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Citation: 2003TCC193
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Date:20030828
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Dockets: 2001-4026(IT)G
2001-4030(IT)G
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BETWEEN:
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CANUTILITIES HOLDINGS LTD.,
CANADIAN UTILITIES LIMITED,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Hershfield, J.
[1] The appeals were heard together on
common evidence. The appeals concern the disposition of shares
owned by each of the Appellants in ATCOR Resources Ltd.
("ATCOR"). Prior to such disposition ATCOR was a public
company listed on the Toronto Stock Exchange, controlled by a
related group of shareholders that included the Appellants. The
transactions effecting the disposition of the Appellants'
ATCOR shares also effected the disposition of all other
outstanding ATCOR shares (which were widely held) in favour of a
single purchaser that I will identify momentarily as Forest
Subco.
[2] The Appellants are also public
companies having shares listed on the Toronto Stock Exchange.
Both Appellants have historically paid regular dividends on their
listed shares including shares that were widely held by various
unrelated individuals and corporations.
[3] Prior to the transactions that
effected the ultimate disposition of the Appellants' shares
in ATCOR there was an amalgamation of a newly formed company,
3140334 Canada Ltd. ("Newco") and ATCOR. The
amalgamated company continued under the name of the predecessor
ATCOR. New shares were received by the Appellants (and by the
other ATCOR shareholders) in the amalgamated ATCOR in exchange
for their old shares on a tax-deferred basis. The new ATCOR
shares held by the Appellants were then redeemed. Other ATCOR
shareholders disposed of their shares in a similar fashion or
were bought out directly by Forest Subco at the same price.
[4] Both Appellants, Canadian
Utilities Limited ("CU") and Canutilities Holdings Ltd.
("CU Holdings"), received redemption proceeds for their
new ATCOR shares on or about January 31, 1996. Funding for these
redemptions and the redemptions and acquisitions of the balance
of the outstanding ATCOR shares held by other ATCOR shareholders
was provided by Forest Oil Corporation ("Forest").
Prior to the amalgamation, Forest had conditionally agreed to
acquire all of the issued shares of ATCOR.
[5] Forest funded the redemptions of
the ATCOR shares by providing funds to a newly formed subsidiary
corporation, 3189490 Canada Ltd. ("Forest Subco").
Forest Subco in turn subscribed for shares in ATCOR after the
amalgamation and after acquiring voting control of ATCOR. The
subscription price was equal to the redemption price of the new
shares in ATCOR held by the Appellants and by other ATCOR
shareholders who were not selling their shares directly to Forest
Subco. Such redemption price equalled the price Forest and the
Appellants had, prior to the amalgamation, agreed to as the
selling price of the ATCOR shares.
[6] Pursuant to subsection 84(3) of
the Income Tax Act ("the Act"),
the redemption of the Appellants' shares in ATCOR resulted in
a dividend being deemed to have been received by them equal to
the difference between the paid-up capital of the shares
redeemed and their redemption price.
[7] While the deemed dividends
received by the Appellants on the redemptions were not taxed
under Part I of the Act due to section 112, they were
subject to tax under Part IV of the Act. Such tax is
fully refundable pursuant to section 129 when the dividends
received (or an equivalent amount) are flowed through, as
dividends, to the next tier of shareholders; that is, when the
recipient of the dividend subjected to Part IV tax pays out
an equivalent dividend. Both Appellants paid sufficient dividends
after receiving the redemption proceeds to obtain full refunds of
their respective Part IV tax liability. CU's refund was fully
effected by virtue of dividends paid by it in 1996. CU
Holdings' refund was fully effected by virtue of dividends
paid by it in 1996 and 1997. The effect of the deemed dividend
treatment, application of section 112 and Part IV and the refund
of Part IV tax was that neither Appellant paid any un-refunded
tax in respect of the disposition of their ATCOR shares. But for
the dividend treatment afforded by the redemption, such
dispositions would have resulted in material taxable capital
gains having been realized by both Appellants on the direct sale
of their ATCOR shares to Forest.[1] Circumstances and careful transaction
structuring undertaken with knowledge of such circumstances
allowed for this result.
[8] The Minister applied subsection
55(2) of the Act and reassessed each Appellant's 1996
taxation year on the basis that it received proceeds of
disposition rather than dividends on the disposition of their
shares in ATCOR. The reassessments which are under appeal bring
the taxable capital gain into each Appellant's 1996 taxation
year, both of which end December 31. Further, the reassessments
in applying subsection 55(2) ignore the deemed dividend so as to
eliminate Part IV tax liability and dividend refunds in 1996
and, in the case of CU Holdings, the dividend refunds in 1997.
The elimination of the refund claimed by CU Holdings in
respect of its 1997 year was effected by a 1997 reassessment
which is also under appeal. Resolution of the 1996 appeal will
consequentially resolve the 1997 appeal.
[9] Subsection 55(2) is an
anti-avoidance provision targeting this very type of transaction,
except as expressly excepted. At the relevant times it read as
follows:
55. (2) Where a corporation resident in Canada has after
April 21, 1980 received a taxable dividend in respect of
which it is entitled to a deduction under subsection 112(1)
or 138(6) as part of a transaction or event or a series of
transactions or events (other than as part of a series of
transactions or events that commenced before April 22, 1980), one
of the purposes of which (or, in the case of a dividend under
subsection 84(3), one of the results of which) was to effect
a significant reduction in the portion of the capital gain that,
but for the dividend, would have been realized on a disposition
at fair market value of any share of capital stock immediately
before the dividend and that could reasonably be considered to be
attributable to anything other than income earned or realized by
any corporation after 1971 and before the transaction or event or
the commencement of the series of transactions or events referred
to in paragraph (3)(a), notwithstanding any other
section of this Act, the amount of the dividend (other than the
portion thereof, if any, subject to tax under Part IV that is not
refunded as a consequence of the payment of a dividend to a
corporation where the payment is part of the series of
transactions or events).
[10] In the context of these appeals, this
anti-avoidance provision provides that where a dividend arising
under subsection 84(3) (as in the cases at bar) results in a
significant reduction in the capital gain that would, but for the
dividend treatment afforded by subsection 84(3), have been
realized on a disposition of the shares otherwise than by way of
redemption, the dividend is not treated as a dividend but as sale
proceeds giving rise to a capital gain. However, the subsection
contains exceptions to its application. The exception at issue in
these appeals applies where the deemed dividend arising on the
redemption is subject to Part IV tax. That qualification being
met, as in the cases at bar, is not sufficient however if: (1)
there is a refund of such Part IV tax as a consequence of a
dividend paid (by the recipient of the deemed dividend) to a
corporation; and, (2) the payment of the dividend (by the
recipient of the deemed dividend) is part of the same series of
transactions and events that resulted in the deemed dividend
receipts. It is the application of these conditions to excepting
the application of subsection 55(2) that frames the issues in
these appeals. The wording of subsection 55(2) supports the view
taken by the parties in these appeals that this exception to the
application of subsection 55(2) will prevail, given that the
qualification that the deemed dividend be subject to Part IV tax
has been met, if either of the conditions described in (1)
or (2) above have not been met. Eliminating the negatives
employed in the drafting of the subject subsection, the issue in
this case might be stated as follows: if the Part IV refunds are
as a consequence of dividends paid to corporations and are
part of the series of transactions and events that gave rise to
the deemed dividend receipts (i.e. the amalgamation and the share
redemptions), the reassessments will prevail.[2] If either of these conditions
have not been met the appeal will succeed.
[11] CU and CU Holdings both maintain that
the dividends that they paid that gave rise to the refunds of
Part IV tax were not part of the series of transactions and
events that included the redemption of their ATCOR shares that
gave rise to the deemed dividend treatment. Further, CU having
paid dividends to both corporations and individuals maintains
that the dividends paid by it in 1996 to individuals (as opposed
to corporations) accounted for the full amount of the refunds
received in 1996 so that the exception to the application of
subsection 55(2) referred to above applies in respect of the
full amount of the deemed dividend it received in 1996 even if
the dividends paid by it in 1996 were part of the series. CU
Holdings having paid dividends to both corporations and
individuals maintains a similar position to the full extent of
dividends paid by it to individuals in 1996 and 1997. The
Respondent argues in respect of both Appellants that the
dividends giving rise to the refunds were part of the series of
transactions and events giving rise to the deemed dividend
treatment on the redemption of the ATCOR shares and that the
dividends paid by the Appellants to corporations (as opposed to
individuals) accounted for the full amount of the refunds.
[12] Before addressing these issues it might
be helpful to make a few general comments on the application of
Part IV and subsection 129(1) in the context of the facts of
these cases. Subsection 186(1) of the Act imposes Part IV
tax of one-third of "assessable dividends"
received by a private corporation or by a "subject
corporation" except where the payer corporation is connected
with the receiving corporation. While both Appellants are public
corporations, they are also "subject corporations" as
defined in subsection 186(3). More particularly, it has been
acknowledged that an individual, Ronald Southern, at all material
times controlled directly or indirectly both Appellants. That
being the case, the parties concede that the question of being
"subject corporations" is not at issue. Further, as the
order of the transactions set out below dictates, the Appellants,
although "connected" with the deemed dividend payer
(ATCOR) prior to and immediately after the amalgamation in 1996,
were not "connected" with ATCOR at the time of the
redemption of the shares in ATCOR which is the time that the
deemed dividends in question are deemed to have been paid under
subsection 84(3). That is, prior to the redemption, Forest Subco
had acquired all of the voting shares of ATCOR so that ATCOR was
not "connected" with either Appellant as that
relationship is defined in subsection 186(4) of the
Act. Further, there is no question that the deemed
dividends were "assessable dividends" as that term is
defined in subsection 186(3) since the Appellants were
"subject corporations" in receipt of taxable dividends
fully deductible under section 112. Accordingly, the Part IV tax
liability is not in issue in these appeals except to the extent
that the application of subsection 55(2) results in its
non-application. As to the refund of Part IV tax, subsection
186(5) extends the application of subsection 129(1) to dividends
paid by public corporations, such as the Appellants, that are
"subject corporations" by deeming them to be private
corporations for the purposes of section 129.
The Transactions & Events
[13] Resolution of the issue of whether the
dividends paid by the Appellants which gave rise to the Part IV
refunds were part of the series of transactions and events that
gave rise to the deemed dividend treatment of the proceeds
received on the redemption of the ATCOR shares, requires a review
of all the transactions and events that surround the redemption
and the payment of dividends by the Appellants. The determination
of such factual matters has been made easier as the parties have
executed an Agreed Statement of Facts. In addition to the Agreed
Statement, a Joint Book of Documents was filed and the Appellants
called five witnesses. Before reviewing the testimony of these
witnesses, I will summarize the relevant facts as agreed to and
as reflected in the Joint Book of Documents.
A. The Players
ATCO Ltd. ("ATCO")
[14] While I have not mentioned this
company, it is necessary to mention it briefly. It is a
management holding company incorporated under the laws of
Alberta. It has a number of subsidiaries involved in many
businesses primarily relating to electric power and natural gas.
It is controlled by Ronald Southern and is a subject corporation
within the meaning of subsection 186(3) of the Act. It is
related to both CU and CU Holdings. Indeed, it indirectly owns
100% of the voting shares of CU Holdings. Together with CU
Holdings, it (ATCO), indirectly owns 67% of the voting shares of
CU. ATCO also owned shares directly in ATCOR but such holdings
are not relevant in the context of these appeals.
CU
[15] CU through its operating subsidiaries
is engaged in electric energy and natural gas utility operations.
One of its holdings was publicly traded shares in ATCOR.
[16] CU has two classes of common shares and
a number of classes and series of preferred shares. Its Class A
common shares are non-voting and its Class B common shares are
voting. Both classes of CU common shares are listed on the
Toronto Stock Exchange. Both classes of common shares are ranked
equally as to dividends.
[17] Throughout CU's taxation year
ending December 31, 1996, approximately 58.5% of its non-voting
Class A common shares and 32% of its voting Class B common shares
were widely held by members of the public, including both
individuals and corporations. The remainder of the CU common
shares were held by corporations related to CU including CU
Holdings. That is, 68% of the voting shares and 48.5% of the
non-voting shares were closely held.
[18] At December 31, 1996, there were 11
separate classes and/or series of CU preferred shares issued
and outstanding, the aggregate redemption amount of which was
$534,500,000. Each class or series of CU preferred shares had
fixed dividend rates. With the exception of one series of CU
preferred shares, all were listed and traded on the Toronto Stock
Exchange. Throughout CU's taxation year ending December 31,
1996, 99.9% of the CU preferred shares were widely held by
members of the public, including both individuals and
corporations.
[19] CU has paid dividends on its common
shares since 1950 (with the exception of 1955 and 1956)and has
paid fixed rate dividends on its preferred shares in accordance
with their terms. CU has increased its annual common share
dividend for 30 consecutive years. Dividends are paid on a
quarterly basis.
