A-454-95
CORAM: MARCEAU J.A.
DESJARDINS
J.A.
McDONALD J.A.
BETWEEN:
HER
MAJESTY THE QUEEN
Appellant
AND
NOVA CORPORATION
OF ALBERTA
Respondent
REASONS
FOR JUDGMENT
McDONALD J.A.
The
issue in this appeal is the application of what was then subsection 55(1) of
the Income Tax Act (the "Act") to the taxpayer's
acquisition of capital losses. The Minister took the position that section
55(1) operated to deny the taxpayer the losses claimed. The Tax Court Judge
found in favour of the taxpayer, and the Minister appealed to this Court.
THE FACTS
In
1985, two transactions were undertaken by Nova Corporation of Alberta
("Nova") and a number of corporations to which Nova was not related
within the meaning of section 251 of the Act. Through these
transactions, Nova acquired shares with an adjusted cost base of approximately
$42,000,000, but only nominal value. Nova's purchase price for these shares
was $2,237,500. Once Nova disposed of these shares through a series of
transactions, it claimed a capital loss of approximately $42,000,000 and thus
an allowable capital loss of nearly $21,000,000 which it carried back to its
1985 taxation year and offset against a capital gain realized in that year,
thus reducing its tax payable under Part I of the Act by approximately
$10,000,000.
The
specifics of the transactions were laid out in an agreed statement of facts
which is reproduced below:
AGREED STATEMENT OF FACTS AND ISSUES
For the purposes of this appeal
the parties, by their respective counsel, admit the following facts and agree
upon the following issues to be decided by the Court. The parties agree that
their admission of facts shall have the same effect as if the facts had
formally been proved and accepted by the Court as true. The parties each
reserve the right to adduce additional evidence which is relevant and probative
of any issue before the Court and which is not inconsistent with the facts
admitted herein. In this agreed statement of facts the terms "taxable
Canadian corporation", "public corporation", "capital
property", "disposition", "proceeds of disposition",
"adjusted cost base", "allowable capital loss", "net
capital loss" and "taxable capital gain" each have the meaning
given to them in the Income Tax Act (the "Act").
1.The Appellant, Nova Corporation
of Alberta, is a corporation incorporated by Special Act of the Legislature of
the Province of Alberta. The Appellant was originally named Alberta Gas Trunk
Lines Limited and, for a time, was known as Nova, an Alberta Corporation.
2.The Appellant's head office and
principal place of business is located at 801 7th Avenue S.W., Calgary,
Alberta, T2P 2N6.
3.This appeal relates to a Notice
of Reassessment dated December 23, 1993, Number 3828084 (the
"Reassessment"), with respect to the Appellant's 1985 taxation year.
4.The Appellant is a resident of
Canada for purposes of the Act and, at all material times, was a taxable
Canadian corporation and a public corporation. Throughout its history the
Appellant's taxation year has ended on December 31.
5.The Appellant owns and operates
a natural gas gathering and transmission pipeline system in Alberta. Throughout
its history the Appellant has made investments in subsidiaries and affiliates.
Its subsidiaries and affiliates have carried on a variety of activities,
including exploring for and marketing hydrocarbons, manufacturing and
transporting petrochemicals and assembling and selling heavy duty trucks.
6.During its 1986 taxation year
the Appellant disposed of the shares of two corporations, Allarco Group Ltd.
("Allarco") and Petralgas Chemicals N.Z. Limited ("Petralgas")
which it held as capital property. In each case the Appellant reported that
its proceeds of disposition were less than the adjusted cost base of the shares
and, in each case, the Appellant reported a capital loss. The details of the
Appellant's claims and the circumstances leading to the acquisition and
disposition of the shares are set out in detail below.
The Carma Transactions
7.In late 1985, both Carma Ltd.
("Carma") and its wholly owned subsidiary, Allarco, were in serious
financial difficulty. By this time both Carma and Allarco were in default on a
debt restructuring which had been implemented in 1982. During 1986 Allarco was
indebted to The Bank of Nova Scotia (the"Bank"), a Canadian chartered
bank, in an amount exceeding $100,000,000 and the aggregate fair market value
of its assets was considerably less than this amount. Allarco's indebtedness
to the Bank was guaranteed by Carma.
8.Carma's guarantee of Allarco's
debt to the Bank was secured by, among other things, a pledge of $25,000 Series
"B" 11% Cumulative Redeemable Retractable Preferred Shares which it
owned in the capital of Allarco (the "Allarco Preferred Shares").
9.Immediately before the
transactions set out below the Allarco Preferred Shares had an adjusted cost
base to Carma of $16,500,000.
10.By June 27, 1986, prior to the
Appellant's involvement, virtually all of the value of the Allarco Preferred
Shares had been lost due to Allarco's financial difficulties and the Allarco
Preferred Shares had only a nominal market value. Accordingly, if Carma had
sold the Allarco Preferred Shares to an arm's length party for their value at
that time it would have realized a capital loss of $16,500,000. As a result of
its financial and tax circumstances, Carma did not expect to be able to use
that loss but believed the loss might be made available to a corporate
purchaser which would be able to utilize it.
11.Carma took the following steps
in order to facilitate the transfer of the inherent capital loss in the Allarco
Preferred Shares to an unidentified prospective purchaser
(a)on May 22, 1986, it caused
three taxable Canadian corporations, 348840 Alberta Ltd. ("840"),
348841 Alberta Ltd. ("841"), and 348842 Alberta Ltd.
("842") to be incorporated under the Business Corporations Act of
Alberta;
(b)on June 19, 1986, Carma became
the sole shareholder of 840, which in turn became the sole shareholder of 841,
which in turn became the sole shareholder of 842; and
(c)on June 22, 1986, Carma sold
the Allarco Preferred Shares to 842 for $1.00. The $16,499,999 capital loss
which would otherwise have been realized by Carma on the sale to 842 was deemed
to be nil by paragraph 85(4)(a) of the Act. As Carma did not own directly any
shares in the capital of 842, a like amount of $16,499,999 was required to be
added to 842's adjusted cost base of the Allarco Preferred Shares pursuant to
paragraph 53(1)(f.1) of the Act. Accordingly, 842's adjusted cost base of the
Allarco Preferred Shares became $16,500,000.
12.Once it became the owner of the
Allarco Preferred Shares, 842 pledged the shares to the Bank as continuing
security for Carma's guarantee of Allarco's debt to the Bank. The Bank was
prepared to release its pledge of the Allarco Preferred Shares if it were
instead granted a right of first refusal to acquire the shares if they were
offered for sale.
