SUPREME
COURT OF CANADA
Between:
Envision
Credit Union
Appellant
and
Her
Majesty The Queen
Respondent
Coram: McLachlin C.J. and LeBel, Rothstein, Cromwell, Moldaver,
Karakatsanis and Wagner JJ.
|
Reasons
for Judgment:
(paras. 1 to 60)
Reasons
Concurring in the Result:
(paras. 61 to 72)
|
Rothstein J. (McLachlin C.J. and LeBel,
Moldaver, Karakatsanis and Wagner JJ. concurring)
Cromwell J.
|
Envision Credit Union v. Canada, 2013 SCC 48, [2013] 3 S.C.R. 191
Envision Credit Union Appellant
v.
Her Majesty The Queen Respondent
Indexed as: Envision Credit Union v. Canada
2013 SCC 48
File No.: 34619.
2013: March 19; 2013: September 26.
Present: McLachlin C.J. and LeBel, Rothstein, Cromwell,
Moldaver, Karakatsanis and Wagner JJ.
on appeal from the federal court of appeal
Taxation — Income Tax — Corporations —
Amalgamations — Amalgamating credit unions seeking to avoid flow‑through
of certain tax attributes to double claim capital cost allowance and reset
preferred rate amount — Whether amalgamation a “qualifying amalgamation” satisfying
requirements of s. 87 of the Income Tax Act — Whether “qualifying
amalgamation” provisions apply to readjust amalgamated corporation’s tax
attributes — Credit Union Incorporation Act, R.S.B.C. 1996, c. 82, ss. 20,
23 — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 87 .
Two
credit unions, D and F (together the “predecessors”) amalgamated to form E. The
merger was undertaken for non‑tax reasons, but the transaction was
structured to obtain the best possible tax outcome. The amalgamation was carried out under the Credit
Union Incorporation Act, R.S.B.C. 1996, c. 82 (“CUIA”). In amalgamating, D and F attempted to avoid the application of s. 87
of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”)
and thereby engage in a non‑qualifying amalgamation by having the
beneficial interest in certain real properties that were surplus to their
business needs (the “surplus properties”) pass at the moment of amalgamation
from the predecessors to a recently created subsidiary, 619. In exchange for
those surplus properties, 619 issued shares to the predecessors, which then
flowed through to E as a result of the amalgamation. Upon amalgamation, E
retained the legal title to the surplus properties as a bare trustee, but the
beneficial interest was vested in 619.
E
took the position that its amalgamation was not a qualifying amalgamation under
s. 87 because the flow‑through requirement of s. 87 applies
only where “all the property” of the amalgamating corporations becomes the
property of the amalgamated corporations. E argues that because certain
properties were sold at the exact moment of the amalgamation, this precondition
to flow‑through was not met. Two particular tax attributes are at issue
in this appeal: capital cost allowance (“CCA”) and the preferred rate amount
(“PRA”). E says that as a result of the non‑qualifying merger, its PRA
was reset to zero, which would have the effect of potentially increasing its
ability to claim the PRA tax credit. Although E filed its tax returns in
accordance with this assumption, it is undisputed that the PRA reset did not
benefit it in the tax years relevant to this appeal. Nevertheless, the PRA
was the reason that the decision was made to pursue a non‑qualifying
amalgamation. E also took the position that the CCA deductions taken by its
predecessors were reset upon amalgamation such that it could claim CCA based on
the original capital cost of the assets to the predecessor credit unions. The
Minister reassessed E for the taxation years 2001, 2002, 2003 and 2004. The
Tax Court dismissed E’s appeal from all reassessments except the reassessment
for the 2001 taxation year, which was held to be statute barred. The Federal
Court of Appeal dismissed the appeal.
Held:
The appeal should be dismissed.
Per McLachlin C.J.
and LeBel, Rothstein, Moldaver, Karakatsanis and Wagner JJ.: A qualifying
amalgamation under s. 87 of the ITA has three basic requirements: (a) all
of the property of the predecessor corporations immediately before the merger must
become property of the amalgamated corporation (“Amalco”) by virtue of the
merger; (b) all of the liabilities of the predecessor corporations
immediately before the merger must become liabilities of Amalco by virtue of
the merger; and (c) all of the shareholders, who owned shares of the
capital stock of any predecessor corporation immediately before the merger,
must receive shares of the capital stock of Amalco because of the merger. Once
the s. 87 requirements are met, the ITA provides for the flow‑through
of various tax attributes while prohibiting the flow‑through of other tax
attributes. All other amalgamations are outside the scope of s. 87 . The
tax consequences of non‑qualifying amalgamations are not specified in the
ITA .
Credit
unions in B.C. are not permitted to amalgamate except in accordance with the
requirements of s. 20 of the CUIA. While s. 20 empowers
predecessor credit unions to set terms and conditions of amalgamation, those
terms and conditions cannot contradict or override the automatic consequences
of amalgamation specified in s. 23 of the CUIA. Under the CUIA,
an amalgamated credit union is a continuation of the predecessor credit unions:
ss. 20(1) and 23(a). The amalgamated credit union is “seized of” all the
property and liabilities of its predecessors: s. 23(b). Nothing in s. 20
or s. 23 of the CUIA permits amalgamating credit unions to contract
out of any of the express statutory consequences of an amalgamation, and there
is no independent common law power that permits credit unions to amalgamate in
a manner that would contradict the terms of the CUIA. To permit
amalgamating credit unions to contract out of s. 23 of the CUIA
would undermine the statutory scheme constructed by the legislature by
jeopardizing the role of s. 23(b) as a protection for creditors. Protection
for creditors is a key issue in an amalgamation. Amalgamations are not
intended to permit corporations to split liabilities from assets.
In
this case, the requirements of s. 87 of the ITA are satisfied by this
amalgamation and the amalgamation was a qualifying amalgamation. By virtue of s. 23(b),
E was seized of the surplus properties at the exact moment of amalgamation.
