Tax Court of Canada


Tax

Income tax

Capital gains and losses

Most reliable method of determining whether assets were transferred was by examining fair market value

In 2009, taxpayer entered into number of different transactions that were designed to effect transfer of one of five divisions to C Inc.. One transaction was rollover of certain assets from division to newly formed corporation pursuant to s. 85(1) of Income Tax Act in exchange for common shares of corporation which taxpayer ultimately sold to C Inc.. When taxpayer filed return for taxation year ending May 31, 2010, it reported its $29.2 million gain on sale of shares as capital gain. Minister of National Revenue audited taxpayer and concluded that taxpayer could not rely on s. 54.2 to deem shares to have been capital property. Minister reassessed taxpayer on basis that gain should have been reported on income account and also issued consequential reassessments of taxation years ending May 31, 2011 and 2012. Taxpayer appealed. Appeals dismissed. It was unclear on face of s. 54.2 how to determine whether assets taxpayer transferred to corporation represented all or substantially all of assets of division. It was found that test in s. 54.2 was intended to be somewhat flexible test but that there was no reason not to consider fair market value of assets when applying test. Assets transferred to corporation made up only 68 percent of total assets of division. Most reliable method of determining whether all or substantially all of assets in division were transferred was by examining fair market value of assets. That analysis indicated that assets taxpayer transferred to corporation did not represent all or substantially all of assets used by division.

Atlantic Packaging Products Ltd. Atlantic Produits D’Emballage Ltée v. The Queen (2018), 2018 CarswellNat 5212, 2018 TCC 183, David E. Graham J. (T.C.C. [General Procedure]).

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