Citation: 2011 TCC 346
Date: 20110711
Docket: 2009-2494(IT)G
BETWEEN:
10737 NEWFOUNDLAND LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip C.J.
[1]
The appellant, 10737
Newfoundland Limited, appeals income tax assessments for 1999, 2000 and 2004 in
which the Minister of National Revenue ("Minister") disallowed the
appellant's claim in its 2002 taxation year for an allowable capital loss on a disposition
of "exchangeable shares" in exchange for shares of a foreign
corporation. The allowable capital losses were applied in 2002 and carried back
to 1999 and forward to 2004. The Minister invoked what is generally referred to
as "stop loss" rules in subsections 40(3.3), (3.4) and
(3.5) of the Income Tax Act ("Act") to deny the capital
loss. These rules defer recognition of capital losses.
[2]
An "exchangeable
share" has been described as "a share of a Canadian corporation (…)
that, together with some ancillary rights, replicates as closely as possible
the economics (and to some extent the legal rights engaged by holders) of a
share of another corporation".
[3]
Another author has
explained that the use of the exchangeable shares is particularly suited when a
non‑resident corporation, a "Foreign Acquiror", wishes to
acquire shares of a Canadian resident corporation in certain circumstances.
"The principal purpose of [the use of exchangeable shares] from a Canadian
tax perspective is to offer Canadian resident shareholders of [the Canadian
resident corporation] the opportunity to tender their shares […] in exchange
for exchangeable shares issued by [the Canadian resident corporation] ..., in a
manner that provides the Canadian resident selling shareholders with the
opportunity to obtain a tax deferred disposition (i.e. rollover) of such shares
for purposes of the Income Tax Act. The exchangeable shares are
exchangeable into shares of the Foreign Acquiror and are intended in an
economic sense to be equivalent to shares of the Foreign Acquiror."
[4]
Exchangeable shares of
a Canadian corporation are usually created on the reorganisation of the capital
of the corporation, converting common shares to exchangeable shares in
proportion of one exchangeable share to one Foreign Acquiror, share for which
the exchangeable shares will eventually be exchanged. The shares of the Foreign
Acquiror that are exchanged for the shareholder's exchangeable shares represent
payment for the acquisition of the shares of the Canadian corporation.
[5]
The basic condition of an
exchangeable share is generally the right of the holder of the exchangeable
share to demand that the exchangeable share of the Canadian resident corporation
be retracted (i.e. redeemed) by the Canadian corporation for an equal number of
shares of the Foreign Acquiror or that the Foreign Acquiror purchase the
exchangeable shares with payment of an equal number of its own shares. The rights
and conditions of the Exchangeable Shares and the corporate agreements relating
to the transaction describe the process by which the erstwhile shareholder of
the Canadian resident corporation becomes the shareholder of the Foreign
Acquiror.
[6]
In 2002 the appellant
disposed of a number of Newbridge Exchangeable Shares ("Exchangeable
Shares") and, in return, acquired Alcatel American Depositary Shares
("Alcatel ADSs" or "ADSs") within the 61 day period
described in paragraphs 40(3.3)(b) and (c). The appellant's
cost base of the Exchangeable Shares was greater than the value of the ADSs at
time of the disposition of the Exchangeable Shares and therefore the appellant
incurred a capital loss. The Minister, on reviewing the facts leading to the
disposition, was of the view that the appellant, as an owner of the
Exchangeable Shares, had a right to redeem the Exchangeable Shares for ADSs.
The Minister concluded that the appellant acquired property, the ADSs,
identical to the Exchangeable Shares within the meaning of paragraph 40(3.3)(b)
of the Act, citing subsection 40(3.5), and denied the loss in
accordance with paragraph 40(3.4)(a) of the Act.
[7]
The appellant’s
position is that the Exchangeable Shares and the ADSs are not identical
properties pursuant to paragraph 40(3.3)(b) of the Act but shares
of two distinct and separate legal entities. An Exchangeable Share, counsel
argued, is not a "right to acquire" an ADS within the meaning of
paragraph 40(3.5)(a) of the Act. The appellant says that it
did not dispose of "a right to acquire" the ADSs; it disposed of
Exchangeable Shares. Therefore, paragraph 40(3.5)(a), which deems a
"right to acquire a property" to be identical to the property, does
not apply to the facts at bar.
[8]
The evidence was
adduced by the following "Partial Agreed Statement of Facts":
Merger of Newbridge and
Alcatel
1. On February 23, 2000, Newbridge
Networks Corporation ("Newbridge") entered into a Merger
Agreement with Alcatel, a corporation governed by the laws of France, pursuant to which Alcatel would,
subject to certain conditions, become the indirect owner of all of the Common
Shares of Newbridge.