This caused the condition in s. 87(1) (a) of the ITA to be
fulfilled. All of the property of the predecessors was property of E by virtue
of the merger. It was not open to the parties, through the CUIA, to
have some property that belonged to the predecessors not become property of E
by virtue of the amalgamation. The provisions of the ITA that provide
for the flow‑through of CCA and PRA apply and E’s tax attributes must be
adjusted accordingly. Despite the fact E was seized of the surplus properties
at the time of amalgamation, an outcome that the predecessors were trying to
avoid, the contracts for sale of the surplus properties and the amalgamation
agreement are still effective. The effect of these agreements was identical to
the effect that the predecessors had planned for, with the sole exception of
the tax consequences which could not have been achieved because of s. 23(b)
of the CUIA. Tax consequences which flow from the application of tax
law cannot be tailored to avoid negative corporate law consequences.
Per Cromwell J.:
At the moment that E was created, the predecessor corporations ceased to have
any independent legal existence. There was thus no point in time when D, F and
E existed as separate legal entities such that D and F could convey their
property to E because, at the moment of amalgamation, only E was a separate legal
entity. That is sufficient to fully answer this appeal and the analysis should
stop there.
It
is both unnecessary and undesirable to resolve this appeal using s. 23(b).
Having found that there was no inconsistency between the actual transaction and
the result of an amalgamation as described in s. 23, it is not necessary
to speculate on what would have happened if that were not the case. The
proposed interpretation of s. 23 has potentially far‑reaching
effects beyond the construction of the CUIA. In effect, it lays down a
rule that all amalgamations under the CUIA (and therefore under
similarly worded provisions in other corporations statutes) cannot, as a matter
of law, fall outside the provisions of s. 87(1) (a) and (b)
of the ITA . This is a significant holding but there is no authority to
support it.
Moreover,
there is reason to be concerned about the correctness of the proposed
interpretation given the text and structure of the statute. Section 23
does not set out the conditions for amalgamation; that is the role of s. 20.
Rather, s. 23 simply describes the effects of an amalgamation, recognizing
that the amalgamation agreement plays a central role in spelling out those
effects. Given that credit unions operate in a highly regulated environment,
it also seems rather unlikely that creditor protection depends heavily on s. 23(b).
Section 20 addresses this concern through the requirement for regulatory
approval of the proposed amalgamation. Further, it is acknowledged that this
interpretation has the potential to give rise to significant practical problems
in future cases.
Cases Cited
By Rothstein J.
Discussed:
R. v. Black and Decker
Manufacturing Co., [1975]
1 S.C.R. 411; referred to: Manco Home
Systems Ltd., Re, 1989
CanLII 2819; Wotherspoon v. Canadian Pacific Ltd., [1987] 1 S.C.R. 952.
Statutes and Regulations Cited
Business Corporations Act, S.B.C. 2002, c. 57,
s. 279(b)(ii).
Company Act, R.S.B.C. 1996,
c. 62, s. 251.
Credit Union Incorporation
Act,
R.S.B.C. 1996, c. 82, ss. 16 to 18, 20 to 24.
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), ss. 87 ,
137(4.3) (b), 256(1.2) .
Authors Cited
Black’s Law Dictionary, 9th ed. St.
Paul, Minn.: West, 2009.
British Columbia Company Law Practice Manual, 2nd ed., vol. 1. Vancouver: Continuing Legal Education
Society of British Columbia, 2007.
McMeel, Gerard. The Construction of Contracts: Interpretation,
Implication, and Rectification, 2nd ed. Oxford: Oxford University Press,
2011.
APPEAL
from a judgment of the Federal Court of Appeal (Evans, Layden‑Stevenson
and Stratas JJ.A.), 2011 FCA 321, 425 N.R. 261, 2012 D.T.C. 5055, 94
B.L.R. (4th) 14, [2012] 3 C.T.C. 66, [2011] F.C.J. No. 1857 (QL), 2011
CarswellNat 5740, affirming a decision of Webb J., 2010 TCC 576, 2010 D.T.C.
1399, [2011] 2 C.T.C. 2229, 79 B.L.R. (4th) 38, [2010] T.C.J. No. 469
(QL), 2010 CarswellNat 4303. Appeal dismissed.
Joel A. Nitikman and Jessica Fabbro, for the appellant.
Daniel Bourgeois and
Eric Noble, for the respondent.
The judgment of McLachlin
C.J. and LeBel, Rothstein, Moldaver, Karakatsanis and Wagner JJ. was delivered
by
Rothstein J. —
I. Introduction
[1]
Every taxpayer is entitled to order his or her
affairs so that the tax payable is less than it otherwise would be. Taxpayers
often engage in tax planning to achieve that result. Of course, if that tax
planning is to achieve the desired result, it must be consistent with the
relevant provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp .) (“ITA ”), and other statutes. If the planning runs afoul of such
provisions, the sought after tax minimization is not achieved. That is the
result in this appeal.
[2]
In this case, two credit unions amalgamated into
Envision Credit Union (“Envision”). In doing so, they sought to avoid the
application of s. 87 of the ITA , which requires that certain tax
attributes of amalgamating corporations “flow through” to the amalgamated
corporation if specific criteria are met. By avoiding the flow-through of
certain tax attributes, the credit union attempted to double claim capital cost
allowance and would have an enhanced capacity for a lower tax rate on a portion
of its income.
[3]
Envision contends that it successfully avoided
the flow-through requirement. In particular, Envision observes that the
flow-through requirement applies only where “all of the property” of the
amalgamating corporations becomes property of the amalgamated corporation.
Envision argues that because certain properties were sold at the exact moment
of the amalgamation, this precondition to flow-through was not met.
[4]
Amalgamations are creatures of statute. For the
reasons that follow, I conclude that Envision was not able to avoid the
application of the ITA rules by selling property at the time of
amalgamation, because the provincial statute that permitted the amalgamation
caused the ITA conditions to be automatically fulfilled. The
amalgamation therefore met the requirements for flow-through of tax attributes
under the ITA . I would dismiss the appeal.
II. Facts
[5]
On January 1, 2001, two British Columbia credit
unions, Delta Credit Union (“Delta”) and First Heritage Savings Credit Union
(“First Heritage”) (together the “predecessors”) amalgamated to form Envision.
The merger was undertaken for non-tax reasons, but the transaction was
structured to obtain the best possible tax outcome.
