594710 B.C. - Federal Court of Appeal finds that the allocation of partnership condo profits to a lossco that acquired its interest at year end without any economic risk was a vacuous transaction abusing ss. 96(1)(f), 103(1) and 160(1)

Income account treatment of the profits realized by a condo-project limited partnership was avoided through the corporate partners (the Partnercos) of the partnership paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders through the payment of stock dividends of preferred shares followed by a redemption of those preferred shares – in turn, followed by a sale by the Holdcos of the Partnercos to a public company with substantial resource pools (Nuinsco). The income of the partnership for the year in which the condo sales had occurred was allocated to Nuinsco following the winding up into it of the Partnercos.

The sale of the Partnercos to Nuinsco two days before the partnership’s year end resulted in the deemed commencement of new taxation years for the Partnercos, which thereby permitted most of the income of the partnership to be allocated to Nuinsco as the principal partner at year end. In finding that such allocation was abusive for purposes of s. 245(4), Woods JA stated that it “divorc[ed] the economic consequences of the arrangement from the allocation of taxable income” given that “Nuinsco had virtually no economic interest or risk in the real estate development… except for a 10 percent ‘deal fee’.”

For similar reasons, she found that the allocation of most of the partnership income to Nuinsco also was an abuse of s. 103(1), and went on to state that “the Minister may not have had to resort to the GAAR in this case because subsection 103(1) appears to apply on its own.”

The taxpayer in this case was not any of the Partnercos, but a Holdco for one of the Partnercos that had received the stock dividend in question. Woods JA found that this stock dividend, when viewed in combination with the subsequent immediate redemption of the stock dividend shares, had the same effect as a cash dividend and, therefore effected a transfer of property to the Holdco for no consideration for purposes of s. 160. Accordingly, from a GAAR perspective, the transactions – which permitted an allocation of income to Nuinsco and the resulting avoidance of any tax liability that could flow through to the Holdco under s. 160 - also amounted to an abuse of s. 160.

Neal Armstrong. Summaries of Canada v. 594710 British Columbia Ltd., 2018 FCA 166 under s. 245(4), s. 103(1), s. 160(1) and s. 152(8).