Placer Dome Inc. v. R., [1996] 2 CTC 2258, 96 DTC 1787

Bell J.T.C.C.: — The Appellant has appealed the reassessment of its 1988 taxation year ending December 31, 1988. The Minister of National Revenue (“Minister”), in reassessing, treated the sums of $59,523,409 and $23,232,706 (totalling $82,756,115) as proceeds of disposition, having disallowed the Appellant’s claim that they were received by it as tax- free inter-corporate dividends.

ISSUE

The Appellant owned shares of Falconbridge Ltd. (“Falconbridge”) and of McIntyre Mines Ltd. (“McIntyre”) in respect of which, in 1988, it received tax free dividends of $59,523,409 and $23,232,706 respectively. Immediately afterwards the shares of both companies were sold to Falconbridge. The issue is whether the amount of those dividends should be treated as proceeds of disposition under subsection 55(2) of the Income Tax Act (“Act”).

FACTS

A. PLACER DOME INC

A. Corporate Structure

6,363.500 common shares

at $30 each

$135.382.500 debenture convertible	1.942.534 common shares
to 6.167.744 common shares	(52 9% of issued)
	MCINTYRE MINES LTD
	9,242,070 common shares

FALCONBRIDGE LTD

Issued bares:

	Falconbridge Lid.		80,467.52.)
	McIntyre Mines Led.		3,669,599
a”.	direct and indirect. b> Placer:
	Undiluted:	19.4%
	Fully diluted:	24.7%

B. Transactions

On June 16, 1988 the Appellant issued an invitation to four. companies to bid for all its interest in Falconbridge and McIntyre (“Falconbridge Interest”). On June 21, 1988 the directors of Falconbridge resolved to offer to purchase the Falconbridge Interest if the Ontario Securities Commission (“OSC”) would grant an order exempting Falconbridge from the “issuer bid” requirements of The Ontario Securities Act. These requirements, if applicable,, would have required Falconbridge to bid for all its issued shares and not only those owned by the Appellant and McIntyre. The issuer bid requirements applicable to Falconbridge differed from the requirements applicable to other potential purchasers of the Falconbridge Interest who were at liberty to purchase all or a portion of the Falconbridge Interest provided the purchase price did not exceed 115% of the average trading price of the shares within a period defined by The Ontario Securities Act.

The Falconbridge application to the OSC was made on the basis, inter alia, that

(a) Falconbridge should not be at a disadvantage to others who might offer to purchase the Falconbridge Interest, and

(b) Falconbridge would pay one or more dividends on all its shares

with the result that, after the transactions, the amount of dividends paid and value of shares of Falconbridge or McIntyre owned by shareholders other than the Appellant would be approximately equal to the amount of dividends paid to the Appellant and the purchase price of its Falconbridge Interest. The OSC granted the order requested by Falconbridge. By offer dated June 29, 1988 Falconbridge offered

(a) to pay a dividend of $4.75 on each of its issued shares,

(b) to purchase the shares of Falconbridge owned by the Appellant, including the shares to be acquired upon conversion of the debenture, for $25.75 per share,

(c) to purchase the warrants to acquire shares of Falconbridge owned by the Appellant for $4.00 per warrant, and

(d) to purchase all shares of McIntyre for $64 per share after McIntyre paid a dividend of $11.96 per share.

The Falconbridge offer was accepted by the Appellant, Falconbridge paid a dividend of $4.75 per share (the Appellant receiving $59,523,409) and McIntyre paid a dividend of $11.96 per share (the Appellant receiving $23,232,706). Falconbridge then purchased the Falconbridge shares and warrants owned by the Appellant and the shares of McIntyre owned by the Appellant.

In filing its return of income for the 1988 taxation year, the Appellant reported the amounts of $25.75 per Falconbridge share and $64 per McIntyre share as proceeds of disposition of capital property. It also reported the sums of $59,523,409 and $23,232,706 as dividends and deducted those amounts in computing taxable income under subsection 112(1) of the Act. On October 8, 1993 the Minister reassessed the Appellant to include the total dividend amount of $82,756,115 as proceeds of disposition of the Falconbridge and McIntyre shares, purportedly on the basis that the amount of the dividend represented proceeds of disposition by virtue of subsection 55(2) of the Act.