Prior to the merger, Newbridge and Alcatel were not "affiliated" for
the purpose of the Income Tax Act.
2. The merger was completed on May 25,
2000, under the terms of a court‑approved Plan of Arrangement
(the "Arrangement").
3. The terms of the Arrangement gave the shareholders
of Newbridge the option to receive as consideration for their Common Shares,
either:
a. 0.81 Alcatel American Depositary Share
("Alcatel ADS") for each Newbridge Common Share; or
b. 0.81 Exchangeable Shares of Newbridge (and
certain ancillary rights) for each Newbridge Common Share; or
c. a combination of the above.
4. Pursuant to the Arrangement the following
events, among others, occurred:
a. the authorized share capital of Newbridge
was reorganized by creating a new class of shares, the Exchangeable Shares;
b. each Newbridge Common Shares (other than
those held by "Dissenting Shareholders" or held by
Alcatel or any of its affiliates) was changed into 0.81 Exchangeable Shares;
c. Newbridge issued one Common Share to
Alcatel Holdings Canada Corp. ("Alcatel Holdings"), a company wholly‑owned
indirectly by Alcatel;
d. each Exchangeable Share (other than the
Exchangeable Shares that the holders elected to retain as Exchangeable Shares)
was transferred by its holder to Alcatel Holdings in exchange for one Alcatel
ADS;
e. each Exchangeable Share held by Alcatel
Holdings was then transferred by Alcatel Holdings to Newbridge in exchange for
that number of Newbridge Common Shares equal to one divided by the exchange
ratio (0.81).
5. Upon completion of the Arrangement,
Alcatel Holdings held all of the issued and outstanding Common Shares of
Newbridge. Former holders of Common Shares of Newbridge who had elected to
receive Exchangeable Shares held all of the issued and outstanding Exchangeable
Shares.
Exchangeable Shares
6. The Exchangeable Shares (together with
certain ancillary rights) were intended to be economically equivalent to the
Alcatel ADSs, with the exception that holders of the Exchangeable Shares are
not entitled to attend or vote at any meeting of the shareholders of Alcatel
(although they are entitled to notice thereof).
7. Holders of Exchangeable Shares are
entitled to receive from Newbridge, subject to applicable law, dividends that
are economically equivalent to any distributions paid on Alcatel ADSs resulting
from dividends declared on the Alcatel Shares.
8. The Exchangeable Shares are subject to
adjustment or modification in the event of a stock split or other change to the
capital of Alcatel so as to maintain the initial one‑to‑one
relationship between the Exchangeable Shares and the Alcatel ADSs.
9. The Management Information Circular of
Newbridge, which describes the Arrangement, provides that "Exchangeable
Shares may be exchanged at any time, on a one for one basis, for Alcatel ADSs
at the option of the holder."
10. Holders of Exchangeable Shares are entitled
at any time, subject to the exercise by Alcatel Holdings of its
"Retraction Call Right", to require Newbridge to redeem any or all of
the Exchangeable Shares registered in their name (the "Retracted
Shares"). If Alcatel Holdings exercises its "Retraction Call
Right", instead of Newbridge redeeming the Exchangeable Shares, Alcatel
Holdings purchases the Retracted Shares from the holder.
11. Whether the Exchangeable Shares are
redeemed by Newbridge or purchased by Alcatel Holdings, the amount paid per
share is equal to the "Current Market Price" of an Alcatel ADS and is
satisfied in full by either Newbridge or Alcatel Holdings causing to be
delivered to the holder a certificate representing one Alcatel ADS for each
Exchangeable Share (together with the full amount of all declared and unpaid
dividend on the Exchangeable Share).
12. If, as a result of solvency requirements or
applicable law, Newbridge is not permitted to redeem all Retracted Shares
tendered by a retracting holder, Newbridge will redeem only those Retracted
Shares as would not be contrary to applicable law and Alcatel Holdings is
required to purchase the Retracted Shares not redeemed.
The transactions
13. On May 11, 2000, 3507271 Canada Inc.
and 100935 Canada Ltd., who owned Common Shares of Newbridge through a holding
company (3748278 Canada Inc.), transferred to Newbridge all of their issued and
outstanding shares of 3748278 Canada Inc. in return for new Common Shares of
Newbridge to be issued from its treasury. 3507271 Canada Inc. and 100935 Canada Ltd. received, in exchange for their
83,160,690 and 401,189,070 shares of 3748278 Canada Inc., 136,329 and 657,687
Common Shares of Newbridge respectively.
