Words and Phrases - "in contemplation of"
3295036 Canada Inc. v. Agence du revenu du Québec, 2018 QCCQ 8100, aff'd 2020 QCCA 1435
On two days in October 1996, the parent company (“Marjad”) of the taxpayer (“3295036”) transferred shares of two public companies, whose fair market value (“FMV”) substantially exceeded their adjusted cost base (“ACB”), to 3295036. Marjad did not have a Quebec presence whereas 3295036 was a Quebec filer. Marjad and 3295036 filed a joint s. 85(1) rollover election for federal and Ontario purposes, but did not make the equivalent Quebec election. The effect was that for purposes of the Taxation Act (Quebec) (“TA”), 3295036 acquired the shares at a cost equal to their FMV, while at the same time the transfer did not generate a tax liability to Marjad.
3295036 sold a portion of the shares in 1998, and the larger portion of them in 2000 and, in each case, reported a gain for federal purposes and a capital loss for Quebec purposes. The ARQ assessed 3295036’s returns for 2007 and 2008 to deny its use in those taxation years of a portion of the capital losses that it had previously reported. TA, s. 529.1 denied the use by 3295036 of its stepped-up cost for the shares if the disposition to it by Marjad of those shares occurred as “part of a series of transactions or events that began before 19 December 1996 and ended after 18 December 1996,” i.e., as part of a series of transactions that terminated with the subsequent sales.
After finding that the subsequent sales were not part of the same “common law” series as the purchasers of the shares had not been identified at the time of the 1996 transfer (paras. 51), Fournier JCQ found (at para. 78) that the share transfers to 3295036 in 1996 were a “series of transactions” and that the subsequent sales of the shares by 3295036 were transactions (the “Transactions”) occurring “in contemplation” of that series and, thus, were assimilated to the series by the TA equivalent of s. 248(10), stating (at para. 90, TaxInterpretations translation):
[T]he Transactions were, all as in Copthorne, the type of transaction necessary in order to render the tax benefit resulting from the Series of Transactions a reality. In other words, the Transactions were the necessary acts for permitting 3295036 to take advantage of its artificially increased ACB at the end of the Series of Transactions commencing in 1996.
He also rejected (at para. 107) 3295036’s submission that the backward-looking interpretation of “in contemplation” adopted in inter alia Copthorne should be rejected because the French version had used the narrower phrase “en vue de” rather than “au vue de” and because a narrower scope should be given to a specific anti-avoidance provision than to GAAR.
Copthorne Holdings Ltd. v. Canada, 2012 DTC 5006 [at at 6536], 2011 SCC 63, [2011] 3 S.C.R. 721
The taxpayer's shareholders circumvented the rule in s. 87(3), which required that the paid-up capital ("PUC") of a subsidiary corporation disappear on a vertical amalgamation, by arranging for the subsidiary corporation in question (whose shares had a high PUC but a low value) to be first distributed to the shareholder group before it and its previous parent were amalgamated horizontally to continue as a predecessor of the taxpayer. At the time of these transactions, the shareholder group had not yet decided how (or whether) they would utilize the preserved PUC. However, a year later, the taxpayer redeemed a large portion of its shares and utilized the PUC attributable to the redeemed shares through a distribution to its non-resident shareholder, thereby avoiding Part XIII tax.
In finding that the taxpayer should be reassessed under s. 245, the Court found that the series of transactions pertaining to the reorganization, and the subsequent redemption, were part of the same series of transactions. Under Canada Trustco, a transaction is completed "in contemplation of" a series of transactions whenever it is completed "because of" or "in relation to" the series. The finding at trial that the transactions shared a "strong nexus" thus fit the expansive meaning of "series of transactions" under s. 248(10).
The Court also addressed the criticism of its finding in Canada Trustco that the words "in contemplation of" could be retrospective. (The argument was essentially that the plain meaning of "in contemplation of" implies the contemplation only of a future event.) The Oxford English Dictionary definition of "to contemplate" does not require that contemplation be prospective (para. 53). Rothstein J. stated (at para. 56):
The fact that the language of s. 248(10) allows either prospective or retrospective connection of a related transaction to a common law series and that such an interpretation accords with Parliamentary purpose, impels me to conclude that this interpretation should be preferred to the interpretation advanced by Copthorne [that "in contemplation of" is prospective only].
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Stare Decisis | high threshold for reversing not met | 193 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit | tax benefit illuminated by comparison to reasonable and simpler alternative | 425 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | policy of s. 87(3) is to avoid preservation of PUC on parent and sub amalgamation | 372 |
| Tax Topics - Statutory Interpretation - Expressio Unius est Exclusio Alterius | implied exclusion principle | 109 |