C. Testimony

John Hick, then Senior Corporate Vice President of the Appellant, stated that at a meeting on June 14, 1988 with Michael Parret, Vice President and Comptroller of Falconbridge, there was no discussion of whether Falconbridge would pay a dividend to the Appellant. Hick also testified that Noranda Inc. (“Noranda”) had made a written application to the OSC on June 22, 1988 to make an offer to purchase the securities of Falconbridge without the offer constituting a take-over bid because the common shares of Falconbridge, excluding warrants and convertible debentures, constituted less than 20% of the outstanding common shares of the company. Hick then stated that no intervention in this application was made because the Appellant’s officials felt that Noranda’s application would not succeed and it did not wish to discourage other potential purchasers from making bids. It was clearly established, through several of the ten witnesses called by the Appellant, and particularly through William James, then President, Chairman and Chief Executive Officer of Falconbridge, that Falconbridge did not want Noranda to be successful in acquiring the Falconbridge Interest. Hick stated that no intervention was made because it did not want to be seen as being anti-minority shareholder despite the potential of Noranda, not subject to take-over bid requirements, being able to offer a higher price to the Appellant. The Appellant also did not wish to be “painted into a position with Falconbridge” because it did not think Falconbridge would succeed. It decided to make no intervention and simply let the OSC decide the two applications.

Hick then stated that a number of persons, including financial, accounting and tax advisers, attended the June 29 bid opening meeting. The Appellant wanted to analyze the offers on an after tax basis and to consider all other elements of the offers and had assembled a team of experts in order to be prepared for whatever type of offer was made. He testified that four offers, two from Noranda and two from Falconbridge were made. Both Noranda offers, one being a partial offer only, were rejected. One Falconbridge offer did not include the purchase of the McIntyre shares. It was rejected on the basis that the Appellant might be left with the burden of McIntyre’s potential liability. The other Falconbridge offer, known as the “M” offer, was accepted on the basis of after tax proceeds, the methodology for completing the transaction and the probability of completion on a timely basis. Also, because this offer included the purchase of all the Appellant’s shares of McIntyre, the Appellant had the potential economic benefit of disposing of McIntyre’s contingent liability problems.

Hick said the possibility that some portion of the dividend might not be taxable may have been mentioned, in passing, to the Appellant’s board on June 30, 1988 but was not focused upon because, as he said “... I wanted to focus in on what I knew to be the case as opposed to speculating.” He then said that the tax advisers had raised the possibility of “safe income” [1] and he stated that he could recall no discussion with them about whether any portion of those dividends, other than “safe income”, would be free of tax. He also stated that he did not recall any discussion with anyone at Falconbridge, or representing Falconbridge, respecting “safe income” before January 11, 1989.

On cross-examination, Hick responded affirmatively to the question of whether the total amount of cash dividends was part of the consideration that the Appellant received for selling its shares. He acknowledged that the amount received in addition to the $82,756,115 in dividends was approximately $450,000,000. He stated that the tax advisers had told him that there was a potential tax saving of some $22,000,000 limited to the amount of “safe income” available. He also said that the recommendation to the Appellant’s board was that the Falconbridge offer was the “clear best offer regardless of where this potential issue of the tax saving landed”. Hick added that the disposition of the Falconbridge Interest related, in large part, to the Appellant’s lack of control of Falconbridge.

Keith Service, the then Director of Financial Services for the Appellant, stated that he had no discussion respecting the substance of either of the two applications to the OSC between June 21 and June 28. He stated that when the bids were opened the Appellant’s personnel decided to treat the dividends as being taxable. He said that they had no knowledge of any “safe income” and that no one in his group recommended acceptance of the Falconbridge bid because of any tax advantage associated with “safe income”. They had assumed that “full tax” would be payable. He said that when they had discussed “safe income” on June 29 the context was that if there was “any gravy that would be a bonus”. He also stated that he had no discussions with anyone at Falconbridge about the computation of “safe income” between October, 1988 and June, 1989 and further that nothing was provided to the Appellant by Falconbridge on or before June 30, 1988 indicating a tax advantage was intended to be provided to the Appellant.