14. Both 3507271 Canada Inc. and 100935 Canada
Inc. elected to receive Exchangeable Shares in consideration for their Common
Shares of Newbridge and in fact received 110,426 and 532,726 Exchangeable
Shares respectively.
15. The exchange of Newbridge Common Shares for
Exchangeable Shares was not a taxable event for 3507271 Canada Inc. and 100935
Canada Inc., pursuant to subsection 86(1) of the Income Tax Act.
16. On June 29, 2000, the Appellant
purchased 110,426 Exchangeable Shares from 3507271 Canada Inc. At that time,
the fair market value of the 110,426 Exchangeable Shares was $10,253,054, the
paid‑up capital was $965,073 and the adjusted cost base was $8,084,278.
The transaction was done by way of rollover pursuant to subsection 85(1)
of the Income Tax Act for an agreed amount of $8,084,278. The
consideration given by the Appellant was 100 shares of its treasury.
17. On June 29, 2000, the Appellant
purchased 532,726 Exchangeable Shares from 100935 Canada Inc. At that time, the
fair market value of the 532,726 Exchangeable Shares was $49,463,609, the paid‑up
capital was $4,655,766 and the adjusted cost base was $37,097,707. The
transaction was done by way of rollover pursuant to subsection 85(1) of
the Income Tax Act for an agreed amount of $37,994,120. The consideration
given by the Appellant was 100 shares of its treasury. This transaction
gave rise to a capital gain of $896,413.
18. On September 30, 2002, the Appellant
disposed of 342,652 Exchangeable Shares by requesting that Newbridge redeem the
shares, as provided for in the Arrangement. At that time, each of the 342,652
Exchangeable Shares had an adjusted cost base of $71.64 and a fair market value
of $3.71.
19. On the same day, the Appellant acquired
342,652 Alcatel ADSs, as per its rights under the Arrangement, and continued to
hold those shares in the 30‑day period that followed the disposition of
the Exchangeable Shares. The Appellant still held the Alcatel ADSs at the end
of the 2002 taxation year.
20. The Exchangeable Shares were capital
property of the Appellant.
21. The Appellant was not a person
"affiliated" with Alcatel for the purpose of the Income Tax Act.
Tax treatment
22. The Appellant reported a capital loss of
$23,276,350 on the disposition of the Exchangeable Shares in its 2002 tax return.
Net capital losses of $2,820,801 and $10,413,407 were carried back to its 1999
and 2000 taxation years respectively. A net capital loss of $11 was carried
forward to its 2004 taxation year.
23. The Minister of National Revenue assessed
the Appellant on the basis that subsection 40(3.4) of the Income Tax
Act applies to suspend the recognition of the capital loss realized by the
Appellant on the disposition of its Exchangeable Shares in the 2002 taxation
year. The Minister consequently disallowed the carry‑back / carry‑forward
of the capital loss reported by the Appellant.
Statutory provisions
[9]
The relevant portions
of subsections 40(3.3), (3.4) and (3.5) read as follows:
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(3.3) Subsection 40(3.4) applies when
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(3.3) Le paragraphe (3.4) s’applique lorsque
les conditions suivantes sont réunies :
|
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(a) a corporation, trust or
partnership (in this subsection and subsection 40(3.4) referred to as the
“transferor”) disposes of a particular capital property (other than
depreciable property of a prescribed class) otherwise than in a disposition
described in any of paragraphs (c)
to (g) of the definition
“superficial loss” in section 54;
|
a) une société, une fiducie ou une
société de personnes (appelées « cédant » au présent paragraphe et
au paragraphe (3.4)) dispose d’une immobilisation, sauf un bien amortissable
d’une catégorie prescrite, en dehors du cadre d’une disposition visée à l’un
des alinéas c) à g) de la définition de « perte apparente » à l’article 54;
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(b) during the period that
begins 30 days before and ends 30 days after the disposition, the transferor
or a person affiliated with the transferor acquires a property (in this
subsection and subsection 40(3.4) referred to as the “substituted property”)
that is, or is identical to, the particular property; and
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b) au cours de la période qui
commence 30 jours avant la disposition et se termine 30 jours après cette
disposition, le cédant ou une personne affiliée à celui-ci acquiert le même
bien ou un bien identique (appelés « bien de remplacement » au présent
paragraphe et au paragraphe (3.4));
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(c) at the end of the period,
the transferor or a person affiliated with the transferor owns the
substituted property.
