3 December 2002 External T.I. 2002-0173345 - TEI Liaison Meeting - Series of Transactions

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Series of Transactions

Position: Subsection 248(10) extends series

Reasons: The law

Tax Executives Institute, Inc.

CCRA Liaison Meeting

December 3, 2002

Question 11 - Series of Transactions

A. Interpretation of the Term

Prior to the decision in OSFC Holdings Ltd. v. The Queen, 2001 FCA 260 (2001), taxpayers and their advisers understood that in order to find that a series of transactions are linked, events "must somehow be logically or reasonably connected to one another" (see 454538 Ontario Limited, et al. v. M.N.R., [T.C.C.] 93 DTC 427, at 432), and taxpayers must intend that transactions or events be linked together. This is consistent with the views expressed by John Robertson in his 1981 paper, Capital Gains Strips: A Revenue Canada Perspective on the Provisions of Section 55 in the REPORT OF PROCEEDINGS OF THE THIRTY-THIRD TAX CONFERENCE (Canadian Tax Foundation 1981) at 105, where he states:

To come within the meaning of this phrase "a series of transactions or events," it would be necessary to have some connecting link between the transaction[s] such as several successive steps to achieve a single objective. If there are a number of transactions or events that operate sequentially and have as a result the reduction of a capital gain, these transactions or events would constitute a series.

In OSFC, however, this definition was broadened significantly. In the court's view, a related transaction does not have to be preordained. All that is required is that the parties to the transaction knew of the prior transaction and took it into account when deciding to complete their transaction.

With this broader interpretation, transactions that are not linked factually, legally, or economically may be considered to be part of the same "series of transactions" simply because a party contemplating a subsequent transaction knew of the first transaction and took it into account in entering another transaction. Consider, for example, a company paying a dividend in the course of a divestiture of assets to which subsection 55(2) potentially applies but does not because an exception in subsection 55(3) applies. At the time of the dividend transaction, a potential purchaser of the company is evaluating whether to make an offer for the company. Clearly, transactions undertaken by the target company prior to the acquisition will be considered by the purchaser in deciding whether to make its acquisition. Thus, the target company's transactions could be considered to be part of the same series of transactions contemplated by the purchaser. TEI believes this result is inappropriate.

Will CCRA explain how the court's broad comments in the OSFC decision affect CCRA's application and interpretation of the definition of "series of transactions or events" in subsection 248(10)? Will CCRA provide published guidance on its interpretation? Without further guidance narrowing the scope of the definition, taxpayers will be uncertain whether transactions will ultimately be considered part of the same series of transactions or events.

B. Rulings for a "Series of Transactions"

Is the determination of whether a proposed transaction is part of a series of transactions a question of law, fact, or a mixed question of law and fact? Will CCRA rule on whether proposed transactions are part of a "series" of transactions?

CCRA Response

A. Interpretation of the Term

We believe that the Federal Court of Appeal's interpretation, in the OSFC decision, of the meaning of a "series of transactions or events" with reference to subsection 248(10) is consistent with the CCRA's longstanding and well-known interpretation of that expression. At the 1988 Annual Conference of the Canadian Tax Foundation, Michael Hiltz, expressed the Agency's (then Revenue Canada's) position on the matter as follows:

In the view of Revenue Canada, a preliminary transaction will form part of a series determined with reference to subsection 248(10) if, at the time the preliminary transaction is carried out, the taxpayer intends to implement the subsequent transactions constituting the series, and the subsequent transactions are eventually carried out. Thus the preliminary and subsequent transactions will be part of a series even though at the time of the completion of the preliminary transaction the taxpayer either had not determined all the important elements of the subsequent transactions - including, possibly, the identity of other taxpayers involved - or had lacked the ability to implement the subsequent transactions.¹

It is our understanding that subsection 248(10) was introduced, in 1996, to make it clear that a series of transactions, for Canadian income tax purposes, is broader than the "common law" series - the transactions comprising the series need not be preordained. The decision in OSFC confirms that subsection 248(10) achieves its intended purpose.

It should be noted that the 454538 Ontario Limited case, referred to in the question, dealt with the meaning of a "series of transactions or events" without reference to subsection 248(10), and is therefore of limited assistance with respect to the interpretation of that expression after the introduction of subsection 248(10) in 1986.

B. Rulings for a "Series of Transactions"

The determination of whether a proposed transaction is part of a series of transactions is a mixed question of law and fact; however the determination normally turns primarily on the facts. As a result of the highly factual nature of the determination, in the context of requests for advance income tax rulings, where the Income Tax Rulings Directorate is not in a position to carry out a complete review of all of the relevant facts, it is not possible to provide an unqualified ruling that transactions are not part of the same series of transactions. Nevertheless, where the taxpayer represents that certain transactions are not part of the same series and provides a persuasive rationale for that conclusion, a qualified ruling may be provided; that is, the ruling is provided subject to the proviso that the taxpayer's representation is correct. While such a ruling does not provide any explicit assurance on the issue, taxpayers have been prepared to proceed with transactions on the basis of such "negative comfort"; that is, they can reasonably expect that so long as there has been no misrepresentation or omission of a relevant fact, the transaction will not be reassessed.

ENDNOTES

¹ Michael Hiltz, "Section 245 Update" in Report of Proceedings of the Fortieth Tax Conference, 1988; Conference Report, (Toronto: Canadian Tax Foundation, 1989) 7:1-9, at 7:6.