Alan Schwartz, tax lawyer representing the Appellant, said that he and his partner had examined several prospective plans. He referred to notes prepared by him respecting the Falconbridge application to the OSC the purpose being to identify the tax issues arising from the transactions proposed by Falconbridge. He commented upon the potential payment by Falconbridge of dividends and concluded that the dividends would be tax free to the extent of “safe income”. He also commented on a number of other tax implications in the proposed transactions and stated that he did not discuss any aspect of the OSC applications or any aspect of “safe income” with anyone at Falconbridge prior to or on June 30, 1988. He said, prior to the bid opening meeting, that he had had no discussion with any official of the Appellant or anyone representing the Appellant about Falconbridge’s “safe income”, the implications associated with it or the question of whether any dividend from Falconbridge would be taxable. He referred to a handwritten summary of tax calculations prepared by Service and given to him when he arrived at the meeting and said that he did not recall any discussions with Service about the preparation of same before attending that meeting. Schwartz then said that upon analyzing the bids the tax advisers assumed that the cash dividend would be taxable except to the extent of “safe income” and also that there was nothing in the offers about Falconbridge’s tax position or about “safe income”. He testified that the Appellant would receive $532,716,103 of “proceeds or dividends” from the offer and further that the tax calculated on the aggregate dividend would be $22,914,000. He gave considerable evidence respecting tax computations on the various offers and commented on a potential difference in interpretation respecting the computation of part of the “safe income”. Schwartz also said that the possibility of “safe income” in Falconbridge vis-à-vis the Appellant and McIntyre did not cause him, personally, to favour a Falconbridge offer over a Noranda offer. He said that there was no difference in the tax assumptions made in respect of the Falconbridge offers and the Noranda offers. He then described receiving the suggestion of one of the Appellant’s outside accountants that the dividend was not taxable because the purpose of paying same was for Securities Act reasons and not for tax reasons. He said that when he started researching that matter in October, 1988 he read the transcripts from the OSC, looked at newspaper articles and eventually gave an opinion, delivered in February, 1989 following discussions with Falconbridge. That opinion was that subsection 55(2) of the Act did not apply to the transaction.

Gary Sugar, then Vice President and a Director of the predecessor of the company handling the bid details, stated that he had had no discussions up to June 29 with any official or representative of the Appellant about the fact that a dividend might be paid by Falconbridge or about the potential implications to the Appellant of a dividend. He said that the rejected Falconbridge offer was “completely unacceptable because it required a shareholders’ vote by the shareholders of McIntyre.” He then said that the Falconbridge “M” offer was clearly the best alternative. He said that the Noranda partial bid did not meet the Appellant’s objective of disposing completely of its investment in Falconbridge. He said that he was not involved in any meeting or discussion on June 29, 1988 about a Falconbridge offer being accepted because of a “safe income” component. Sugar said that it was the Appellant’s intention to sell the Falconbridge Interests because it did not have effective control of that company.

Douglas Cannon, a partner of Alan Schwartz, stated that at the June 29, 1988 meeting the prospective dividends were treated as being proceeds of disposition under subsection 55(2) of the Act. He also said that both Falconbridge bids were better than the Noranda bids.

John Sabine, a lawyer then representing Falconbridge, specialized in corporate and security matters. He said that his instructions from William James, President of Falconbridge, were to treat all shareholders equally in any proposed transaction for acquisition of the Falconbridge Interest. He described other potential deal structures which were rejected. He said that he had discussed with Hick whether Falconbridge could make a proposal which might include time to permit shareholders to vote on a transaction and that Hick told him that was not possible. He stated that the exemption order Falconbridge sought would permit it to make a bid without having a shareholder vote and that the OSC had never allowed a company to repurchase its own securities without having a shareholders’ vote. He said that Falconbridge wanted to make an argument that it was disadvantaged and consistent with James’ wishes that all shareholders be treated equally, the control premium that would otherwise go to the Appellant from another purchaser should be shared equally with all Falconbridge shareholders. He said further that they had determined that the only way that could be done was to pay a dividend

at the front end and isolate the control premium and sell the notion to the Commission that shareholders were all going to be treated equally if our bid went forward.

He then said that he did not recall being at any meeting where the question of whether that plan would give the Appellant a tax advantage was discussed. He stated it was essential that when the Appellant’s shares of Falconbridge were purchased the OSC and Falconbridge shareholders must be satisfied that the remaining stock would have a value at least equivalent to its value on the transaction date. In that regard he said that Falconbridge required from the investment bankers a sufficient assurance to make the exemption application to the Commission. Finally, Sabine said that he could not recall any discussion at any meeting which he attended about any kind of tax advantage in the offers that were made to the Appellant.

