Consideration paid under cancellation agreement was different for each party

Tax – Income tax – Administration and enforcement

Taxpayer E Inc. (Newco) purchased new business assets from non-arm’s length affiliate (Oldco) in exchange for Newco satisfying assumed liabilities and shares of Newco, while Oldco retained obsolete old business assets. Rollover transaction was undertaken pursuant to s. 85 of Income Tax Act. Oldco and Newco each redeemed shares held by other and each issued demand promissory note, which were set off against each other under mutual debt cancellation agreement. After Oldco failed to satisfy tax debt, Minister of National Revenue assessed Newco under s. 160 of Act. Newco appealed. Appeal dismissed. Newco gave consideration of shares and promissory note for new business assets. Tendered consideration had fair market value (FMV) deemed equal to $30 million, which disappeared when cancellation agreement took effect. Transaction of debt forgiveness, in form of contractual set-off, was transfer indirectly by any other means whatsoever as used in s. 160 of Act. There was disparity between face value of promissory notes and respective FMV as of moment of transfer. FMV of Oldco note held and owned by Newco was nominal in any fair market for such negotiable bills. FMV of Newco note held and owned by Oldco was backed by $30 million of assets owned by Newco. Consideration for forgiveness of valuable Newco note was forgiveness of Oldco note with nominal value. Consideration paid under cancellation agreement was different for each party, and gap created deficiency under FMV comparison under s. 160(1)(e)(i) of Act. Application of s. 160 of Act was not unfair.

Eyeball Networks Inc. v. The Queen (2019), 2019 CarswellNat 3504, 2019 TCC 150, Randall S. Bocock J. (T.C.C. [General Procedure]).

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