Date: 20010822
Docket: 98-2960-IT-G
BETWEEN:
GRAPHIC PACKAGING CANADA CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
(delivered orally from the bench on
April 19, 2001, at Ottawa, Ontario,
and amended for greater clarity)
Archambault, J.T.C.C.
[1]
Graphic Packaging Canada Corporation (GPC) is appealing an
assessment issued by the Minister of National Revenue
(Minister) under the Income Tax Act (Act)
with respect to the 1988 taxation year. In computing the capital
gain resulting from the sale of all of GPC's shares in
Gravure Graphics of Minnesota Inc. (GGM) to American Can
Company (American) on April 7, 1988, the Minister
disallowed a deduction of $2,618,529 (payments) claimed by
GPC as costs of disposition. This figure represents amounts paid
under an Equity Appreciation Bonus Plan (Bonus Plan) to
certain senior executives of Color-Ad Packaging Inc.
(CAPI), a wholly owned subsidiary of GGM. The Minister
claims that GPC did not have any legal obligation to make the
payments to the CAPI executives.
[2]
The Minister also disallowed a portion of a capital loss claimed
by GPC on the sale on August 25, 1988 of 1,002,666 shares (CNR
shares) that it owned in Canadian Natural Resources Limited
(CNR). The loss was thus reduced from $18,096,405 to
$25,859. This reduction of the capital loss is substantially
attributable to three adjustments. First, the Minister reduced
the adjusted cost base (ACB) of GPC's CNR shares by
$17,985,328 to $180,926. Then, he disallowed the following
deductions (CNR disposition expenses) claimed by GPC in
respect of the disposition of the CNR shares: a) an amount of
$85,000 paid to Peters & Co. Ltd. (Peters), and b) an
amount of $959 paid on account of legal fees.
[3]
According to counsel for GPC, the only issues left to be decided
are the following: i) whether the payments to the CAPI executives
are deductible in computing the capital gain of GPC realized on
the disposition of its GGM shares, or alternatively, whether
those payments could be treated as a deduction from income in
computing GPC's income for its 1988 taxation year; ii) with
respect to the capital loss claimed on the CNR shares, the matter
of the computation of the ACB of the CNR shares. GPC does not
contest the disallowance by the Minister of the CNR disposition
expenses.
Facts
[4]
At the beginning of the hearing, counsel for GPC filed
Exhibit A-2, a request made by counsel for the
Minister to have the appellant admit the truth of certain facts
outlined in paragraphs 1 to 51 of that document. Here are those
facts:
I. SALES OF SHARES OF GRAVURE GRAPHICS
MINNESOTA INC.
1. On March 14, 1998 the Appellant [GPC]
acquired a 100% interest in a U.S. company known as Gravure
Graphics Minnesota, Inc. ("GGM") from J.K. May
Investments Ltd. ("JKMay") and Maynaki Holdings Ltd.
("Maynaki").
2. GGM owned 100% of the shares of a U.S.
operating company known as Color-Ad Packaging Inc.
("CAPI").
3. Subsequent to its acquisition of GGM, the
Appellant sold its shares of GGM to an arms-length company
("American") and reported a capital gain of
$25,146,457.
4. Included in the disposition expenses reported by the
Appellant were payments made by the Appellant to certain
employees of CAPI pursuant to agreements ("the
agreements") made between the former shareholders of GGM
(JKMay and Maynaki) and the employees of CAPI, totaling
$2,618,529.00 ("the payments"), agreements to which the
Appellant was not a party.
5. The agreements provided for a commitment
by JKMay and Maynaki to certain employees of CAPI to share in the
increase in share values of CAPI in the event that the shares
were sold.
6. The agreements did not stipulate that
this commitment was to become the obligation of a subsequent
purchaser and in fact specified that any modifications had to be
in writing, agreed to by all parties. No such written
modifications were made.
7. The Appellant was under no legal
obligation to make the payments to the employees of CAPI.
8. Any obligations by JKMay and Maynaki to
the employees of CAPI were not transferred to the Appellant upon
its acquisition of GGM.
9. These obligations were not a condition of
the sale of the GGM shares to the Appellant; rather they were
made to satisfy separate agreements to compensate the employees
in the event of such a sale, agreements to which the Appellant
was not a party.