[20] In the period of 1994 to 1998, CU paid
quarterly dividends on the issued and outstanding CU common
shares and CU preferred shares. The yearly totals of such
dividends are as follows:
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Year
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CU
Common
Shares
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CU Preferred
Shares
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1994
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$89,470,015
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$45,189,139
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1995
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$92,439,215
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$41,767,186
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1996
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$94,571,891
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$36,964,119
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1997
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$99,579,121
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$30,559,583
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1998
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$103,908,817
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$28,689,000
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[21] Dividends paid in 1996 to shareholders
that were not corporations totalled $56,919,973.00 (43.273%) and
dividends paid in 1996 to shareholders that were corporations
totalled $74,616,036.00 (56.727%). (Tab 53, Volume 5 of Joint
Book of Documents.)
CU Holdings
[22] CU Holdings is a holding company the
sole assets of which were publicly traded shares of CU and
ATCOR.
[23] CU Holdings has one class of common
shares and one class of cumulative redeemable preferred shares
issuable in series. All issued common shares were held indirectly
by ATCO. They were not publicly traded.
[24] At all relevant times, there were three
series of preferred shares issued, the aggregate redemption
amount of which was $299,999,925.00 at December 31, 1996.
Throughout CU Holdings' taxation years ending
December 31, 1996 and December 31, 1997, 99.3% of its
preferred shares were widely held.
[25] Each series of CU Holdings'
preferred shares had specified dividend entitlements. Dividends
were paid on a quarterly or monthly basis depending on the
series. In the period of 1994 to 1998, CU Holdings paid dividends
on its issued and outstanding preferred shares. The yearly totals
of such dividends are as follows:
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Year
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CU Holdings
preferred shares
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1994
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$11,916,000
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1995
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$19,867,800
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1996
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$15,800,696
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1997
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$14,388,597
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1998
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$16,341,600
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The Agreed Statement does not admit to any dividends having
been paid on CU Holdings' common shares.
[26] Dividends paid in 1996 to shareholders
that were not corporations totalled $2,992,256.00 (18.9%).
Dividends paid in 1996 to shareholders that were corporations
totalled $12,808,440.00 (81.1%). Dividends paid in 1997 to
shareholders that were not corporations totalled $2,657,373.00
(18.5%). Dividends paid in 1997 to shareholders that were
corporations totalled $11,731,223.00 (81.5%). (Tab 54, Volume 5,
Joint Book of Documents.)
ATCOR
[27] ATCOR was engaged in oil and gas
exploration, production, processing and marketing.
[28] Prior to January 31, 1996, the capital
of ATCOR consisted of non-voting Class A common shares and voting
Class B common shares. The Class A shares and the Class B shares
were both listed on the Toronto Stock Exchange. On January 31,
1996, there were 27,272,536 Class A shares and 10,835,416 Class B
shares issued and outstanding. The ownership of such shares was
as follows:
ATCOR Class A
Shares
ATCOR Class B Shares
Widely-held
19,377,315
1,406,570
ATCO
0
2,500
CU
6,350,583
5,531,708
CUHL
1,544,638
3,894,638
Total
27,272,536
10,835,416
[29] Collectively, ATCO, CU and CUHL (the
"Majority Shareholders") owned, directly or indirectly,
approximately 29% of the non-voting Class A shares and
approximately 87% of the voting Class B shares. The Articles of
ATCOR were not put in evidence. However, given that both classes
of shares were treated equally on the buy-out, it seems
safe to assume holders participated rateably in any distribution
of corporate earnings and assets.
Forest and Forest Subco
[30] Forest is a natural gas and oil company
incorporated in New York in 1924. It has been a public company
since 1969 and at all relevant times was listed and traded on the
Nasdaq National Market.[3] Forest Subco was incorporated under the laws of
Canada. At all relevant times it was a wholly owned subsidiary of
Forest.
Newco
[31] Newco was incorporated under the laws
of Canada and prior to its amalgamation with ATCOR its one issued
and outstanding share, one common voting share, was held by
ATCO.
Arm's Length Dealings
[32] At all material times prior to, on and
after the closing date, none of the Majority Shareholders were
related to Forest or Forest Subco within the meaning of section
251 of the Act and each of the Majority Shareholders dealt
at arm's length with Forest and Forest Subco.
B. The Proposal
[33] On August 30, 1995 ATCO and Forest
entered into a Confidentiality Agreement regarding a proposed
transaction for the sale of ATCOR to Forest. In October 1995
Forest or its financial advisers communicated three different
proposals for the acquisition of the ATCOR shares. The agreed
upon structure approved by the directors of ATCOR on December 12,
1995 is set out in an Acquisition Agreement dated December 12,
1995 between Forest, ATCOR and the Majority Shareholders. Such
agreed upon structure is also described in ATCOR's management
proxy circular dated December 15, 1995.
[34] The management proxy circular
accompanied a notice of a special meeting of shareholders of
ATCOR to be held on January 16, 1996 (the "Notice &
Circular"). The purpose of the special meeting of
shareholders was to consider and vote upon the amalgamation of
ATCOR and Newco.
[35] A letter accompanying the Notice and
Circular made it clear that the amalgamation, if approved, would
trigger the subsequent transactions covered under the Acquisition
Agreement with the result that ATCOR shareholders would be bought
out for $4.88 per ATCOR share and Forest Subco would own all of
the issued and outstanding shares of the amalgamated entity. The
letter states that Forest intended to complete an equity offering
in the United States in January of 1996 and that the amalgamation
and subsequent transactions were conditional upon Forest's
ability to raise the required funds. The letter informs
shareholders of ATCOR that a special committee of the Board of
Directors of ATCOR, having received independent financial advice,
recommended the approval of the amalgamation. In addition, the
Board of Directors of ATCOR received a separate fairness opinion
from a different independent financial adviser before
recommending approval of the proposed transactions at the
proposed price.
[36] Under the proposed Amalgamation
Agreement predecessor ATCOR shares were exchanged for shares of
amalgamated ATCOR. Newco's issued and outstanding shares (to
be held by ATCO) were to be converted into common shares of
amalgamated ATCOR. Under the Acquisition Agreement such common
shares were to be acquired by Forest Subco for an aggregate price
of $1.00. Under the Amalgamation Agreement holders of predecessor
ATCOR shares could elect to exchange on a one for one basis their
ATCOR shares for Class A Special Shares, Class B Special Shares
or Class C Special Shares of amalgamated ATCOR. The Class A
Special Shares, Class B Special Shares and Class C Special Shares
were redeemable at $4.88 per share. Under the Acquisition
Agreement, Forest Subco would acquire all tendered ATCOR shares
at $4.88 per share. All untendered shares would be redeemed.[4]
[37] Under the Amalgamation Agreement the
Class A Special Shares were allocated a paid-up capital amount of
$2.65 each and the Class B Special Shares were allocated a
paid-up capital amount of $1.40 each. On redemption, the deemed
dividend in respect of the Class A Special Shares would therefore
be $2.23 per share ($4.88 minus $2.65) and the deemed dividend in
respect of the Class B Special Shares would be $3.48 per share
($4.88 minus $1.40). I note at this point as well that CU's
adjusted cost base of the shares it received on the amalgamation
was $2.68 per share and CU Holdings' adjusted cost base of
the shares it received on the amalgamation was $1.43 per share.
The allocation of the paid-up capital at per share amounts
approximately equal to the Appellants' respective per share
adjusted cost bases resulted not only in the fixing of the deemed
dividend amounts each would be deemed to receive on redemption
but effectively eliminated the capital gain on the disposition of
their shares in ATCOR.[5]
[38] The paid-up capital in respect of the
Class C Special Shares was determined by formula that ensured
that such paid-up capital could not exceed the paid-up capital of
all the ATCOR shares as calculated under the Act
immediately before the amalgamation.
[39] I might observe that at this
point, when the paid-up capital allocations were made, the
Appellants would have known the exact amount of the dividend each
of them would be deemed to have received on the redemption of
their shares in ATCOR as well as the probable dividend payments
each would make to the effect that they would have known at this
point with some certainty what the Part IV tax liability would be
and what the Part IV tax refunds would be in 1996 and 1997. The
Notice and Circular sets out, in some detail, the income tax
consequences of the subject redemptions including the Part IV
liability of subject corporations although it does not refer to
Part IV tax refunds.
C. The Completed
Transactions
[40] On January 16, 1996, a special meeting
of the shareholders of ATCOR was held during which the
shareholders considered and passed a special resolution approving
and adopting the amalgamation of ATCOR and Newco.
[41] On January 25, 1996, Forest made an
equity offering in the United States, Canada and
internationally.
[42] On January 31, 1996, Forest
successfully completed an equity offering of 13,200,000 shares of
its common stock at $11(US) per share. It used the net proceeds
of $126,500,000.00 (US) together with a credit facility in the
amount of $8,300,000.00 (US) to fund the acquisition of ATCOR.[6]
[43] In accordance with the Acquisition
Agreement, ATCOR and Newco amalgamated on January 31, 1996 under
the provisions of the Canada Business Corporations Act,
R.S.C. 1985, c. C-44 ("CBCA").
[44] On the amalgamation, ATCO's one
common share in Newco was converted into one common share of
ATCOR. By virtue of ownership of this share, being the only
issued voting share of ATCOR, ATCO controlled ATCOR immediately
after the amalgamation.
[45] On the amalgamation, the 27,272,536
issued and outstanding ATCOR Class A Shares and 10,835,416
issued and outstanding ATCOR Class B Shares were converted to
Class A Special Shares, Class B Special Shares and Class C
Special Shares so that immediately after the amalgamation, the
shares of ATCOR were held as follows:
|
|
Common
|
Class A Special Shares
|
Class B Special Shares
|
Class C Special Shares
|
|
ATCO
|
1
|
|
2,500
|
|
|
CU
|
|
11,882,291
|
|
|
|
CU Holdings
|
|
|
5,439,276
|
|
|
Widely-held
|
_
|
6,926,232
|
2,217,176
|
11,640,477
|
|
TOTAL:
|
1
|
18,808,523
|
7,658,952
|
11,640,477
|
[46] After the amalgamation Forest Subco
purchased ATCO's one ATCOR common share for $1.00. By virtue
of this purchase Forest Subco acquired control of ATCOR.
[47] Immediately after the sale of the ATCOR
common share, CU and CU Holdings were no longer connected
with ATCOR within the meaning of subsection 186(4) of the
Act.
[48] After acquiring control of ATCOR,
Forest Subco subscribed for and purchased 1,000,000 ATCOR Common
Shares for an aggregate subscription price of
$129,161,278.00.
[49] ATCOR then proceeded to redeem all of
the 18,808,523 ATCOR Class A Special Shares and 7,658,952 ATCOR
Class B Special Shares for redemption proceeds of $4.88 per share
for total redemption proceeds of $129,161,278.00. Included
in such redemption were the 11,882,291 ATCOR Class A Special
Shares held by CU ($57,985,580.00) and the 5,439,276 ATCOR Class
B Special Shares held by CU Holdings ($26,543,667.00).
[50] Forest Subco then acquired the
11,640,477 outstanding ATCOR Class C Special Shares from all
holders for $56,805,527.76, being $4.88 per share.
D. The Normal Course
Dividends
[51] The Appellants paid normal course
dividends in 1996 and 1997 as set out in paragraphs 20 and 25
above.
E. The Reassessments
[52] In computing its income tax liability
under Part I of the Act for its taxation year ending
December 31, 1996, CU included the amount of $26,497,509.00 (the
"CU Deemed Dividend") in its T2 return pursuant to
subsection 84(3) of the Act in respect of the redemption
of its ATCOR Class A Special Shares. Such amount was then
deducted under subsection 112(1). CU computed its Deemed Dividend
as follows:
Amount paid on redemption of ATCOR Class A Special Shares
(11,882,291 x $4.88) $57,985,580.00
Less paid-up capital of ATCOR Class A Special
Shares redeemed (11,882,291 x $2.65) 31,488,071.00
$26,497,509.00
[53] In computing its income tax liability
under Part I of the Act for its taxation year ending
December 31, 1996, CU Holdings included an amount of
$18,928,680.00 (the "CU Holdings Deemed Dividend") in
its T2 return pursuant to subsection 84(3) of the Act in
respect of the redemption of its ATCOR Class B Special Shares.
Such amount was then deducted under subsection 112(1).