13.On October 22, 1986, Carma, 842
and 348843 Alberta Ltd., another subsidiary of Carma, being the only
shareholders of Allarco, entered into a unanimous shareholders' agreement in
which they agreed to grant the Bank a right of first refusal with respect to
the Allarco Preferred Shares. The right of first refusal provided the Bank
with the right to purchase the Allarco Preferred Shares if any transfer of the
Allarco Preferred Shares were proposed. The right of first refusal did not
apply to a proposed transfer to a parent corporation on the winding up of 842
if it was the holder of the Allarco Preferred Shares as long as the parent
corporation agreed to assume 842's obligations under the unanimous
shareholders' agreement. Once the unanimous shareholders' agreement was signed
the Bank released the pledge over the Allarco Preferred Shares which it held as
security.
14.On October 22, 1986, the
Appellant purchased the sole issued share of 842 from 841 for a purchase price
of $1,237,500, which was equal to 15 cents for every dollar of allowable
capital loss inherent in the only asset of 842, the Allarco Preferred Shares.
The change of control of 842 resulting from this transaction did not affect the
adjusted cost base of the Allarco Preferred Shares held by 842 which remained
at $16,500,000.
15.On October 24, 1986, the
Appellant commenced the dissolution of its wholly owned subsidiary, 842. The
Allarco Preferred Shares were transferred to the Appellant in the course of
winding up, and the Appellant assumed the obligations of 842 under the
unanimous shareholders agreement so that the right of first refusal of the Bank
referred to in paragraph 13 did not apply. 842 was legally dissolved and by
virtue of subparagraph 88(1)(a)(iii), paragraph 88(1)(c) and paragraph 54(a) of
the Act, the adjusted cost base of the Allarco Preferred Shares to the
Appellant was deemed to be $16,500,000.
16.The only purpose of the series
of transactions described in paragraphs 13 to 15 was to enable the Appellant to
avail itself of the capital loss inherent in the Allarco Preferred Shares by
acquiring those shares as capital property with an adjusted cost base of
$16,500,000.
17.On November 19, 1986, as the
last step in the series of transactions described in paragraphs 13 to 15, the
Appellant sold the Allarco Preferred Shares to the Bank for $1.00 which were
its proceeds of disposition. Pursuant to the provisions of paragraph 40(1)(b)
of the Act the Appellant calculated that its loss from the disposition of the
Allarco Preferred Shares was $16,500,00. Pursuant to the provisions of
paragraph 39(1)(b) of the Act the Appellant calculated that its capital loss
from the disposition of the Allarco Preferred Shares was $16,500,000. Pursuant
to the provisions of paragraph 38(b) of the Act the Appellant calculated that
its allowable capital loss from the disposition of the Allarco Preferred Shares
was $8,250,000.
18.The price of the share of 842
was determined in negotiations between the Appellant on the one hand, and Carma
on the other hand, with Carma attempting to maximize its receipt and the
Appellant attempting to minimize its payment. In these negotiations with
respect to price the Appellant and Carma were each acting in their own self‑interest.
19.The Appellant was not a party
to any of the transactions described in paragraphs 11 to 13 inclusive and did
not control or direct them. Before October 22, 1986, the Appellant had no
right or obligation to purchase the sole issued share of 842, but before
completing that purchase, the Appellant completed a due diligence review of the
documentation relating to the transactions described in paragraphs 11 to 13
inclusive and satisfied itself that the transactions had occurred, that 842
owned the Allarco Preferred Shares, and that the adjusted cost base of the
Allarco Preferred Shares in 842's hands was $16,500,000.
20.All of the documents relating
to the transactions set out in paragraphs 11 to 17 herein were legally
effective and binding upon the parties thereto and the transactions forth in
the documents truly represent the agreements between the parties and were not
shams.
21.The Minister examined all of
the relevant documents in the course of an audit of the Appellant and concluded
that the Appellant's adjusted cost base of the Allarco Preferred Shares was
$16,500,000 immediately before it sold the shares to the Bank.
The Petralgas Transactions
22.Among the Appellant's
investments in 1986 was an interest in Alberta Gas Chemicals Ltd.
("AGCL"), a taxable Canadian corporation which owned and operated
several methanol plants in Canada. At all material times the issued and
outstanding shares of AGCL were owned as to 50% by the Appellant and as to 50%
by Allarco.
23.AGCL owned 49% of the issued
and outstanding shares of Petralgas which was a New Zealand corporation. AGCL
had acquired its interest in Petralgas in 1980. The remaining 51% of the
shares of Petralgas were owned by Petroleum Corporation of New Zealand
("Petrocorp"), a New Zealand corporation which was controlled by the
Government of New Zealand. Petralgas owned and operated a methanol plant in
New Zealand.
24.An agreement between AGCL and
Petrocorp obliged thern to provide capital and other financial support to Petralgas
in proportion to their respective shareholdings. By early 1986, AGCL had
invested $25,425,000 in Petralgas, but its interest in Petralgas had only
nominal fair market value because Petralgas had encountered serious financial
difficulties.
25.Immediately before the
transactions described below, AGCL's adjusted cost base of its shares of
Petralgas (the "Petralgas Shares") was $25,425,000. Accordingly, if
AGCL had sold the Petralgas Shares to an arm's length party for their value at
that time it would have realized a capital loss of $25,425,000.
26.By May of 1986, AGCL was also
in financial difficulty and had commenced negotiations with its major creditors
with respect to a restructuring of its own debts. AGCL's financial position
was made worse by its funding obligations for Petralgas. AGCL's financial
difficulties made its continuing involvement in Petralgas uneconomic and, at
the insistence of its creditors, AGCL approached Petrocorp to determine if
Petrocorp would be prepared to acquire its interest and assume its funding
obligations in respect of Petralgas. During May of 1986, Petrocorp agreed in
principle that it would be prepared to take over AGCL's 49% interest in
Petralgas and its continuing funding obligation.
27.AGCL also owned all of the
issued shares of Alberta Gas Chemicals Resources Ltd. ("AGCR"),
which, in turn, owned all the issued shares of 346976 Alberta Ltd.
("976"), a corporation newly incorporated for the purposes of the
transactions described in paragraphs 28 and 29 below.
