Her Majesty the Queen v. Husky Oil Limited, [1995] 1 CTC 460, 95 DTC 5244

Pratte J.A. (Stone, MacGuigan, JJ.A., concurring):-This is an appeal from a judgment by the Tax Court allowing the respondent’s appeal from the reassessment of its income tax for its 1986 taxation year. By that reassessment, the Minister of National Revenue added $25,741,645 to the respondent’s income pursuant to paragraph 245(2)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") [1] on the basis that, as a result of certain transactions, it had received benefits in that amount from two other companies, namely, Carma Ltd. ("Carma") and Consolidated Brinco Ltd. ("Brinco").

The facts which gave rise to this litigation are not in dispute. They may easily be summarized.

In 1986, Carma and Brinco, two companies with which the respondent is not related, had so arranged their affairs that each of them owned all the shares of a subsidiary which could be wound up without any fiscal cost and had no other assets than shares that, at the time, were almost valueless but had a very high adjusted cost base. In that year, the respondent entered into similar agreements with Carma and Brinco hoping that, as a result, it could obtain the reimbursement of part of the tax it had had to pay in respect of capital gains it had made in 1984. Pursuant to those agreements, the respondent purchased for an aggregate sum of approximately $27,400,000 all the shares of the two subsidiaries. It then caused its two new subsidiaries to be wound up and, as a consequence, acquired the shares that they owned at a cost which, by virtue of subparagraph 88(l)(a)(ii) and paragraph 88(1)(c), was deemed to be $173,200,000, the adjusted cost base of these shares to the two wound up subsidiaries. The respondent then sold those shares for a price equal to their market value of $15,200,000 thereby incurring, for the purposes of the Income Tax Act, a loss of $158,000,000, half of which ($79,000,000) could, pursuant to paragraph 111(1 )(b) be carried back and deducted from the respondent’s 1984 income in the computation of its 1984 income tax.

Upon filing its 1986 income tax return, the respondent requested that its 1984 income tax be reassessed on the basis that its 1986 net loss of $79,000,000 was to be deducted in computing its taxable income for 1984. The Minister of National Revenue acceded to that request and, as a consequence, on March 8, 1990, sent to the respondent a cheque in the amount of approximately $38,000,000. To obtain that tax refund, the respondent had paid a little more than $12,000,000; its net benefit from the operation was therefore close to $26,000,000.

Pursuant to subparagraph 152(4)(b)(i) of the Act, the Minister could, until November 6, 1990, have reassessed the respondent’s income tax for 1984 to deny the deduction of its alleged 1986 net capital losses in the computation of its 1984 taxable income. He did not do so. Instead, on March 3, 1993, when it was no longer possible to reassess the respondent’s 1984 income tax, he reassessed the respondent’s 1986 tax on the basis that, in that year, the respondent had received, as a result of the transactions that I have just described, a net benefit of approximately $26,000,000 which, pursuant to paragraph 245(2)(a) of the Act, was to be included in its 1986 income. That is the reassessment from which the respondent appealed successfully to the Tax Court.

I must add that it is common ground

1. that the Minister, when he reassessed the respondent’s 1986 income tax, was of the view, not only that paragraph 245(2)(a) of the Act applied, but, also, that the 1986 capital loss could have been disallowed either on the basis of the doctrine of substance over form or on the basis of the application of subsection 55(1) of the Act; [2]

2. that the prices paid by the respondent to Carma and Brinco for the shares of their respective subsidiaries were determined in arm’s length negotiations during which Carma and Brinco were attempting to maximize their receipts while the respondent was attempting to minimize their payments; and

3. that in arriving at the prices to be paid to Brinco and Carma for the shares of their respective subsidiaries, the respondent took into account the following factors as they were understood at the time:

(a) the amount of the tax refund which would result from the application of the net capital loss arising from the transactions to its 1984 taxation year;

(b) the risk that the transactions would not succeed because Revenue Canada successfully challenged the transactions on the basis that

(i) the transactions could be upset on the basis of the doctrine of substance over form;

(ii) the capital losses could be denied on the basis of subsection 55(1) of the Act;

(iii) the tax avoidance provisions of the Act, including subsection 245(2), would apply to the transactions;

(iv) the historic adjusted cost base of the shares of the two subsidiaries was not available to the respondent; and

(c) the likelihood of the respondent finding an alternative seller or Carma and Brinco finding an alternative buyer.