CU Holdings computed its Deemed Dividend as follows:
Amount paid on redemption of ATCOR Class B Special Shares
(5,439,276 x $4.88)
$26,543,666.00
Less paid-up capital of ATCOR Class B Special Shares redeemed
(5,439,276 x $1.40)
7,614,986.00
$18,928,680.00
[54] In computing their liability for tax
under Part IV of the Act for their taxation year ending
December 31, 1996, CU and CU Holdings treated their respective
Deemed Dividend as an assessable dividend not received from a
corporation connected with it and paid Part IV tax under
paragraph 186(1)(a). CU Holdings also paid tax under
Part IV pursuant to paragraph 186(1)(b) equal to the
portion of CU's refund under subsection 129(1) that was
attributable to the dividend CU paid CU Holdings. CU paid Part IV
tax of $8,832,503.00 (one-third of the CU Deemed Dividend) and CU
Holdings paid $9,266,097.00 (one-third of the CU Holdings
Deemed Dividend plus the tax under
paragraph 186(1)(b)). CU offset its liability under
Part IV of the Act by a dividend refund of $8,832,503.00
claimed by CU as a consequence of the dividends paid in 1996 on
its common and preferred shares (the normal course dividends). CU
Holdings partially offset its tax liability under Part IV by a
dividend refund of $5,269,117.00 claimed by CU Holdings as a
consequence of the dividend payments made on its preferred shares
in 1996 (the normal course dividends). The remainder of CU
Holdings' tax paid under Part IV was refunded in 1997 as a
consequence of dividend payments made on its preferred shares in
1997.[7]
[55] By the Reassessment dated May 22, 2001,
the Minister:
(i) increased CU's tax
payable under Part I of the Act by $5,646,814.00 for
CU's 1996 taxation year by adding an amount of $19,605,780.00
to CU's income on the basis that under subsection 55(2) the
amount of the CU Deemed Dividend was to be treated as proceeds of
disposition with resulting capital gains treatment. The Minister
computed the income inclusion as follows:
Proceeds of Disposition (11,882,291 shares x $4.88 per
share)
$57,985,580.00
Adjusted Cost Base (11,882,291 shares x $2.68 per
share)
$31,844,539.00
Capital
Gain
$26,141,041.00
Taxable Capital Gain ($26,141,041 x 75%) to be added to
income
$19,605,780.00
(ii) reduced CU's tax
liability under Part IV of the Act by $8,832,503.00 [8];
(iii) decreased CU's dividend
refund under subsection 129(1) of the Act by
$8,832,503.00;
(iv) made consequential adjustments
for interest and penalties.
[56] By the Reassessment dated May 22, 2001,
the Minister:
(i) increased CU Holdings'
tax payable under Part I of the Act by $4,095,982.00 for
CU Holdings' 1996 taxation year by adding an amount of
$14,066,082.00 to CU Holdings' income on the basis that under
subsection 55(2) the CU Holdings' Deemed Dividend was to
be treated as proceeds of disposition with resulting capital
gains treatment. The Minister computed the income inclusion as
follows:
Proceeds of Disposition (5,439,276 shares x $4.88 per
share)
$26,543,666.00
Adjusted Cost Base (5,439,276 shares x $1.432 per
share)
7,788,890.00
Capital
Gain
$18,754,776.00
Taxable Capital Gain ($18,754,776 x 75%) to be added to
income
$14,066,082.00
(ii) reduced CU Holdings'
tax liability under Part IV of the Act by $9,266,097.00.
As in respect of CU, there was no assessable dividend if
subsection 55(2) applied and no tax under paragraph
186(1)(b) to the extent CU's refund had been
eliminated by the CU reassessment;
(iii) decreased CU Holdings'
dividend refund under subsection 129(1) of the Act by
$5,269,117.00; and
(iv) made consequential interest
adjustments.
[57] By reassessment for CU Holdings'
1997 taxation year the Minister decreased CU Holdings'
dividend refund under section 129 of the Act as a
consequence of the reduction of CU Holdings' refundable tax
on hand given the reduction in Part IV tax liability under the
1996 reassessment.
The Appellants' Witnesses
[58] The Appellants called five witnesses
who participated in the ATCOR/Forest transactions. The witnesses
were called to attest to the fact that the disposition of ATCOR
shares was carried out for business and commercial reasons and
that the structure of the transactions including the amalgamation
and share redemptions were carried out for commercial reasons to
facilitate the disposition. Further, their testimony was intended
to confirm that the payment of the CU and CU Holdings dividends
in 1996 and 1997 was not at all dependent on the ATCOR/Forest
transactions and that those dividends would have been paid in any
event in the normal course regardless of whether or not the
ATCOR/Forest transactions had ever taken place. As to the latter
point, counsel for the Respondent acknowledged during the course
of the hearing that they did not take issue with the fact that
the CU and CU Holdings dividends in 1996 and 1997 would have been
paid regardless of the ATCOR/Forest transactions and that there
was no dependency on the ATCOR/Forest transactions as a means of
funding the payment of the CU and CU Holdings dividends in 1996
and 1997. On the other hand, the Respondent did not acknowledge
that the structure of the transactions with Forest, including the
amalgamation process and redemption of ATCOR shares, was carried
out strictly for commercial reasons.
[59] At this point I would note that the
relevance of the purpose of the structure of the transactions
with Forest was not argued. In applying subsection 55(2) in the
case of a dividend under subsection 84(3) the test is whether one
of the results of the series of transactions or events was to
effect a significant reduction in the capital gain that, but for
the deemed dividend arising under subsection 84(3), would have
been realized on a disposition of the shares at fair market
immediately before the redemption. In the case of the application
of subsection 84(3) then the purpose of the series of
transactions or events is not open to question. On the other hand
the import of a tax purpose might bolster an argument that the CU
and CU Holdings normal course dividends paid in 1996 and 1997
ought to be included in the ATCOR/Forest series of transactions
by virtue of the fact that a tax purpose for the structure of
that series would connect such dividends with that series. This
would change the focus away from excluding the normal course
dividends by reason of not being dependent on the other
transactions toward including such dividends by reason of being
connected by a purpose. A predictable, foreseen event known to
follow in a particular sequence might be brought into the series
where the event is purposefully used to advantage. I will deal
with this issue later in these Reasons but I raise it now to give
perspective to the testimony of the Appellants'
witnesses.
[60] The first witness called by the
Appellant was Bill Britton, a lawyer with Bennett Jones in
Calgary. The ATCO companies were a long time client of
Mr. Britton and the firm. Mr. Britton was responsible for
the administration of legal services provided by Bennett Jones to
the ATCO companies. In 1995 and 1996 he was a director of ATCO,
CU, CU Holdings and ATCOR.
[61] As in past transactions, including the
acquisition of CU in 1980, Mr. Britton's role included
assuming responsibility to carry out various acquisitions and
dispositions subject ultimately to the approval of senior
management and the Board of Directors of the various companies
that might have been involved in the particular acquisition or
disposition being overseen or directed by Mr. Britton.
[62] Mr. Britton testified that although one
of the reasons for acquiring ATCOR was to facilitate an income
stream to help finance CU's dividend obligations on its
preferred shares, ATCOR's financial results were not in line
with a growth strategy targeted for the ATCO companies. It was
determined that ATCOR's contribution was not sufficient and
was fluctuating so as to cause unacceptable variations in the
growth strategy. Fluctuations were said to be attributable to
fluctuating oil and gas prices that in turn affected reserve
values. Further, Mr. Britton suggested that due to its
holdings in ATCOR there was a diminished interest by investment
bankers following CU. This was corroborated by Mr. William
Sembo. It was also a question of return on invested time. There
were 14 directors of ATCOR and attending to ATCOR affairs took
considerable time and attention without the rewards sought. For
all these reasons, in or about May of 1995 Mr. Britton was asked
by Ron Southern and by the then CFO of ATCO, Cam Richardson, to
explore the market in terms of selling ATCOR.
[63] Mr. Britton testified that the
intention from the outset was to explore the market on the basis
of including all ATCOR shareholders in the sale. That is, there
was no intention to exclude the public shareholders. This
approach he said was dictated to some extent by securities law
which is protective of minority interests and by what Mr. Britton
referred to as a responsible "motherhood" attitude. As
to the latter, I note that correspondence dated June 1, 1995 (at
tab 25, volume 3 of the Joint Book of Documents), suggests
that an offer was first to be sought for the Majority
Shareholders of ATCOR and that the likelihood of an offer to
other shareholders would be dealt with separately at a future
date. Perhaps this approach helped ensure the best possible price
for all shareholders.
[64] Mr. Britton testified that although
there were some assets that the Majority Shareholders wanted to
retain (which required that the purchaser and minority ATCOR
shareholders approve the carving out of some assets of ATCOR),
the objective was to find a buyer that could absorb the
operations so as to maintain the best value and preserve jobs.
The consideration he said was to be cash.
[65] Mr. Britton, on a confidential basis,
talked to the CEOs of a number of potential candidates. As well,
he and Mr. Richardson contacted three securities firms requesting
proposals regarding the sale of ATCOR. In June of 1995 three
proposals were received. They address the role that the
respective firm would play. They refer to divestiture options in
very general terms, marketing strategies, pricing and generally
promote their prospective role should they be retained to assist
in the sale. One proposal goes further. It deals with the
tax-free transfer of assets to be retained by the Majority
Shareholders of ATCOR and ultimately recommends a cash sale of
ATCOR shares as tax deferrals on share exchanges did not seem
necessary given what they believed was a high cost base of the
ATCOR shares held by the Majority Shareholders. This only
confirms what I think would be obvious in any event; a sale
strategy even in its early stages would recognize the influence
of tax strategies in steering the structure of the
transaction.
[66] Mr. Britton testified that, for reasons
of confidentiality, none of the three security firms from whom
marketing proposals were requested were engaged to assist with
finding a buyer. Mr. Britton continued to seek out potential
buyers on his own and found Forest on his own. After initial
meetings a confidentiality agreement was entered into in August
of 1995 between the President of Forest and Mr. Britton.
Following preliminary due diligence, Forest sent a proposal on
October 4, 1995. It was a proposal to acquire all the ATCOR
shares in exchange for Forest shares at a price of $4.63 per
share. An alternate proposal to include cash consideration was
subject to a contingency, namely the cash portion of the
alternate offer was contingent on Forest raising funds.
[67] Mr. Britton testified that he believed
such contingency created difficulties under Canadian securities
law. It was Mr. Britton's understanding at least that unlike
U.S. law, Canadian law prohibited a sale subject to a financing
condition.
[68] On October 24, 1995 Forest's U.S.
legal advisers wrote to arrange a meeting to finalize
negotiations. That letter still referred to cash plus share
consideration as the consideration for the purchase of ATCOR
shares. Mr. Britton testified that Forest was then told of
the cash requirement and a similar but revised letter was sent by
Forest's advisers on October 31, 1995. It delayed the closing
schedule, indicated cash consideration for the purchase of ATCOR
shares (with a vendor option to receive share consideration) and
stipulated that the consideration would be paid on a tax
effective basis for all parties. There remained in both letters
the contingency regarding Forest raising funds under a public
offering. While Mr. Britton testified that this contingency was a
problem, there was no indication in the revised correspondence
that this had been raised as a problem area. One might reasonably
assume, it seems to me, that the manner of dealing with the issue
(namely the amalgamation structure) had already been considered
by the Appellants' advisers.
[69] A press release was issued on November
22nd announcing negotiations for the sale of ATCOR.
While the proposal was not finalized and a final price had not
been agreed upon at the time of the press release, Mr. Britton
confirmed that there was reasonable confidence by then that a
deal would be worked out with Forest. That again suggests that a
resolution of the financing contingency problem had already been
considered by the Appellants' advisers.
[70] The issuance of the press release also
meant, according to the testimony of Mr. Britton, that there was
reasonable confidence that an agreement would be struck that
would be approved by a requisite majority of votes of each class
of outstanding ATCOR shares (including the non-voting shares of
which the Majority Shareholders only owned some 29%). That is, in
order for there to be a deal, the co-operation of the public
shareholders of ATCOR was necessary. It seems likely then that a
structure sensitive to the requirements of public shareholders,
as well as to the Majority Shareholders, must have already been
considered by the Appellants' advisers.
[71] Mr. Britton went on to testify that in
early December 1995 two firms were retained to provide fairness
opinions on the proposed sale. The engagement letters show that
the terms and structure of the sale (the price, the amalgamation
and the redemption versus sale option to be made available to all
shareholders) were known by this time. Neither the terms of
engagement nor the opinions included in the Joint Book of
Documents make reference to the Amalgamation Agreement per
se or any tax consequences associated with the amalgamation
structure. The opinions confirmed the view nonetheless that the
acquisition was fair to all shareholders. Following receipt of
such opinions the Acquisition Agreement was entered into on
December 12 with appended documentation that included the
proposed Articles of Amalgamation and Amalgamation Agreement.
[72] Although conceding that the Appellants
would have taken tax advice from his firm's tax group, Mr.
Britton would not admit to any knowledge of, or to remembering
any particulars of, tax planning by his firm in respect of the
subject transactions. He stated that the structure was not
dictated by the Appellants but was worked out as a problem solver
and was dictated by Forest. This was corroborated to some extent
by another witness, David Baxter, who worked on the transaction
on Forest's behalf. Further, I note that correspondence from
ATCOR's counsel tends to support that the structure was
recommended by them. On the other hand, as is supported by
further testimony dealt with below, there is little question that
the Appellants' advisers had input on details of the
structure which were of no interest to Forest. Even as to the
amalgamation structure itself it seems likely that the
Appellants' advisers were on the same page as Forest's
advisers. Indeed, they were likely a page or two ahead of
Forest's advisers on these issues as they related to vendor
income tax issues. The readiness of the Appellants' advisers
to produce the various required documents, the Notice and
Circular, the Amalgamation and Acquisition Agreements and the
like which ensured acceptable income tax options for
shareholders, both public shareholders and the Majority
Shareholders, support this view as do the testimony of
Mr. Baxter and, more particularly, Mr. MacNeil, to which I
will refer to shortly.