II. DISALLOWANCE OF LOSSES RESULTING FROM SALE OF SHARES OF
CANADIAN NATURAL RESOURCES LIMITED:
10. A determination made under section 55 of the British
Columbia Securities Act was issued March 31, 1981, whereby
Drummond Petroleum Ltd. ("Drummond"), (name
subsequently changed to Excel Energy Inc. ("Excel") on
May 29, 1987) acquired 2,787,300 common shares in the capital
stock of Canadian Natural Resources Limited ("CNR"). In
connection with this determination, Drummond gave an undertaking
dated March 27, 1981 to the Superintendent of Brokers whereby
Drummond agreed that it would not dispose of CNR shares without
first applying for a ruling under section 55, or qualifying the
CNR shares by way of a prospectus or statement of material
facts.
11. In the next few years the market value of the CNR shares
dropped drastically and Drummond ultimately wrote down its
investment in CNR to $1.00 from an original value of $68,347,347
as at October 31, 1982.
12. Cease trade orders were issued in or about July, 1986 by
several provincial securities commissions (British Columbia,
Alberta, Manitoba and Ontario) concerning CNR shares, due to the
failure to file required information.
13. During the latter part of 1986 and early 1987 Drummond
undertook to sell its CNR holdings, following a prescribed
pattern. It entered into an exclusive marketing arrangement with
the brokerage firm Peters & Co. Limited ("Peters")
whereby Peters would use its best efforts to arrange for the sale
of one or more subsidiaries of Drummond, such subsidiaries having
no assets other than common shares of CNR.
14. A waiver letter dated February 27, 1987 provided to
Drummond from the British Columbia Superintendent of Brokers
waiving the conditions agreed to in the March 27, 1981
undertaking, provided that Drummond seek the express written
consent of the Superintendent to any disposition of CNR shares
other than for the purpose of establishing a capital loss under
the Income Tax Act.
15. Drummond applied on or about April 1, 1987 to the British
Columbia Securities Commission for an order of partial revocation
of its cease trade order with respect to the common shares of
CNR. In this application, the following statements were made by
Drummond:
i)
"Drummond has entered into a further arm's length
arrangement whereby two Federal corporations will ultimately
acquire the CNR shares in order to realize a capital loss. In
order for the adjusted cost base to follow the CNR shares,
Drummond must transfer the CNR shares to a wholly-owned
subsidiary of a wholly-owned subsidiary."
ii)
Under the heading "Nature of the Application", the
following is stated: "In view of the fact the transaction is
being entered into to trigger a tax loss, the Waiver of
Undertaking issued February 27, 1987 by the Superintendent of
Brokers would apply such that Drummond need take no further steps
in this regard.
However, it is recognized that the CNRL shares are still
subject to a cease-trade Order issued July 31, 1986 and extended
August 15, 1986 such that trading in the securities of
CNRL is prohibited. It is submitted that the granting of a
Partial Revocation of Cease-Trade Order to allow Drummond to
carry out the transactions previously set forth would in no way
be prejudicial to the public interest, since the shares are being
acquired by a private corporation for the purpose of realizing a
tax loss and therefore, no distribution to the public is
contemplated".
16. On or about June 16, 1987 156655 Canada Inc.
("156655") was incorporated under the Canada
Business Corporations Act ("CBCA") by a lawyer with
the Calgary law firm Code Hunter. 156655 was a wholly owned
subsidiary of Excel.
17. On or about April 7, 1988 the Appellant sold its interest
in GGM to American, and reported in its 1988 income tax return a
capital gain of $25,146,457 from this disposition.
18. On or about April 13, 1988 at 12:53 p.m. Calgary time
156655 acquired 1,002,666 shares of CNR at $0.17 per share on the
Toronto Stock Exchange ("TSE") for a gross price of
$170,453. Commission charges amounted to $1,000.00. The shares
were acquired, in a preordained transaction, in two lots of
502,666 and 500,000 from individuals A & B, respectively, who
sold the shares "short" i.e. they did not personally
own the shares at the time of sale.
19. At all material times hereto, Jeff Bergeson and Bernie
Katchen, described in paragraph 18 as individuals "A"
and "B", and Jim Grenon, were acting as agents,
nominees or trustees of Peters, or were employees of Peters, who
in turn were acting as trustees, nominees or agents for one or
both of Excel and 156655.
20. Jeff Bergeson, Jim Grenon and Bernie Katchen all had
contacts to either or both of Peters & Co. and Code
Hunter.