William James, President, Chairman and Chief Executive Officer of Falconbridge at the time of the transaction, said that

Noranda had started this creeping take-over in which they were trying to get a considerable block of Falconbridge, probably something in the 40 per cent odd....

He was concerned about minority shareholders being “left out in the cold”. He said that Falconbridge’s chief financial officer, Oyvind Hushovd, presented the idea of paying a dividend so that every shareholder would receive a premium and that this was followed by one of the lawyers suggesting that Falconbridge seek an OSC exemption from the issuer bid rule. He said that Falconbridge could only pay “approximately the 20 day average price” for its shares, that they had to pay “market for the shares” but then “could go as high as we wanted on the dividends”. James discussed the fact that he was not in favour of paying a dividend as high as $4.75 but that they wanted to beat the Noranda bid. He said that he believed their bid was equal to 118 or 119% of the market price when the dividend was included. When asked by counsel whether the possibility of a tax advantage affected his decision about the determination of total consideration to be offered to the Appellant, James said,

Absolutely not. And I was the one that made the decision. The Board...they went along with it, they agreed.

In cross-examination, James said that he knew there was some tax advantage but that it was insignificant to him. He said that Falconbridge “was still going to beat them out on the face value of a dividend and the stock price.”

Michael Parret, Treasurer of Falconbridge at the time of the transaction, said that a group of Falconbridge officials were together for lunch on June 17 focusing upon what Falconbridge could do that other bidders could not do in order to win the bid with all shareholders benefitting from the control premium. He said that the one idea that came forward that made Falconbridge particularly unique from other bidders was the ability to pay a dividend. He also said an issuer bid exemption from the OSC and the need to obtain a fairness opinion from independent financial advisers was discussed. He said the idea of paying a dividend gave the appearance of cash flowing through the system equitably, all in the context of shareholders being treated fairly. He stated that the possibility of providing a tax advantage to the Appellant in respect of the dividend was not discussed at that lunch meeting. He also said that he did not recall any discussion at the June 29, 1988 meeting about a potential tax advantage from payment of a dividend rather than a higher sales price. In cross- examination, Parret said,

We were aware that we believed that Placer Dome would have a tax advantage. We weren’t structuring it to get it to them. It was an outcome of the structure of the deal.

In response to questions regarding the potential tax advantage to the Appellant arising out of “safe income” Parret said,

No, I don’t agree with that, sir. It was not part of the determination by the Board as to what that - that that should be factored in or in any way evaluated. The Board focused on what was this deal going to cost Falconbridge. What additional debt was it going to be. Was the company going to be ale to carry the debt.

They focused on the legality of it. Were we in compliance with the various Securities Rules. They did not do as you suggested, sir.

Oyvind Hushovd was Vice President and Chief Financial Officer of Falconbridge at the time of the transaction. He described having had the idea, at the June 17 lunch, of paying a dividend. He discussed this with others at the lunch and stated that John Sabine had said that such step “might actually have a chance”. He then discussed this matter with James and that the “idea went from there”. He said there was no discussion at the lunch about the possibility of a tax advantage being passed on to the Appellant as a result of the dividend idea. He also said he had not recommended to James or to the Board that they take into account the potential tax advantages outlined in executive summaries prepared by officials of the company when pricing the transaction respecting the Appellant.

Barry Dent, a partner of Clarkson Gordon at the time of the transaction, stated that the assumption was made that there was no “safe income” and that the advice given to the Falconbridge Board was to take full tax into account when comparing bids.

CONCLUSION ON

The Respondent’s view that the dividends of $59,523,409 and $23,232,706 received by the Appellant should be treated as proceeds of disposition by the Appellant of shares of Falconbridge and McIntyre is based upon its interpretation of subsection 55(2) of the Act. The pertinent portion of that subsection reads as follows,

Where a corporation resident in Canada has ... received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) ... as part of a transaction or event or a series of transactions or events ... one of the purposes of which ... was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3)(a), notwithstanding any other section of this Act, the amount of the dividend ...

(a) shall be deemed not to be a dividend received by the corporation;

(b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and....