[73] Mr. Britton also testified as to the
historical dividend practices and payments of both CU and CU
Holdings. There is no dispute as to this aspect of his
testimony.
[74] The second witness, Daniel Baxter, is a
lawyer with the firm MacLeod Dixon that acted for Forest at the
relevant times. They were retained in early November 1995. At
that point the deal was agreed on only to the extent of a cash
price for the purchase of all ATCOR shares subject to
financing.
[75] Mr. Baxter testified that three
different structures were considered as a means to purchase the
ATCOR shares. A takeover bid, an amalgamation where the
shareholders received redeemable securities or a plan of
arrangement. Forest determined that it wanted to proceed with the
amalgamation structure. It is not necessary for me to elaborate
on the considerations that went into this decision. I am
satisfied that commercial considerations alone drove this
decision. The purchase of a public company that was subject to
financing by a public offering by a foreign purchaser would have
its complexities, particularly where the transaction was targeted
to close within a few months. The amalgamation structure
accomplished the commercial objectives in a coordinated and
efficient manner. Not even hindsight would suggest a more
efficient commercial course of action.
[76] Like Mr. Britton, Mr. Baxter was not
familiar with the tax considerations that might have gone into
the fine-tuning of the amalgamation structure. He admitted,
however, that he would see no reason, except possibly for tax
considerations, to set-up different classes of redeemable shares
on the amalgamation. Indeed, he acknowledged that the direct
purchase of a single class of redeemable post amalgamation shares
of ATCOR by Forest (Forest Subco) would have satisfied
Forest's commercial objectives. He acknowledged however, that
setting up different classes of shares in this type of buy-out
structure was common.
[77] The next witness, William Sembo, is the
Vice-Chairman of RBC Capital Markets in Calgary. In 1995 he was a
Vice-President and Director of RBC Dominion Securities in
Calgary. He was responsible for providing general corporate
finance advice to the ATCO companies. He was involved with both
the marketing proposal and the fairness opinion prepared by RBC
referred to above. With respect to the fairness opinion he
testified that it was their firm's view that the terms of the
proposed transaction were fair from the financial point of view
to all shareholders. He said the firm satisfied itself that there
were no collateral benefits to ATCO or any of its affiliated
companies under the terms of the transaction but that they did
not consider the income tax consequences to the ATCOR
shareholders in respect of their dispositions.
[78] He went on to testify that in its role
as an investment adviser RBC followed the activities and
developments of the ATCO group of companies and published reports
to the public on this group based on its research. He testified
that utility and pipeline companies were evaluated by the
investing public on the basis of dividend policy and dividend
yield. He confirmed that there was a pattern of regular growth of
dividends in the ATCO group and that that was the market
expectation. He testified that the expectation of growth was
largely based on the continued execution of a business plan that
saw ATCO's subsidiary businesses grow and expand. Such
business plan included selling businesses that did not contribute
to such growth or that did not align themselves or create
synergies with other businesses. Selling off businesses that did
not align well was the trend. The market was looking for
"pure" plays where they would have one or two industry
exposures. Mr. Sembo also testified that the sale of subsidiary
companies in the case of the ATCO group of companies permitted
cash accumulations for the redemption of certain preferred shares
that were due for redemption.
[79] Mr. Sembo's testimony, generally
speaking, corroborates Mr. Britton's testimony as to the
reasons for the sale of ATCOR.
[80] The next witness was Arthur Easterly, a
self-employed engineer who was at relevant times the President
and CEO of ATCOR.
[81] He testified that he was not aware of
the proposed sale of ATCOR until sometime in October of 1995 when
Mr. Britton talked to him about the possibility of the sale.
[82] Mr. Easterly's role in the sale of
ATCOR was making available and explaining ATCOR's holdings to
Forest's representatives. He also ended up on the independent
committee of the Board that retained the services of a financial
adviser for a fairness opinion in order to give a recommendation
to the Board of ATCOR. One of the main concerns of the fairness
opinion was to obtain comfort on the value of ATCOR's assets
and whether the transaction was fair to all shareholders. Mr.
Easterly said he was not involved in price negotiation, rather it
was Bill Britton who engaged in such negotiations.
[83] Mr. Easterly confirmed that the
committee did not as such take into account income tax
considerations of the shareholders. On the other hand,
Mr. Easterly did acknowledge that he was a shareholder
himself and was aware of his own position and assumed that the
Majority Shareholders would similarly be aware of their
position.
[84] Like the witnesses before him, Mr.
Easterly could not answer income tax questions put to him
including questions about the tax considerations on the valuation
of the ATCOR shares. He was asked whether the valuation of assets
at the corporate level took into account income tax
considerations and whether or not the valuation of shares versus
assets would have taken into account income tax considerations.
He could not answer such questions.
[85] The next and last witness, John
MacNeil, is a lawyer practicing with Bennett Jones in Calgary.
Mr. MacNeil made a statutory declaration in December 2002 and
gave direct evidence as to the contents of the declaration.
[86] Mr. MacNeil was employed by the Ontario
Securities Commission from 1987 to 1989 and then was legal
counsel for the Ontario Securities Commission from 1989 to 1992.
He was senior counsel at the office of the General Counsel of
Ontario Securities Commission from 1992 to 1994. He joined
Bennett Jones in 1994 and became a partner in 1998. He practices
principally in the areas of security law, mergers and
acquisitions. He has been involved in significant merger
and transactions.
[87] Mr. MacNeil was called to offer opinion
evidence as well as evidence as to his involvement in the subject
transaction. The Respondent did not object to the qualification
of Mr. MacNeil as an expert.
[88] In November of 1995 Mr. MacNeil was
asked for his advice regarding the proposed purchase. He
confirmed that the subject financing condition imposed by Forest
largely precluded a takeover bid structure. This was a
"going private" transaction targeting the acquisition
of 100% of the outstanding shares of ATCOR. Aside from the
problem with the financing condition, a takeover bid was not
feasible as it might lead to compulsory acquisition requirements
requiring second step transactions designed to squeeze out
reluctant shareholders.
[89] With respect to a plan of arrangement
it was described as a more complicated, lengthy and expensive
process taking three to six months. It requires a court
determination of fairness. Mr. MacNeil acknowledged
significant advantages to proceeding by arrangement and that it
was likely a suitable way to proceed but for it being a more
complicated, lengthy and expensive process.[9]
[90] As to Mr. MacNeil's input on the
Forest/ATCOR transactions, he testified that he advised the
commercial lawyers of his firm that the Forest financing
condition was problematic. He consulted with Dan Baxter and
Forest came back with the proposal for an amalgamation which he
reviewed. The proposal was for a customary type of amalgamation
resulting in all the shareholders of ATCOR receiving redeemable
preferred shares being cashed out. Mr. MacNeil's advice
was that this was an acceptable form of transaction and would
comply with corporate and securities laws.
[91] The amalgamation structure was a simple
and effective structure. I do not need to rely on Mr.
MacNeil's opinion in coming to this conclusion although I do
not mean to condone its use simply as a means of circumventing
take-over laws designed to protect minority shareholders.
Regardless, I note that an amalgamation structure from a
commercial perspective does not require an Amalgamation Agreement
that creates and permits exchanges of predecessor shares for
different classes of amalgamated company shares each having
different paid-up capital amounts, the choice of which was
approved by the ATCOR Board of Directors on the basis of a
fairness opinion and a committee recommendation that made no
reference to such issues. The only explanation for the different
classes of Special Shares and the paid-up capital allocations
amongst them was that the amalgamation was structured in a normal
or usual way which is to say the structure followed normal or
usual implementation techniques to which I would add "as
designed by tax planners".
[92] Indeed, Mr. MacNeil testified that the
request for different classes of redeemable shares did not come
from Forest but rather came from the tax group of Bennett Jones.
Mr. MacNeil acknowledged that the commercial group sought tax
advice on the structuring of the transactions. He acknowledged
that Ron Sirkis and Stan Ebel, two highly regarded tax
specialists, were on the tax team. Mr. MacNeil acknowledged that
the tax lawyers wanted different classes of redeemable preferred
shares and that they wanted separate classes to facilitate the
deemed dividend treatment for the Majority Shareholders. More
specifically he testified that the tax group was involved in
detailing the amalgamation including the paid-up capital
allocations. The following is taken from the transcript of the
proceedings at pages 209 and 210:
Q. Is it common in
an amalgamation structure to have redeemable preferred
shares?
A. Absolutely.
Q. Is it common in
an amalgamation structure to have more than one class of
preferred shares?
A. Yes, it is.
...
HIS
HONOUR:
I just want to clarify one point that I'm not sure on with
respect to paragraph 17 of your deposition, sorry, your
declaration.
The first line of that refers to a structure of amalgamation that
was proposed by Forest's counsel. I would have understood
from that and indeed when you commented on that paragraph
specifically I had the impression that the structure as it
unfolded with 3 different classes of redeemable shares or 2
classes of redeemable and one purchaseable outright, paid up
capital accounts and various classes of shares and whatnot, I had
the feeling that was being proposed by Forest or that was what
you were deposing and first gave evidence on, but you later
referred in cross-examination, I guess, to the proposal as to
different classes of shares and that structure actually came from
Mr. Ebel.
A. Correct.
When asked as to the tax consequences related to separate
classes, this witness made reference to the Notice and Circular
which referred to refunds of Part IV tax in circumstances
applicable to the Appellants and admitted to knowing that the
Appellants were interested in receiving redeemable preferred
shares, namely the Class A and Class B Special Shares and that
this would result in a refundable tax being payable.
[93] When asked about ATCOR's board
forming a special committee to advise the directors as well as
having its own, separate, fairness opinion, Mr. MacNeil
stated that a special committee was established because a number
of directors at ATCOR were also directors for the Majority
Shareholders. The Majority Shareholders would, in supporting the
amalgamation, have a conflict of interest. Accordingly it was
deemed prudent for the Board of Directors to both set up a
separate special committee consisting of non-conflicted persons
and to seek independent expert advice upon which they would be
entitled to rely. No explanation was given as to why the conflict
did not encourage either the Board or the special committee to
seek an opinion on the fairness of the paid-up capital
allocations which was one determining factor in fixing the tax
consequences among all the shareholders as well as being one
determining factor in the choice of Special Shares to be taken on
the amalgamation.
[94] As to normal course dividends paid by
the Appellants in the subject years, Mr. MacNeil's statutory
declaration stated that normal course dividends played no role in
the structure and completion of the transaction. On
cross-examination Mr. MacNeil acknowledged that that statement in
his declaration was meant by him to refer to whether or not
dividends were relevant to his advice and the answer to that
question was that normal course dividends were not relevant to
his advice. Mr. Ebel, while present at the hearing, was not
called to testify as to whether it was relevant to his
advice.
[95] Lastly, I note that there was a read-in
from the transcript of discoveries. The read-in was of testimony
of an auditor of the CCRA who acknowledged on behalf of the Crown
that there was no issue as to the Appellants paying dividends in
the normal course regardless of the ATCOR/Forest transaction. The
auditor acknowledged that the Appellants would have been able to
pay their dividends notwithstanding such transaction. The auditor
also agreed that some of the refunds were a consequence of
dividends paid to persons other than corporations. (This is a
legal conclusion and is of no relevance.) The purpose of the
read-in was to underline that the sale of ATCOR and the
redemption proceeds received by the Appellants were not necessary
to fund their respective normal course dividends. The
Respondent's counsel conceded at the hearing that this was
the case.
The Respondent's Submissions
[96] The Respondent submits that the series
of transactions or events referred to in subsection 55(2)
consisted of the following:
(a) The election by the
Appellants to have their shares in predecessor ATCOR converted
into redeemable Class A and Class B Special Shares of amalgamated
ATCOR (the "Election");
(b) The redemption by amalgamated
ATCOR of the Appellants' Class A and Class B Special Shares
which resulted in the receipt of the CU Deemed Dividend and the
CU Holdings Deemed Dividend (the "Redemption"); and
(c) The declaration and payments of
dividends by CU in 1996 and by CU Holdings in 1996 and 1997
(the "Dividend Payments").
[97] The Respondent submits that the
Dividend Payments are a series of transactions or events within
the common law meaning ascribed by OSFC Holdings Ltd. v. The
Queen, 2001 DTC 5471 and that the Election and the Redemption
are transactions related to, and completed in contemplation of,
the Dividend Payments and therefore, by virtue of subsection
248(10), form part of the same series of transactions as the
Dividend Payments. The particular passage of OSFC upon
which the Respondent puts considerable reliance is at paragraph
36 which reads as follows:
[36] Thus, before applying
subsection 248(10), "series" must be construed
according to its common law meaning, which I have found to be
pre-ordained transactions which are practically certain to occur.
