Total Energy – Federal Court of Appeal confirms that the use of losses of an insolvent public company by a SIFT trust was an abuse of s. 111(5)

In September 2007, a company (“Nexia”), which traded in loss companies, acquired all of non-voting common shares of an insolvent public corporation (“Biomerge”) (representing 80% of its equity) and 45% of its voting common shares. In May 2009, a plan of arrangement was implemented under which the units of an income fund (“Total”), which was becoming subject to tax under the “SIFT” rules, were exchanged for new common shares of Biomerge, the existing voting common shares of Biomerge were largely cashed-out, and Total was wound-up into Biomerge (now, “New Total”) pursuant to s. 88.1(2). The former Total unitholders held 99.8% of the New Total equity.

In confirming the decision below that these transactions were an abuse of s. 111(5), Stratas JA indicated that:

• It was immaterial that Deans Knight did not deal with trust conversions, as the “object, spirit, and purpose of s. 111(5) does not change depending on the facts of the particular case nor on the status of the acquiror.”
• It was also immaterial that s. 256(7)(c)(i) (dealing specifically with a transaction of this type) was added only subsequently (“Deans Knight … did not look at other provisions enacted after s. 111(5) in order to determine the object, spirit, and purpose of s. 111(5).”
• The Tax Court had appropriately found “that this particular series of transactions frustrates the object, spirit, and purpose of s. 111(5), which is [quoting Deans Knight] ‘to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders’."

Neal Armstrong. Summary of Total Energy Services Inc. v. Canada, 2025 FCA 77 under s. 245(4).