28.Between June 2 and September
22, 1986, the following steps were taken in order to facilitate the transfer of
the inherent capital loss on the Petralgas Shares to the Appellant:
(a)AGCR granted the Appellant an
option to purchase the shares of 976 for $100, subject to the condition that
976 be the owner of the Petralgas Shares at the time of the exercise of the
option:
(b)AGCL sold the Petralgas Shares
to 976 for $1,000,000 and paid by way of a demand non‑interest bearing
promissory note. The $24,425,000 capital loss which would otherwise have been
realized on that sale was deemed to be nil by paragraph 85(4)(a) of the Act and
a like amount of $24,425,000 was required to be added to 976's adjusted cost
base of the Petralgas Shares pursuant to paragraph 53(1)(f.1) of the Act;
(c)the Appellant exercised its
option to purchase the shares of 976 from AGCR for $100. The change of control
of 976 resulting from this transaction did not affect the adjusted cost base of
the Petralgas Shares held by 976 which remained at $25,425,000; and
(d)976 then sold the Petralgas
Shares to the Appellant for $1,000,000. The $24,425,000 capital loss which
would otherwise have been realized on that sale by 976 was deemed to be nil by
paragraph 40(2)(e) of the Act and a like amount of $24,425,000 was required to
bc added to the Appellant's adjusted cost base of the Petralgas Shares pursuant
to paragraph 53(1)(f.1) of the Act.
29.As the final step in the
series, on September 22, 1986 the Appellant sold the Petralgas Shares to Petrocorp
for $1.00 which were its proceeds of disposition. Pursuant to the provisions
of paragraph 40(1)(b) of the Act the Appellant calculated that its loss from
the disposition of the Petralgas Shares was $25,425,000. Pursuant to the
provisions of paragraph 39(1)(b) of the Act the Appellant calculated that its
capital loss from the disposition of the Petralgas Shares was $25,425,000.
Pursuant to the provisions of paragraph 38(b) of the Act the Appellant
calculated that its allowable capital loss from the disposition of the
Petralgas Shares was $12,712,500.
30.The only purpose of the series
of transactions described in paragraph 28 was to enable the Appellant to avail
itself of the capital loss inherent in the Petralgas Shares by acquiring those
shares as capital property with an adjusted cost base of $25,425,000.
31.976 used the $1,000,000
received from the Appellant to pay the promissory note it had issued to AGCL.
32.The $1,000,000 purchase price
paid by the Appellant for the Petralgas Shares was slightly less than 8 cents
for every dollar of allowable capital loss inherent in them. That price was
determined in negotiations between AGCL and the Appellant, with AGCL attempting
to maximize its receipt and the Appellant attempting to minimize its payment.
In these negotiations with respect to price the Appellant and AGCL were each
acting in their own self‑interest.
33.The Appellant, as the owner of
50% of the shares of AGCL, reflected its share of the loss of the value of the
AGCL investment in Petralgas in its own consolidated financial statements.
34.All of the documents relating
to the transactions set out in paragraphs 28 and 29 were legally effective and
binding upon the parties thereto and the transactions as set forth in the
documents truly represent the agreements between the parties and were not
shams.
35.The Minister examined all of
the relevant documents in the course of an audit of the Appellant and concluded
that the Appellant's adjusted cost base of the Petralgas Shares was $25,425,000
immediately before it sold the shares to Petrocorp.
Particulars of Tax Filings and
Reassessments
36.In filing its return for its
1986 taxation year, the Appellant reported an allowable capital loss (the
"Allarco Allowable Capital Loss") of $8,250,000 for its 1986 taxation
year in respect of the sale of the Allarco Preferred Shares, such loss having
been computed pursuant to paragraphs 40(1)(b), 39(1)(b) and 38(b) of the Act.
37.In determining its income under
section 3 of the Act for its 1986 taxation year, the Appellant did not deduct
any amount under paragraph 3(b) of the Act in respect of the Allarco Allowable
Capital Loss.
38.In filing its return for its
1986 taxation year, the Appellant reported an allowable capital loss (the
"Petralgas Allowable Capital Loss") of $12,712,500 for its 1986
taxation year in respect of the sale of the Petralgas Shares, such loss having
been computed pursuant to paragraphs 40(1)(b), 39(1)(b) and 38(b) of the Act.
39.In determining its income under
section 3 of the Act for its 1986 taxation year, the Appellant did not deduct
any amount under paragraph 3(b) of the Act in respect of the Petralgas
Allowable Capital Loss.
40.The Appellant made a timely
claim for the deductions of $8,250,000 for the Allarco Allowable Capital Loss
and $12,712,500 for the Petralgas Allowable Capital Loss in computing its
taxable income for its 1985 taxation year in respect of the carry‑back of
these losses pursuant to paragraphs 111(8)(a) and 111(1)(b) of the Act. These
losses were applied against its reported taxable capital gain of $82,549,667
which had been realized upon the disposition of its head office building in
1985. Prior to any in depth audit, the Minister reassessed the Appellant's
1985 taxation year to carry back these 1986 losses.
41.On December 23, 1993 the
Minister issued the Reassessment reducing the net capital losses carried back
from 1986 as follows
(a)Allarco Allowable Capital Loss:
Claimed $ 8,250,000
Disallowed 7,631,250
Allowed$ 618,750
(b)Petralgas Allowable Capital
Loss:
Claimed $12,712,500
Disallowed 12,212,500
Allowed $ 500,000
42.At the time of issuing the
Reassessment the Minister concluded that but for paragraph 55(1)(c) of the Act,
the Allarco Allowable Capital Loss and the Petralgas Allowable Capital Loss as
reported by the Appellant in 1986 would have been allowable capital losses of
the Appellant in 1986 and the net capital loss claimed in 1985 would have been
properly deducted. The Appellant takes issue with the conclusion that
subsection 55(1) has any application to these transactions.
43.Upon being advised by the
Minister of the proposed reassessment for 1985 the Appellant requested the
Minister to allow it to claim additional discretionary deductions for its 1985
taxation year so as to minimize the tax payable by the Appellant as a result of
the 1986 net capital loss carry back being reduced.
44.The result of the Reassessment
was to reduce by $19,843,750 the 1986 net capital loss available to be carried
back to the Appellant's 1985 taxation year and deducted in computing its
taxable income for that year.
45.By Notices of Objection filed
on the 25th day of January, 1994 the Appellant objected to the Reassessment.
46.By Notification dated March 30,
1994, the Minister confirmed the Reassessment.
47.By Notice of Appeal dated March
30, 1994 the Appellant appealed to this Court.
THE DECISION UNDER APPEAL
The
Tax Court Judge considered the application of subsection 55(1) to the case at
bar and found that it did not apply to reduce the losses claimed by Nova. In
reaching this conclusion, the Tax Court Judge looked to whether the Allarco
Preferred shares and the Petralgas Shares were disposed of by Nova under
circumstances such that Nova may reasonably be considered to have artificially
or unduly increased the amount of its losses from the dispositions.
The
Tax Court Judge looked at the plain meaning of subsection 55(1) and held that
the subsection required some action on the part of the taxpayer to increase the
adjusted cost base of the assets it acquired. As the deduction came about by
operation of the statute, the taxpayer had not actually done anything to
increase the ACB or decrease the proceeds of disposition, and the Tax Court
Judge concluded that Nova was entitled to the losses claimed.
