Tax Court of Canada


Income tax

Tax avoidance

Series of transactions beginning with arrangement agreement was avoidance transaction

Company V which dealt in medical diagnostic instruments filed proposal in bankruptcy and ceased medical business but had $16 million in business losses. Taxpayer B was oil and gas company which negotiated amalgamation agreement with V. Agreement involved issuance of Class B shares of V, which were converted to shares of amalgamated company. V claimed losses on 2006 return and Minister re-assessed and denied losses. Reassessment was based on assumptions related to allegations of sham and acquisition of control. Taxpayer appealed. Appeal dismissed. Transaction was not a sham. Predecessor corporations had plan of arrangement approved by Alberta court. Class B shareholders were not group of persons having control of V. General anti-avoidance rule (GAAR) applied. Ability of amalgamated corporation to use V’s losses was tax benefit. Series of transactions beginning with arrangement agreement was avoidance transaction as not undertaken primarily for purposes other than to obtain tax benefit. V wanted to monetize its tax attributes and B wanted to obtain those attributes. Contrary to policy of s. 256(7) of Income Tax Act to take account of Class B shares where existence of shares was ephemeral at time of amalgamation and where very existence of shares predicated on amalgamation occurring and where only on amalgamation did Class B shareholders contribute to capital stock of corporation. This constituted abuse of provision.

Birchcliff Energy Ltd. v. The Queen (2017), 2017 CarswellNat 6871, 2017 TCC 234, Gaston Jorré J. (T.C.C. [General Procedure]).

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