3295036 Canada Inc. v. Agence du revenu du Québec, 2020 QCCA 1435

In October 1996, a Quebec-taxpayer company (“329”) acquired public company shares from its parent, on two separate days, in “Quebec shuffle” transactions. The parent realized no gain because federal and Ontario s. 85(1) elections were made. However, 329 acquired the shares at full cost for Quebec purposes because no Quebec rollover election was filed. Most of the shares were sold by 329 in 2000 at a capital loss for Quebec purposes, and it claimed some of those capital losses in its 2007 and 2008 Quebec returns.

A specific Taxation Act provision (s. 529.1) effectively denied 329’s use of its stepped-up cost if its two 1996 acquisitions occurred as part of a series of transaction that ended after 18 December 1996. The Court affirmed the finding of Fournier JCQ below, that the two 1996 share drop-downs were a “series of transactions” and applied Copthorne to find that the subsequent sales of the shares by 329 were transactions occurring “in contemplation” of that series and, thus, were assimilated to the series by the Quebec equivalent of s. 248(10) (TA s. 1.5). The Court stated (at para. 9, TaxInterpretations translation):

The judge was correct in concluding that the transactions at issue fell within the scope of TA section 1.5. LI. Indeed, they were not known at the time the tax planning was implemented, but were undoubtedly the type of transactions contemplated in order to benefit from the tax advantage resulting from the "Quebec shuffle".

In October 1996, a Quebec-taxpayer company (“329”) acquired public company shares from its parent. The parent realized no gain because federal and Ontario s. 85(1) elections were made. However, 329 acquired the shares at full cost for Quebec purposes because no Quebec rollover election was filed. Most of the shares were sold by 329 in 2000 at a capital loss for Quebec purposes, and it claimed some of those capital losses in its 2007 and 2008 Quebec returns.

The Court confirmed the finding below that the ARQ was not precluded from reassessing 329’s 2007 and 2008 taxation years to deny the capital losses carried forward from 2000 on the basis that the 1996 “Quebec shuffle” transactions had not stepped-up the adjusted cost base of the shares in question, notwithstanding that the 2000 year was statute-bared. In this regard, the Court quoted with approval the statement of Bowman J (as quoted, in turn, in Papiers Cascades Cabano, 2006 FCA 419, at para. 23) that:

If [the Minister] assesses a prior year incorrectly and that year becomes statute-barred this will prevent his reassessing tax for that year, but it does not prevent his correcting the error in a year that is not statute-barred, even though it involves adjusting carry-forward balances from previous years, whether they be loss carry-forwards or balances of investment tax credits.