Damis Properties – Tax Court of Canada finds that s. 160 and GAAR did not apply to a sale of companies holding cash sales proceeds to a purchaser who purported to eliminate the tax liability
Five corporate taxpayers sought to increase their after-tax return from the sale by their farm partnerships of the farm by transferring their partnership interests under s. 85(1) to newly-formed subsidiaries, to which the partnerships then allocated the gains realized from the farm sale, then selling their subsidiaries to a purchaser (WTC) with a mystery plan for eliminating the tax liabilities of each subsidiary. (It emerged much later that this plan was simply to make CCA claims on software transferred post-closing into the purchased subsidiaries - which Owen J found did not satisfy the income - producing purpose test in Reg. 1102(1)(c).) The sale price for the shares allowed the taxpayers to effectively share in a portion of the purported elimination of the tax liabilities. WTC then used the applicable portion of the cash proceeds from the sale still resting in the subsidiaries (the “Property”) to pay the purchase price.
Ten years later, CRA assessed the taxpayers under s. 160(1).
Owen, J agreed that the transactions entailed an indirect transfer of property from the subsidiaries to the taxpayers, stating that “the participation of WTC in the indirect transfer of the Property does not alter the basic fact that the Property that was originally in the subsidiaries ended up in the hands of the Appellants.” However, he found that at the relevant time (which he concluded was the time at which the indirect Property-transfer steps were completed, namely, the payment of the cash purchase price by WTC), the taxpayers were dealing at arm’s length with the respective subsidiaries.
At that time, the taxpayer was deemed by s. 256(9) to have no longer had legal control of the subsidiary from the beginning of that day – and the taxpayer also was dealing with the subsidiary at arm’s length as a factual matter at that time, given that a WTC nominee had taken charge as director and officer of the subsidiary two days’ previously, as requested by it for its commercial (albeit, ineffectual) purposes.
S. 160(1) also was inapplicable on the basis that (having regard to s. 160(1)(e)) the taxpayers received the fair market value of their shares. In this regard, Owen J stated:
[I]n my view the words “consideration given for the property”, when read in the context of the entire subsection, can only mean consideration given by the transferee for the property regardless of who receives that consideration. …
Owen J then turned to the Crown’s GAAR position, which was that there was an abusive avoidance of s. 160, having regard to the proposition that s. 160 would have applied to the taxpayers if they had instead received the Property as a dividend on their shares. In rejecting this alternate transaction, Owen J stated:
The role of the subsidiaries as single purpose corporations created to be sold to WTC precluded a dividend of any kind as that would be offside the terms of the sale for which the subsidiaries were expressly created is a transfer of property without consideration.
He concluded that there was no tax benefit.
He also found that there was no avoidance transaction, stating that the taxpayers “undertook the Transactions to effect the sale of their shares in the subsidiaries to WTC on a tax efficient basis” and that there was “no evidence to suggest that in 2006 the Appellants considered the application of section 160 and took steps to avoid the application of that provision.”
Finally, there was no abuse, as to which he stated:
[S]ubsection 160(1) was not frustrated or circumvented. The subsection applied exactly as intended.
S. 160 instead applied to the transfer of the Property from the subsidiaries to WTC.