21. On or about April 13, 1988 at 1:03 pm Calgary time Excel
sold 1,002,666 shares of CNR for 0.17 per share on the TSE for a
gross price of $172,453. These shares were sold, in a preordained
transaction, in lots of 502,666 and 500,000 to the same
individuals A & B respectively, permitting them to cover
their short positions.
22. As Excel was of the view that it controlled 156655 at the
time the latter purchased the shares of CNR, Excel took the
position in reporting the transaction referred to in paragraph 21
above that subparagraph 40(2)(g)(i) and subsection 54(i) of the
ITA were applicable, viz that its capital loss of $17,995,354, as
calculated below, was denied:
|
Proceeds
|
$ 172,953
|
|
ACB of shares
|
18,168,307
|
|
Capital loss
|
$17,995,354
|
23. On or about April 13, 1988 at 1:44 p.m. Calgary time
156655 sold 1,002,666 shares of CNR for $0.18 per share on the
TSE for a gross price of $180,480 which were purchased on the
Toronto Stock Exchange by Jim Grenon in a preordainted
[sic] transaction. Commission charges amounted to $500.00.
As a result 156655 claimed a capital loss of $17,985,328,
calculated as follows:
|
Proceeds
|
$ 180,479
|
|
ACB
|
18,165,807
|
|
Capital Loss
|
17,985,328
|
* By the supposed operation of subparagraph 53(1)(f), 156655
added to the ACB of the CNR shares acquired by it as noted in
paragraph 18 above the loss supposedly denied to Excel:
|
Cost of shares
|
$ 170,453
|
|
Add: 53(1)(f) amount
|
17,995,354
|
|
ACB to 156655
|
18,165,807
|
This loss, however, was reported as nil as a result of the
supposed application of the superficial loss rules, specifically
subparagraph 54(i) since 156655 had subsequently
re-acquired [sic] 1,002,366 shares of CNR on or
about May 6, 1988 (see paragraph 26 below).
24. On or about April 13, 1988 at approximately 2:20 p.m. a
purchase and sale agreement was executed between the Appellant
and Excel whereby Excel sold all of the one hundred (100) issued
and outstanding shares [of] 156655 to the Appellant for
$2,470,000 payable as follows:
i)
immediate payment
of
$ 70,000.00
ii)
promissory note
for
$2,400,000.00
Excel warranted to the
Appellant at the time of closing of this transaction that the ACB
of the CNR shares owned by 156655 was $18.12 per share.
25. The price negotiated between the Appellant and Excel for
the shares in 156655 was based on the amount of cash 156655 had
on hand at the time of the transaction and also the potential tax
loss associated with the CNR shares which 156655 held at that
time. Cash on hand in 156655 at the time of the acquisition of
the 100 shares of 156655 by the Appellant was $181,400.
26. On or about May 6, 1988 156655 purchased 1,002,366 shares
of CNR on the TSE for a price of $0.18 per share for a gross
price of $180,926. Commission charges amounted to $500.00. As a
result of the supposed application of the superficial loss rules,
specifically subparagraph 40(2)(g) and paragraphs 54(i) and
53(1)(f), the adjusted cost base of these shares was increased by
the amount of the loss denied to 156655 resulting from the
transaction noted in paragraph 18 above:
|
Cost
|
$ 180,426
|
|
Add: amount supposedly
denied as capital loss
|
17,985,328
|
|
Revised ACB to 156655
|
18,165,753
|
27. On or about May 9, 1988 an Escrow Agreement was made among
the Appellant, Excel and Code Hunter (Trustee) whereby the sum of
$2,400,000.00 (Escrow Amount) would be held by the Escrow Agent
(Code Hunter) in trust until such time (Release Date) as set out
in the Escrow Agreement. The Release Date is stipulated to be
"The date on which Revenue Canada is barred from lawfully
serving a notice of assessment or reassessment pursuant to the
terms of the Income Tax Act (as amended from time to time)
relative to the fiscal year of the purchaser commencing on
December 31, 1987 and the fiscal year of its subsidiary 156655
Canada Inc. commencing immediately before April 12, 1988 and
relative to the new fiscal year end of the subsidiary 156655
Canada Inc. created as a result of the purchase by the purchaser
of the shares in 156655 Canada Inc. pursuant to the purchase
and sale agreement; ...".