The Tax Court allowed the respondent’s appeal on the ground that, as the respondent acquired the shares of Carma’s and Brinco’s subsidiaries for a price which had been determined in bona fide arm’s length negotiations and which, for all concerned, represented what was then thought to be the fair market value of those shares, it cannot be said that, as required by subsection 245(2), either Carma or Brinco conferred any benefit on the respondent.

The appellant’s position is that the respondent was clearly engaged in tax avoidance when it made those arrangements with Carma and Brinco for the sole purpose of obtaining a reimbursement of part of the tax paid in respect of its 1984 capital gains; that, as a result of those arrangements, the respondent obtained the tax reimbursement he was hoping for; that, according to the jurisprudence, [3] a benefit conferred on a taxpayer within the meaning of subsection 245(2) may consist in a tax advantage; and that the tax benefit obtained by the respondent as a consequence of the arrangements made with Brinco and Carma must be considered as having been obtained from those two companies.

I find no merit in those submissions.

The problem here is not to determine whether the respondent was engaging in tax avoidance when it purchased the shares of Brinco’s and Carma’s subsidiaries. In my view, it was. But that is irrelevant. The only question is whether subsection 245(2) applies in the circumstances of this case or, to put it more precisely, whether it can be said, when the transactions that I have described are viewed realistically, that, as a result of those transactions, Brinco and Carma have conferred on the respondent a benefit of $26,000,000.

The tax refund obtained by the respondent was a benefit. No one denies that. But was that benefit conferred on the respondent by Brinco, Carma or another person? The respondent was either entitled or not to obtain the tax refund. If it was so entitled, that benefit was not conferred on the respondent by anyone but merely flowed from the provisions of the Income Tax Act that deemed the respondent to have suffered a capital loss in 1986 and authorized it to deduct part of that loss in the computation of its 1984 income; if, on the other hand, the respondent had no right to that tax refund but got it by reason of an error made in the reassessment of its 1984 income tax, then the benefit gained by the respondent would have its source in the provisions of the Act which prohibited the Minister from reassessing its 1984 income tax after November 6, 1990. In neither case could the respondent’s right to the tax refund be said to have been obtained from Carma and Brinco which were the only persons susceptible of having conferred a benefit on the respondent in the course of all those transactions. In fact, the only advantage that these two companies could conceivably have granted the respondent by selling it the shares of their subsidiaries is the possibility of claiming a tax reimbursement, not the right to get that reimbursement. Those shares, in themselves, had little value, but, insofar as they enabled their owner to claim to have suffered a capital loss, they were very valuable to a corporation which, like the respondent, had earned taxable capital gains that could be offset by those losses. If the ownership of those shares had carried with it the certain and indisputable right to claim a reduction of the taxes paid in respect of the capital gains previously made by their owner, then, conceivably, the sale of those shares for a price inferior to the tax benefit that they would certainly provide to their purchaser could be said to confer a benefit on the purchaser. That benefit would result from the fact that the shares would arguably have been sold for less than their value. Such is not the situation here. The respondent knew when it purchased the shares that it might obtain no tax benefit from that transaction and the doubts that he entertained on that point were certainly well founded since it was the view of the Minister of National Revenue, when he issued the reassessment here in question, that, had the respondent’s 1984 income tax been correctly assessed, no tax benefit would have been gained by the respondent. In those circumstances, the shares certainly did not have a value equal to the tax benefit that the respondent hoped to get. As the prices for which those shares were purchased by the respondent were negotiated openly by parties acting freely and at arm’s length, it must be presumed that, as found by the Trial judge, those prices represented the fair market value of the shares. In those circumstances, Carma and Brinco cannot be said to have conferred a benefit on the respondent.

For these reasons, I would dismiss the appeal with costs.

Appeal dismissed.