594710 B.C. Ltd. – Tax Court of Canada finds that GAAR did not apply to the sale to a lossco of partner corps with pending condo sale profit allocations

Income account treatment of the profits realized by a condo-project limited partnership was avoided through the corporate partners of the LP paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders, followed by a sale by the Holdcos of the corporate partners to a public company with substantial resource pools. The income of the LP for the year in which the condo sales had occurred was allocated to this public company following the winding up into it of the corporate partners.

Rossiter CJ rejected CRA’s GAAR challenge, which was based on GAAR being applied to the Partnercos' avoidance of an allocation to them of the condo profits, then to the Holdcos' avoidance of the application to them of s. 160 respecting what should have been Partnerco tax liabilities. He found that, at the Partnerco level, there was no abuse of s. 111(5), which dealt with loss trading, not profit trading. Nor was there an abuse of the partnership income allocation provisions of ss. 103 and 96 – it was totally conventional that close to 100% of the income of the LP was allocated to the corporation (the loss pubco) which was the limited partner at the partnership year end.

Turning to the alleged avoidance of s. 160, he acknowledged that the transactions entailed an indirect transfer of property from the LP to the Holdcos from a s. 160 perspective, but did not consider that there had been any receipt of property on other than FMV terms. However, he considered that if he were wrong on this mechanical valuation point, the transactions would have entailed an abuse of s. 160.

Neal Armstrong. Summaries of 594710 B.C. Ltd. v. The Queen, 2016 TCC 288 under s. 245(4), s. 245(2), s. 160.