28. On or about May 9, 1988 a Guaranteed Investment
Certificate in the amount of $2,400,000 was taken out by the
Appellant with the T.D. Mortgage Corporation. The registered
holder on the certificate is shown as Code Hunter. This
certificate has been renewed on a yearly basis with Code Hunter
as the registered holder.
29. On or about August 1, 1988 156655 and the Appellant
executed an agreement wherein it was intended to terminate the
existence of 156655.
30. On or about August 1, 1988 the shareholders of 156655
passed a special resolution resolving to dissolve 156655
voluntarily pursuant to section 203 of the CBCA.
31. On or about August 19, 1988 a Certificate of Dissolution
was issued pursuant to the CBCA advising that 156655 had been
dissolved as of August 19, 1988.
32. From its inception to the date of its dissolution 156655
carried on no active business other than the activity of trading
in CNR shares.
33. On or about August 19, 1988 156655 was wound up into the
Appellant pursuant to section 88 of the Act.
34. On or about August 25, 1988 the Appellant sold 1,002,366
shares of CNR on the TSE for $0.155 per share for a gross price
of $155,366. Commission charges amounted to $300.00. As a result
the Appellant believes it is entitled to the following capital
loss in its 1988 corporate tax return from the disposition of
these shares:
|
Proceeds
|
$ 155,366
|
|
ACB
|
$18,165,754
|
|
Capital Loss
|
$18,010,388
|
35. Also deducted by the Appellant from the Proceeds noted in
paragraph 34 above were the amounts of $85,000, purportedly paid
to "Peters & Co. Limited" and $959 claimed as legal
fees, outlays for which no supporting documentation has been
provided, yielding a supposed capital loss totaling
$18,096,347.*
* The amount of the
capital loss actually claimed by the Appellant in its 1988 tax
return was $18,096,405.
36. At all material times Jeff Bergeson and Jim Grenon were
friends as well as business associates.
37. At all material times Bernie Katchen and Jim Grenon were
friends as well as business associates.
38. At all material times Jim Grenon and Bernie Katchen have
done business deals together through the years.
39. Jim Grenon and Jeff Bergeson have done business deals over
the years.
40. Jim Grenon was associated with Peters & Co. from 1984
to 1992. In April of 1988 Jim Grenon had an association with
Peters & Co. working in a corporate finance capacity, and in
particular, one of the things he did was putting together
creative tax deals.
41. Jim Grenon was involved in actively marketing transactions
involving the sale of shares of Canadian Natural Resources that
had a high adjusted cost base and low fair market value in order
to realize their tax loss potential.
42. The proposal from Peters & Co. Limited outlined in a
letter dated January 7, 1997 to Drummond was motivated by the
fact that the CNR shares had a high cost base with a low fair
market value which would allow the possibility to transfer the
unrealized loss to a third party.
43. Jim Grenon approached the B.C. Securities Commission to
obtain an exemption from the cease trading order in order to
carry out the plan to transfer the unrealized tax loss potential
of the CNR shares from Drummond/Excel to a third party.
44. In the event that the Appellant's appeal is allowed,
Jim Grenon will receive a fee in the hundreds of thousands of
dollars for his services in developing and facilitating the
transfer of the CNR shares from Excel to the Appellant.
45. Jim Grenon contacted Bernie Katchen as part of the overall
plan to transfer the CNR shares from Excel to the Appellant and
advised Bernie Katchen to make the transactions of the CNR shares
on April 13th, 1988 which are outlined in paragraphs
5(t) and 5(u) of the Reply to Notice of Appeal.
46. The transactions by Jeff Bergeson and Bernie Katchen
relating to the sale of the CNR shares on April 13, 1988 outlined
in paragraphs 5(t) and 5(u) of the Reply to Notice of Appeal were
part and parcel of the preordained plan to facilitate the
transfer of the CNR shares from Excel to the Appellant.
47. Jim Grenon agrees that the document entitled
"Disposal of CNR Shares" and listed as production 29 of
the Respondent's List of Documents appears to be an outline
of the plan that he was involved in that resulted in the CNR
shares belonging to Excel eventually being transferred to the
Appellant.
48. The transactions involving the CNR shares made by Jeff
Bergeson and Bernie Katchen on April 13, 1988 outlined in the
Reply to Notice of Appeal at paragraphs 5(t) and 5(u) were part
of the overall plan that saw the acquisition of the CNR shares by
the Appellant.
49. In 1985, Bernie Katchen worked with Jim Grenon in putting
together the tax loss purchase schemes.
