Words and Phrases - "group of persons"
Madison Pacific Properties Inc. v. The King, 2023 TCC 180
The appellant (“MPP”) was an insolvent, publicly traded, mining company with accumulated non-capital and net capital losses of $9.7 million and $72.7 million, respectively. In order for two companies (“Madison” and “Vanac,” which dealt with each other and MPP at arm’s length) to access those losses and shelter gains and income from portfolios of rental properties, transactions were implemented, beginning in October 1997 which, in general outline, included the following:
- The common shares of the existing shareholders were exchanged for preferred shares and Class B voting common shares;
- Through a series of transactions, those shareholders’ preferred shares were effectively replaced by shares of a subsidiary of MPP to which it had transferred its mining assets (with that subsidiary then being amalgamated with third-party mining company), so that MPP was now an empty shell; and
- Madison and Vanac transferred respective portfolios of rental properties to MPP in consideration for the assumption of liabilities and for the issuance of a mixture of Class B voting shares and Class C non-voting shares (with the same attributes other than being generally non-voting) so that Madison and Vanac collectively held (and in equal proportions, after giving effect to some catch-up transactions to equalize those holdings) 46.6% of the voting rights and 92.8% of the equity of MPP. This transaction deliberately overvalued the shares that were so issued by MPP to Madison and Vanac so as to effectively transfer around $2.8 million of equity value to the existing public Class B common shareholders of MPP, so as to pay them for the losses. Taking into account the Class B shares held by friendly parties, such as directors, Madison and Vanac effectively had more than half the voting rights and, conversely, a significant portion of the public shareholders did not exercise their voting rights.
Regarding the denial of MPP’s losses under s. 245(2), MPP argued that it had received no tax benefit from the use of non-voting shares because, even if Madison and Vanac each had received only shares in the form of Class B voting shares, each would have acquired 46.4% of the MPP equity, so that neither would have acquired de jure control of MPP. Graham J rejected this submission on the basis that Madison and Vanac had been acting in concert in the transactions, so that, under this alternate scenario, there would have been an acquisition of control of MPP by a group of persons, thereby resulting in the application of s. 111(4). In particular, they had acted together to execute a sophisticated and artificial series of transactions to achieve the objective of gaining access to the MPP losses while effectively controlling it.
Graham J went on to find that the transactions were an abuse of the object and spirit of s. 111(4).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | acquisition of close to legal control of a Lossco by two arm’s length companies in a different business to access its losses was an abuse | 452 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit | in the alternative transaction, two acquirers of the shares of a Lossco would have been acting in concert so as to be a group that acquired control of the Lossco | 291 |
Promutuel Réassurance v. The Queen, 2020 TCC 13
The taxpayer (“ProRé”) was a corporation without share capital engaged in the reinsurance of casualty risk whose capital had been contributed by 27 mutual general insurance companies (the “MGICs”), which were non-share corporations carrying on insurance businesses in their respective territories in Quebec with members having a participation in their capital. The MGICs were also the sole members of a non-share corporation (“Groupe Promutuel,” or the “Federation”) which did not have any capital participation in ProRé, and whose affairs were administered by a board of directors consisting of 10 individuals – seven directors and three managing directors of different MGICs. A majority of the voting shares of a taxable Canadian trust company (“ProCap”) with an $11.8 million non-capital loss were held by the MGICs, with most of the balance held by ProRé (and some also by Groupe Promutuel).
The MGICs and Groupe Promutuel transferred all their shares of ProCap to ProRé for consideration (in the case of the (Class A) voting shares transferred by the MGICs) in the form of certificates of additional participation in the capital of ProRé (the “transactions”). ProCap was then wound-up into its sole shareholder (ProRé).
S. 256(7)(d) deemed there to have been no acquisition of control of ProCap, so that the non-capital loss was preserved.
Favreau J first noted that the corporate Act governing ProRé specifically provided that the Board of Directors of ProRé was appointed by the Board of Directors of the Federation, so that it was clear that the “effective control of ProRé was held by the Federation through its Board of Directors” and that the “MGICs had no means of exercising effective control over the business and affairs of ProRé in a manner analogous or equivalent to the Buckerfield's test” (at para. 56, TaxInterpretations translation). However, the Federation did not control ProCap immediately before the transaction given that the Federation held no shares of ProCap (with the MGICs holding a majority of the ProCap voting shares) and although the 10 directors of ProCap were up to that time to be appointed by the board of the Federation from amongst its members, the agreement to this effect did not constitute a unanimous shareholders agreement (and, thus, was not to be taken into account for de jure control purposes) given that nothing in the corporate statute governing ProRé “allowed ProCap's shareholders to enter into agreements to take away or restrict the powers normally vested in ProCap's directors” (para. 64).