[6]
The amalgamation was carried out under the Credit
Union Incorporation Act, R.S.B.C. 1996, c. 82 (“CUIA”). Under that
Act, an amalgamated credit union is a continuation of the predecessor credit
unions: ss. 20(1) and 23(a). The amalgamated credit union is “seized of” all
the property and liabilities of its predecessors: s. 23(b). The relevant
provisions of the CUIA and the ITA are in the attached Appendix.
[7]
Under the ITA , there are two types of
amalgamations. “Qualifying amalgamations” are those that meet the requirements
in s. 87 of the ITA . Once the s. 87 requirements are met, the ITA
provides for the flow-through of various tax attributes while deeming a new
taxation year and prohibiting the flow-through of other tax attributes. All
other amalgamations, which are sometimes called “statutory amalgamations” or
“non-qualifying amalgamations”, are outside the scope of s. 87 . The tax
consequences of non-qualifying amalgamations are not specified in the ITA
and therefore must be determined using the other provisions of the ITA ,
where relevant, other relevant statutes and the common law.
[8]
A qualifying amalgamation under s. 87 of the ITA
has three basic requirements:
(a) all of the property of the
predecessor corporations immediately before the merger must become property of
the amalgamated corporation (sometimes called “Amalco”) by virtue of the
merger;
(b) all of the liabilities of the
predecessor corporations immediately before the merger must become liabilities
of Amalco by virtue of the merger; and
(c) all of the shareholders, who owned
shares of the capital stock of any predecessor corporation immediately before
the merger, must receive shares of the capital stock of Amalco because of the
merger.
[9]
In this case, Delta and First Heritage attempted
to avoid the application of s. 87 and engage in a non-qualifying amalgamation
by having the beneficial interest in certain real properties that were surplus
to their business needs (the “surplus properties”) pass at the moment of
amalgamation from the predecessors to a recently created subsidiary, 619547
B.C. Ltd. (“619”). In exchange for those surplus properties, 619 issued shares
to the predecessors, which then flowed through to Envision as a result of the
amalgamation. Upon amalgamation, Envision retained the legal title to the
surplus properties as a bare trustee, but the beneficial interest was vested in
619.
[10]
Envision took the position that its amalgamation
was not a qualifying amalgamation because not all of the property of the
predecessors had passed to Envision. Specifically, the beneficial ownership of
the surplus properties passed to 619 and did not flow through to Envision.
While shares of 619 flowed to Envision, ownership of shares does not mean that
Envision owned the property of 619: A.F., at para. 68, footnote 49. The
provisions in s. 87 that provide for the flow-through of various tax attributes
did not apply because all of the property of the predecessors did not flow through
to Envision.
[11]
Two particular tax attributes are at issue in
this appeal: capital cost allowance (“CCA”) and the preferred rate amount
(“PRA”). The specific details of how the PRA functions are not important to
this appeal. It is sufficient to know that the PRA is an amount used to
calculate a PRA tax credit and, as a general matter, it is preferable for
taxpayers to have a lower PRA. The PRA tax credit has the effect of increasing
the amount of income that is taxed at what is effectively the lower small
business tax rate.
[12]
Envision says that as a result of the
non-qualifying merger, its PRA was reset to zero, which would have the effect
of potentially increasing its ability to claim the PRA tax credit. Although
Envision filed its tax returns in accordance with this assumption, it is
undisputed that the PRA reset did not benefit it in the tax years relevant to
this appeal. Nevertheless, the PRA was the reason that the decision was made to
pursue a non-qualifying amalgamation. Envision also took the position that the
CCA deductions taken by its predecessors were reset upon amalgamation, although
it says it adopted this position only for the purpose of “consistency” with its
treatment of the PRA.
[13]
CCA is, of course, widely known in the legal and
accounting communities. However, a brief explanation may be helpful for the
discussion that follows. CCA is a business deduction that reflects the fact
that while the costs of acquiring certain depreciable capital assets (like
buildings, equipment, vehicles etc.) are incurred in one taxation year, the
assets are in fact used over a period of years. Under the CCA scheme, assets
are grouped in classes according to their type.
[14]
Each year, a taxpayer is permitted to deduct a
percentage (assigned by the ITA for each class) of the undepreciated
capital cost (“UCC”) of each class. This amount that is deducted is what is
called the CCA. The starting UCC for each class is determined based on the
actual cost to the taxpayer of acquiring the assets in that class. Each year,
the UCC is reduced based on the CCA that the taxpayer has claimed in that
taxation year.
[15]
Consistent with its position that its PRA had
been reset by the amalgamation, Envision argued that since any CCA claimed by
the predecessor credit unions did not flow through to Envision, the opening
balance of their UCC account could be reset to the actual original capital cost
of the assets. This would permit Envision to claim the same CCA already claimed
by the predecessor credit unions. This “reset” meant that the UCC of Envision
was set at approximately $51 million, the original cost of the assets to the
predecessor credit unions, rather than approximately $20 million which was the
total of the UCC balances of the two predecessor credit unions at the time of
amalgamation.
[16]
The Minister reassessed Envision for the years
2001, 2002, 2003 and 2004 on the basis that the PRA and the UCC should flow
through from the predecessors to Envision. Envision appealed these
reassessments.
III. Judicial History
A. Tax Court of Canada, 2010 TCC 576, 2010 D.T.C. 1399
[17]
At the Tax Court, Webb J. (as he then was)
concluded that s. 87 did not apply to this amalgamation. He found that the
predecessors had the legal capacity to sell the surplus properties at the same
time as the amalgamation, since the predecessors’ legal personalities were
continued under the relevant legislation. He considered the effect of the CUIA
and concluded that since s. 20(2) provided that parties to an amalgamation can
specify the manner of carrying the amalgamation into effect, it was open to the
predecessors to agree that certain property would not become the property of
Envision at the time of amalgamation. Essentially, he found that while s. 23(b)
stated that all property of the predecessors becomes property of the
amalgamated credit union, that was a default rule that the predecessors could
(and in this case did) contract out of. As a result, he held that s. 87 did
not apply to this amalgamation.