50. Bernie Katchen trusted Jim Grenon and would perform a
transaction at his direction on simply his say so
[sic].
51. Bernie Katchen and Jeff Bergeson do not know each
other.
[5]
Counsel for GPC admitted all of these facts, except those set out
in paragraphs 4 to 9, 18, 19, 23, 35, 44, 45, 46, 48, 49 and 50.
He did not deny the facts described in paragraphs 4 to 9; he only
stated that the agreements referred to in those paragraphs spoke
for themselves. He also admitted paragraph 18, except for the
words "in a preordained transaction". He admitted
paragraph 23, except for the portion relating to the shares
having been purchased by Jim Grenon in a preordained transaction
and the use of the word "supposed". He admitted as well
paragraph 35, except for the statement that there were no
supporting documents provided. He admitted the first clause of
the sentence in paragraph 50 but not the second.
[6]
Counsel for GPC denied paragraphs 19 and 49, and stated that
paragraph 44 was irrelevant. With respect to paragraphs 45,
46, and 48, he admitted that Mr. Grenon had discussed with
Mr. Katchen the transactions eventually carried out by Mr.
Katchen as outlined in paragraphs 5(t) and 5(u) of the Reply
to Notice of Appeal. However, he stated that the transactions
carried out by Messrs. Bergeson and Katchen were carried out
by them on their own behalf and on their own account. Finally,
those transactions were not part and parcel of preordained
transactions.
[7]
Mr. Robert May testified by video conference. He controlled
Maynaki, one of the shareholders that sold the GGM shares to GPC.
According to him, the Bonus Plan, which was only set up in
January 1988 by JKMay, Maynaki and the CAPI executives, reflected
prior verbal commitments made by JKMay and Maynaki to those
executives. It was to the benefit of GGM's shareholders to
retain those key executives. That benefit materialized when the
GGM shares were sold to American at a substantial profit in April
1988. Mr. May described the circumstances surrounding the
sale of the GGM shares by JKMay and Maynaki to GPC on
March 14, 1988 and he confirmed that it was made on a
section 85 rollover basis in contemplation of the resale of the
shares on April 7, 1988 to American. It seems that this
intermediary transaction took place in order to enable certain
shareholders (Venture Capitalists) of GPC to participate
in the capital gain realized on the sale of the GGM shares to
American. Prior to this intermediary transaction, the Venture
Capitalists had an economic interest in GGM without having actual
shares in that corporation. I take it for granted that the
rollover (rollover agreement) took place in order to
afford the said shareholders the same tax benefit as the other
Canadian shareholders of GGM.[1]
[8]
Mr. May could not explain why the rollover agreement, which was
drafted by lawyers, did not stipulate that GPC was to make the
payments to the CAPI executives under the Bonus Plan. The
intention, as expressed by Mr. May, was that GPC should
assume those obligations of Maynaki and JKMay and, indeed, it was
GPC that made the payments to the CAPI executives. Prior to the
rollover agreement, JKMay and Maynaki each owned 50 percent of
the common shares of GGM and two thirds of the shares of GPC; the
Venture Capitalists held the other third of GPC's shares.
Analysis
[9]
This appeal raises two separate issues: the first has to do with
the deductibility of the payments made by GPC to the CAPI
executives; the second relates to the computation of the ACB of
the CNR shares disposed of on August 25, 1988. I shall
deal with the latter issue first.