To that is added "any related transactions or events
completed in contemplation of the series".
Subsection 248(10) does not require that the related
transaction be pre-ordained. Nor does it say when the related
transaction must be completed. As long as the transaction has
some connection with the common law series, it will, if it was
completed in contemplation of the common law series, be included
in the series by reason of the deeming effect of subsection
248(10). Whether the related transaction is completed in
contemplation of the common law series requires an assessment of
whether the parties to the transaction knew of the common law
series, such that it could be said that they took it into account
when deciding to complete the transaction. If so, the transaction
can be said to be completed in contemplation of the common law
series.
[98] Subsection 248(10) reads as
follows:
For the purposes of this Act, where there is a reference to a
series of transactions or events, the series shall be deemed to
include any related transactions or events completed in
contemplation of the series.
[99] The Respondent submits that the
Dividend Payments constituted a common law series of transactions
or events as described in OSFC because:
(a) The Dividend Payments were
pre-ordained to produce a final result, being the distribution of
funds to shareholders;
(b) When the first dividend (quarterly
or monthly) was declared and paid in 1996 in respect of each
Appellant, all essential features of the subsequent declarations
and payments were determined by persons who had the firm
intention and ability to implement them, being the Boards of
Directors of each Appellant; and
(c) There was no practical likelihood
that each dividend declared and paid in 1996 with respect to CU
and in 1996 and 1997 with respect to CU Holdings would not
occur.
[100] With respect to the Election the Respondent
submits that the Class A and Class B Special Shares were created
to allow the Appellants to elect to take them in exchange for
their predecessor ATCOR shares and that the Election was made by
the Appellants to ensure that they received their respective
Deemed Dividend on the disposition of their amalgamated ATCOR
shares.
[101] The Respondent submits that the Election was an
event that was related to the Dividend Payments. The Respondent
submits that the Election clearly had "some connection"
with the Dividend Payments in that the Election gave rise to the
Redemption, which in turn gave rise to each Appellant's
respective Deemed Dividend and to the Part IV tax which was to be
refunded as a result of the Dividend Payments. Further, the
Respondent submits that there is no evidence to suggest that the
Appellants would have made the Election if they did not expect
that the Part IV tax that they paid on their respective Deemed
Dividend would be refunded as a result of the Dividend
Payments.
[102] The Respondent further submits that the Election
was completed in contemplation of the Dividend Payments and that
it is reasonable to infer from the evidence that the Appellants
were aware that by making the Election, the Part IV tax
payable upon the redemption of the shares elected to be taken was
refundable. It is also submitted that it is reasonable to infer
from the evidence that the Appellants not only knew of but took
into account, the fact that the tax payable on the redemption of
their amalgamated ATCOR shares would be refunded by virtue of the
Dividend Payments.
[103] The Respondent therefore submits that the Election
was related to the Dividend Payments and completed in
contemplation of the Dividend Payments as required by subsection
248(10) as interpreted in OSFC. As such the Election is
deemed under subsection 248(10) to be part of the series of
transactions or events which are the Dividend Payments.
[104] With respect to the Redemption, the Respondent
made similar submissions as made in respect of the Election. It
follows that since the Redemption was tied to the Election, there
would be the same findings as to the Redemption being related to
and completed in contemplation of the Dividend Payments as
applicable to the Election. Accordingly, the Respondent submits
that the Redemption was related to the Dividend Payments and
completed in contemplation of the Dividend Payments as required
by subsection 248(10) as interpreted in OSFC. As such, the
Redemption is deemed under subsection 248(10) to be part of the
series of transactions or events which are the Dividend
Payments.
[105] In response to the Appellants' argument that
the Dividend Payments were normal course dividends and as such
had no connection to the ATCOR/Forest transactions, the
Respondent submitted that the Appellants' position failed to
consider the meaning of the phrase "series of transactions
or events" as it is used in subsection 55(2) and subsection
248(10). The Respondent submitted that it was the very regularity
and certainty of the Dividend Payments that caused them to be
part of the same series of transactions or events as the receipt
of the Deemed Dividends for the purposes of subsection 55(2) of
the Act.
[106] In further response to the Appellants'
argument that the Dividend Payments were destined to happen
regardless of the sale transaction and therefore not part of the
same series, the Respondent submitted that taking such an
interpretation would severely limit the operation of
subsection 55(2) and posed the following example, which the
Respondent described as the converse of the situation involved in
the current litigation:
Mr. A owns all the shares of Holdco that in turn owns all the
shares of Target. Mr. B and Holdco enter into an agreement of
purchase and sale for the shares of Target. The purchase price is
agreed to be $1 million plus an amount equal to the amount of
cash in Target as the closing date. Prior to the closing date,
Target pays a dividend to Holdco. The payment of the dividend
prior to the sale is a classic situation to which subsection
55(2) is meant to apply.
In this case the event giving rise to the reduction in the
capital gain is the actual dividend paid. The question, for the
purposes of subsection 55(2), is whether that event forms a
series with the subsequent sale transaction. The Respondent
submitted that to suggest that subsection 55(2) should not be
applicable in this example because the sale would have occurred
regardless of whether the dividend was paid would be to
inappropriately narrow the ambit of subsection 55(2).
[107] With respect to the second condition which could
prevent the application of the Part IV exception (i.e. whether
the refunds of Part IV tax were as a consequence of dividends to
corporations), the Respondent argues simply that there were
sufficient dividends to corporations in 1996 in the case of each
Appellant to account for the full refunds allowed under section
129. The Respondent argued in the alternative that the portion of
the Appellants' respective Deemed Dividend that should be
eligible for the Part IV exception would be the portion of the
total dividends paid that were paid to non-corporations. Such
arguments would only need to be considered if I determine that
the dividends paid, that is the normal course dividends, were not
part of the same series of transactions or events as the
ATCOR/Forest transactions.
The Appellants' Submissions
[108] The Appellants submitted that the Part IV
exception specifically requires a finding that the normal course
dividends are part of the same series of transactions or events
as the ATCOR/Forest transaction. Subsection 55(2) speaks of a
"series of transactions or events" to which the
provision may apply. It was argued that the plain reading of the
Part IV exception does not allow a conclusion that the normal
course dividends are that series of transactions (which
the Appellants' counsel referred to as the "base series
of transactions"). The base series of transactions, it is
submitted, are the ATCOR/Forest transactions.
[109] In considering whether the normal course dividends
can be considered as part of the ATCOR/Forest series of
transactions, Appellants' counsel referred to OSFC at
paragraph 19 where the Federal Court of Appeal accepted the tests
set forth by the House of Lords in Furniss v. Dawson,
[1984] A.C. 474 (H.L.) as narrowed by the House of Lords in
Craven v. White, [1989] A.C. 459 (H.L.), which are as
follows (the "Furniss & Dawson
requirements"):
...
As the law currently stands, the essentials emerging from
Furniss v. Dawson, [1984] A.C. 474, appear to me to be
four in number: (1) that the series of transactions was, at the
time when the intermediate transaction was entered into,
pre-ordained in order to produce a given result; (2) that that
transaction had no other purpose than tax mitigation; (3) that
there was at that time no practical likelihood that the
pre-planned events would not take place in the order ordained, so
that the intermediate transaction was not even contemplated
practically as having an independent life, and (4) that the
pre-ordained events did in fact take place.
[110] The Appellants submit that these requirements to
attach the normal course dividends to the ATCOR/Forest series of
transactions are not met.
[111] Appellants' counsel further cites 454538
Ontario Limited v. M.N.R., [1993] 1 C.T.C. 2746,
Industries S.L.M. v. M.N.R., [1996] 2 C.T.C. 2572
andLes Placements E. & R. Simard v. H.M.Q., 97
DTC 1328 as authority for their submission that a determination
of what constitutes a "series of transactions" at
common law requires that the following general elements be
present:
(i) a logical or reasonable
connection between transactions;
(ii) an intention by the
taxpayers that the transactions be linked together to achieve a
specific result; and
(iii) an interdependence and
interrelation of the transactions.
[112] The Appellants argued that such requirements to
attach the normal course dividends to the ATCOR/Forest series of
transactions are not met. There is no reasonable connection
between the transactions and an intention to connect them should
not be drawn from the results obtained. There is genuine
independence of the transactions. Each was complete in itself.
More specifically:
(a) the ATCOR/Forest
transactions did not impact on the regularity or amount of the
normal course dividends;
(b) the ATCOR/Forest transactions were
a separate and independent commercial deal carried out for their
own business purpose;
(c) the normal course dividends would
have been paid regardless of whether or not the ATCOR/Forest
transactions were ever contemplated and/or completed;
(d) the ATCOR/Forest transactions were
not related to or completed in contemplation of the declaration
and payment of the normal course dividends; and
(e) the declaration and payment
of the normal course dividends prior to or after the closing date
of the ATCOR/Forest transactions were not related to or paid in
contemplation of the ATCOR/Forest transactions.
[113] Appellants' counsel submitted that the common
law series of transactions began and ended with the closing of
all transactions and events described in the Acquisition
Agreement and that any transactions or events that were not
described in the Acquisition Agreement fell outside the common
law series of transactions, including the normal course
dividends.
[114] As to whether subsection 248(10) applies such that
the payment of the normal course dividends is deemed to be part
of the common law series, i.e. part of the ATCOR/Forest series of
transactions, Appellants' counsel acknowledged that the
Federal Court of Appeal in OSFC concluded that subsection
248(10) of the Act broadened the meaning of "series
of transactions or events" beyond that defined by the House
of Lords in Craven v. White. Subsection 248(10) requires
three criteria as set out in paragraph 36 of the OSFC,
namely:
(a) a series of transactions
within the common law meaning;
(b) a transaction "related"
to that series; and
(c) the completion of the related
transaction "in contemplation of" that series.
As to the "in contemplation" requirement, the
Federal Court of Appeal adds, also in OSFC at paragraph
36, that subsection 248(10) requires:
... an assessment of whether the parties to the transaction
knew of the common law series, such that it could be said that
they took it into account when deciding to complete the
transaction. If so, the transaction can be said to be completed
in contemplation of the common law series.
[115] Applying the analysis of the Court in OSFC
to the within appeals, Appellants' counsel submitted that in
order for subsection 248(10) to apply, I would be required to
find that:
(i) the payment of the
normal course dividends are related to the ATCOR/Forest
transactions (i.e. the common law series); and
(ii) the payment of the
normal course dividends were in contemplation of ATCOR/Forest
transactions.
[116] With respect to the "related"
requirement Appellants' counsel submitted that OSFC
does not provide much guidance on the meaning of
"related", saying only that the transaction in question
requires some connection with the common law series but does not
elaborate on the extent of connection required. Appellants'
counsel submitted that guidance as to the requisite connection
required between transactions can be found in previous
jurisprudence of this Court. Essentially this takes
Appellants' counsel to arguing that "related" as
used in subsection 248(10) does not expand the common law
considerations dealing with how closely transactions need to be
connected to be counted as being, or forming part of, a series.
Short of convincing me of this and that common law is helpful to
the Appellants' cause, their submission comes down to the
following:
It is respectfully submitted that the payment of Normal Course
Dividends was not related to the ATCOR/Forest Transaction.
Specifically, there is no interdependence between the sale of
ATCOR and the payment of the Normal Course Dividends. The primary
objective of the Appellants was the sale of ATCOR to Forest and
such objective was wholly independent and disconnected from the
payment of the Normal Course Dividends. Importantly, the
ATCOR/Forest transaction would have taken place regardless of the
payment of subsequent Normal Course Dividends. It was a viable
transaction in and of itself even if the Normal Course Dividends
subsequently ceased.
[117] With respect to the "in contemplation
of" requirement, Appellants' counsel submitted that in
addition to finding that the Appellants knew of the ATCOR/ Forest
transactions when declaring the dividends, it would also be
necessary, in order to satisfy such requirement as described in
OSFC, to find that the Appellants took into account the
ATCOR/Forest transactions in deciding to make the declaration and
payment of normal course dividends with the intent that the
normal course dividends be linked together with the ATCOR/Forest
transactions to achieve a particular result.
[118] Counsel for the Appellants then goes on to submit
that the evidence discloses that at the time of the negotiation
of the ATCOR/Forest transactions the payment of normal course
dividends played no part in arriving at the decision to have the
acquisition proceed by way of amalgamation. In fact, it is
submitted that the evidence supports a finding that the
requirement to carry out the ATCOR/Forest transactions by way of
an amalgamation was necessary to accommodate the particular
circumstances of Forest. It was further submitted that in the
present circumstances the facts are clear that the normal course
dividends would have been paid regardless of the completion,
non-completion or structuring of the ATCOR/Forest transactions.