ANALYSIS
Both
parties agree that this entire transaction was undertaken by Nova to avoid
tax. It was, in effect, a purchase of losses with an eye to reducing Nova's
tax burden. As has been held by this Court and the Supreme Court of Canada
many times, there is no crime in tax avoidance. In this way, Nova's loss
claim, though difficult to admire, is not inherently wrong, and must be
assessed with a dispassionate eye.
1. The Statutory Framework
In
1986, subsection 55(1) held:
55(1) For the purposes of this
subdivision, where the result of one or more sales, exchanges, declarations of
trust, or other transactions of any kind whatever is that a taxpayer has
disposed of property under circumstances such that he may reasonably be
considered to have artificially or unduly
(a) reduced the amount of his gain
from the disposition,
(b) created a loss from the
disposition, or
(c) increased the amount of his
loss from the disposition,
the taxpayer's gain or loss, as
the case may be, from the disposition of the property shall be computed as if
such reduction, creation or increase, as the case may be, had not occurred.
Following
the Supreme Court of Canada in Friesen v. The Queen, [1995] 3
S.C.R. 103, the first step in assessing a provision of the Income Tax Act
is to assess its plain meaning. Where the statutory language admits of no
ambiguity, the plain meaning shall prevail, and there is no need to resort to
an object and spirit analysis.
Upon
a plain reading of this subsection, there is a precondition to the application
of the subsection: the taxpayer must have done something to artificially or
unduly increase his losses from disposition. That is, it is not enough that
there be a loss, or that a loss be artificially or unduly increased in amount.
For the subsection to apply, it requires that "he" -- the taxpayer --
have increased the amount of his loss from disposition.
The
term "loss from disposition" is defined in subparagraph 40(1)(b)(i)
of the Act as the amount by which the adjusted cost base (ACB) exceeds
the taxpayer's proceeds of disposition of the property. On a plain reading of
subsection 55(1), then, the taxpayer must have done something to influence
either the adjusted cost base or the proceeds of disposition in order to have
artificially or unduly increased his losses.
The
next logical step in the analysis is to assess whether Nova did anything to
affect the ACB or the proceeds of disposition of the Allarco and Petralgas
shares.
(a) The Petralgas Transactions
In
the Petralgas transactions, paragraphs 85(4)(a), 40(2)(e) and 53(1)(f.1)
operated to enable Nova to claim an ACB of $25,425,000. AGCL sold its
Petralgas shares to '976, a subsidiary, for a $1,000,000 promissory note. The
loss that AGCL might otherwise have been able to claim was deemed to be nil by
paragraph 85(4)(a). At the same time, paragraph 53(1)(f.1) operated to require
the $25,425,000 to be added to '976's ACB of the Petralgas shares.
As
explained in the detailed statement of facts, AGCR owned '976. Nova held an
option to purchase the shares of '976 from AGCR which it exercised after the
above transactions were complete. In exchange for $100, control of '976 moved
from AGCR to Nova. This did not affect the ACB of the Petralgas shares held by
'976. At this point, '976 sold the Petralgas shares to Nova for $1,000,000.
The capital loss of $24,425,000 which would otherwise have arisen on that sale
was deemed to be nil by paragraph 40(2)(e), and 53(1)(f.1) again operated to
add $24,425,000 to Nova's ACB. As a final step, Nova sold the Petralgas shares
to Petrocorp for $1.00, thus realizing a "loss from disposition"
under paragraph 40(1)(b) of the Act.
(b) The Allarco Transactions
In
the Allarco transactions, the adjusted cost base (ACB) came about through the operation
of subsection 88(1) along with paragraphs 85(4)(a) and 53(1)(f.1). Paragraph
85(4)(a) states that where a taxpayer disposes of capital property to a
corporation that it controls, its capital loss from the disposition is deemed
to be zero. Thus, when Carma sold the Allarco shares to '842, a third-tier
subsidiary,
paragraph 85(4)(a) of the Act deemed Carma's capital loss to be zero.
At this point, paragraph 53(1)(f.1) operated to require the amount of capital
loss Carma could have otherwise claimed to be added to '842's ACB for the
shares. After a series of other transactions outlined in the detailed
statement of facts, Nova purchased the sole share of '842 from '841 for
$1,237,500. The change of control did not affect the ACB of the Allarco shares
which remained $16,500,000. Two days after taking control, Nova commenced the
dissolution of its now wholly-owned subsidiary, '842. By virtue of
subparagraph 88(1)(a)(iii), as well as paragraphs 88(1)(c) and 54(a), the ACB
of the Allarco shares to Nova was deemed to be $16,500,000. Once '842 had been
wound up, Nova sold the Allarco shares to the Bank for $1.00. Hence, Nova
suffered a loss on disposition.
There
is no suggestion by the Minister's representative that Nova influenced the
proceeds of disposition in either transaction. Similarly, there is no
allegation that Nova tampered with the adjusted cost base of the shares. What
is clear is that by operation of subsection 88(1) in the case of the Allarco
preferred shares and by operation of paragraphs 40(2)(e) and 53(1)(f.1) in the
case of the Petralgas shares, Nova inherited the adjusted cost base of the
shares. That being the case, I cannot see how Nova could be seen as having
increased the amount of "loss from disposition" of the shares.
2. Scope of s.55(1)
It
is clear that the tax loss claimed by Nova is far in excess of the actual loss
sustained by Nova in this transaction. Thus, the Minister's Representative
urges that this Court apply subsection 55(1) in a broad manner, arguing that
this subsection is in essence the predecessor to the current anti-avoidance
provisions and should be given a wide interpretation so as to maximize its
scope. According to this position, the subsection should be given a purposive
interpretation to counter "inappropriate tax avoidance" such as the
transactions in this case.
Although
the Minister's Representative argued ably, I am unable to agree that the
subsection should be pushed beyond the limits of its plain meaning. Parliament
has broad powers to enact and modify income taxation legislation. In cases
where the plain meaning of the provision is unambiguous, it is not this Court's
role to expand the scope of Income Tax Act provisions beyond the plain
meaning of the words used in the subsection: Canada v. Antosko,
[1994] 2 S.C.R. 312. While it is true that in situations of ambiguity, a
purposive approach may be instructive in interpreting a provision, there is no
such ambiguity here. A plain reading of the section leaves the reader with a
clear indication of a requirement that the taxpayer have done something to
artificially increase his losses.
