B.C. v. Peakhill Capital - B.C. Court of Appeal finds that structuring a receiver’s sale of B.C. real property as a share sale to avoid LTT was not an avoidance transaction

B.C. appealed from an order pronounced in a receivership under the Bankruptcy and Insolvency Act (Canada) approving a reverse vesting order (“RVO”), under which the shares of the insolvent debtor were sold to a purchaser after removal of unwanted assets and liabilities. This share sale avoided the imposition of property transfer tax (“PTT”) under the Property Transfer Tax Act (B.C.) thereby enhancing the value of the estate to be distributed to the secured creditors – and the judge below had found that this was the purpose for structuring the transaction as a share sale.

The Province argued inter alia that the judge’s order effectively deprived it of the ability pursuant to s. 2.001(3) of the PTTA (the “Recapture Provisions”) to deny the tax benefit from the transaction on the basis that it was an “avoidance transaction.” This term referred inter alia to a transaction that “is not one that may reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than for the purpose of obtaining the tax benefit.” In rejecting this submission, Harris JA stated:

[S]tructuring a transaction to avoid the transfer of title and thereby PTT is a legitimate commercial practice outside the insolvency context. … I can see no reason why that which is legitimate and proper outside the insolvency context should be viewed differently within it.

In any event, I can find no air of reality to the suggestion that the Recapture Provisions could apply to this transaction. The Province fastens on to the suggestion that the sole purpose of the transaction is to avoid PTT, but that is not entirely accurate. As the judge found, the purpose of the transaction was to maximize recovery for the creditors and it did so by avoiding PTT. The goal of maximizing recovery for creditors is a bona fide purpose intended to further the objectives of the BIA. Avoiding PTT was simply the means by which that benefit was conferred. To use the language of the provisions, the RVO is a transaction that may reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than for the purpose of obtaining the tax benefit.

Harris JA did not discuss the point that the tax benefit was that of the purchaser, not the receiver-vendor. Leaving that aside, the above analysis seems to be similar to that in Spruce Credit Union, which essentially found that a transaction with a primary non-tax purpose is not an avoidance transaction even though it was adopted in preference to an alternative transaction that was less tax effective. In other words, if a reasonable commercial alternative to selling an asset for $97 is selling the shares for $100, the latter transaction can be viewed as undertaken primarily to generate the $97, so that the $3 increment (related to the purchaser’s tax benefit) is incidental.

Neal Armstrong. Summaries of British Columbia v. Peakhill Capital Inc., 2024 BCCA 246 under s. 245(3) and BIA, s. 243.