Thus, in making the declaration and payment of normal course
dividends, CU and CU Holdings did not take into account the
ATCOR/Forest transactions.
[119] With respect to their alternative argument,
Appellants' counsel submitted that in the event that the
normal course dividends are found to be part of the same series
of transactions or events as the ATCOR/Forest transactions,
subsection 55(2) does not require that portion of the Deemed
Dividends that are subject to Part IV tax that is refunded as a
consequence of the payment of a dividend to a non-corporation be
recharacterized as proceeds of disposition. Accordingly, to the
extent that all or any portion of the Deemed Dividend that is
subject to Part IV tax is refunded as a consequence of the
payment of normal course dividends to a recipient other than a
corporation, subsection 55(2) will not apply to treat that
portion of the deemed dividend as proceeds of disposition. It is
noted that section 129 does not calculate or attribute refunds to
specific dividends or by reference to specific recipients. The
refunds are calculated by reference to dividends "paid ---
in the year". In such circumstances the Appellants'
counsel made the following submission:
It is submitted that the words of the Part IV Exception in
subsection 55(2) are clear and unambiguous. The
proviso in the Part IV Exception does not apply to
Part IV tax refunded as a consequence of the payment of a
dividend to a non-corporation. There is no dispute as to the
amount of dividends paid to non-corporations by CU and CUHL in
the relevant years. It is submitted that subsection 129(1)
provides for the refund of Part IV tax in the circumstances in
respect of the payment of dividends to non-corporations by CU and
CUHL in the relevant years.
It is submitted therefore that even if the Normal Course
Dividends are found to be part of a series, the Part IV Exception
still applies to that portion of the Deemed Dividend subject to
Part IV tax which was refunded as a consequence of the payment of
dividends to non-corporations.
Analysis
[120] I will deal firstly with the Respondent's main
argument which is that subsection 248(10) applies to include the
ATCOR/Forest transactions as part of the series of normal course
dividends. The Respondent maintains that the normal course
dividends, as a common law series in and by itself, can include
the prior ATCOR/Forest transactions by applying subsection
248(10) even if, but for that deeming provision, the transactions
would not be a series at common law. In my view,
subsection 248(10) by its plain wording does not invite or
permit its application in this way.
[121] The Part IV exception to the application of
subsection 55(2) looks to whether there is a Part IV refund
"as a consequence of the payment of a dividend where the
payment is part of the series". (emphasis added)
[122] What series is "the series" being
referred to? There can be little doubt that it is the particular
series referred to at the outset of subsection 55(2), namely, the
series of transactions or events as a part of which a corporation
has received a taxable dividend in respect of which it is
entitled to a deduction under subsection 112(1). The
reference to this series narrows the scope of the series being
examined. Without looking to the expanded definition of
"series" in subsection 248(10), the normal course
dividends are not part of the events by which a taxable dividend
was received by the Appellants in respect of which the recipient
was entitled to a deduction under subsection 112(1). If they
were part of that series without the application of 248(10), the
application of that subsection would be redundant.[10]
[123] If the normal course dividends are not part of the
series of events referred in the Part IV exception then, in
applying the Part IV exception in this case, it cannot be said
that the Part IV refund was as a consequence of the payment of a
dividend which was part of the series that resulted in the
Appellants receiving their respective Deemed Dividend unless
subsection 248(10) dictates otherwise.
[124] Subsection 248(10) by its express language seeks
to identify a series referred to in the Act and includes
transactions or events as part of "the series" (i.e. as
part of that series) so referred to in the Act such as the
series referred to in subsection 55(2) if they (such transactions
or events) are related to and are completed in contemplation of
that particular series. The particular series in subsection 55(2)
to which subsection 248(10) can attach transactions or
events is the series as a part of which a corporation has
received a taxable dividend in respect of which it is entitled to
a deduction under subsection 112(1). To use subsection 248(10)
other than to attach transactions related to that series requires
a somewhat circular construction of subsection 55(2) that its
language does not in my view invite.[11] In the jargon of the
Appellants' submissions, the "base series of
transactions" for the purposes of the Part IV exception to
the application of subsection 55(2) is the ATCOR/Forest
transactions not the normal course dividends paid by the
Appellants.
[125] The Respondent has expressed concern that this
construction of subsections 55(2) and 248(10) might mean
that transactions and events that are to occur regardless of a
tax avoidance structure, can never be included in the series that
make up that structure. I believe this concern is unfounded. In
the classic example given (see paragraph 106 of these Reasons),
the event giving rise to the reduction in the capital gain is the
actual dividend paid. The question, for the purposes of
subsection 55(2), is whether that event forms a series with the
subsequent sale transaction. In making that determination there
is no need to ask whether the sale could be regarded as having
been completed in contemplation of the dividend even though the
sale would have taken place in any event. Such question only
arises if it is necessary to look to subsection 248(10). In this
example, that is not necessary.
[126] I would add that even if the reference in
subsection 248(10) to "the series" narrows the scope of
subsection 248(10) in examples such as the classic example posed
by the Respondent, it neither negates the expansive nature of
that subsection (as I will comment on further in these Reasons)
nor frustrates the intended application of subsection 55(2) to
such example since a common law determination of series in that
example, without reliance on subsection 248(10), gives the
Respondent its desired result. I have little doubt that the
dividend paid to Holdco would be found at common law to have been
received as part of a series of transactions, that included the
sale, one of the purposes of which was to effect a significant
reduction in the amount of the capital gain that would have been
realized on the sale but for the dividend. Unlike the case at
bar, the dividend seems to have no independent existence. In the
case at bar, the normal course dividends and the sale both have
independent existences. As discussed below, the Craven v.
White analysis would attach the dividend to the sale to form
a common law series. Unlike subsection 248(10), common law,
including the Craven v. White analysis, is not dependent
on identifying a particular transaction from which others must
flow in order to form a series. Indeed, the classic example cited
by the Respondent is a good example of the type of pre-ordination
of events arising from the same conscious volition that the
Craven v. White analysis embraces as the test for
constituting a series for fiscal purposes at common law.
[127] Having concluded that subsection 248(10) cannot
apply to attach the Election, Redemption and Deemed Dividends to
the series of Dividend Payments (i.e. the normal course
dividends) is not to conclude that that is the end of the matter.
As anticipated by most of the Appellants' submissions, the
question of whether the normal course dividends are part of the
series of transactions or events that comprised the ATCOR/Forest
transactions is still an open question. The Respondent's
Reply at paragraph 10(l) assumes the normal course dividends
resulting in the refunds of Part IV tax are part of the series of
transactions or events undertaken by the Appellants. The
Respondent has also argued that it is the predictability of the
normal course dividends that brings them into the ATCOR/Forest
series of transactions.
[128] Before considering the requirements for attaching
(either at common law or under subsection 248(10)) the normal
course dividends to the series of transactions or events that
comprised the ATCOR/Forest transactions, I will in deference to
the Respondent's position summarize certain factual findings
that the Respondent asserts are helpful to advance its
position.
[129] In essence, it is the Respondent's position
that where planning elements within a series take into account a
known future event to ensure a desired result, the incorporation
of those elements "connects" the future event with the
series at common law or satisfies the "related" and
"in contemplation" requirement set out in OSFC
and subsection 248(10).
[130] Accordingly the Respondent's position depends on
findings of fact that confirm that elements of the ATCOR/Forest
transactions were incorporated solely in order to target refunds
arising from the normal course dividends. While there is evidence
that there was tax planning input, I have no direct evidence on
what that was. While I can make reasonable inferences from the
evidence before me, without drawing negative inferences from the
Appellants' silence, there is also the question of whether
the Appellants by their silence have ignored the burden of proof
resting with them. In spite of invitations by me to address my
evidentiary concerns, particularly in the area of paid-up capital
allocations, the Appellants chose not to address or respond to
this area of enquiry. Appellants' counsel deliberately called
only witnesses who were unable and/or unprepared to address the
tax planning input relating to the ATCOR/Forest transactions.
Ultimately their position seems to be that the tax planning input
was irrelevant.
[131] In respect of tax planning input, I make the
following observations:
(a) The tax lawyers at Bennett
Jones were involved with the ATCOR/Forest transactions in
November 1995, if not earlier. Daniel Baxter representing
Forest became involved in early November. Mr. MacNeil of
Bennett Jones was involved by the commercial group of his firm
and consulted with Daniel Baxter who proposed an
amalgamation. Mr. MacNeil was aware of his firm's tax
group's involvement on behalf of the Majority Shareholders
and of the refinements they included in the final form of the
Amalgamation Agreement. The press release went out on November
22, 1995. Mr. Britton testified that they, i.e. the Majority
Shareholders, were satisfied by this time that the deal would be
worked out. I am satisfied that like the cash consideration
requirement and the resolution of the contingent financing issue,
the tax structure would have been well advanced by this
stage;
(b) The Appellants would likely have
been informed of the commercial preference for an amalgamation
even before it was proposed by Daniel Baxter. They would
have been informed of the advantages of such structure from all
perspectives not only its commercial efficiency which I have
accepted. That it was ultimately proposed by Forest given the
commercial realities surrounding the transaction does not detract
from the likelihood that the Appellants would have known its
advantages from a tax and commercial point of view. The tax
consequences of an amalgamation, with some fine-tuning, would
result in the avoidance of capital gains taxes on the sale of
ATCOR shares. To think that the Appellants were not aware of this
in agreeing with the amalgamation structure, which they could
fine-tune to advantage, would be somewhat naïve in my
view. The approval of the Amalgamation Agreement by the Majority
Shareholders was the starting point of the closing of the
ATCOR/Forest transactions. The Majority Shareholders'
commitment to approve the amalgamation was set out in the Notice
and Circular long before casting votes at the Special Meeting.
Their approval was quite independent of the recommendation of the
Board of Directors of ATCOR. Their approval was not subject to a
fairness opinion. At the outset of the ATCOR/Forest transactions
they knew they were approving a tax free sale of their ATCOR
shares;
(c) While the Notice and Circular
(under the heading "Legal Matters") indicates that
Bennett Jones were the lawyers for ATCOR, the evidence before me
is that they were acting for the Majority Shareholders as
well;
(d) In fine-tuning the Amalgamation
Agreement the interests of a variety of categories of
shareholders should have been considered and rationalized. I have
no direct evidence however as to what such rationalization might
have been. Having said that, I note that the advance approval of
the Majority Shareholders, whose circumstances were known to
Bennett Jones and who as shareholders can act in self-interest,
was required. The Majority Shareholders knew of and approved the
terms of the Amalgamation Agreement, which included paid-up
capital allocations which in respect of two classes of ATCOR
shares matched the respective adjusted cost bases of the
Appellants' shares in ATCOR. That approval occurred prior to
December 15, 1995;
(e) The fixing of the paid-up capital
is a relevant event. The paid-up capital of a corporation's
shares can be reallocated on amalgamation. I attribute no
pejorative connotation to transactions that shift paid-up capital
amongst different classes of shares. Shareholders come and go.
