Harvard Properties – Tax Court finds that s. 160 applied where the vendors were wilfully blind to their sale price reflecting non-payment by the purchaser of triggered asset-sale tax

A Calgary shopping mall was sold by Harvard Properties and the other co-owners to a third party (“Abacus”) in a share sale transaction but at a price representative the mall’s asset value and, thus, at a premium to its share-sale value. This was accomplished by transferring their co-ownership interests on a s. 85(1) rollover basis to respective Newcos (“HP Newco”, in the case of Harvard Properties) in consideration inter alia for voting and non-voting shares, followed by a sale of those voting shares to an Abacus subsidiary (NH Properties) for promissory notes for under half of the sale price. The Newcos then sold the shopping centre to a third party (Bentall), and the co-owners then sold their Newco non-voting shares to NH Properties for the balance of the purchase price (receiving, by direction, the Bentall sales proceeds), at no gain due to an ACB step-up pursuant to a stated capital increase coming out of the newly-created capital dividend accounts of the Newcos. Real estate counsel for the vendors negotiated for these transactions to all occur in one integrated interdependent closing.

Boyle J referred to the finding in Microbjo that the purpose of the arm’s length test is to render assurances that the terms reflect ordinary commercial dealings, and that there was not such assurance here, as the vendors were wilfully blind to the source of their premium and the Abacus transaction profit being a tax liability on the Newcos’ sale to Bentall “that would not be paid”. Boyle J found that the vendors and NH Properties were not dealing with each other at arm’s length on the basis both of this absence of “ordinary commercial dealings” and that the parties “clearly acted together to dictate [the] Newcos’ actions from their inception and throughout the closing of this series of transactions”.

In finding that the cash proceeds received by Harvard Properties exceeded the FMV of the Newco shares sold by it (the first element of its s. 160 assessment), Boyle J stated:

There appears to be little to no chance that any arm’s length party unrelated to these transactions would agree to accept, much less pay for, the HP Newco shares at the relevant time as the Newcos would moments in time later have no assets, no business, and the possibility of a significant liability for their roles in these transactions … .

Accordingly, s. 160 applied to the transactions in the cash amounts referenced by him, subject to a determination in still-pending proceedings as to the quantum of any unpaid tax liability of NH Properties.

Boyle J found, in the alternative, that if the series of transactions had avoided the application of s. 160, there was an abusive avoidance of s. 160 through the structuring of a supposed arm’s-length through a sale of the voting shares of the Harvard Properties’ Newco (HP Newco) before the asset sale, capital dividend and sale of the non-voting Newco shares. Furthermore, he considered that the reasonable way in the circumstances to deny the tax benefit was to treat s. 160 as applying to the extent of the shortfall in consideration given on the transfer.

Harvard Properties had been assessed under s. 160 beyond the normal reassessment period, as permitted by s. 160(2). In rejecting the taxpayer’s submission that the assessment of it in the alternative under s. 245(2) was statute-barred because it was made beyond the normal reassessment period, Boyle J stated:

[T]here is no “normal reassessment period” applicable to the application of the GAAR … . The only requirement is that GAAR be involved or taken into account in a timely and otherwise validly issued assessment under the Act.

Neal Armstrong. Summaries of Harvard Properties Inc. v. The King, 2024 TCC 139 under s. 160(1), s. 251(1)(c), s. 245(4), s. 245(2) and General Concepts – FMV - shares.