ACB of the CNR shares
[10] As can be
seen from the facts described above, the loss claimed by GPC on
the disposition of the CNR shares on August 25, 1988
was essentially a loss that it had "purchased" from
Excel in order to offset the capital gain that it realized on the
disposition of its GGM shares to American on April 7, 1988. For
this aggressive scheme — which was implemented before the
introduction of the general anti-avoidance rule in section 245 of
the Act — to work, it was crucial that the loss realized by
Excel on the disposition of its CNR shares (1:03 CNR
shares) at 1:03 p.m. on April 13, 1988 on the Toronto
Stock Exchange be disallowed as a superficial loss pursuant to
subparagraph 40(2)(g)(i)[2] of the Act and that such loss be added pursuant
to paragraph 53(1)(f) of the Act[3] to the ACB of the CNR shares
(12:53 CNR shares) acquired by 156655 at 12:53 p.m. on
April 13, 1988. Pursuant to subparagraph 40(2)(g)(i) of
the Act, a taxpayer's superficial loss is nil. A superficial
loss is defined in paragraph 54(i) of the Act, which read
as follows:
54(i) "Superficial loss". —
"superficial loss" of a taxpayer means
his loss from the disposition of a property in any
case where
(i) the same or identical property (in this
paragraph referred to as "substituted
property") was acquired, during the period
beginning 30 days before the disposition and ending 30 days after
the disposition, by the taxpayer, his
spouse or a corporation controlled, whether
directly or indirectly in any manner whatever, by
him, and
(ii) at the end of the period referred to in
subparagraph (i) the taxpayer, his spouse or the
corporation, as the case may be, owned, in
any manner whatever, the substituted property,
except that a loss otherwise described in this paragraph shall
be deemed not to be a superficial loss if the disposition giving
rise to the loss
(iii) was a disposition deemed by paragraph
33.1(11)(a), subsection 45(1), section 48, 50 or 70 or
subsection 104(4), 138(11.3), 144(4.1) or (4.2) or 149(10) to
have been made,
(iv) was the expiry of an option, or
(v) was a disposition of property by the taxpayer to which
subsection 85(4) applies,
(vi) (Repealed by 1986, c. 6, S. 27(4).)
[My emphasis.]
[11] In my
view, the scheme adopted by GPC was flawed. The series of
transactions implemented to effect a disposition in favour of GPC
of Excel's "pregnant capital loss" with respect to
the CNR shares failed because Excel did not realize a superficial
loss when it disposed of its 1:03 CNR shares. This is so for
basically two reasons. Although the 12:53 CNR shares acquired by
156655 could have constituted substituted property within the
meaning of paragraph 54(i) because they were property the
same as or identical to the 1:03 CNR shares disposed of by Excel
and were acquired by 156655 while it was controlled by Excel,
they do not meet the second condition described in subparagraph
54(i)(ii) that must be met in order for the loss to be a
superficial loss. The shares in question were not owned by 156655
at the end of the relevant period, that is, on May 13, 1988. That
period started on March 14, 1988, 30 days prior to
the disposition of the 1:03 CNR shares by Excel on
April 13, 1988, and ended on May 13, 1988,
30 days after the disposition of those shares. The 12:53 CNR
shares were disposed of at 1:44 p.m. on April 13, 1988.
[12]
Furthermore, there are no other CNR shares of 156655 that meet
the second condition set out in subparagraph 54(i)(ii) of
the Act. It is true that 156655 acquired on May 6, 1988
(that is, during the relevant period) CNR shares (May CNR
shares) which were property the same as or identical to the
1:03 CNR shares and that it still owned them on
May 13, 1988. However, those shares did not constitute,
in my view, "substituted property" as defined in
subparagraph 54(i)(i) because they were not acquired by
156655 when it was controlled by Excel. Indeed, on
April 13, 1988, at 2:20 p.m., control of 156655 had
been given up by Excel and acquired by GPC.
[13] In my
view, this literal application of paragraph 54(i) to
the facts of this case is sufficient to dispose of the issue
regarding the computation of the ACB of the CNR shares disposed
of by GPC. Such application raises no issue as to the
interpretation of that paragraph. To my surprise, however, that
is not the approach argued for by counsel for the respondent.
Instead, he took a slightly different view. He focused mainly on
the interpretation of the expression "the corporation"
found in subparagraph 54(i)(ii) of the Act. He
expressed his point of view as follows in his written
argument:
15. The Appellant's argument on this aspect of the case is
that while "the corporation" in ss. 54(i)(ii) refers to
the same corporation specified in 54(i)(ii) [I think he meant
54(i)(i).], it does not require that the corporation be
"controlled, whether directly or indirectly in any manner
whatever, by him," since although these words appear in
54(i)(i), they are not repeated in 54(i)(ii). To this, the
respondent submits that repeating all of the words in the second
provision is not necessary and that the words "the
corporation" mean precisely the same corporation, with the
same control features, as is mentioned in the previous
provision.
[14] On that
interpretation, the loss on the disposition of the 1:03 CNR
shares by Excel would not be a superficial loss because the May
CNR shares were not owned by a corporation controlled by Excel.