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c) à la fin de cette période, le
cédant ou une personne affiliée à celui-ci est propriétaire du bien de
remplacement.
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(3.4) If this subsection applies
because of subsection 40(3.3) to a disposition of a particular property,
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(3.4) Lorsque le présent paragraphe
s’applique par l’effet du paragraphe (3.3) à la disposition d’un bien, les
présomptions suivantes s’appliquent :
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(a) the transferor’s loss, if
any, from the disposition is deemed to be nil, and
…
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a) la perte du cédant résultant de
la disposition est réputée nulle;
…
|
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(3.5) For the purposes of subsections
40(3.3) and 40(3.4),
|
(3.5) Les présomptions suivantes
s’appliquent dans le cadre des paragraphes (3.3) et (3.4):
|
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(a) a right to acquire a
property (other than a right, as security only, derived from a mortgage,
hypothec, agreement for sale or similar obligation) is deemed to be a property
that is identical to the property;
…
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(a) le droit d’acquérir un bien (sauf
le droit servant de garantie seulement et découlant d’une hypothèque, d’une
convention de vente ou d’un titre semblable) est réputé être un bien qui est
identique au bien;
…
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[10]
It is common ground
among the parties that the "disposition of a particular capital property"
referred to in paragraph 40(3.3)(a) is the disposition of the
Exchangeable Shares, that is, the result of the appellant asking Newbridge to
retract the Exchangeable Shares. However, the appellant disagrees with the
Minister that, in the 61 day period referred to in paragraph 40(3.3)(b),
the appellant acquired a property that was identical to the Exchangeable Shares,
since a Newbridge Exchangeable Share cannot be identical to an Alcatel ADS.
Appellant's submissions
[11]
I
agree with Mr. Lefebvre that normally a share of one corporation is not
identical to that of another corporation. That the shares may have the same
economic equivalence does not make them identical. Indeed, it would be an
exceptional circumstance for a share of one corporation to be identical to a
share of another corporation. A share of Canadian Pacific valued at $60 is not
identical to a share of Bank of Montreal valued at $60. The monetary values of
the shares may be identical but the rights, conditions, restrictions in the different
shares, let alone the underlying assets of the business carried on by each of
the corporations, may be different. On the other hand, it is arguable that a
preferred share of a corporation, convertible into a common share of the
corporation, may be identical to the common share if the price, voting rights,
dividends and other rights are the same. Here we are comparing a voting share
of one company to a non voting share of another company, for example. Absent
subsection 40(3.5), all would agree that an Alcatel ADS was not identical
to a Newbridge Exchangeable Share.
[12]
Appellant’s
counsel referred to subsection 40(3.3) and submitted that while paragraph (a)
applied to the facts in dispute, that is, the appellant disposed of the
Newbridge Exchangeable Shares, paragraphs (b) and (c) do not apply
since, during the 61 day period, the appellant did not acquire property
identical to the Newbridge Exchangeable Shares and at the end of the 61 day
period it did not own substituted or identical property. What his client
acquired, he asserted, were Alcatel ADSs pursuant to the retraction right but what
it disposed of were Newbridge Shares: these are shares of two different
corporations that are not identical.
[13]
The triggering of the
events, i.e. the disposition of capital property for purposes of
paragraph 40(3.3)(a), was not a disposition of a right to acquire
shares but the disposition of Newbridge Shares, according to the appellant. The
right to acquire ADSs was embedded in the Newbridge Exchangeable Shares.
Counsel insisted that what was disposed of by the appellant were the
Exchangeable Shares, not a right to acquire ADSs. The purchaser of the
Exchangeable Shares, Alcatel (or Newbridge), was obliged to pay for each
Exchangeable Share with an Alcatel ADS having the same value as an Exchangeable
Share.
[14]
If
I understand counsel’s analysis
of paragraph 40(3.5)(a), it is that paragraph 40(3.5)(a)
serves only to explain subsection 40(3.3). In counsel’s view, for example,
if one has a right to acquire a share of BCE Inc, then for purposes of
subsection 40(3.5), the right to acquire the BCE share is a property that
is identical to the BCE shares. In the appeals at bar, however, the right to acquire
Alcatel ADSs is found in the Newbridge Exchangeable Shares, a property not
identical to any Alcatel ADS.
[15]
Mr. Lefebvre
asserted that paragraph 40(3.5)(a) is concerned with the
application of paragraph 40(3.3)(b), that, on the facts of these
appeals, if the Newbridge Exchangeable Shares "somehow gave a right to
acquire other Newbridge shares, then … [paragraph 40(3.3)(b) and subsection 40(3.5)] would come into play and apply."