[18]
Webb J. then considered the tax consequences of
a non-qualifying amalgamation. He found that this Court’s decision in R. v.
Black and Decker Manufacturing Co., [1975] 1 S.C.R. 411, applied to this
amalgamation with the effect that Envision, deemed by statute to be a
continuation of its predecessors, could not argue that no CCA had been claimed
by the predecessors. Black and Decker requires that amalgamated
corporations created under the continuation model of amalgamation “continue
without subtraction” of the predecessors (p. 422). The CUIA provides for
a continuation model of amalgamation and therefore it was not open to Envision
to adopt only the original capital cost of the assets that it received from its
predecessors and not also the CCA deducted on those assets.
[19]
Webb J. also rejected the argument that the
provincial CUIA could not impact how taxes were calculated under the
federal ITA . He concluded that simply because applying Black and
Decker to the facts of this case would generate the same result as s. 87 ,
this was not a reason to reach a different result. Therefore, the UCC of
Envision had to be reduced based on the CCA previously claimed by the
predecessors.
[20]
Finally, Webb J. held that the Minister’s
attempt to reassess Envision’s 2001 return was statute barred. This conclusion
was not appealed by the Minister.
B. Federal Court of Appeal, 2011 FCA 321, 425 N.R. 261
[21]
The Court of Appeal found that s. 87 applied to
this amalgamation because the property owned by the predecessors (the surplus
properties) could be traced into property owned by Envision (the shares of
619). The amalgamation merely changed the form in which Envision held ownership
of the surplus properties since the surplus properties were in effect converted
into shares of 619.
[22]
The Court of Appeal also found that the Tax
Court was correct that Black and Decker had the effect of requiring
Envision to adopt the combined UCC balances of its two predecessors even if the
amalgamation was not a qualifying one.
IV. Issues
[23]
This appeal raises three questions:
(1) Was the Envision amalgamation a qualifying
amalgamation under s. 87 of the ITA ?
(2) If the Envision amalgamation was not
a qualifying amalgamation, how should Envision’s UCC and PRA be calculated?
(3) If the Envision amalgamation was not
a qualifying amalgamation and the ITA otherwise permits Envision to
reset its UCC and PRA without reference to its predecessors, is the general
anti-avoidance rule applicable to deny Envision the tax benefit flowing from
that conclusion?
[24]
In view of my conclusion described below, that
this was a qualifying amalgamation, it is not necessary for the Court to answer
questions 2 and 3. As a result, it is not necessary to address whether the flow-through
of tax attributes following a non-qualifying amalgamation is governed by Black
and Decker, as held by the courts below. I leave this question for another
day.
V. Analysis
[25]
In my view, the requirements of s. 87 are
satisfied by this amalgamation because Envision was seized of the surplus
properties at the moment of amalgamation. Therefore, the amalgamation was a
qualifying amalgamation. In reaching this conclusion, I am guided by the
provisions of the CUIA, the terms of the amalgamation agreement and the
terms of the agreements for the sale of the surplus properties. I conclude that
it was not open to the parties, by virtue of the CUIA, to have some
property that belonged to the predecessors not become property of Envision by
virtue of the amalgamation.
A. Section 23 of the CUIA
[26]
Section 23 of the CUIA has not previously
been interpreted by this Court. Indeed, to my knowledge, prior to these
proceedings, this section had never been interpreted by a court. In terms of
authority, this Court has only the benefit of the reasons of the courts below.
Although no doubt assisted by those reasons, this Court is not bound by the
decisions of the Tax Court on questions of statutory interpretation. While I am
mindful of the reasons of Webb J., I reach the opposite conclusion as to the
meaning and effect of s. 23(b) of the CUIA.
[27]
Section 23(b) of the CUIA states:
23 On and after the date of the amalgamation . . .
. . .
(b) the amalgamated
credit union is seized of and holds and possesses all the property,
rights and interests and is subject to all the debts, liabilities and
obligations of each amalgamating credit union . . . .
This language provides
that the result of an amalgamation under the CUIA is that the
amalgamated credit union is the owner of all the property of its predecessors.
[28]
The CUIA provides no deeming rule for
determining at what time on the date of the amalgamation that amalgamation
takes place, unlike the B.C. Business Corporations Act, S.B.C. 2002, c.
57, s. 279(b)(ii), which provides that if no time is specified for the
amalgamation, it occurs at the beginning of the specified date. However, an
amalgamation must take place at a particular time and not just on a particular
date. In this case, the parties are in agreement that the moment of
amalgamation was set in the amalgamation agreement as the commencement of
January 1, 2001.
[29]
Envision argues that credit unions can contract
around the effect of s. 23(b) with respect to particular properties. To
reach this conclusion, Envision relies on s. 20 of the CUIA which
permits amalgamating credit unions to specify “the terms and conditions of the
amalgamation” and “the manner of carrying the amalgamation into effect”.
Envision argues that it is possible for predecessor credit unions to specify
that certain property will not be subject to the rule in s. 23(b) and will
instead pass to a third party, at the exact moment of amalgamation. Envision
takes the position that s. 23(b) is only operative on property that the
amalgamation agreement has not otherwise provided for. In this case, Envision
argues, because the predecessor credit unions had agreed that the surplus
properties would pass to 619, s. 23(b) could not cause Envision to be seized of
those surplus properties.
[30]
In my view, s. 23(b) is not a provision out of
which amalgamating credit unions are permitted to contract. Instead, it is a
mandatory provision that prescribes the consequences of an amalgamation under
the CUIA.
[31]
Credit unions in B.C. are not permitted to
amalgamate except in accordance with the requirements of s. 20 of the CUIA.
Section 20(2)(a)(ii) permits predecessors to set the terms and conditions of
amalgamation. However, s. 23 describes the effects of a s. 20 amalgamation.
While s. 20 empowers predecessor credit unions to set terms and conditions of
amalgamation, those terms and conditions cannot contradict or override the
automatic consequences of amalgamation specified in s. 23 of the CUIA.
Nothing in s. 20 expressly provides authority for amalgamating credit unions to
set their own effects or consequences of amalgamation with respect to assets or
liabilities. These effects of amalgamation are provided for in s. 23.