I
also note that in 1987, the Act was amended so as to prevent the type of
loss purchase undertaken in this case. Parliament chose not to give these
amendments retroactive effect. Although certainly not determinative of the
issue before this Court, the subsequent amendment suggests that the legislators
perceived a loophole. It is that loophole which the Respondent found and
capitalized on while it was available. As was held in I.R.C. v. Fisher's
Executors, [1926] AC 395 at 412 (HL), "[a taxpayer] may legitimately
claim the advantage of any express terms or any omissions that he can find in
his favour in taxing Acts." This concept remains with us today in
situations where the Act is clear on a plain reading. It appears to me
that the loss on disposition claimed by the taxpayer in this case came about
purely by operation of the provisions of the Income Tax Act. This
operation of the Act has since been amended to prevent like
occurrences. In my view, the taxpayer cannot be punished for taking full
advantage of the operation of the Act while it so existed.
3. "His loss" v. "a loss"
Much
was made in oral argument about the differentiation between the use of the phrase
"his loss" in subparagraph 55(1)(c) and simply "loss" in
subparagraph 55(1)(b). It was argued that the differing text required a
different meaning be imparted to each of the two provisions. That is, the
taxpayer Nova was precluded from claiming the Allarco and Petralgas losses
under paragraph 55(1)(c), as the losses were not "his [the taxpayer's]
losses."
It
is clear that the economic losses actually incurred by Nova on the purchase of
these shares were much less than the losses claimed. Once Nova purchased the
shares in Allarco and Petralgas, though, the loss derived from disposition of
those shares was deemed to be Nova's loss. The loss referred to in subsection
55(1) is the loss on disposition which, as explained earlier, is defined in the
Act as being the difference between the ACB and the proceeds of
disposition. Once the taxpayer inherits the ACB of the shares through
operation of the Act, the loss is deemed to be the taxpayer's loss.
Subparagraph
(b) refers to the taxpayer creating a loss, while (c) refers to the taxpayer
increasing his loss. The Minister's Representative argued that the phrase
"his loss" in (c) should be read as meaning "his economic
loss." In my view, the different use of "a loss" and "his
loss" does not advance the Minister's case. I do not understand the
phrase "his loss" to mean the taxpayer's economic loss. Instead, it
refers to the loss claimed by the taxpayer. To read in economic loss would
render the postamble of the provision at best ambiguous and at worst
redundant. Further, the provision requires some undue or artificial increase
in "his loss". If this is read as "his economic loss",
then the section no longer operates to deny this taxpayer the losses claimed,
as there has been no artificial or undue increase in the taxpayer's economic
loss in this case.
4. Artificial or undue
Having
concluded that subsection 55(1) requires some action on the part of the
taxpayer, and that this action is not present in the case at bar, the issue of
whether the losses claimed were artificially or unduly increased need not be
decided. For the sake of completeness, though, an analysis of this issue
serves to strengthen my overall conclusion that subsection 55(1) does not
operate to deprive the taxpayer of the losses claimed in this case.
The
issue of whether a deduction is "artificial or undue" has been
considered by this Court in the context of the application of subsection
245(1). In Mara Properties Ltd. v. The Queen [1995] 2 FC 433, my
brother Marceau J.A. and I agreed on the interpretation of the phrase
"artificial or undue." As he said at pages 437-438:
"Even if subsection 88(1)
operates to allow the Respondent to consider the difference between the deemed
cost and the actual proceed of sale as a loss sustained in the course of
business, this loss could not be said to be "artificial" or
"undue" as it would arise by specific operation of the Act."
The
specific machinations of the Act's provisions in this case were outlined
above. Although the transactions were complex, there is no indication that
these provisions were stretched beyond their plain meaning at any time to
accommodate these transactions. The losses claimed by the taxpayer came about
by operation of the Act. I agree with Marceau J.A. that such losses
cannot then be considered to be "artificial" or "undue".
Further
to this point, it was argued before us that because the taxpayer's economic
losses were different than the actual losses claimed, the losses are
necessarily artificial. With respect, I cannot agree, as this interpretation
would render the use of the words "artificial or undue" redundant.
Had the legislature intended that any difference between economic loss and loss
claimed could not be validly claimed by the taxpayer, then clear legislative
wording to that effect would have been used.
CONCLUSION
Subsection
55(1) is not a broad anti-avoidance provision. It's scope cannot be expanded
beyond its plain meaning where there is no ambiguity. A plain reading of the
provision indicates that it requires some action on the part of the taxpayer in
order for it to apply. That is, the taxpayer must actually do something to
affect his loss on disposition of the property. As I have explained, this
entails affecting either the ACB or the proceeds of disposition. In this case,
the taxpayer did nothing to affect those figures. The ACB's of the shares were
inherited by the taxpayer, and the shares were disposed of for their market
value, which was nothing. The losses claimed by the taxpayer came about
through the inheritance of ACB's, and this inheritance came about through
operation of the Act. The taxpayer did nothing but avail himself of the
provisions as they then existed.
Even
if this Court were to find that the taxpayer had done "something" to
affect the losses claimed, subsection 55(1) would not operate against the
taxpayer in this case. The section requires that the increase in losses be
artificial or undue. Looking at the transaction in isolation, the losses
actually suffered by the taxpayer were substantially less than the losses
claimed. However, this does not render the losses "artificial or
undue." As was held by this Court in Mara (supra), losses
are not "artificial or undue" when they arise by operation of the
Income Tax Act, as occurred in this case.
For these reasons, I would dismiss the appeal
with costs.
"F.J. McDonald"
J.A.
A-454-95
CORAM:MARCEAU J.A.
DESJARDINS J.A.
McDONALD J.A.
IN
RE: The Income Tax Act
BETWEEN:
HER
MAJESTY THE QUEEN
Appellant
-
and -
NOVA CORPORATION OF
ALBERTA LTD.
Respondent
REASONS
FOR JUDGMENT
DESJARDINS J.A.
Reduced
for purposes of simplicity and clarity are the relevant facts in the Allarco
transaction drawn from the Agreed Statement of Facts. The principles involved
in the Petralgas transaction are the same as those in the Allarco transaction.
In
late 1985, both Carma and its wholly owned subsidiary, Allarco were in serious
financial difficulty. At this time, both Carma and Allarco were in default on
a debt restructuring plan which had been implemented in 1982. During 1986,
Allarco was indebted to The Bank of Nova Scotia (the "Bank"), in an
amount exceeding $100,000,000 and the aggregate fair market value of its assets
was considerably less than this amount. Allarco's indebtedness to the Bank was
guaranteed by Carma. Carma's guarantee of Allarco's debt to the Bank was
secured by, among other things, a pledge of 825,000 Series "B" 11%
Cumulative Redeemable Retractable Preferred Shares (the "Allarco preferred
shares" or the "loss shares") which it owned in the capital of
Allarco.
Immediately
before the transactions set out below, the Allarco preferred shares had an
adjusted cost base to Carma of $16,500,000.