However, "the right was to acquire an ADS share … so therefore [there is]
no application for [paragraph 40(3.3)] (b)."
[16]
Appellant’s counsel
referred to the Federal Court of Appeal decision in The Queen v. Cascades
Inc.
as authority for his submissions that a right to acquire ADSs is identical to
ADSs but that does not make it identical to the Exchangeable Shares, in
particular at paragraph 32 where Nadon J.A. wrote that
… [i]n fact paragraphs 40(3.5)(a) and (b) must be consulted to
understand the meaning of a "property that is identical", a phrase
that is mentioned but not defined at paragraph 40(3.3)(b). Paragraphs 40(3.5)(a)
and (b) indicate, first, that a right to acquire a
property is deemed to be a property that is identical to the property itself
and, second, that a share of a corporation that is acquired in exchange for another
share is deemed to be a property that is identical to the other share.
[17]
The importance of
paragraph 40(3.5)(a), according to counsel, is that it is the
option, the right to acquire, that is identical to the property itself. In appellant’s
view, then, subsection 40(3.5) does not have the effect of causing
subsection 40(3.3) to "suddenly" create identical properties
between the Newbridge Exchangeable Shares and the Alcatel ADSs. The property
that is identical to the Alcatel ADSs is the right to acquire the ADSs, not the
Newbridge Exchangeable Shares. Justice Nadon, counsel submitted, stated
that the purpose of paragraph 40(3.5)(a) is "to put substance
and interpretation to [paragraph] 40(3.3)(b)".
Respondent's submissions
[18]
The respondent argued
that at the end of the day, on September 30, 2002, the appellant was in the
same position it was in at the beginning of the day; it held the same number of
Alcatel ADSs as earlier in the day it held of Newbridge Exchangeable Shares. At
all relevant times, both the ADSs and the Exchangeable Shares had the same
economic value. In the respondent’s view, the appellant did not dispose of
anything; there was no true realization of loss. It simply exchanged an
indirect interest in Alcatel for a direct interest in Alcatel.
[19]
The purpose of
subsection 40(3.3), according to respondent’s counsel, is to deny a loss where
a taxpayer incurs a loss on a disposition of property within an affiliated
group or on disposing of its property in return for the same or identical
property; in such a case, she stated, no real loss has actually been incurred:
the appellant acquired property deemed identical to the Exchangeable Shares.
[20]
Counsel for the
respondent explained that when a former common shareholder of Newbridge
received Exchangeable Shares on the capital reorganization of Newbridge,
subsection 86(1) of the Act deferred tax on any gain. When the Exchangeable
Shares are then exchanged for ADSs, she stated, if there is a loss on the
disposition of the Exchangeable Shares, the loss is recognised only when the
ADSs, the identical property in her view, are sold to persons not affiliated
with the appellant. It is the application of subsections 40(3.3) and (3.4)
that deny the immediate loss on the disposition of the Exchangeable Shares for
the ADSs.
[21]
Crown counsel argued
that notwithstanding that the Exchangeable Shares and ADSs are not identical,
the deeming provision in paragraph 40(3.5) creates the fiction of making
them identical. Because they are not identical, the statute makes them identical.
The Exchangeable Shares contain a right to acquire the ADSs, as required in
subsection 40(3.5); "[t]he Exchangeable Shares are precisely that, a
right to acquire the Alcatel ADSs", counsel submitted, and therefore they
are deemed to be identical to the Alcatel ADSs. She suggested that when the
appellant purchased the Exchangeable Shares in 2000, it "was in fact
purchasing … Alcatel shares." The owner of an Exchangeable Share at any
time could demand its exchange for an ADS.
[22]
There is no dispute
that provisions of subsections 40(3.3), (3.4) and (3.5) be given a textual
interpretation while reading these provisions in context, that is, within the
overall scheme of the Act itself. As the Chief Justice and Justice Major
stated in Canada Trustco Mortgage Co. v. Canada:
10 It
has been long established as a matter of statutory interpretation that
"the words of an Act are to be read in their entire context and in their
grammatical and ordinary sense harmoniously with the scheme of the Act, the
object of the Act, and the intention of Parliament": see 65302 British
Columbia Ltd. v. Canada, [1999]
3 S.C.R. 804 (S.C.C.), at para. 50. The interpretation of
a statutory provision must be made according to a textual, contextual and
purposive analysis to find a meaning that is harmonious with the Act as a
whole. When the words of a provision are precise and unequivocal, the ordinary
meaning of the words play a dominant role in the interpretive process. On the
other hand, where the words can support more than one reasonable meaning, the
ordinary meaning of the words plays a lesser role. The relative effects of
ordinary meaning, context and purpose on the interpretive process may vary, but
in all cases the court must seek to read the provisions of an Act as a
harmonious whole.