[32]
In this respect, I am in agreement with Cromwell
J. Section 20 describes the conditions for an amalgamation. Section 23
describes the effects. I also agree that this is the structure that the CUIA
adopts with respect to acquisitions in ss. 16-18. However, I cannot see how
this distinction between effects and conditions of amalgamation raises doubts
for my colleague about the conclusion that parties cannot contract out of the
effects of s. 23(b).
[33]
To permit amalgamating credit unions to contract
out of s. 23 of the CUIA would undermine the statutory scheme
constructed by the legislature. Nothing in s. 20 or s. 23 of the CUIA
permits amalgamating credit unions to contract out of any of the express
statutory consequences of an amalgamation, and there is no independent common
law power that permits credit unions to amalgamate in a manner that would
contradict the terms of the CUIA.
[34]
Cromwell J. relies on the fact that the other
paragraphs in s. 23 contain explicit references to the amalgamation agreement:
“. . . the amalgamating credit unions are amalgamated and are
continued as one credit union under the name and with the constitution and
rules provided in the amalgamation agreement” (s. 23(a)); “every member
and auxiliary member of each amalgamating credit union is bound by the
amalgamation agreement” (s. 23(c)). He suggests that because these
paragraphs adopt the terms of the amalgamation agreement, somehow the same
thing should hold true for s. 23(b) where there is no reference to the terms of
the amalgamation agreement. With respect, I cannot see how the explicit
adoption of the amalgamation agreement in s. 23(a) can assist in reaching the
same conclusion for s. 23(b) where there is no such language. If anything, it
suggests the opposite conclusion: that the consequences prescribed by s. 23(b)
cannot be altered by the terms of the amalgamation agreement. Nor does s.
23(c), which simply makes the amalgamation agreement binding on the members of
the credit unions, suggest that the terms of the amalgamation agreement may be
inconsistent with s. 23(b).
[35]
The policy reasons of the legislature for not
permitting contracting out of the effects of s. 23 can easily be understood.
Protection for creditors is a key issue in an amalgamation. If Envision’s
reading of the statute were correct, there would be no reason that predecessor
credit unions could not also opt out of the effect of s. 23(b) in respect of
liabilities, by specifying that liabilities or obligations should not pass to
the amalgamated credit union. This would be an untenable result. Amalgamations
are not intended to permit corporations to split liabilities from assets. The
role of s. 23(b) as a protection for creditors is even more important because
the CUIA does not contain specific provisions that protect the interests
of creditors as does the B.C. Business Corporations Act.
[36]
I agree with Cromwell J. that regulatory
approval is required for credit unions to amalgamate and that credit unions
operate in a highly regulated environment. However, the statutory obligation of
the regulator in approving an amalgamation agreement is to determine whether
the amalgamation agreement is “contrary to the interests of one or more of the
amalgamating credit unions or its or their members”: CUIA, s. 20(3)(b).
While the regulator may be interested in the protection of creditors, this is
not the focus of the regulatory approval process. Section 23(b), then, remains
as an important element of creditor protection.
[37]
By virtue of s. 23(b), therefore, Envision was
seized of the surplus properties at the exact moment of amalgamation. This
caused the condition in s. 87(1) (a) of the ITA to be
fulfilled. All of the property of the predecessors was property of Envision by
virtue of the merger.
[38]
Envision argues that this interpretation would
render the requirements with respect to property and liabilities in s. 87 of
the ITA redundant because it would be impossible to fail to meet them,
as effectively all corporate amalgamation statutes in Canada provide for
continuity in respect of assets and liabilities. While this may be the case
now, at any time, corporate law statutes could be amended to alter those
provisions. The fact that the two conditions in the ITA will always be
fulfilled because of current corporate law provisions does not require a
different interpretation to be given to those corporate law statutes. The ITA
exists to impose tax consequences based on corporate law; it does not exist to
cause those corporate laws to be interpreted differently.
[39]
The Envision amalgamation was a qualifying
amalgamation. Subsections 87(2)(d) and 137(4.3)(b), the
provisions of the ITA that provide for the flow-through of CCA and PRA,
apply and Envision’s tax attributes must be adjusted accordingly.
[40]
Cromwell J. argues that the s. 23(b) analysis is
unnecessary. However, it was the basis on which this appeal was argued both in
this Court and in the courts below. The parties made submissions on the meaning
and effect of these sections of the CUIA. While my colleague suggests
that this result will create significant practical problems in other cases, I
cannot see any advantage to declining to decide an issue after a full appeal
process and complete submissions of the parties. Indeed, to the extent that
practical problems should guide judicial decision making, I think those factors
suggest that this Court decide this matter now rather than leaving the matter
unresolved and therefore uncertain.
B. Effect of the Amalgamation and Purchase and Sale Agreements
[41]
The above analysis is sufficient to resolve the
tax issue in this case, because s. 23(b) of the CUIA caused the
conditions in s. 87 of the ITA to be fulfilled. Nonetheless, Envision
raises the issue of the effectiveness of the amalgamation agreement which
Envision argues was the mechanism by which s. 23(b) was circumvented. Envision
argues that if it was not possible for Envision to structure its affairs so
that the surplus properties did not become property of Envision, the
amalgamation agreement between the predecessor credit unions might be invalid (appellant’s
reply factum, at para. 18).
[42]
To the extent that Envision is arguing that the
Court’s interpretation of s. 23(b) of the CUIA and s. 87 of the ITA
should turn on the effect it would have on these parties’ private transaction,
I would not give effect to that argument. Tax consequences which flow from the
application of tax law cannot be tailored to avoid negative corporate law
consequences.
[43]
I agree that the practical problems posed by
potentially invalidating an amalgamation that has been operational for over 10
years could be significant. However, I am not convinced that such practical
problems arise in this case. Despite the fact that Envision was seized of the
surplus properties at the time of amalgamation, an outcome that the
predecessors were trying to avoid, the sale agreements and the amalgamation
agreement were still effective. As I explain below, the effect of those
agreements was identical to the effect that the predecessors had planned for,
with the sole exception of the tax consequences which could not have been
achieved because of s. 23(b) of the CUIA.
