Birchcliff – Federal Court of Appeal finds that a GAAR analysis should look beyond the immediate but transitory effect of transactions for avoiding the loss-streaming rules

A newly-launched public corporation ("Predecessor Birchcliff") accessed 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, while being assured that they would get their money back on the closing date if Veracel was not amalgamated with Predecessor Birchcliff. As the investors received a majority voting equity interest in Amalco (“Birchcliff”), the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders mostly received a modest preferred share interest in Birchcliff, which was redeemed for cash.

Birchcliff got off to a bad start when, at the beginning of his GAAR analysis, Webb JA essentially indicated that, from an abuse-analysis standpoint the actual transactions should be recognized as having “the same effect” and being “equivalent to” the investors having directly received voting majority control of Predecessor Birchcliff on the amalgamation. He then commented:

The logical rationale of the exception in clause 256(7)(b)(iii)(B) is that it would apply to exclude the larger corporation from the deemed acquisition of control rule in the opening part of subparagraph 256(7)(b)(iii), if two corporations amalgamate.

Here, although Veracel was the larger corporation, essentially all its assets were the subscription-receipt cash proceeds – and “There was no scenario under which Veracel would have been allowed to retain the money…”).

He concluded:

[T]he policy underlying clause 256(7)(b)(iii)(B) of the Act would dictate that there was an acquisition of control of Veracel in this situation.

Neal Armstrong. Summary of Birchcliff Energy Ltd. v. Canada, 2019 FCA 151 under s. 245(4).