Effective control of corporation unchanged by new management, business activity and name

Tax - Income Tax - Tax avoidance

Intermediary venture capital company M Ltd. set up “recapitalization and restart transactions” to move taxpayer D Corp.’s assets and liabilities into new corporation and to use taxpayer’s remaining corporate shell to raise money through initial public offering (IPO) to fund new business. New business’s profits would be sheltered by taxpayer’s non-capital losses, scientific research and experimental development (SRED) expenditures, and investment tax credits (ITCs) (together Tax Attributes). Prior to IPO, M Ltd. converted its debenture into 35 per cent of voting shares and 100 per cent of non-voting shares of taxpayer. After IPO closed, M Ltd., through related corporation, purchased remaining shares of taxpayer at guaranteed amount. Minister of National Revenue reassessed taxpayer’s four taxation years to disallow claimed Tax Attributes and terminal loss. Taxpayer appealed. Appeal allowed. Taxpayer obtained tax benefit from transactions, as they resulted in reduction of tax through claiming of Tax Attributes. Tax Attribute deductions resulted from alleged avoidance transactions, because without transactions, Tax Attributes would not have been available to claim against post-IPO income. Transactions were avoidance transactions as taxpayer did not plead that transactions were for bona fide business purpose. Taxpayer’s primary purpose in entering into transactions was to carry out “monetization” of Tax Attributes and reduce tax. Avoidance transactions did not amount to abusive tax avoidance under s. 245(4) of Income Tax Act. Object, spirit or purpose of s. 111(5) of Act was to target manipulation of losses of corporation by new person or group of persons, through effective control over corporations’ actions. Object, spirit or purpose of s. 256(8) of Act was to prevent taxpayer from circumventing listed avoidance provisions by acquiring control over shares or share voting rights in order to achieve effective control of corporation. Transactions did not amount to abuse of tax attribute streaming restrictions in ss. 111(5), 37(6.1) and 127(9.1) of Act, as they did not frustrate or defeat object, spirit or purpose of these provisions. M Ltd. did not acquire de jure control or effective control of taxpayer such that object, spirit and purpose of s. 111(5) of Act and related tax attribute streaming restrictions was circumvented. M Ltd. had no effective control of taxpayer and did not need to have effective control to make tax plan work. Changes of management, business activity, assets and liabilities and name were not markers of change of effective control of corporation and did not offend policy of s. 111(1)(a) of Act. Avoidance transactions did not amount to abuse of ss. 256(8) and 251(5)(b) of Act because M Ltd. did not have effective control over majority of voting shares of taxpayer prior to IPO.

Deans Knight Income Corporation v. The Queen (2019), 2019 CarswellNat 1133, 2019 CarswellNat 3807, 2019 TCC 76, 2019 CCI 76, B. Paris J. (T.C.C. [General Procedure]).

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