Birchcliff - Tax Court of Canada finds that raising share equity through a lossco immediately before its amalgamation was abusive
Following the nullification of the original Birchcliff decision, a fresh judgment has been issued.
That case concerned a newly-launched public corporation ("Birchcliff") accessing the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Rather than financing the properties directly, private placement investors were told that they could subscribe for subscription receipts of Veracel instead, which was not a problem to them because their subscription receipts would be converted into Veracel Class B common shares as a transitory step under a Plan of Arrangement in which Veracel was then amalgamated with Birchcliff. As the investors received a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders got a modest preferred share interest in Amalco, which was redeemed for cash.
As part of his description of the facts, Jorré J made a finding that Birchcliff’s purpose in amalgamating with Veracel was to access the Veracel losses, given that Birchcliff did not need Veracel if all it wanted to do was an equity raise. However, when he got to his GAAR analysis of s. 245(3), he stated:
[I]t is absolutely clear that the series of transactions here was not undertaken primarily for purposes other than to obtain the tax benefit. Therefore, the series is an avoidance transaction.
He did not cite any authority for his equating of a series with a transaction.
His abuse (s. 245(4)) analysis was straightforward. He stated:
The statutory provision itself shows that the policy underlying the provision is that the “minority” predecessor, i.e. the predecessor whose shareholders, were they acting in concert, would not have control in the amalgamated corporation, will lose its tax attributes, its losses, on an amalgamation with another corporation. It does not include what might be described as contingent shareholders like the Class B shareholders here.
The artificial insertion of Class B shareholders of Veracel, persons whose shares’ only purpose was to be converted into common shares, and whose shares had such a short existence that they had to be deemed by the plan of arrangement to be created before the amalgamation, is a manipulation of the shareholdings of a predecessor contrary to the object of the rules in subsection 256(7).
Consequently, there was an acquisition of control for purposes of the Veracel losses.