Eyeball Networks – Federal Court of Appeal finds that a shareholder whose shares have been redeemed has provided valuable consideration therefor by surrendering its shares
Pursuant to a conventional s. 55(3)(a) spin-off transaction, a company (“Oldco”) spun off one of its two businesses to a “Newco,” also owned by its sole individual shareholder. The spin-off was completed in the usual manner with a cross-redemption of shares between Oldco and Newco for notes, which then were set off.
The Tax Court had found that s. 160 applied on the basis that the $30M note that Oldco issued on the redemption of its shares held by Newco was valueless. This view was rejected by Noël CJ. True, at that point Oldco had divested itself of its most valuable business assets – but it held in lieu thereof Newco preferred shares to be redeemed for a $30M note owing to it by Newco, which had those assets.
The Crown itself made what might seem like the opposite argument, namely, that on the redemption by Oldco of its preferred shares held by Newco for a $30 million note, “no consideration was effectively given to Oldco in return.” (para. 65). Noël CJ stated that there indeed was consideration going the other way in the form of “Newco in turn … surrender[ing] the shares which had a corresponding $30 million value in its hands.”
The Crown also made a further argument that likely started with the insight that the same spin-off could have been accomplished (albeit, with less tax efficiency) simply by having Oldco drop the business into a Newco subsidiary and then distribute Newco as a dividend in kind – so as to clearly engage s. 160. In rejecting the Crown’s submission that the determination as to whether full consideration had been paid by Newco should be determined by the “overall result” produced by the series of transactions, Noël CJ stated that “the adequacy of the consideration given must be measured against the value of the property transferred by way of a ‘snapshot’ taken at the point in time when the transfer takes place.”
There also were pleasant-sounding dicta, including that a price adjustment clause eliminated any possible value discrepancy between the FMV of the transferred property and the consideration therefor, and that the concept of a series of transactions “only applies when one (or more) of the transactions within the series is primarily tax driven.”