By
June 27, 1986, prior to the respondent's involvement, virtually all of the
value of the Allarco preferred shares had been lost due to Allarco's financial
difficulties and the Allarco preferred shares had only a nominal market value.
Accordingly, if Carma had sold the Allarco preferred shares to an arm's length
party for their value at that time it would have realized a capital loss of
$16,500,000. As a result of its financial and tax circumstances, Carma did not
expect to be able to use that loss but believed the loss might be made
available to a corporate purchaser which would be able to utilize it.
Carma
took the following steps in order to facilitate the transfer of the inherent
capital loss in the Allarco preferred shares to an unidentified prospective
purchaser:
(a)on May 22, 1986, it caused three taxable
Canadian corporations, 348840 Alberta Ltd. ("840"), 348841 Alberta
Ltd. ("841"), and 348842 Alberta Ltd. ("842") to be
incorporated under the Business Corporations Act of Alberta;
(b)on June 19, 1986, Carma became the sole
shareholder of 840 which, in turn, became the sole shareholder of 841 which, in
turn, became the sole shareholder of 842; and
(c)on June 22, 1986, Carma sold the Allarco
preferred shares to 842 for $1. The $16,499,999 capital loss, which would
otherwise have been realized by Carma on the sale to 842, was deemed to be nil
by paragraph 85(4)(a) of the Income Tax Act (the "Act"). As
Carma did not own directly any shares in the capital of 842, a like amount of
$16,499,999 was required to be added to 842's adjusted cost base of the Allarco
preferred shares pursuant to paragraph 53(1)(f.1) of the Act. Accordingly,
842's adjusted cost base of the Allarco preferred shares became $16,500,000.
On
October 22, 1986, the respondent purchased the sole issued share of 842 from a
legal stranger 841 for a price of $1,237,500. At the time of purchase, 842's
only asset was the shares in the capital stock of Allarco. The change of control
of 842 did not affect the adjusted cost base of the Allarco preferred shares
which retained a nominal value and an adjusted cost base (as defined by
paragraph 54(a) of the Act) of $16,500,000.
On
October 24, 1986, the respondent commenced the dissolution of its wholly-owned
subsidiary 842. In the course of the liquidation, the Allarco preferred shares
were transferred to the respondent. This attracted the application of
subparagraph 88(1)(a)(iii) and paragraphs 88(1)(c) and 54(a) of the Act.
In
the result, there was no loss to 842 on the disposition of the Allarco
preferred shares to the respondent, and the respondent inherited 842's adjusted
cost base of the Allarco preferred shares of $16,500,000.
On
November 19, 1986, the respondent sold the Allarco preferred shares to the Bank
for $1. The arithmetic difference between the respondent's adjusted cost base
of the Allarco preferred shares ($16,500,000) and its proceeds of disposition
($1) was its loss from the disposition of those shares pursuant to paragraph
40(1)(b) of the Act.
To
sum up, therefore, Carma, which held the Allarco preferred shares with a market
value equal to nil, but with a high adjusted cost base, created a subsidiary
840 which, in turn, created a subsidiary 841 which, in turn, created a
subsidiary 842. Carma then sold the loss shares for $1 to the third-tier
subsidiary 842 which acquired the high adjusted cost base. Nova came into the
picture by buying from the second-tier subsidiary the sole issued share of 842
which owned the loss shares. 842 was then liquidated. Nova acquired the loss
shares with the high adjusted cost base, sold the shares to the Bank for $1 and
claimed a fiscal loss in its 1986 tax return.
The
Petralgas transaction, as stated earlier, is substantially the same as the
Allarco transaction except that the respondent's newly acquired subsidiary was
not liquidated. Instead, the respondent purchased for $1,000,000 the Petralgas
shares from the subsidiary at a time when their adjusted cost base was $25,425,000.
Pursuant to paragraphs 40(2)(e) and 53(1)(f.1) of the Act, the respondent's
adjusted cost base of the Petralgas shares became $25,425,000.
I
shall deal principally with the Allarco transaction, but will sometimes make
reference to the Petralgas transaction.
The issue
The
issue before this Court is whether the Allarco and the Petralgas transactions
are subject to the application of the anti-avoidance rules found in paragraph
55(1)(c) of the Act. In deciding this issue, the proper construction and scope
of subsection 55(1) of the Act must be examined.
There
is no doubt that the only purpose of these series of transactions was to enable
the respondent to avail itself of the capital loss inherent in the Allarco and
Petralgas preferred shares. The respondent does not dispute that fact. Nor is
there any debate that, as a result of the transactions described, there was a
loss and that the loss for tax purposes exceeded the respondent's economic
loss.
The
appellant submits that subsection 55(1), a generally-worded tax avoidance
provision, applies to the loss purchase entered into by the respondent whereby
it purchases tax losses from two corporations, which were not related to it,
for a price that was approximately one-fifth of the amount of tax savings which
arose from its use of those losses.
The
respondent pleads, however, that for paragraph 55(1)(c) to apply the
respondent, not the statute, must be responsible for the increase of the loss
in issue. It pleads that the appellant is asking the Court to use subsection
55(1) of the Act to preclude the survival of a high adjusted cost base
following a change in control. Amendments to the Income Tax Act to
block such a result were enacted on January 15, 1987, adding subsection 249(4)
and paragraph 111(4)(c),
but there were no such provisions in the Act at the time of the transaction in
question.
Interpretation of tax statutes
In
interpreting paragraph 55(1)(c) of the Act, it is appropriate to begin the
analysis with a discussion of some of the principles involved in the
interpretation of tax statutes.
The
interpretation of tax statutes is no longer dependant on predetermined
assumptions which favour either the taxpayer or the government. In Stubart
Investments Limited v. The Queen,
the Supreme Court of Canada stated that fiscal legislation is to be read in its
entire context, having regard to the legislative purpose and scheme. Estey J.
said the following:
... Gradually, the role of the tax
statute in the community changed, as we have seen, and the application of
strict construction to it receded. Courts today apply to this statute the
plain meaning rule, but in a substantive sense so that if a taxpayer is within
the spirit of the charge, he may be held liable.
In
Corporation Notre-Dame de Bon-Secours v. Communauté Urbaine de Québec, Gonthier J. provided five
rules of interpretation of taxing statutes (based on the seminal cases Stubart and The Queen v.
Bronfman Trust):
1)The interpretation of tax legislation should
follow the ordinary rules of interpretation;
2)A legislative provision should be given a
strict or liberal interpretation depending on the purpose underlying it, and
that purpose must be identified in light of the context of the statute, its
objective and the legislative intent: this is the teleological approach;
3)The teleological approach will favour the
taxpayer or the tax department depending solely on the legislative provision in
question, and not on the existence of predetermined presumptions;
4)Substance should be given precedence over form
to the extent that this is consistent with the wording and objective of the
statute;
5)Only a reasonable doubt, not resolved by the
ordinary rules of interpretation, will be settled by recourse to the residual
presumption in favour of the taxpayer.
