Section 54.2


Atlantic Packaging Products Ltd. v. Canada, 2020 FCA 75

transfer of assets representing 68% of the FMV of the assets of a business division did not satisfy the “substantially all” test

The taxpayer, a paper products manufacturer, engaged in a hybrid transaction in which it sold some of the assets of its “Tissue Division” directly to a third-party purchaser (“Cascades”) and rolled the balance of them down to a Newco under s. 85(1) for Newco shares and sold the Newco shares to Cascades. CRA assessed on the basis that the sale of the Newco shares was on income account. The Tax Court found that the transferred assets represented about 68% of the fair market value of the assets of the Tissue Division – and perhaps significantly less, given that some of the Tissue Division assets had not been valued. Accordingly, the requirement of s. 54.2 - that all or substantially all of the assets of the business have been transferred to a corporation – had not been met, so that s. 54.2 did not deem the gain on the share sale to be a capital gain.

In dismissing the taxpayer’s appeal, Webb JA stated (at para. 41):

I agree with the Tax Court Judge that conveying 68% of the assets used in the Tissue Division to 722 would not satisfy the requirement that all or substantially all of the assets of the Tissue Division be conveyed to 722. Therefore, it is not necessary to revise the calculation to include an amount for these [other] assets.

Words and Phrases
substantially all
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Machinery and Equipment the number and frequency of similar dispositions of depreciable property was relevant to capital account treatment 341
Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Act - Section 27 - Subsection 27(1.3) raising of new issue would prejudice the Crown 222

See Also

Atlantic Packaging Products Ltd. Atlantic Produits D'Emballage Ltée v. The Queen, 2018 TCC 183, aff'd 2020 FCA 75

s. 54.2 did not apply to the drop-down of under 68% of the assets of a business division to a Newco for Newco shares

The taxpayer was a paper products manufacturer. One of its five divisions was its Tissue Division which focused on the manufacturing and sale of toilet paper and paper towels. In 2009, the taxpayer entered into a number of transactions designed to effect the transfer of the Tissue Division to a competitor named Cascades Canada Inc. A rollover of certain assets of the Tissue Division was made to a newly formed corporation named 7228392 Canada Inc. (“722”) pursuant to s. 85(1) in exchange for common shares of 722, which were ultimately sold to Cascades. The Tissue Division operated from three different locations, two of which, (the “Progress Property” and the “Whitby Property” where large tissue rolls were produced from recycled paper), were owned by the taxpayer and the third location, (the “Converting Property” where those rolls were converted into rolls of toilet paper and paper towels), was leased from an affiliated party. The only assets that were transferred to 722 were the Converting Mill and the remaining converting assets. All of the other assets of the Tissue Division were either sold directly to Cascades, leased to Cascades or retained by the taxpayer. The taxpayer’s leasehold interest in the Converting Property was subleased to Cascades for $1 per year.

The taxpayer reported its $29.2 million gain on the sale of the shares of 722 as a capital gain in reliance on s. 54.2. The Minister reassessed the taxpayer on the basis that the gain should have been reported on income account as the Tissue Division was not a business in itself but rather was a part of the Appellant’s overall paper products business, and in any case the taxpayer did not transfer all or substantially all of the assets used in the Tissue Division to 722. The only issue before Graham J was the applicability of s. 54.2.

Before going on to find that s. 54.2 did not apply, Graham J first noted that it was unnecessary, given his findings below, for him to address whether the Tissue Division was a separate business, and then stated (at paras 25, 27 and 28):

It is unclear on the face of section 54.2 how I am to determine whether the assets … transferred to 722 represent all or substantially all of the assets of the Tissue Division. …The test in section 54.2 can be contrasted to the definition of “small business corporation” found in subsection 248(1). That definition requires an examination of whether “all or substantially all of the fair market value of the assets” of the corporation meets certain tests. …[W]hen Parliament wants to require the use of fair market value in an “all or substantially all” test, it does so explicitly. However, …[i]t simply indicates that I am not limited to considering value.

While there does not appear to be a requirement that the recipient of the assets be able to carry on the business, the inverse is not necessarily true. It is arguable that the test in section 54.2 could be satisfied so long as the recipient had received all of the key assets of the business, regardless of their value. …

…I find that the test in section 54.2 is intended to be a somewhat flexible test but that there is no reason not to consider the fair market value of the assets when applying the test. …

Graham J found, to the extent that the test in s. 54.2 considers fair market value, the taxpayer had not met the test, stating (at paras 32, 33):

… [T]he assets transferred to 722 would make up only 68% of the total assets of the Tissue Division. While I acknowledge that all or substantially all does not mean 90% and that the specific percentage that meets the test in any given context may vary, I cannot accept that it means something just over two-thirds. …

There was no evidence as to the fair market value of the portion of the Progress Property [or] … the Whitby Property used by the Tissue Division. … Had these assets been included in the … calculation, the percentage of fair market value transferred to 722 would have been even lower.

He also rejected (at paras. 38 et seq.) on the evidence that the dropped-down assets represented “the heart of the business of the Tissue Division.”

Words and Phrases
substantially all
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) prior filing positions contradicted position that tissue division was separate business 437

Administrative Policy

90 C.R. - Q33

Contrary to its earlier position, RC now accepts that s. 54.2 applies to a disposition by a partnership for shares.

10 November 89 T.I. (April 90 Access Letter, ¶1178)

s. 54.2 is not available with respect to the transfer of all the assets of a limited partnership to a corporation under s. 85(2) followed by a sale of the shares to an arm's length purchaser, because the limited partnership is not a person under the Act.

89 C.R. - Q33

Because a partnership is not a person, the provisions of s. 54.2 do not apply where the disposition is made by a partnership.

89 C.R. - Q13

RC can confirm the application of s. 54.2 where the applicant represents that the property transferred to the corporation for consideration including treasury shares will consist of 90% or more (measured by fair market value) of all of the property used by the transferor in an active business carried on by the transferor. Since the intent of s. 54.2 is to provide capital gains treatment on a pre-ordained plan to dispose of the shares of the transferee, s. 245 will not apply.