(1) The Sale Agreements for the Surplus
Properties
[44]
While Envision has not directly raised the issue
of the effectiveness of the agreements for purchase and sale, a proper
understanding of the effect of these agreements is necessary to understand how
the amalgamation agreement operated in this case.
[45]
Two agreements were entered into to provide for
the sale of the surplus properties. These agreements were structured so that
the vendors were Delta and First Heritage. The agreements further provided that
the sale of the surplus properties was to take place at the exact moment of the
amalgamation as set out in the amalgamation agreement. Envision argues that
since the vendors were the predecessors they were the parties that sold the
surplus properties. Therefore Envision did not and could not have sold the
properties to the subsidiary. I cannot agree.
[46]
At the moment of amalgamation, the predecessors,
Delta and First Heritage, no longer had separate legal personalities capable of
fulfilling the terms of the sale agreements. While they were continued under
the CUIA, they were continued inside Envision: Black and Decker,
at p. 422. Any legal obligations that the predecessors had entered into that
needed to be fulfilled, at or after the time of the amalgamation, had to be
fulfilled by Envision. This is the effect of s. 23(b) of the CUIA, which
causes the amalgamated credit union to be seized of all of the obligations of
its predecessors on and after the moment of amalgamation. So, despite the fact
that the agreements listed Delta and First Heritage as the vendors, at the
moment of amalgamation, the vendor was Envision.
[47]
This principle flows from this Court’s decision
in Black and Decker, at p. 418, where it was noted that under a
continuation model of amalgamation, “upon amalgamation each constituent company
loses its ‘separate’ existence but it by no means follows that it has thereby
ceased to exist”. From this understanding of amalgamation, it follows that
contracts that were entered into in the names of the predecessor corporations
are binding upon and must be fulfilled by the amalgamated entity, barring
restrictions in those contracts to the contrary: British Columbia Company
Law Practice Manual (2nd ed. 2007), vol. 1, at p. 11-7.
[48]
Nothing in the agreements for the sale of the
surplus properties prohibited them from being fulfilled upon an amalgamation.
Indeed, the agreements specifically state that they are binding on Delta and
First Heritage’s successors. A corporation’s successor is generally understood
to include those corporations formed as a result of an amalgamation: Black’s
Law Dictionary (9th ed. 2009). Therefore, since at the moment of
amalgamation, Delta and First Heritage had no separate existence and because
the contracts for sale of the surplus properties were binding on Envision,
those agreements were properly carried out by Envision at that time.
[49]
The parties have characterized this case as
being one of simultaneous transactions. While it is no doubt true that two
things were happening at the same time (Envision being seized of all property
by virtue of s. 23(b) and the surplus properties being sold by virtue of the
sale agreements), the parties did not acknowledge the different nature of these
two events. The distinction is between a transaction with respect to the
properties (the sale) and a larger transaction that had an effect on the
properties (the amalgamation).
[50]
When Envision was seized of the property, it was
not by virtue of an agreement for purchase and sale. Envision’s seizure of the
property cannot be equated to a conveyance: Black and Decker, at
p. 417. Instead, it is more appropriate to think of Envision’s being seized of
the assets of its predecessors as similar to changing the name of the legal
owner. Distinguishing seizure from a conveyance makes sense given the adoption
of the continuation model of amalgamation. A conveyance requires that the
seller and the buyer be separate legal entities at the time of the transfer of
the property. At the moment Envision was created, the predecessors ceased to
have any independent legal existence, so there were not two parties capable of
engaging in a conveyance. In this case, there was no point in time when Delta,
First Heritage and Envision existed as separate legal entities such that
Delta and First Heritage could convey their property to Envision. At the moment
of amalgamation, only Envision continued to exist as a separate legal entity.
[51]
No court has previously interpreted the phrase
“is seized of” in the context of the CUIA. Similar language existed in
s. 251 of the Company Act, R.S.B.C. 1996, c. 62, which governed
corporate amalgamations. Interpretations of that section suggest that the
language ought to be considered as analogous to the provisions that this Court
interpreted in Black and Decker: Manco Home Systems Ltd., Re, 1989
CanLII 2819 (B.C.S.C.). As noted above, this Court in Black and Decker
concluded that continuation model amalgamations are not transfers or
conveyances of assets.
[52]
At the moment that Envision was created, it was
seized of the property and was immediately able to transact in relation to that
property. Envision was therefore immediately able to and indeed required to
fulfill the obligations of the predecessors, such as the obligation to sell the
surplus properties to 619. It follows that the agreements for the sale of the
surplus properties were effective.
(2) The Amalgamation Agreement
[53]
I now consider whether s. 23(b) renders any
portion of the amalgamation agreement invalid. Part 6.1 of the amalgamation
agreement between the predecessors provides:
As and from the Effective Time, Delta
and First Heritage shall be amalgamated and shall continue as the Amalgamated
Credit Union under the name and with the Constitution and Rules hereinbefore
provided and the Amalgamated Credit Union shall, subject to Part 8 hereof,
be seized of and shall hold and possess all of the property, rights and
interests, and shall be subject to all debts, liabilities and obligations, of
each of Delta and First Heritage . . . . [Emphasis
added; A.R., at p. 116.]
This provision, with the
exception of the underlined text, simply repeats the effect of s. 23 of the CUIA.
Part 8 provides that at the Effective Time, the predecessors will transfer
certain surplus assets to a subsidiary.
[54]
There is nothing in Part 8 that is inconsistent
with the requirements of s. 23(b) of the CUIA. As described above
in relation to the purchase and sale agreements for the surplus properties, it
was open to the predecessors to make commitments that would be fulfilled at or
after the time of amalgamation. However, at and after that time, the
predecessors had no independent legal existence so actions undertaken to fulfil
those commitments were undertaken by the amalgamated credit union, Envision.
[55]
The statement in Part 6, that the seizure of the
assets is “subject to Part 8”, must be interpreted in light of the meaning of
Part 8. The effect of Part 8 is to commit the predecessors to selling the
surplus properties at the moment of amalgamation. Nothing in Part 8 prevented
Envision from being seized of the surplus properties upon amalgamation. Rather,
it merely committed the predecessors and therefore Envision to making the
sale.