[23]
In Cascades, the Court of
Appeal made a textual analysis of subsection 40(3.5) as well as
subsections 40(3.3) and (3.4) and concluded that:
… in light of the overall scheme of the legislation and of the provisions
in question, they should be seen as establishing a stop‑loss rule. As
Gerald D. Courage points out in his article Utilization of Tax
Losses and Debt Restructuring, 2006 Ontario Tax Conference, (Toronto;
Canadian Tax Foundation, 2006), 9:1‑86, at page 2:
… the Act contains a number of so called "stop‑loss
rules" where there has been a transfer of property with an accrued loss
within a statutorily defined closely held group. While the transfer might
otherwise be treated as a sufficient realization so as to permit recognition of
the loss, nevertheless the loss is denied until the property (or, in some
cases, property received in exchange on the transfer) is transferred out of the
group, at which point there is effectively a "true" realization by
the group of the loss for tax purposes.
[24]
Obviously respondent's
counsel did not agree with her confrère that the fact that the Newbridge
Exchangeable Shares were not identical to the Alcatel ADSs was relevant.
Paragraph 40(3.5)(a), she declared, demolishes any such relevance
by deeming two properties ordinarily not identical to be identical. She cited R.
v. Verrette,
where Beetz J. explained that:
… A deeming provision is a statutory fiction; as a rule it
implicitly admits that a thing is not what it is deemed to be but decrees that
for some particular purpose it shall be taken as if it were that thing although
it is not or there is doubt as to whether it is. A deeming provision
artificially imports into a word or an expression an additional meaning which
they would not otherwise convey beside the normal meaning which they retain
where they are used; it plays a function of enlargement analogous to the word
"includes" in certain definitions; however, "includes"
would be logically inappropriate and would sound unreal because of the
fictional aspect of the provision.
[25]
Counsel submitted that
the ordinary meaning of the words in the phrase "a right to acquire a
property" (« le droit d'acquérir un bien ») in
paragraph 40(3.5)(a) is very wide and is limited only by its content.
The only words limiting the scope of the phrase are the words in brackets
immediately following the phrase:
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(other than a
right, as security only, derived from a mortgage, hypothec, agreement for
sale or similar obligation)
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(sauf le droit
servant de garantie seulement et découlant d’une hypothèque, d’une convention
de vente ou d’un titre semblable)
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[26]
Respondent's counsel
referred to the comments of Professor Sullivan on the "implied
exclusion" argument to support her submission. According to Professor Sullivan:
[a]n implied exclusion argument lies whenever there is reason to
believe that if the legislature had meant to include a particular thing within
its legislation, it would have referred to that thing expressly. Because of
this expectation, the legislature's failure to mention the thing becomes
grounds for inferring that it was deliberately excluded. Although there is no
express exclusion, exclusion is implied. As Laskin J.A. succinctly put it,
"legislative exclusion can be implied when an express reference is
expected but absent". …
[27]
Professor Sullivan
explains that:
… [w]hen a provision specifically mentions one or more items but is
silent with respect to other items that are comparable, it is presumed that the
silence is deliberate and reflects an intention to exclude the items that are
not mentioned. As explained by Noel J.A. in Canada (Canadian Private Copying Collective) v. Canadian Storage Media Alliance, dealing with a series of
express exceptions, "if a statute specifies one exception (or more) to a
general rule, other exceptions are not to be read in. The rationale is that the
legislator has turned its mind to the issue and provided for the exemptions
which were intended."
[28]
Thus, counsel submited,
it is only a right to acquire a property that is identified in the brackets
that would not be deemed to be property identical to the property and be
subject to paragraph 40(3.5)(a). All other rights to acquire a
property are deemed to be property identical to the property. The right to
acquire the ADSs is a right attached to the Exchangeable Shares and falls
clearly within the provision and is identical to the ADSs.
[29]
Parliament's intention
in enacting paragraph 40(3.5)(a), counsel declared, was to include
rights to acquire a property to be identical to the property to be acquired. On
the facts at bar there is a share, the Exchangeable Share, that has a right to
acquire property, the Alcatel ADS, and once one acquires the ADS, the ADS and
the Exchangeable Share are deemed to be identical properties. This
interpretation, counsel added, is reasonable and is analogous to the share for
share exchange rule in paragraph 40(3.5)(b).