New shares can be issued and/or cancelled at various times at
varying prices. The Act makes no attempt to trace capital
accounts to particular shareholders. Shifting paid-up capital
accounts is a tax planning tool and there is no reason in a case
like this that paid-up allocations would not be factored into
fine-tuning the Amalgamation Agreement as a tax planning
consideration or if it otherwise helped ensure that the sale to
Forest would be approved. However there is no evidence that the
particular paid-up capital allocations were helpful in ensuring
public shareholder approval of the sale. The Majority
Shareholders' approval was the necessary starting point and
unlike public shareholders I am satisfied that they had input,
directly or through their counsel, Bennett Jones, in the paid-up
capital allocations and rationalizations;
(f) What are the paid-up capital
allocation rationalizations? The allocation of the paid-up
capital to the Class C Special Shares was irrelevant. ATCOR
shareholders electing Class C Special Shares would be selling
their shares and the paid-up capital in respect of their shares
would not be a relevant amount in computing income for tax
purposes. Each share of the Class A and Class B Special Shares
was given a paid-up capital allocation approximately equal to the
per share adjusted cost base of one of the Appellants' shares
in predecessor ATCOR. As noted earlier in these Reasons such
allocation resulted not only in fixing the respective Deemed
Dividend each Appellant would receive but effectively eliminated
the capital gain on the disposition of their ATCOR shares. The
Majority Shareholders knew that the particular paid-up capital
allocation approved by them would result in total tax avoidance
for the Appellants unless subsection 55(2) applied,[12] and, as stated, they
had some role in dictating such result. On the evidence before me
I can find no other rationalization for the allocations;
(g) That the paid-up capital
allocations were adopted to achieve the end result achieved is a
factor capable of linking the ATCOR/Forest transactions with the
normal course dividends in terms of establishing a series. The
Appellants have not brought any evidence to obviate concerns over
such linkage;
(h) In finding that the Majority
Shareholders had a role in dictating the paid-up capital
allocations I am mindful that it cannot be said that they, or
more particularly the Appellants, set the paid-up capital of the
shares they elected to take. They were set by the boards of the
two predecessor companies. However, again, it would be quite
naïve to think that they were not consulted on the paid-up
capital allocations, and the effects of same, before approving
them. Indeed it seems that only the Majority Shareholders showed
any interest in these allocations. While I give ATCOR and its
advisers the benefit of any doubt that the paid-up capital
allocations were not designed to favour one shareholder over
another, I have seen nothing to indicate that the allocations
were addressed by the ATCOR Board of Directors notwithstanding a
duty to consider the effects of all aspects of the buy-out on all
shareholders. The fairness opinions did not address such
allocations. Public shareholders were given limited choices but
on the evidence before me had no input or independent
representation on the paid-up capital allocations. The Notice and
Circular made no mention as to how the allocations were
determined. The public shareholders had three choices. The Notice
and Circular described how each shareholder might, for the best
tax results, determine which class of shares to take on the
amalgamation. The choices given public shareholders were
seemingly assessed as sufficient to ensure approval and obviously
that assessment proved correct. Nonetheless, the choices given
public shareholders did not reflect their input or all their
circumstances except in a broad brush way. On the other hand the
Appellants by their own input and/or that of their lawyers had a
say in the tax consequences that would flow on a redemption of
their shares in amalgamated ATCOR beyond that which was allowed
simply by making an election as to the class of ATCOR shares to
be taken on the amalgamation. This distinguishes them from public
shareholders; [13]
(i) I have noted that the Board
of Directors of ATCOR and the special committee did not seek and
did not receive in the fairness opinions solicited by them any
comments on the paid-up allocations. While I accept that the
Board of Directors of ATCOR would have attempted to be fair in
its recommendation of the amalgamation proposal, I am not
prepared for the purposes of these appeals to accept ATCOR's
Board of Directors apparent lack of interest in this issue as
evidence of what the normal commercial terms of a buy out
transaction might be in a case such as this. Nor do I accept the
testimony of the Appellants' witnesses on this point. I have
no reliable evidence on this aspect of the Amalgamation
Agreement. Indeed, as pointed out, Appellants' counsel made a
deliberate decision not to bring evidence on this aspect of the
ATCOR/Forest transactions;
(j) With respect to the decision
of Appellants' counsel not to bring evidence as to the
planning strategy associated with the paid-up capital
allocations, I note that the Replies to the Notices of Appeal
made no assumptions on the point. Nonetheless, I remarked at the
trial that a knowledgeable tax planner aware of normal course
dividends could predict with some certainty the refund of Part IV
tax it could qualify for under section 129 of the Act. As
such, addressing the factual matters surrounding such awareness
is required to deal with the relationship issues between the
transactions and events in determining which transactions and
events are part of the same series. The assumption in the Replies
that the normal course dividends were part of the same series of
transactions and events as the ATCOR/Forest transactions is
sufficient to put the onus of proof on the Appellants as to all
potentially relevant relationship factors including factors not
specifically set out in the pleadings. They have failed to meet
this onus on this point. The relevance of this finding is
discussed below.
[132] I return now to the question of identifying a
series of transactions and events. While I have already dealt
with subsection 248(10) in relation the Respondent's argument
that it applies to attach the ATCOR/Forest transactions to the
series of normal course dividends, I have yet to deal with that
provision in relation to the argument that it applies to attach
the normal course dividends to the ATCOR/Forest series of
transactions. Accordingly, I will revisit that provision in this
latter context and then deal with the common law meaning of
series.
Subsection 248(10)
[133] This subsection is an enlargement of the common
law series. See paragraphs 33 and 34 of OSFC.
[134] Subsection 248(10) requires three things: first, a
series of transactions within the common law meaning; second, a
transaction related to that series; and third, the related
transaction must be completed in contemplation of that series.
See paragraph 35 of OSFC.
[135] It is not in dispute that the first requirement is
met. There is a series of transactions within the common law
meaning, namely the series consisting of the ATCOR/Forest
transactions. Even assuming that the second requirement of
subsection 248(10) has been met, i.e. namely that the normal
course dividends are related to that series, the third
requirement that the completion of the normal course dividends
(as the related transaction) be in contemplation of that series
has not been met. Clearly the normal course dividends were not
completed in contemplation of that series. They were independent
events. The fact that the transactions and events that
constituted the ATCOR/Forest series contemplated the normal
course dividends is not relevant. Even taking into account the
normal course dividends when fixing the paid-up capital
allocations is not relevant where the question is whether the
normal course dividends were completed in contemplation of that
event. It is the transaction that is sought to be added to the
series by the extended definition in subsection 248(10) that
must be completed in contemplation of the series. That is clearly
not the case in the respect of the normal course dividends. I
accept that the Appellants would not have taken into account the
ATCOR/Forest transactions in deciding to make the declaration and
payment of normal course dividends. That payment evidences no
intent that the normal course dividends be linked together with
the ATCOR/Forest transactions to achieve a particular result.
[136] While it is not necessary to see if the second
requirement in subsection 248(10) for adding the normal
course dividends to the ATCOR/Forest transactions (that they be
related to that series) has been met, a question arises as to
whether the factors to be considered in determining whether
transactions are "related" are the same factors to be
considered at common law in determining what transactions form
part of a series. In my view it cannot be the same question.
"Related" transactions as used in subsection 248(10)
must refer to a looser tie or connection than the connection
required at common law. Hence the reference in paragraph 36 of
OSFC to "some connection". Otherwise subsection
248(10) would not be an expanding definition which clearly it is
intended to be as confirmed in OSFC. A looser connection
than required at common law coupled with the requirement that it
(the transaction sought to be included in a series) be completed
in contemplation of the series is sufficient for the purposes of
subsection 248(10). The common law criteria for connecting
transactions to a series is confirmed to be quite narrow by the
need for such expansive refinement. It is in this context that I
turn now to the common law meaning of "series".
The Common Law Test for Constituting a Series
[137] Determining whether a series exists at common law
involves a consideration of how closely tied transactions must be
in order to constitute a series. This area of enquiry is endorsed
by the Federal Court of Appeal in OFSC referring to the
determination of a series for the purposes of GAAR at paragraph
18 of OSFC. This must, in my view, be the primary area of
inquiry whether the context of the enquiry is in respect of the
application of GAAR or otherwise. To supplement such primary area
of enquiry at common law we can turn to the Furniss &
Dawson requirements as approved of in OSFC for
determining whether or not a transaction is part of a series. I
say that the Furniss & Dawson requirements supplement
the primary area of enquiry as I take them (in the context in
which those requirements are set out in Craven v. White)
only as giving focus to the primary area of enquiry for
determining whether a transaction forms part of a series. Looking
behind these requirements allows for their proper application in
answering the question of how closely tied individual events must
be in order to constitute them a series.
[138] In Craven v. White three separate cases
were dealt with in which there were a series of linear
transactions in which execution of an intermediate transaction
with tax saving consequences was effected. The issue was whether
the intermediate transaction was to be given effect for tax
purposes. The House of Lords had wrestled with this question on
numerous previous occasions. Cases referred to and commented on
in Craven v. White reflect a lively intellectual struggle
on the question of when to give effect to any transaction
completed for the sole purpose of saving tax on another
transaction. It is clear that in resolving this question, the
majority in Craven v. White, particularly Lord Oliver, did
not intend to embrace any test that would ignore a legally
effective transaction simply because its sole purpose was tax
mitigation or avoidance. The test to be applied was whether the
transactions under scrutiny, that is the transactions mitigating
the tax otherwise payable on the other transaction and that other
transaction, were a single, indivisible, composite transaction.
In applying this test Lord Oliver set out the four essential
Furniss & Dawson requirements for including a tax
avoidance step as a composite part of a single transaction so as
to give it no effect for tax purposes. Strictly speaking then the
Furniss & Dawson requirements embraced by the Federal
Court of Appeal in OSFC are not prerequisites for
constituting a "series" at common law. That specific
question was not raised in the Craven v. White cases. That
is, there was no question in the Craven v. White cases
that the intermediate transactions under scrutiny were part of a
linear series of transactions. They formed part of a series as a
result of the primary area of enquiry which looks to how closely
the transactions are tied regardless, for example, of a tax
mitigation motivation. Being commercially tied is sufficient. The
tax mitigation or avoidance requirement was not essential to
bring the tax driven step into the series but was essential in
order to ignore it in favour of recognizing the appropriate tax
consequences of the series as a whole. To successfully attack the
tax avoidance sought to be achieved by the series of transactions
being scrutinized in those cases, the House of Lords held that
the four Furniss & Dawson requirements must all be
met. While the Federal Court of Appeal in OSFC accepts
this as an appropriate formulation at common law of the meaning
of the term "series" as used in the Act, that
formulation cannot stand alone. It must, to apply in other
contexts, draw more heavily on the wider analysis provided in
Craven v. White. Indeed Justice Rothstein's
summation of the common law meaning of series in OSFC of
paragraph 36 invites such analysis. That meaning is as
follows:
[36] Thus, before applying
subsection 248(10), "series" must be construed
according to its common law meaning, which I have found to be
pre-ordained transactions which are practically certain to
occur.
This definition of "series" invites elaboration as
to the meaning of pre-ordination in the context of defining a
"series" at common law particularly in the context of
the third requirement of the four Furniss & Dawson
requirements dealing with the question of whether transactions
have an independent life.
[139] Before embarking on such elaboration which is to
return to the primary area of focus (i.e. the nature of the ties
among the transactions and events required to constitute them a
series or part of a series), I will dispose of the issue of
whether the Furniss & Dawson requirements per
se are helpful to the Respondent if applied as requirements
to add the normal course dividends to the ATCOR/Forest series of
transactions. The normal course dividends in this context are the
intermediate transactions (although in fact they are an end
transaction) referred to in the Furniss & Dawson
requirements. Consider the four essential requirements in
Furniss & Dawson:
(a) That the series of
transactions was, at the time when the intermediate transaction
(i.e. the normal course dividends) was entered into,
pre-ordained in order to produce a given result. The
ATCOR/Forest series of transactions was pre-ordained as was the
series of normal course dividends. As part of the ATCOR/Forest
series the paid-up capital allocations were made, at a time when
the normal course dividends were a virtual certainty, "in
order" to produce a given result, namely the avoidance of a
taxable gain. Accordingly this first requirement is met in my
view even though each series, viewed as a whole, was also
intended, indeed primarily intended, to achieve separate bone
fide commercial results. Subsection 55(2) directs me to look
to the event that avoids recognition of a taxable gain. Such
direction requires that I put less emphasis on the broader
objectives of the series;
(b) That that transaction (i.e. the
normal course dividends) had no other purpose than tax
mitigation. This is clearly not the case. I note here that while
for the purposes of applying subsection 55(2) to the appeals at
bar, we are concerned only with results, not purpose, both this
second Furniss & Dawson requirement and the first
requirement in (a) above, apply a "purpose" test.
Clearly, for the purpose of identifying a series,
"purpose" is relevant as a common law requirement.
Indeed intentions are a critical link in the recognition of a
series. I note here as well that as evidenced by the acceptance
of the parties that the ATCOR/Forest transactions are a
"series" in themselves and that the normal course
dividends are a series in themselves, a tax driven purpose is not
relevant in identifying each as a "series". Taken
separately, they each are a series. Otherwise we have no
"base series of transactions" to which common law (or
subsection 248(10)) can attach a further transaction. A tax
purpose may link transactions to a series but it is not a
necessary component in identifying a series;
(c) That there was at that time no
practical likelihood that the pre-planned events would not take
place in the order ordained so that the intermediate transaction
(i.e. the normal course dividends) was not even contemplated
practically as having an independent life. While the first part
of this test is met, i.e. there was no practical likelihood that
the pre-planned events including the normal course dividends
would not take place in the order ordained, the second part of
this test is not met. That is, the normal course dividends
clearly have an independent life;
(d) That the pre-ordained events did
in fact take place. This test was met.
[140] Applying the Furniss & Dawson
requirements to add the normal course dividends to the
ATCOR/Forest series of transactions, it is clear that normal
course dividends cannot thereby be added to or form part of that
series. While this may suggest that that is the end of the
matter, there is a connection between the ATCOR/Forest series of
transactions and the normal course dividends - namely a reliance
on the latter's certainty - that requires further examination. Is
such pre-ordination a determinative link at common law
notwithstanding that a strict application of the Furniss &
Dawson requirements say it is not a sufficient link? I turn
now to consider that broader question.
[141] The broader question of how closely tied the
ATCOR/Forest series of transactions are to the normal course
dividends comes down to the question of whether the linkage
between the paid-up capital allocations (forming part of the
ATCOR/Forest series of transactions) is a sufficient tie to the
normal course dividends to make the two into a single or common
series (which is to say that they are then the same series). This
is an open question. The fixing of the paid-up capital amounts of
the shares that the Appellants intended to receive on the
amalgamation was in contemplation of the normal course dividends.