To come to that conclusion, counsel for the respondent analyzed
the distinction between "a" corporation in
subparagraph 54(i)(i) and "the" corporation
in subparagraph 54(i)(ii). He referred to the
definition of the words "a" and "the"
provided in The Concise Oxford Dictionary, 10th edition:
"a . . . used when mentioning someone or something
for the first time; the indefinite article";
"the . . . denoting one or more people or things
already mentioned or assumed to be common knowledge". The
corporation referred to in subparagraph 54(i)(ii) is
thus the corporation referred to in subparagraph (i), i.e. a
corporation controlled by the taxpayer, here Excel.
[15] I agree
with this conclusion of counsel for the respondent and with his
contention that the text of subparagraph 54(i)(ii) is
clear and unambiguous. His interpretation is in conformity with
the classic principles of interpretation, in particular, the
principle enunciated by the Supreme Court of Canada in
Québec (Communauté urbaine) v. Corp.
Notre-Dame de Bon-Secours, [1994] 3
S.C.R. 3, at page 17, where it is stated:
In light of this passage there is no longer any doubt that the
interpretation of tax legislation should be subject to the
ordinary rules of construction. At page 87 of his text
Construction of Statutes (2nd ed. 1983), Driedger
fittingly summarizes the basic principles: ". . . the words
of an Act are to be read in their entire context and in
their grammatical and ordinary sense harmoniously with the scheme
of the Act, the object of the Act, and the intention of
Parliament".
[My emphasis.]
[16] Counsel
for GPC also argues that the wording of
subparagraph 54(i)(ii) is clear but he adopts the
contrary interpretation to the Minister's! He basically
states that once you have identified a corporation in
subparagraph 54(i)(i), here 156655, you do not have
to determine whether that corporation is still controlled by the
taxpayer (here Excel) at the end of the relevant period. I
obviously disagree with this interpretation. But even if I were
to give him the benefit of the doubt and conclude that the
wording of subparagraph 54(i)(ii) is ambiguous, I
would still adopt the respondent's interpretation. If one
takes into account the purpose of paragraph 54(i) and
of subparagraph 40(2)(g)(i) of the Act, it is clear that
it is to prevent a taxpayer from deducting a capital loss on
property that has been disposed of when the taxpayer or someone
who is part of the same economic unit, such as the taxpayer's
spouse or a corporation controlled by the taxpayer, acquired the
same or identical property during the relevant period and still
held it at the end of that period. If the taxpayer's spouse
divorced him or if the corporation ceased to be controlled by him
during the relevant period, the taxpayer, if I were to adopt the
interpretation of counsel for GPC, could be prevented from
deducting his loss. I do not see any valid reason for such a
result: why should the " stop-loss
rule " in subparagraph 40(2)(g)(i) apply
when the "substituted property" is no longer owned by
someone in the same economic unit at the end of the relevant
period? There is in that case a true economic disposition of the
property. That property is no longer subject to the control of
the taxpayer. Given two diverging interpretations of
subparagraph 54(i)(ii), one achieving the purpose of
the legislation and the other not, the choice is clear.
[17] Since no
superficial loss was suffered by Excel on the disposition of its
1:03 CNR shares, its loss of $17,995,354 was not nullified
pursuant to subparagraph 40(2)(g)(i) of the Act, and
no adjustment pursuant to paragraph 53(1)(f) could be
made in computing the ACB of the 12:53 CNR shares. Therefore,
when 156655 disposed of the 12:53 CNR shares at 1:44 p.m. on
April 13, 1988, it actually realized a capital gain and not a
capital loss. Accordingly, no consequential adjustment has to be
made to the ACB of the May CNR shares pursuant to
paragraph 53(1)(f) of the Act. GPC therefore failed
to establish that the Minister made an error in computing its
loss on the disposition of the May CNR shares on
August 25, 1988.
[18] Most of
the testimony given during the hearing centred around the role
played by Messrs. Grenon, Bergeson and Katchen. The Minister
tried to establish that these three persons "were acting as
agents, nominees or trustees of Peters, or were employees of
Peters, who in turn were acting as trustees, nominees or agents
to one or both of Excel and 156655".[4] For the reasons I have given, it
should not be necessary to decide in what capacity these persons
were acting. However, in case it should prove necessary to do so,
I would conclude that the Minister failed to meet his onus of
establishing those facts. The burden was on him because when he
issued the assessment to GPC, he did do not assume those
particular facts.