However, s. 256(7)(d) instead was satisfied on the basis that the MGICs were a group of persons who controlled ProRé both before and after the transaction and who controlled ProCap immediately before the transaction. In finding that the MGICs constituted a group of persons (who in fact acted in concert in the transaction), Favreau J noted that with the assistance of the Federation they operated using the same accounting and technological platform, they had a common objective, decided unanimously to implement the transaction and in the meantime had decided the basis upon which representatives on the board of the Federation were to be allocated (i.e., approximately equal representation for each of the three geographic regions of Quebec). Favreau J then stated (at paras. 92-93):
Since the MGICs, as a group of persons, controlled the Federation and the Federation controlled ProRé, the MGICs must be considered to also control ProRé by virtue of the simultaneous control principle set out in subsection 256(6.1) of the ITA, both immediately after and immediately before the disposition by the MGICs of the Class A shares of ProCap to ProRé.
At the level of ProCap, the evidence revealed that the MGICs, as a group, also controlled ProCap, immediately prior to the disposition by the MGICs of the Class A shares of ProCap to ProRé. ProCap's shareholders' agreement and the amendments made to it demonstrate that the MGICs had the power to exercise control of the corporation through their ability to appoint the majority of the members of the board of directors of the corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 256 - Subsection 256(8.1) | s. 256(8.1) deemed non-share insurance corporation to have issued shares to its insurance-company members | 154 |
Yardley Plastics of Canada Ltd. v. MNR, 66 DTC 5183, [1966] CTC 215 (Ex Ct)
Two corporations whose voting shares were held as follows
| Shareholder | Canadian Moldings | Yardley Plastics |
| Hill | 4.6% | 28% |
| Hill III | 18.6% | 22.5% |
| Wycoff | 21.7% | 11% |
| Daymond | 21.7% | 14% |
| Strachan | 21.7% | nil |
| Ebner | nil | 17% |
| Jacobson | 11.7% | 7.5% |
| 100% | 100% |
were found to be controlled by the same group of persons, namely, Hill, his son, Hill III, and three unrelated individuals, namely, Wycoff, Daymond and Jacobson, following the assumption to this effect by the Minister. Although Noël J. rejected a submission of the Minister "that the latter is allowed to choose out of several possible groups any aggregation holding more than 50% of the voting power ... and that such a group then becomes irrebuttably deemed to be the controlling group for purposes of section 39(4) of the [pre-1972] Act as this could lead to an absurd situation where no two large corporations in this country would be safe from being held to be associated" (p. 5188), he went on to indicate that the question whether there is control by a "group of persons" owning a majority of the voting power is a question of fact and, here, the taxpayer had failed to challenge the Minister's assumption of fact (and apparently would have had difficulty doing so in light of the common management of the two corporations). With respect to a submission that Hill and Hill III were a related group which were deemed by s. 139(5d) (now s. 251(5)(a)) to control Yardley Plastics, and that this related group did not control Canadian Moldings, the two corporations could therefore not be held to be associated, Noël J. held that s. 139(5d), although extending the concept of a related group, could not restrict the meeting of s. 39(4)(b) of the pre-1972 Act (subsequently, s. 256(1)(b) of the Act).
Vina-Rug (Canada) Limited v. Minister of National Revenue, 68 DTC 5021, [1968] CTC 1, [1968] S.C.R. 193
Because John Stradwick, Jr., his brother W.L. Stradwick and H.D. McGilvery, who collectively owned more than 50% of the shares of Stradwick's and Vina-Rug, had at all material times a sufficient interconnection as to be in a position to exercise control over the two corporations, and therefore constituted a 'group of persons' within the meaning of s. 39(4) of the pre-1972 Act, the two corporations were associated. It was irrelevant whether other combinations of majority shareholders could be found.
Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232, nullified on procedural grounds 2017 FCA 89
A predecessor ("Birchcliff") of the taxpayer negotiated a plan to merge with a corporation ("Veracel"), which had discontinued its medical equipment business, in order to access Veracel's non-capital losses and credits. Investors subscribed for subscription receipts of Veracel and received voting common shares of Veracel therefor under a Plan of Arrangement, and Veracel and Birchcliff amalgamated immediately thereafter under the Plan. The voting common shares received by the investors on the amalgamation represented a majority of the voting shares of the amalgamated corporation, so that no acquisition of control of Veracel occurred under s. 256(7)(b)(iii)(B), and the loss-streaming rules under ss. 111(5)(a) and 87(2.1) were avoided.
Before finding that this represented abusive avoidance under s. 245(2), Hogan J rejected (at para. 61) the Minister's submission that the new investors represented a "group of persons" who had acquired control of Veracel:
[T]here is no evidence to show that the New Investors knew each other or had a plan to control the corporation together. ..[They] entered into the Subscription Agreement and granted a proxy to [two officers of Veracel and Birchcliff] to vote their shares in favour of the plan…because it appealed to their individual self-interest [and]…did so without discussing the matter with the other investors. Therefore…the grant of the proxy…is insufficient to demonstrate a common connection… .
See summary under s. 245(4).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Sham | transitory share issuance under plan of arrangement was not a sham | 177 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) | share subscription was avoidance transaction notwithstanding its "overarching purpose" was financing | 148 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | abusive reverse takeover by Lossco through diverted private placement | 261 |