This creates fertile ground to argue that that is a sufficient
tie, connection or relationship between the two to constitute the
normal course dividends as part of the ATCOR/Forest series of
transactions at common law.
[142] I am satisfied that the paid-up capital
allocations as a distinct event forming part of the ATCOR/Forest
series of transactions took the normal course dividends into
account and were relied upon. The primary purpose of the
allocation was to avoid the capital gain. However that result
without the expectation of Part IV tax refunds may not have been
worth pursuing. In that sense it can be said that normal course
dividends were an important if not necessary link to the paid-up
capital allocations. Such allocations were made with the intent
to take advantage of the normal course dividends in the
elimination of taxes on the sale of their ATCO shares. I have no
evidence that such linkage was not of paramount importance. In
the absence of such evidence, I am satisfied that the facts speak
for themselves - the linkage is there. I am required then to
consider its sufficiency. If the paid-up capital allocations,
being the event that gives rise to each Appellant's
respective Deemed Dividend, are sufficiently linked to the normal
course dividends, to constitute that event and the normal course
dividends as a series, the Part IV exception to the application
of subsection 55(2) cannot apply - subject of course to the
Appellants' alternative argument regarding the second part of
the Part IV exception.
[143] As stated earlier in these Reasons, I am
encouraged by the Federal Court of Appeal in OSFC to look
further at Craven v. White, beyond the strict application
of the Furniss & Dawson requirements to determine how
such requirements were meant to apply in the context of these
appeals so as to determine the relevance, if any, of reliance on
pre-ordained events in establishing a series. Although
Justice Rothstein in OSFC rejects, at paragraph 24, the
"mutual interdependence" and "end results"
tests as he described them at paragraph 21, he accepts the
version of those tests described in the third of the four
Furniss v. Dawson requirements. That is, he accepts that
the transaction sought to be included in a series can only be
included if it "was not even contemplated practically as
having an independent life". This requirement is emphasized
throughout Lord Oliver's judgment in Craven v. White.
In his struggle to contain the potential results of earlier House
of Lord's decisions, one view of which would, for fiscal
purposes, ignore any transaction having an avoidance purpose,
Lord Oliver crafts a judgment to ensure the advancement of the
"other" view which he described at page 517 as
follows:
...On the other view, Dawson decided no more than that
the approach to the construction of interdependent transactions
sanctioned by Ramsay is properly to be applied to what has
been described as a 'linear' transaction as well as to a
circular self-cancelling transaction if the necessary
conditions exist enabling the court realistically to regard the
two transactions together as constituting one single composite
and indivisible whole involving only a single disposal for tax
purposes.
[144] It is clear that in the context of the Craven
v. White cases, a link in a chain that had an independent
life when considered in isolation was not a sufficient link to
constitute it part of a series which was, for fiscal purposes, to
be treated as a composite transaction. If we are to take anything
from Craven v. White in regard to defining a series, it
would be that a series for tax purposes is one that can only be
seen as a "single composite transaction". Indeed the
four Furniss & Dawson requirements set out at page 527
of Craven v. White are expressly said to be the
justification for fiscal composite treatment.
[145] As to the significance of pre-ordination, Lord
Oliver at page 523 makes it clear that pre-ordination is the
footing on which a finding of a composite transaction is based.
He describes pre-ordination as planned sequential events
"which result from the same initial conscious
volition or contemplation" (emphasis added). The
requirements Lord Oliver intends to rely on, again at
page 523, reflect "successive transactions, [that] are
so indissolubly linked together, both in fact and in intention,
as to be properly and realistically viewed as a composite
whole".
[146] Pre-ordination by itself is meaningless. Only a
pre-ordained event linked to another event or transaction by the
same conscious volition is sufficiently tied to the other event
to constitute a series. Two coordinated events linked by simple
reliance one on the other, is not the pre-ordination conceived of
in Craven v. White and cannot be taken as the
pre-ordination requirement reflected in the Furniss &
Dawson requirements employed in Craven v. White and
embraced by Justice Rothstein.
[147] While I have not been provided an exhaustive list
of Canadian authorities on the question of what constitutes a
series, my review of the authorities provided and others dealing
with the question, confirms that reliance on a known,
pre-ordained future event would not at common law bring
that future event into the series of transactions that relied on
it. In Les Placements E. & R. Simard Inc., 97 DTC
1328, Tardif, J. (TCC) applied an interdependence test as
described in Les Industries S.L.M. Inc. and Gestion Prego Inc.
v. MRN, [1996] 2 C.T.C. 2572 by Archambault, J. (TCC).
Tardif, J. found at page 1336 two transactions, each being viable
and complete in itself, were not a series.
[148] Even rejecting total mutual interdependence of
transactions as a requirement for finding a series for tax
purposes at common law and ignoring other strict tests such as
the inextricable linkage of events referred to by Bonner, J.
(TCC) in Canadian Pacific Limited v. The Queen, 2000 DTC
2428 at 2432 as a requirement for finding a series for tax
purposes at common law, a requirement of a common subject matter
or motivation emerges from all authorities considered. In
454538 Ontario Limited and 454539 Ontario Limited v.
MNR, [1993] 1 C.T.C. 2746, Sarchuk, J. (TCC)
concludes that for there to be a series the events must somehow
be logically or reasonably connected to one another. At page 2753
he describes this approach as being consistent with the
dictionary definitions of the relevant terms. The dictionary
definition of "series" referred to things of "one
kind" or persons having the "same
characteristics". In the context of commercial or fiscal
transactions such connection might be the continuation of a
common subject matter or events driven or guided by the same
conscious volition as described in Craven v. White by Lord
Oliver. The normal course dividends have nothing in common with
any element of the ATCOR/Forest transactions. They are not driven
or guided by the same conscious volition. The normal course
dividends are not a continuation of any aspect of the
ATCOR/Forest series of transactions. They do not exist to
facilitate any aspect of the ATCOR/Forest series of transactions.
They do, in fact, facilitate a tax planned element of the
ATCOR/Forest series and reliance is placed on them. That is not
sufficient however to constitute them, the normal course
dividends, as part of the ATCOR/Forest series of
transactions.
[149] What is clear to me having completed my analysis
is that there are several meanings to the word
"series". In Craven v. White Lord Oliver remarks
at page 518 that series means "no more than a
succession of a related matters, a description that applies to
virtually every human activity embarked on with a view to
producing any rational result". Clearly Lord Oliver does not
accept such broad definition of series as a sufficient linkage or
tie in determining the existence of a series in the context of
linking avoidance transactions. A narrower definition requiring a
common subject matter or common objective of all events or common
conscious volition has clearly been regarded as more acceptable.
Pursuant to such a definition the ATCOR/Forest transactions are a
"series". They are commercially tied. Indeed they are
inextricably linked. They consist of sequentially
pre-ordained steps deriving from the same conscious
volition and are essential to achieving a desired result. That
constitutes them as a series in themselves regardless of the
strict application of the Furniss &
Dawsonrequirements.These transactions can be viewed as a
single composite transaction as described in Craven v.
White. Even a paid-up capital allocation was required. It was
part of that series. That the paid-up capital allocation relied,
with advantage, on the wholly independent normal course dividends
does not make those normal course dividends part of the
series.
[150] Based on the foregoing, I conclude that the series
requirement to exclude the Part IV exception to the application
of subsection 55(2) has not been met. That an event in a series
is related to another event, even adapted in reliance on such
other event, to achieve a tax advantage, is not sufficient at
common law to make the other event part of the series if it has a
genuine independent purpose and existence. In my view, no common
law definition of "series" would include the normal
course dividends as part of the ATCOR/Forest series of
transactions.
[151] On the other hand, I have found that the purpose
of an event in these appeals was to reduce the capital gain
otherwise payable. The result was exactly that as well. Hence
subsection 55(2) applies under either the purpose test or the
results test subject to the Part IV exception. How then can the
application of the series test in the Part IV exception draw
on a body of law that upholds the exclusion where, in the context
of these appeals, both a capital gains tax avoidance purpose and
result are present? I have struggled with this question. The
answer seems to be that the Part IV exception does not ask if the
normal course dividends facilitated tax avoidance by virtue of
causing refunds of Part IV tax but rather asks if the normal
course dividends were part of the series that avoided a tax on a
capital gain. The former is true, the latter is not except in the
broadest sense of the word "series". The Part IV
exception exists on its own terms. That it and subsection 248(10)
may have missed the mark in catching the subject transactions is
not for me to correct. I am mindful of the danger of expanding
the common law meaning of "series" and thereby the
subject anti-avoidance provision by filling in legislative
gaps when Parliament uses such a vague term. Even the Respondent
by relying so heavily on subsection 248(10) seems to acknowledge
that, but for that expanded definition of "series", the
better view of the common law series test is that it has not been
met in this case. I have little doubt that the fixing of the
paid-up capital was related to and relied on the normal
course dividends. However that is not sufficient. The normal
course dividends stand-alone. The normal course dividends cannot
be said to be part of the series of transactions and events that
give rise to the deemed dividends in this case.
[152] While it is unnecessary to decide these appeals on
the basis of whether the Part IV refunds were attributable
to dividends paid to non-corporations versus corporations, I note
that the appeals would, in my view, also succeed on that basis.
If the question raised by this condition to the Part IV
exception, namely "are the Part IV refunds as a
consequence of dividends paid to corporations or
non-corporations where dividends are paid to both?",
has no statutory resolve, the benefit must be given to the
taxpayer where doing so does not clearly frustrate the intent of
the provision. In this case the express language of the
Act does not resolve the question and the benefit must go
to the taxpayer. By allowing such benefit, the intent of the
subject provisions is not frustrated; indeed the intent seems to
be advanced by such allowance.
[153] The purpose of this aspect of the Part IV
exception is clear to me. Capital gains taxes have not been
avoided where the gains are distributed as dividends to
shareholders that must account for their tax liability on receipt
of such dividends without deferral afforded by the section 112
dividend deduction (non-deductible distributed gains). That is,
subsection 55(2) is only to apply, in general terms, to
inter-corporate dividends. Even inter-corporate dividend cases
will be excepted from subsection 55(2) where the benefit of the
deferral of the section 112 deduction is lost by the imposition
of Part IV tax. The theory of the Part IV exception relies on
there being no tax deferral on the dividend which is to say that
either there should be no refunds of the Part IV tax or if there
are refunds there should be sufficient non-deductible distributed
gains (i.e. distributions to non-corporations) to account for the
refund. In the latter case capital gains' taxes have not been
"avoided" since effectively an amount equal to the gain
has been distributed as dividends to shareholders who must
account for their tax liability on receipt of such dividends
without deferral afforded by the section 112 dividend deduction.
On this basis the Appellants' position in respect of this
aspect of the Part IV exception is preferable to that of the
Respondent.[14]
[154] Further, comparing the express language of other
sections of the Act supports the view that applying a
pro-ration approach to this Part IV exception is not appropriate.
Consider the express language of Part IV itself.
Paragraph 186(1)(b) pro-rates the Part IV tax payable
by imposing it on that portion of the dividend received that the
dividend received is of the total of the dividends paid by the
payer's corporation in that year in respect of which the
payer is eligible for a refund. This pro-ration may suggest a
general legislative intent to pro-rate all dividends giving
rise to refunds as circumstances require. Applying such intention
to the Part IV exception would support the Respondent's
alternative argument that the Part IV exception in subsection
55(2) should be pro-rated on the basis of dividends paid to
corporations versus dividends paid to non-corporations. On the
other hand one might argue that where a pro-ration is not
expressly provided for in other contexts, such as in subsection
55(2), the legislative intent to be inferred must be that no
pro-ration is called for. Given the foregoing comments and
general rules of statutory construction, I would conclude that
the latter argument would clearly prevail.
[155] In any event, these comments are not germane to my
conclusion in this matter. As stated, these appeals succeed
because the normal course dividends cannot be said to be part of
the series of transactions and events that give rise to the
Appellants' respective Deemed Dividends. The Part IV
exception to the application of subsection 55(2) therefore
applies.
[156] Accordingly the appeals are allowed with
costs.
Signed at Toronto, Canada, this 28th day of August 2003.
Hershfield, J.
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COURT FILE NOS.:
|
2001-4026(IT)G
2001-4030(IT)G
|
|
STYLE OF CAUSE:
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CanUtilities Holdings Ltd.,
Canadian Utilities Limited and
Her Majesty the Queen
|
|
PLACE OF HEARING
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Calgary, Alberta
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DATE OF HEARING
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February 3, 4, 5, 2003
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REASONS FOR JUDGMENT BY:
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The Honourable Justice
J.E. Hershfield
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DATE OF JUDGMENT
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August 28, 2003
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Counsel for the Appellants:
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Curtis R. Stewart, Michel Bourque,
Cliff D. O'Brien, Q.C.,
J. Patrick Peacock, Q.C.
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Counsel for the Respondent:
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Bonnie F. Moon, David Palamar and
Brooke Sittler
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Firm:
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Bennett Jones, Calgary, Alberta
|
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For the Respondent:
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Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
|
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