[30]
In interpreting a legal
fiction such as a deeming provision, counsel asserted, what needs to be
interpreted is its scope and not its force; once the facts fall within the
wording of a provision, the deeming provision applies. Here, the wording is
clear — there is a right to acquire a property and the right is deemed to
be identical to the property. That, insisted counsel for the respondent, is the
purpose of paragraph 40(3.5)(a). The provision's stop loss rule is
what the Court of Appeal recognized in Cascades.
Analysis
[31]
The question in these
appeals is, whether during the 61 day period in paragraph 40(3.3)(b),
either the appellant or a person affiliated with the appellant acquired a
property identical to the Exchangeable Shares and either person owned the
identical property at the end of the 61 days. There is no question that
the appellant disposed of the Exchangeable Shares; the basic issue is whether
the appellant also disposed of a right to acquire the ADSs.
[32]
The creation of the
Exchangeable Shares was to facilitate the acquisition by Alcatel of the shares
of Newbridge owned by residents of Canada so that the
Canadian residents would defer capital gains on the dispositions of their
shares to Alcatel. This was part of a proper tax plan to assist a commercial
transaction between Canadian resident shareholders of a Canadian corporation
and a foreign corporation.
[33]
The parties agree that
for purposes of paragraph 40(3.3)(a) of the Act, the
appellant disposed of capital property. Their dispute is whether the property
was Newbridge Exchangeable Shares, in which case the appeals would be allowed,
or was the disposition also of "a right to acquire a property" for
purposes of paragraph 40(3.5)(a), in which case the appeals would
be dismissed.
[34]
A share was defined by
Farwell J. in Borland's Trustee v. Steel:
A share is an
interest of a shareholder in the company measured by a sum of money, for the
purpose of liability in the first place, and of interest in the second, but
also consisting of a series of mutual covenants entered into by all
shareholders inter se in accordance with … the Companies Act …
The contract
contained in the articles of association is one of the original incidents of
the share. A share is not a sum of money … but is an interest measured by a sum
of money and made up of various rights contained in the contract,
including the right to a sum of money of a more or less amount.
(Emphasis added)
[35]
This definition was approved by
the House of Lords in IRC v. Crossman.
Crossman dealt with a question of share valuation. The estate duty laws
directed the Internal Revenue Commissioner to assess duty based on the value of
the property on the open market. However, the block of shares in question
contained an overriding preemption right — before the shares could be sold
on the open market they had to be offered to certain shareholders for a price
set below the fair market value. The Commissioner argued that the value of the
shares had to be assessed based on the open market rates. The House of Lords
disagreed. The Lords concurred in their opinion that the preemption right could
not be disregarded. Lord Russell wrote, at page 66, that:
[a] share in a
limited company … is the interest of a person in the Company, that interest
being composed of rights and obligations which are defined in the Companies
Act and by the memorandum and articles of association of the company. A
sale of a share is a sale of the interest so defined …
[36]
And at page 67:
[i]f the
property in question is that bundle of rights and obligations known as a share
in a limited company, the entirety of the bundle must surely be the subject
matter of the sale and not part only. The requirement that property be sold in
the open market cannot alter the nature or the character of the property which
is there offered for sale.
[37]
Lord MacMillan stated, at page 69,
that:
[w]ithin the
law the rights and liabilities appurtenant to a share may vary widely. But it
cannot exist independently of the inherent attributes with which it has been
created.
[38]
In Canada, the definition in Borland's
Trustee was approved by LaForest J. writing in dissent in McClurg
v. Canada. Earlier, in Sparling v. Québec (Caisse
de dépôt & de placement),
LaForest J. explained:
… A share is not an isolated piece of property. It is
rather, in the well-known phrase, a "bundle" of interrelated rights
and liabilities. A share is not an entity independent of the statutory
provisions that govern its possession and exchange. Those provisions make up
its constituent elements. … A "share" and thus a
"shareholder" are concepts inseparable from the comprehensive bundle
of rights and liabilities created by the Act. Nothing in the statute,
common sense or the common law indicates that this bundle can be parcelled out
piecemeal at the whim of the Crown. It cannot pick and choose between the
provisions it likes and those it does not. To do so would be to permit it to
define an entity which is the creature of federal legislation. What the Caisse
obtained was an integral whole.