These
rules of interpretation adopt a purposive approach, emphasizing the context of
the statute, its objective and the legislative intent. While a tax provision
must be construed in light of the purpose underlying it, the words of a provision
must, however, be capable of supporting a proposed interpretation.
The
abandonment of the traditional strict constructionist approach to tax statute
in favour of a purposive approach has impacted on the courts' view of tax
avoidance schemes. It is trite law that one of the principles that has
governed the judicial response to tax enactments is that a taxpayer is entitled
to arrange his affairs so as to attract the minimum amount of tax. This view
was first articulated in the decision of the House of Lords in IRC v. Duke
of Westminster:
...
Every man is entitled if he can to order his affairs so as that the tax
attaching under the appropriate acts is less than it otherwise would be. If he
succeeds in ordering them so as to secure this result, then, however
unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may
be of his ingenuity, he cannot be compelled to pay an increased tax.
While
this principle has governed Canadian tax law, its scope has been restricted by
both judicial doctrines and the enactment of anti-avoidance provisions in the Income
Tax Act. Professor Ruth Sullivan in Driedger on the Construction of
Statutes
notes the following:
There is no shortage of
anti-avoidance tools available to Canadian judges. First, transactions that
are merely a sham or formally ineffective may be set aside. Second, courts may
pierce the corporate veil to prevent parties from taking advantage of
inappropriate avoidance techniques. Third, although step by step transaction
analysis and the bona fide business purpose test have not been adopted in
Canada, the courts can rely on purposive analysis to accomplish much the same
thing. Finally, there are statutory rules aimed at controlling or preventing
avoidance. These are found not only in income tax legislation but also in
other kinds of fiscal law. [footnotes omitted]
This
Court, therefore, must take a purposive approach to the interpretation of
paragraph 55(1)(c) and identify its objective and effect by examining the
context of Subdivision c - Taxable Capital Gains and Allowable Capital Losses
of Division B of the Act, which provides the scheme of capital gains and
losses, and the language of the provision itself.
The purpose of paragraph 55(1)(c)
Paragraph
55(1)(c) is a general anti-avoidance provision with a specific application to
the disposition of capital property. It is intended to negate the effect of
any transactions entered into by a taxpayer which may reasonably be considered
to have artificially or unduly reduced the amount of a capital gain arising on
the disposition of a capital property.
In
enacting paragraph 55(1)(c), Parliament clearly recognized that, in certain
circumstances, the application of the rules contained in Subdivision c -
Taxable Capital Gains and Allowable Capital Losses, could lead to inappropriate
results: artificial or undue creation or increase of losses or artificial
reductions in gains from the disposition of property.
While
the case at bar involves the proper interpretation to be given to paragraph
55(1)(c), the capital losses acquired by Nova through the Allarco and Petralgas
transactions were made possible through the operation of several provisions in
the Act.
It
is admitted that Nova was not a party to any of the transactions which preceded
its buying of the sole issued share of 842 from 841 for a purchase price of
$1,237,500 on October 22, 1986. Nova, however, was in the market for precisely
this kind of "product", which I will later consider in the light of
paragraph 55(1)(c) of the Act.
I
ask, therefore, whether the Allarco and Petralgas transactions are of a kind
which Parliament intended to capture under paragraph 55(1)(c) of the Act?
The
provisions which facilitated the transfer of the unrealized capital loss in the
Allarco and Petralgas transactions, namely paragraphs 85(4)(a), 40(2)(e) and
53(1)(f.1) of the Act, are provisions which were intended to prevent the
triggering of unrealized losses by dispositions to related parties (paragraphs
85(4)(a) and 40(2)(e)) and relief to the taxpayer who has so disposed of such
property (paragraph 53(1)(f.1)). Paragraph 53(1)(f.1) is the provision that
operated, on the sale of the Allarco preferred shares from Carma to 842, to
deny the $16,499,999 loss to Carma and to add the amount of the denied loss to
the cost base of the Allarco preferred shares then held by 842. Similarly, on
the sale of the Petralgas shares from AGCL to 976, paragraph 53(1)(f.1)
operated to deny the loss of $25,425,000 to AGCL and to add the amount of the
denied loss to the Petralgas shares then held by 976. Both 842 and 976 were
second-tier subsidiaries of the corporations from which they obtained the loss
shares, Carma and AGCL respectively. This had to be by design. If 842 and 976
had been first-tier subsidiaries of Carma and AGCL respectively, the loss on
the transfer of the Allarco and the Petralgas shares would not have been added
to 842's and 976's adjusted cost base of those shares, but rather would have
been added to Carma's adjusted cost base of its shares of 842 and AGCL's
adjusted cost base of its shares of 976 pursuant to paragraph 85(4)(b). As a
result, Carma and AGCL would have realized the loss on the arm's length
disposition of their shares of 842 and 976 respectively. Thus, if the arrangement
was hopefully to work, without reference to paragraph 55(1)(c), it was
necessary to set up and to dispose of the loss shares to second-tier
subsidiaries.
The
appellant argues that the scheme of the Act is intended to prohibit the
transfer of losses between unrelated parties. The respondent agrees. The
respondent states, however, that there are rollover provisions in the Act which
dictate that, on transfers of property between related parties, the transferer
does not realize any gain or loss and the transferee inherits the transferor's
cost base of property. These are the provisions, says the respondent, that
dictate the results of the transaction in this case.
This
is true, but with a nuance. Once the rollovers had been achieved at the
second-tier level by Carma, Nova willingly brought itself into the picture
through the acquisition from 841 of the sole issued share of 842 which owned
the loss shares of Allarco. Nova became in command of the loss by triggering
at its call the liquidation of 842 and the timing of the future sale of the
Allarco preferred shares to the Bank for $1.
Is
this deviation of the rollover provisions permissible under paragraph 55(1)(c)
of the Act?
The wording of paragraph 55(1)(c)
While
the Supreme Court of Canada and this Court respectively held in Mara and
Husky that subsections 245(1) and 245(2) had no application to similar
avoidance transactions in those cases, the same conclusion is not necessarily
reached when seeking to apply paragraph 55(1)(c). One must examine the
specific wording of paragraph 55(1)(c) in order to determine its application
and scope. It reads as follows:
|
55(1) For the purposes of this subdivision, where the
result of one or more sales, exchanges, declarations of trust, or other
transactions of any kind whatever is that a taxpayer has disposed of property
under circumstances such that he may reasonably be considered to have artificially
or unduly
...