[56]
Although there is extrinsic evidence that the
predecessors intended to prevent Envision from being seized of the surplus
properties, such an arrangement would be in violation of s. 23(b) of the CUIA.
When a contract may be construed in two ways, a lawful interpretation ought to
be preferred over an unlawful one: G. McMeel, The Construction of
Contracts: Interpretation, Implication, and Rectification (2nd ed. 2011),
at para. 7.31. Accordingly, the words of the contract (as opposed to the
intention of the parties with respect to tax consequences) are best interpreted
as merely ensuring that the surplus properties were sold at the time of the
amalgamation. This interpretation is consistent with s. 23(b) of the CUIA.
As a result, the amalgamation agreement is not invalid.
C. Tracing Must Be Rejected
[57]
In view of my conclusions above, it is
unnecessary to consider the Court of Appeal’s approach of tracing the surplus
properties through the shares of 619. However, I am of the view that if it had
been necessary to consider it, the tracing approach would have to be rejected.
It is a basic rule of company law that shareholders do not own the assets of
the company: see, e.g., Wotherspoon v. Canadian Pacific Ltd., [1987] 1 S.C.R.
952, at p. 1033. While the ITA provides for “look-through” rules in
certain circumstances which permit this basic rule to be ignored for tax
purposes, those provisions are explicit: see, e.g., the s. 256(1.2) look-through
rules that deem shares (property) owned by a corporation to be controlled by
the shareholders of the corporation.
[58]
The Minister argues that the broad definition of
property and the language in s. 87 of “in such a manner that” is sufficient to
create such a look-through or tracing rule. In my view, that cannot succeed.
That legislative language is not as explicit as those provisions of the ITA
that permit shareholders to be deemed to be the owners of corporate property.
The tracing approach cannot be used to cause an amalgamation to meet the
requirements of s. 87 .
VI. Disposition
[59]
As a result of s. 23(b) of the CUIA, it
was not possible for the predecessors to structure an amalgamation that did not
meet the condition in s. 87(1) (a) of the ITA . Therefore, the
Envision amalgamation was a qualifying amalgamation under the ITA and
Envision’s UCC balance and PRA must be determined in accordance with s. 87 of
the ITA .
[60]
I would dismiss the appeal with costs.
The
following are the reasons delivered by
[61]
Cromwell J. — I agree with my colleague Rothstein J. that this appeal should be
dismissed with costs. I reach this conclusion on the basis set out in para. 50
of my colleague’s reasons. In essence, the appellant’s position must be
rejected because it is premised on a sequencing of events that is not reflected
in the transaction that the parties undertook. As my colleague points out, at
the moment that Envision was created, the predecessor corporations ceased to
have any independent legal existence. There was thus no point in time when Delta
Credit Union, First Heritage Savings Credit Union and Envision Credit Union
existed as separate legal entities such that Delta and First Heritage could
convey their property to Envision because, at the moment of amalgamation, only
Envision was a separate legal entity. That is sufficient to fully answer the
appellant’s appeal and I would stop the analysis there.
[62]
My colleague also relies on s. 23 of the Credit
Union Incorporation Act, R.S.B.C. 1996, c. 82 (“CUIA”), to resolve the appeal by holding that s. 23(b) is a provision
out of which amalgamating credit unions are not permitted to contract: para.
30. However, I find it both unnecessary and undesirable to adopt this
interpretation of s. 23 in this case. It is unnecessary because the line of
reasoning to which I refer in the first paragraph of my reasons is sufficient
to resolve the question raised on appeal. Having found that there was no
inconsistency between the actual transaction and the result of an amalgamation
as described in s. 23, it is not necessary to speculate on what would have
happened if that were not the case. It is undesirable, in my respectful view,
for a number of reasons.
[63]
My colleague interprets s. 23(b) of the CUIA
as establishing a prerequisite to a lawful amalgamation. In effect, my
colleague’s reasons lay down a rule that all amalgamations under the CUIA
(and therefore under similarly worded provisions in other corporations
statutes) cannot, as a matter of law, fall outside the provisions of s. 87(1) (a)
and (b) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”).
This is a significant holding. But there is apparently no authority to support
it (certainly none is cited) and it did not attract the approval of the learned
Tax Court judge in this case: see reasons of Webb J. (as he then was), 2010
TCC 576, 2010 D.T.C. 1399, at para. 50. Moreover, there is reason to be
concerned about the correctness of the proposed interpretation given the text
and structure of the statute. It is also acknowledged that this interpretation
has the potential to give rise to significant practical problems in future
cases. All of these considerations, to my mind, call for caution and cast doubt
on the wisdom of deciding this point.
[64]
I will not dwell on the absence of authority —
Rothstein J. cites none on this point — other than to observe that the Court is
generally assisted by reasons of other courts on points that it decides. We
have no such assistance here. I will not expand further on the fact that the
learned Tax Court judge did not accept the interpretation now advanced other
than to note that his conclusion suggests that the interpretative point before
us is at least one on which reasonable and highly experienced tax lawyers may
reasonably differ. I will address in somewhat more detail the aspects of the
text and structure of the statute that raise doubts in my mind as to the
correctness of my colleague’s interpretation.
[65]
Turning first to the text, Rothstein J. reads
s. 23 as setting out legal requirements for an amalgamation out of which the
parties cannot contract. However, when one contrasts the language used in s. 23
with that in s. 20, that construction seems at least doubtful.
[66]
When the legislature intended to set out legal
requirements for amalgamation, it used language appropriate to achieve that
goal. It did so very clearly in s. 20. Section 20 provides that two or more
credit unions may amalgamate, “but must not do so except in accordance with
this section”: s. 20(1). It would be hard to find clearer expression of the
intent to set out legal requirements. There follows in s. 20 a detailed list of
substantive and procedural requirements, including the need for regulatory
approval. The important point is that s. 20 uses clear language to set out the
requirements and that is clearly the purpose of the provision.
[67]
Contrast the language of s. 20 with that used in
s. 23. Section 23 uses language that describes the effects of amalgamation; it
does not use language that establishes requirements for a lawful amalgamation.