[39]
The Exchangeable Share
had attached to it a right that allowed the appellant to receive an Alcatel ADS
at any time within the five‑year window described in the Partial Agreed
Statement of Facts. This right was part of the bundle of rights in the
Exchangeable Share. Even if the appellant took no action with respect to
exchanging its Exchangeable Shares, it would have ended up with Alcatel ADSs at
the end of the five‑year term. It is clear that as owner of the
Exchangeable Shares, the appellant could exercise a right to acquire Alcatel
ADSs. The
respondent's argument that the retraction right trumps all other rights in an
Exchangeable Share appears to be inconsistent with this line of cases. Based on
Borland's Trustee, Crossman and Sparling, cited above, a
share should be looked at as a composite of different rights. By emphasizing
the retraction right, the respondent arguably is proposing the existence of a
distinct and separate property that the taxpayer did not own. The respondent is
trying to parcel out piecemeal what suits its case.
[40]
The
respondent's submissions suggest that the Exchangeable Shares were
substantially a vehicle for the shareholders of Newbridge to acquire Alcatel
ADSs at their convenience within the five year term, while at the same time
having the same benefits as shareholders of Alcatel. Counsel seems to suggest
that the Exchangeable Share was not really a share. One cannot lose sight that there
was a legal relationship between the appellant and Newbridge, one of
shareholder and the corporation.
[41]
In
Shell Canada,
McLachlin J. (as she then was) stated that:
39. This Court has repeatedly
held that courts must be sensitive to the economic realities of a particular
transaction, rather than being bound to what first appears to be its legal
form: Bronfman Trust, supra, at pp. 52‑53, per Dickson C.J.;
Tennant, supra, at para. 26, per Iacobucci J. But there are at
least two caveats to this rule. First, this Court has never held that the
economic realities of a situation can be used to recharacterize a taxpayer's
bona fide legal relationships. To the contrary, we have held that, absent a
specific provision of the Act to the contrary or a finding that they are
a sham, the taxpayer's legal relationships must be respected in tax cases.
Recharacterization is only permissible if the label attached by the taxpayer to
the particular transaction does not properly reflect its actual legal effect: Continental
Bank Leasing Corp. v. Canada, [1998] 2
S.C.R. 298, at para. 21, per
Bastarache J.
40. Second, it is well established in
this Court's tax jurisprudence that a searching inquiry for either the
"economic realities" of a particular transaction or the general
object and spirit of the provision at issue can never supplant a court's duty
to apply an unambiguous provision of the Act to a taxpayer's
transaction. Where the provision at issue is clear and unambiguous, its terms
must simply be applied: Continental Bank, supra, at para. 51, per
Bastarache J.; Tennant, supra, at para. 16, per
Iacobucci J.; Canada v. Antosko, [1994]
2 S.C.R. 312, at pp. 326-27 and 330, per Iacobucci J.;
Friesen v. Canada, [1995]
3 S.C.R. 103, at para. 11, per Major J.; Alberta (Treasury Branches) v. M.N.R., [1996]
1 S.C.R. 963, at para. 15, per Cory J.
[42]
The appellant was a bona fide
shareholder of Newbridge; it held Exchangeable Shares with all the rights and
obligations attached to these shares. To say that the taxpayer disposed of "a
right to acquire" Alcatel ADSs, ignoring that this right was attached to the
Exchangeable Shares, would amount to a recharacterization of the legal
relationship between the appellant as a shareholder of Newbridge and Newbridge
itself.
[43]
Because an Exchangeable
Share was economically equivalent to the ADS, the Crown says that the appellant
did not gain or lose anything economically when it exchanged the Exchangeable
Shares for ADSs and therefore did not really occur a loss. This is a simplistic
argument by the Crown. In any transaction where a fair market value price for
property is negotiated, it can be said that the buyer and seller are exchanging
properties of equivalent value, neither is a loser nor a winner economically in
the transaction. However, where one party receives less for a property than he
or she paid for it, the party has an economic loss and this is what happened
here. The appellant disposed of the Exchangeable Shares at less than their cost
base.
[44]
Paragraph 40(3.5)(a)
deems "a right to acquire a property" to be property to be identical
to the property. The provision is directed to "a right to acquire a
property" and the property itself. In other words, what is deemed
identical is "a right to acquire the property" and the acquired property
itself. At bar, the particular property disposed of in paragraph 40(3.3)(a)
is not "a right to acquire a property", but another property
altogether, the Exchangeable Shares. The appellant acquired the ADSs because it
disposed of shares in Newbridge, shares with all the rights and conditions
attached to them. The deeming provision in paragraph 40(3.5)(a)
cannot apply because the properties it deems to be identical properties are not
present.
[45]
The appeals are allowed
with costs.
Signed at Ottawa, Canada, this 11th day of July 2011.
"Gerald J. Rip"
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