Although neither the pleadings nor the evidence established that the Appellant was a corporation resident in Canada, this fact was not disputed. It is assumed that it was so resident and, accordingly, the first condition of that subsection has been met.

It is not disputed that the Appellant was, for its 1988 taxation year, entitled to the deduction of the aforesaid dividends received by it under subsection 112(1) of the Act. Accordingly, the second condition of that subsection is met.

The next question is whether one of the purposes of the transactions (assuming a transaction can have a purpose) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized by the Appellant on the sale at fair market value of the shares of Falconbridge and McIntyre. It is my conclusion that neither the Appellant nor Falconbridge had such purpose.

Respondent’s counsel submitted that under subsection 55(2) the Appellant need only have a purpose, not a main purpose, of effecting a significant capital gain reduction. He referred to definitions of “purpose” such as from Black's Law Dictionary:

That which one sets before him to accomplish or attain; an end, intention, or aim, object, plan, project. Term is synonymous with ends sought, an object to be attained, an intention etc.

and from Shorter Oxford English Dictionary:

1. The object which one has in view.

2. The action or fact of intending or meaning to do something: intention, resolution, determination.

He then submitted that a person is presumed to intend the natural consequences of his actions and that in the Appellant’s case one of the consequences was the significant reduction of capital gain. This approach seems to employ hindsight. The receipt of a dividend which may be free of tax does not mean that one of the purposes of the transactions was the payment or receipt of a tax free dividend. That approach looks at the transactions completed rather than examining all evidence in order to determine whether that particular result was an objective of any party to the transactions.

Counsel also argued that in determining whether one of the purposes was a reduction of capital gain both the vendor’s and purchaser’s perspective in light of the entire circumstances of the transactions must be analyzed. The argument continues with the premise that business acumen and experience and the presence of tax advisers are relevant circumstances, that the transaction was in substance a sale, that Falconbridge recognized and acted on the dividend tax advantage and that the Appellant was aware of the “safe income” potential.

The evidence is clear that the idea of Falconbridge paying a dividend did not arise until June 17, 1988 when it was advanced by Oyvind Hushovd, Vice President and Chief Financial Officer of Falconbridge. The idea was proposed as a solution to the requirement that Falconbridge make a bid for all its issued shares with attendant shareholder meeting requirements and to provide equal treatment to all shareholders. The subsequent suggestion of applying to the OSC for an order exempting Falconbridge from the issuer bid requirements of The Ontario Securities Act presented what its management concluded was the only method of proceeding. That plan was completed by the OSC exemption order and the presentation of the offer which was accepted by the Appellant.

The evidence of Messrs. Hick, Service, Schwartz, Sugar, Cannon and Dent, being officers or representatives of the Appellant is overwhelming in its persuasive force that the Appellant had not participated in the creation and structure of the Falconbridge bid. That finding alone renders it impossible to conclude that one of the purposes of the Appellant was to effect a significant reduction in the capital gain to be realized on the disposition of its Falconbridge and McIntyre shares. The evidence of Messrs. Sabine, James, Parret and Hushovd on behalf of Falconbridge is compelling that Falconbridge neither alone, nor in conjunction with the Appellant had formulated such purpose.

There is no suggestion in the evidence of any of the ten witnesses who appeared for the Appellant that the dividend paying idea was conceived for the purpose of reducing capital gain. Those witnesses occupied responsible and professional positions and were, in my estimation, credible. I find that the purpose of Falconbridge was simply and solely to achieve the goal of acquiring its shares and the shares of McIntyre. I find also that the Appellant’s purpose in accepting the “M” bid was to dispose of its shares of those two companies on what it determined to be an acceptable basis.

The discussion of “safe income” and other tax aspects of the dividends does not compromise the conclusion I have reached. It would have been inordinate for that sophisticated and knowledgeable assembly not to have considered all factors in planning and executing these large, complex transactions.

An additional submission by Respondent’s counsel was that the Appellant’s argument was circular in that the Appellant made a designation under paragraph 55(5)(f) [2] of the Act, that this indicated recognition that the transactions offended subsection 55(2) and that its position was inconsistent with that designation. However, a designation does not necessarily direct a conclusion that one of the purposes was to effect a capital gain reduction. Prudence dictates that a designation be made where the possibility of subsection 55(2) applying exists.

The appeal is allowed with costs.

Appeal allowed.