Section 23 is premised on a certificate of amalgamation having been issued and
it adopts the terms of the amalgamation agreement in relation to “the name . .
. the constitution and rules provided in the amalgamation agreement”: s. 23(a).
It further provides that every member of each amalgamating credit union is
bound by the amalgamation agreement: s. 23(c). This would be an odd choice of
language if the provision were meant to lay down hard and fast rules with which
amalgamations must comply. It would also seem to be an odd approach to drafting
to put a prohibition relating to the contents of an amalgamation agreement in
s. 23(b) between two other subsections, 23(a) and 23(c), that indicate that the
provisions of the amalgamation agreement govern once the certificate is issued.
In short, there is reason to think that s. 23 does not set out the conditions
for amalgamation; that is the role of s. 20. Rather, it may well simply
describe the effects of an amalgamation, recognizing that the amalgamation
agreement plays a central role in spelling out those effects.
[68]
Turning to the structure of the CUIA, it
too casts some doubt on the correctness of Rothstein J.’s interpretation of s.
23. The provisions in the CUIA which deal with acquisitions (ss. 16 to 18)
and amalgamations (ss. 20 to 24) have a similar structure. Section 16 sets out
the conditions for acquisition of a credit union by asset transfer in the same
way that s. 20 sets out the conditions for amalgamation. Section 17 deals with
acquisitions directed by the commission in the same way that s. 20 deals with
amalgamations directed by the commission. Section 18 describes the effects of
the transaction based on the acquisition agreement in the same way that s. 23
deals with the effects of the amalgamation based on the amalgamation agreement.
[69]
My colleague is concerned that the
interpretation of s. 23 he proposes is essential in order to address concerns
that, without such a provision, creditors of predecessor credit unions would
not, or might not be protected on amalgamation. Section 20 addresses this
concern, however, through the requirement for regulatory approval of the
proposed amalgamation. I also note that credit unions operate in a highly
regulated environment and it seems to me to be rather unlikely that creditor
protection depends so heavily on s. 23(b).
[70]
Taking these points into account, there seems to
me to be good reason to question the interpretation advanced by my colleague.
[71]
I am also concerned about the possible
unintended consequences of my colleague’s interpretation. As he properly
acknowledges in para. 43, “the practical problems posed by potentially
invalidating an amalgamation that has been operational for over 10 years could
be significant”. Although no such problems in fact arise here, I would not
adopt an interpretation that is recognized to have the potential to give rise
to significant practical problems in other cases when doing so is not necessary
for the resolution of this appeal. Given that Rothstein J.’s interpretation may
put in doubt the legality of previous amalgamations which received appropriate
regulatory approval and, given further that the point has apparently never come
up before, it seems to me that deciding this point when it is unnecessary to do
so is much more likely to create problems than to solve them.
[72]
To conclude, Rothstein J. proposes an
interpretation: (1) that has potentially far-reaching effects beyond the
construction of the CUIA; (2) in support of which no authority is
offered; (3) which encounters some difficulty having regard to the structure
and text of the statute; and (4) which is acknowledged to have the potential to
cause significant practical problems in other cases. With great respect, it is
my view that the Court should not take this step when doing so is completely unnecessary
for the proper disposition of the appeal before us.
APPENDIX
Relevant
Provisions
Income Tax Act, R.S.C.
1985, c. 1 (5th Supp .)
87. (1) [Amalgamations] In this section, an amalgamation means a merger
of two or more corporations each of which was, immediately before the merger, a
taxable Canadian corporation (each of which corporations is referred to in this
section as a “predecessor corporation”) to form one corporate entity (in this
section referred to as the “new corporation”) in such a manner that
(a) all of
the property (except amounts receivable from any predecessor corporation or
shares of the capital stock of any predecessor corporation) of the predecessor
corporations immediately before the merger becomes property of the new
corporation by virtue of the merger,
(b) all of the
liabilities (except amounts payable to any predecessor corporation) of the
predecessor corporations immediately before the merger become liabilities of
the new corporation by virtue of the merger, and
(c) all of the
shareholders (except any predecessor corporation), who owned shares of the
capital stock of any predecessor corporation immediately before the merger,
receive shares of the capital stock of the new corporation because of the
merger,
otherwise than as a result of the
acquisition of property of one corporation by another corporation, pursuant to
the purchase of that property by the other corporation or as a result of the
distribution of that property to the other corporation on the winding-up of the
corporation.
Credit Union Incorporation Act, R.S.B.C. 1996, c. 82
20 (1) [Amalgamation] Two or more credit unions (the “amalgamating
credit unions”) may amalgamate and continue as one credit union (the “amalgamated
credit union”), but must not do so except in accordance with this section.
(2) Amalgamating credit unions, including any ordered under section
277 (g) of the Financial Institutions Act to amalgamate, together must
propose and submit to the commission an amalgamation agreement that
(a) specifies
(i) the name of
the proposed amalgamated credit union,
(ii) the terms
and conditions of the amalgamation,
(iii) the manner
of carrying the amalgamation into effect,
. . .
(3) On receiving a
proposed amalgamation agreement submitted to the commission, including one
where one or more of the amalgamating credit unions is acting under section 21
through an administrator,
(a) the commission
may consent to the proposed amalgamation agreement, or
(b) if
the commission considers that the proposed amalgamation agreement is contrary
to the interests of one or more of the amalgamating credit unions or its or
their members, the commission may refuse to consent to it.
. . .
23 [Vesting on amalgamation] On and after the date of the amalgamation
shown in a certificate of amalgamation issued under section 20 (7) (b),
(a) the
amalgamating credit unions are amalgamated and are continued as one credit
union under the name and with the constitution and rules provided in the
amalgamation agreement,
(b) the
amalgamated credit union is seized of and holds and possesses all the property,
rights and interests and is subject to all the debts, liabilities and
obligations of each amalgamating credit union, including any obligations to
members or auxiliary members under section 24, and
(c) every
member and auxiliary member of each amalgamating credit union is bound by the
amalgamation agreement.
Appeal
dismissed with costs.
Solicitors
for the appellant: Dentons Canada, Vancouver.
Solicitor for the
respondent: Attorney General of Canada, Ottawa.
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