Gillen – Tax Court of Canada finds that property was not used in a business for s. 110.6(14)(f)(ii) purposes when it was beneficially acquired and dropped-down on the same day

The availability of the enhanced capital gains exemption to a group of taxpayers depended on the proposition that a newly-formed limited partnership had used, in a Canadian active business, applications to the Saskatchewan government for potash exploitation rights before it transferred such property to a newly-incorporated corporation (“Devonian”), whose shares were sold a number of months later. D’Arcy J found that, in fact, on the same day that the LP acquired the permit rights from the general partner, it had transferred the beneficial ownership of those permit rights to Devonian, so that its fleeting beneficial ownership of those assets did not qualify them as being used in a Canadian active business.

In rejecting the taxpayer’s submission that, until the subsequent completion of the transfer of the permits to Devonian (on their subsequent grant by the government), the taxpayer nonetheless was using the permit applications in a business carried on by it, as required under the s. 110.6(14)(f)(ii) test, D’Arcy J stated that this ignored the so-called “relation-back” theory, and in this regard quoted a judicial statement that “while the trust relationship between vendor and purchaser may be dubious before closing, once the agreement is completed the trust relationship is solidified retroactively.”

Neal Armstrong. Summaries of Gillen v. The Queen, 2017 TCC 163 under s. 110.6(14)(f)(ii), General Concepts – Ownership, General Concepts – Effective Date.