[19] In their
testimony, both Mr. Katchen and Mr. Bergeson indicated that not
only did they not recall the circumstances surrounding the short
sales of the CNR shares but they did not even remember having
entered into those transactions. Mr. Bergeson even
acknowledged that it is possible that they could have taken place
without his personal knowledge. However, Messrs. Bergeson
and Katchen both incurred losses of $1,350 as a result of their
transactions involving the CNR shares and they both deducted
those losses in computing their income for tax purposes.
Furthermore — and this is crucial — they were not
reimbursed by anyone for the losses.
[20] It should
be added that they did not complain to their stockbroker that the
transactions in question were carried out illegally, without
their knowledge. By their conduct, they have either agreed to
them or ratified them. Mr. Katchen was even able to file at
the hearing the original transaction slips issued by Peters with
respect to his short sale, having found them attached to his tax
returns. Mr. Grenon also testified that both Mr. Katchen and
Mr. Bergeson had acted on their own behalf. There is no
document or agreement that would establish any agency
relationship. I am convinced that they did not act on behalf of
Excel or 156655 with respect to those transactions. Rather, they
acted as principals.
Bonus Plan Payments
[21] Based on
the testimony of Mr. May, I am satisfied that it was due to an
oversight that the undertaking to pay the CAPI executives was not
properly stipulated in the rollover agreements between JKMay and
Maynaki on the one hand and GPC on the other hand. It should be
stressed that JKMay and Maynaki owned all the shares of GGM and
controlled GPC with two thirds of its common shares. Given this
situation, it was not as critical that the rollover agreements
properly reflect the obligation of GPC to make the payments to
the CAPI executives. Had it been a sale to an
arm's-length purchaser, I am convinced that the vendors
would have been more careful to ensure that the written
documentation reflected all of GPC's undertakings. During
argument, I asked counsel for the Minister if he was aware of any
reason (including tax reasons) why the parties to the rollover
agreements may have intended not to have GPC assume the
obligation to make the payments to the CAPI executives. He did
not know of any. I do not see any either. Had there been any such
reasons, it would have been more difficult to conclude that the
omission was due to a mere oversight.
[22] I should
add that it made sense that GPC should bear the financial costs
of the Bonus Plan payments because the GGM shares were rolled
over to GPC in order to allow the Venture Capitalists to
participate indirectly in the capital gain realized on the
disposition of the GGM shares to American. It was only fitting
that they should also participate indirectly in the expenses
incurred to realize that gain.
[23] In these
circumstances, I come to the conclusion that the intent of the
parties was to have GPC undertake to make the payments to the
CAPI executives when it acquired the GGM shares from Maynaki and
JKMay. In my view, the payments made to those executives are part
of GPC's cost of the GGM shares.
[24] For these
reasons, the appeal of GPC is allowed and the assessment is
referred back to the Minister for reconsideration and
reassessment on the basis that GPC is entitled to deduct, in
computing its capital gain on the GGM shares, the payments made
to the CAPI executives.
Signed at Magog, Quebec, this 22nd day of August 2001.
"Pierre Archambault"
J.T.C.C.
COURT FILE
NO.:
98-2960(IT)G
STYLE OF
CAUSE:
GRAPHIC PACKAGING CANADA CORPORATION
and Her Majesty the Queen
PLACES OF
HEARING:
Montreal, Quebec
Ottawa, Ontario
DATES OF
HEARING:
February 19 and 20, 2001 (Montreal)
April 19, 2001 (Ottawa)
REASONS FOR JUDGMENT BY: The
Honourable Judge Pierre Archambault
DATE OF
JUDGMENT:
April 20, 2001
APPEARANCES:
Counsel for the Appellant: Wilfrid Lefebvre
Counsel for the
Respondent:
Robert Gosman
Gérald L. Chartier
COUNSEL OF RECORD:
For the
Appellant:
Name:
Wilfrid Lefebvre
Firm:
Ogilvy Renault
Montreal, Quebec
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-591(GST)I
BETWEEN:
ROBERT D. PARTRIDGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on August 8, 2001, at Kingston,
Ontario, by
the Honourable Judge Gerald J. Rip
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Rosemary
Fincham
JUDGMENT
The
appeal from the assessment made under Part IX of the Excise
Tax Act for the period from January 1, 1997 to December 31,
1999, is allowed, without costs, and the assessment is referred
back to the Minister of National Revenue for reconsideration and
reassessment in order to delete the penalty assessed pursuant to
section 275 of that statute.
The
appellant is entitled to no further relief.
Signed at Ottawa, Canada, this 24th day of August 2001.
J.T.C.C.
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