section 160 into the provision itself. The Respondent also notes
that the modification of a fiscal period, where available, is not to be done
lightly and can only be done on consent of the Minister.
[159] The Respondent finally highlights the effect of subsection 249(4) of
the Act, which deems a corporation, the control of which has changed, to
end its taxation year immediately before the change of control occurs. This
deemed year‑end rule fixes the time at which the corporation's gains and
losses must be reconciled for future recognition and utilization. That
corporation will begin a new taxation year immediately after the acquisition of
control, and it may use a new fiscal year-end independent of the prior fiscal
periods that may have been applicable at the change of control. The Respondent
submits the Technical Notes accompanying the introduction of subsection 249(4)
and a Finance press release as evidence of the proposition that its enactment
was part of Finance’s prevention of the “inappropriate transfer of unusable tax
deductions and credits to unrelated taxpayers.” The Respondent views
subsection 249(4) as a key component of a broader interlocking mechanism within
the Act designed to prevent arm’s length taxpayers from buying and
selling tax losses, deductions or credits.
[160] The Respondent submits, on this basis, that the Nuinsco transactions
were abusive of section 160.
[161] The Respondent has maintained that the Appellant used the effect of
the deemed year end rules to avoid the application of section 160, thereby
circumventing it and frustrating its purpose. While the Respondent acknowledges
that there was no reliance by the Appellant on section 249.1 and that there may
have nothing improper in of itself in the dividends paid by the Partnercos to
the Holdcos, the subsequent sale of the shares of the Partnercos prior to the
Partnercos’ year-end made the previous transactions problematic. The Respondent
cites the criteria for an abuse established by LeBel J. in Lipson; namely,
that an abusive transaction must achieve an outcome that the statutory
provision was intended to prevent, defeat the underlying rationale of the
provision or circumvent the provision in a manner that frustrates or defeats
its object, spirit or purpose.
[162] The Respondent says that “the Partnercos turned to subsection 249(4)
of the Act in order to circumvent section 160 in circumstances where its
application would be in accord with its purpose and its circumvention
frustrates that purpose”.
In so doing, the Respondent draws an analogy to the Mathew appeal,
where, as previously mentioned, the Supreme Court found that the transactions
defeated the purpose of both subsection 18(13) and section 96.
[163] The Respondent highlights the comments of Rothstein JA (as he then
was) in dissent in the judgment of the FCA that led to the Supreme Court's
decision in Addison & Leyen.
Notably, his dissent was later cited with approval in Addison & Leyen,
where the Supreme Court quoted the following paragraph:
92 […] [Section 160] only affects transfers of property to persons in
specified relationships or capacities and only when the transfer is for less
than fair market value. Having regard to the application of subsection 160(1)
in specific and limited circumstances, Parliament's intent is not obscure.
Parliament intended that the Minister be able to recover amounts transferred in
these limited circumstances for the purpose of satisfying the tax liability of
the primary taxpayer transferor.
[164] The Appellant submits that a finding of abuse should be approached
cautiously, mindful of the effect that the invocation of the GAAR can have on
the legitimate tax planning of other taxpayers. It proffers the observation by
the Supreme Court that “Parliament intends taxpayers to take full advantage of
the provisions of the Income Tax Act that confer tax benefits. Indeed,
achieving the various policies that the Income Tax Act seeks to promote
is dependent on taxpayers doing so.”
This point is, however, dependent on determining Parliamentary intent on
whether the tax benefit in question was intended to be conferred or whether it
goes against the policy that the Act seeks to promote.
[165] Furthermore, I consider that the jurisprudence provides protection
against thwarting Parliamentary intent in the manner contemplated by the
Supreme Court. I note the holding by the Federal Court of Appeal in Lehigh that:
37 […] the fact that an exemption may be claimed in an unforeseen or
novel manner, as may have occurred in this case, does not necessarily mean that
the claim is a misuse of the exemption. It follows that the Crown cannot
discharge the burden of establishing that a transaction results in the misuse
of an exemption merely by asserting that the transaction was not foreseen or
that it exploits a previously unnoticed legislative gap. As I read Canada
Trustco, the Crown must establish by evidence and reasoned argument that
the result of the impugned transaction is inconsistent with the purpose of the
exemption, determined on the basis of a textual, contextual and purposive
interpretation of the exemption.
[Emphasis added]
[166] Indeed, in Lehigh and in Gwartz the Crown failed to
discharge that burden of demonstrating that the appeal in that case involved
such a result. The analogy that the Crown seeks to draw is between the case at
bar and the exemptions at play in those appeals, where there was no ambiguity
as to whether the taxpayer qualified for the exemption. In Lehigh, for
instance, the FCA stated that a transaction could abuse such a bright line
test.
[167] I accept the position of the Respondent that the GAAR may apply when
dealing with a provision, the scope of which Parliament has chosen to restrict
or limit so as to exempt certain transactions that might otherwise be caught by
more general language. In this case, a fair reading of section 160 of the Act
with regard to its text, context and purpose leads to the conclusion that it
supports the position provided by the Respondent. As held in Canada Trustco,
such a policy must arise out of an analysis anchored in a textual, contextual
and purposive interpretation of the provisions at issue. But such an analysis seeks to
identify what the underlying policy of the provisions at issue is, rather than
the “traditional statutory interpretation” issue of how a purposive reading
affects the interpretation of the provision’s meaning. The Supreme Court has
made that distinction clear when it noted that “[w]hen the Minister invokes the
GAAR, he is conceding that the words of the statute do not cover the series of
transactions at issue” or do not otherwise restrict the behaviour alleged to be
abusive.
In this case, I find that the Respondent has sufficiently demonstrated the
existence of an underlying policy against allowing those who incur liability
for income tax from reducing, through transfers to non-arm’s length parties at
a time where the transferor is so liable or reasonably likely to anticipate
incurring such liability, the pool of assets with which they may satisfy that
tax debt.
[168] Furthermore, I am convinced that the manner in which the series of
transactions operated so as to allow for the transfer of cash from HLP
indirectly to the Appellant while footing Nuinsco or Partnerco itself with the
tax liability due to the operation of the deemed year end rules was abusive of
section 160. But for the deemed year end, section 160 would have applied to
make the Appellant liable for Partnerco’s tax debt due to the indirect transfer
to the Appellant during the same taxation year. This was thwarted by the
divorcing of the actual partnership income from the allocation of it for tax
purposes and abused section 160 in so doing.
[169]
My consideration of these matters is tempered
however by my recognition that the assessment of the Appellant should still be
vacated since there is no underlying tax debt owing by Partnerco. My conclusion
as to the lack of a tax benefit to the Appellant similarly tempers these
observations. I have not considered the issue of the timing of the income
arising out of the exercise of the Put Agreement, given my conclusions above.
[170]
For the reasons stated above, I would vacate the
assessment under appeal, with costs to the Appellant.
[171] I would be remiss if I did not thank counsel for well-organized,
well‑argued information and overall excellent presentations on this
appeal.
Signed at Ottawa, Canada, this 15th day of December,
2016.
“E.P. Rossiter”
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