(c) increased the amount of his loss from the
disposition,the taxpayer's gain or loss, as the case may be, from the
disposition of the property shall be computed as if such reduction,
creation or increase, as the case may be, had not occurred.
[Emphasis
added]
|
55(1) Aux fins de la présente sous-section, lorsque
les circonstances dans lesquelles ont été effectuées une ou plusieurs
opérations de vente ou d'échange, ou autres transactions de quelque nature
que ce soit, permettent de croire raisonnablement que le contribuable
a disposé d'un bien de façon à artificiellement ou indûment
...
(c) augmenter le montant
de sa perte résultant de la disposition,
le gain ou la perte du contribuable, selon le
cas, résultant de la disposition du bien, est calculée comme si une
telle réduction, perte ou augmentation, selon le cas, ne s'était pas
produite.
[Je souligne]
|
Paragraph
55(1)(c) provides a results-driven test. The way in which that result can be
reached is framed broadly, encompassing sales, exchanges and declarations of
trust, "or other transactions of any kind whatever..." The intention
of the taxpayer is irrelevant.
All
the circumstances must be looked at to appreciate if the taxpayer "may
reasonably be considered to have..." ("permettent de croire
raisonnablement que..." in the French version) artificially or unduly
increased his loss. The standard to be applied is one of reasonable
consideration. But it is clear that the proper approach to applying paragraph
55(1)(c) of the Act requires that one views the transactions as a whole rather
than in isolation. It would be clearly misleading to examine Nova's actions in
isolation from the series of transactions which led to the disputed result.
This is so because each step was an essential part of the overall scheme: had
any of the parties failed to go through with any one of the steps in the series
of transactions, Nova would never have had the Allarco and Petralgas losses to
claim. The "product" to be bought was arranged so as to fit the
business purposes pursued by corporations such as Nova. The series of
transactions would have had no value had Nova not taken the steps it did, for
example in the Allarco situation, to acquire 842, to wind up its affairs, and
appropriate itself of the loss shares, and then sell them at the market value
of $1 to the Bank. Without Nova's own actions, the scheme first elaborated by
Carma would never have come to fruition.
The
resulting increase in the taxpayer "loss" must, however, have been
achieved artificially or unduly. The meaning of the words "his loss"
is in dispute. The appellant claims that these words refer to the economic
loss suffered by the respondent, namely the cost of capital spent to acquire
the loss shares ($1,237,500 for the Allarco shares and $100,000 for the
Petralgas shares) and not the loss it claimed ($16,500,000 and $25,425,000
respectively) since these losses were not Nova's losses but those of unrelated
corporate entities.
I
agree with the respondent that the words "his loss" must be read in
the light of subparagraph 40(1)(b)(i) of the Act. The words "his loss...
from the disposition..." are a defined term which corresponds to the
arithmetic difference between the adjusted cost base to him before the
disposition and the proceeds of disposition.
This
loss must not, however, have been "artificially or unduly increased"
by the taxpayer.
Nothing
of the sort has happened, claims the respondent. Nova did not artificially
influence any of these two figures. The proceeds of disposition of the
Allarco and Petralgas shares were sold for a nominal amount of $1 which
represented their true worth. The adjusted cost base of the shares was not
determined by the respondent, but resulted from the operation of the Act.
The
position of the respondent is correct, but does not answer the real question
raised by the anti-avoidance provision of paragraph 55(1)(c). The adjusted
cost base may have been obtained by operation of the Act. But, it was obtained
contrary to the scheme and intent of the Act. When paragraph 53(1)(f.1) of the
Act was introduced in 1977, the following Budget Date Comment was made:
The Minister has recognized that
the present treatment of capital losses of a corporation from a disposition of
property to a parent corporation or a corporation controlled by that parent
under paragraph 40(2)(e) was unduly harsh. It is proposed that such losses be
added to the adjusted cost base of the purchaser to whom the property has been
transferred in a manner similar to that provided for in the case of superficial
losses. The purchaser will thus be able to realize the capital loss on a
subsequent arm's length sale.
[Emphasis
added]
Nova
profited from the rollover provisions as between related corporations by
acquiring the sole issued share of 842, which owned the loss shares, and then
dissolving the subsidiary. Had Nova been genuinely interested in the Allarco
preferred shares themselves (which it was not), it would have bought them
directly from 842 which could have claimed the capital loss. What Nova
obtained "by operation of the Act" was obtained through a distortion
of the Act. A distorted tax result ensues.
The
words "unduly or artificially" do not cover, as claimed by Nova, only
cases where the taxpayer takes steps to increase his adjusted cost base of the
shares, for instance, by having the corporation declare a dividend which increased
the adjusted cost base of the shares but had no other effect. The words "unduly or
artificially", viewed within the principles of statutory interpretation
under Corporation Notre-Dame de Bon-Secours, cover also situations such
as the present one, where action was taken in clear defiance of the scheme of
the rollover provisions and contrary to normal business practice.
In
Husky Oil Ltd., Canada v.,
this Court upheld a similar avoidance transaction because it "flowed from
the provisions of the Act". That might have been the right answer in that
case, where the words "... that a person conferred a benefit on a
taxpayer..." in subsection 245(2) of the Act were to be interpreted.
"By
operation of the Act" was also mentioned by this Court in R. v. Mara
Properties Ltd.
where both the majority and minority judges of this Court found subsection
245(1) of the Act to be inapplicable because the loss arose by specific
operation of the Act. We are left in limbo with regard to the legacy of those
reasons for judgment, however, since the Supreme Court of Canada's decision,
which reversed the majority opinion of this Court, is directed only to the
"conclusion" reached by the Tax Court of Canada and the dissenting
judge in the Court of Appeal.
Paragraph
55(1)(c) is an anti-avoidance provision which is intended to play a role in the
income tax system. To the extent that the words of the provision reasonably
bear the meaning given to them in a particular situation, the anti-avoidance
provision modifies the rules of the game set forth in the Duke of
Westminster case.
My
reasoning is not based on the economic loss of the respondent compared to its
claimed fiscal loss. My proposition is that through a deviation of the
rollover provisions, about which Nova is not an innocent bystander, the
respondent may reasonably be considered to have unduly and artificially
increased one of the two figures in the calculation of its fiscal loss, namely
the adjusted cost base. The morality of these transactions does not concern
us. Their reality, however, does, in the light of the Income Tax Act.
Nova's action is well captured by the terms of paragraph 55(1)(c) of the Act.
I
would allow this appeal with costs throughout, I would set aside the decision
of the Tax Court of Canada and I would dismiss the respondent's appeal thus
confirming the reassessment of the Minister.
"Alice Desjardins"
J.A.
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