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FEDERAL INCOME TAX - Tax avoidance - Series of transactions

Wednesday, June 26, 2019 @ 6:28 AM  


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Appeal by an amalgamated company from reassessment disallowing $16 million in non-capital losses incurred by Veracel Inc. and claimed by the appellant. Veracel filed a proposal in 2002 and ceased its medical equipment business. As of 2004, Veracel had non-capital losses of about $16 million. In 2005, the appellant amalgamated with SC Corp. and formed PB. PB entered into agreements to purchase oil and gas properties. To raise the money to acquire the properties, Veracel sold subscription receipts to public investors. Veracel and PB entered into several agreements and completed various steps in 2005 to use the non-capital losses and the other tax attributes of Veracel to reduce the taxes payable by the appellant that would otherwise be payable because of the income that would be generated from the oil and gas properties that would be acquired by PB. Veracel and PB amalgamated to form the appellant. The appellant purchased the properties. The holders of the subscription receipts were either to receive shares of the appellant or their money back. The Tax Court Judge concluded that the issuance of the Class B shares of Veracel immediately before its amalgamation with PB was contrary to the object and spirit of the rules in s. 256(7) of the Income Tax Act and was abusive.

HELD: Appeal dismissed. The transactions that were completed resulted in an abuse of the provisions of the Act for the purposes of the general anti-avoidance rule (GAAR). There was an abuse of s. 256(7) that allowed the appellant to avoid the application of the loss carry-forward restrictions in s. 111(5) of the Act. The appellant abused the Act by entering into transactions designed to avoid an acquisition of control. The combination of the issuance of the Class B shares of Veracel to the holders of the subscription receipts followed immediately by the amalgamation of Veracel and PB had the same effect and was equivalent to the holders of the subscription receipts only receiving shares of the appellant following the amalgamation of Veracel and PB. If the holders of the subscription receipts would only have received shares of the appellant, there would have been an acquisition of control of Veracel on the amalgamation of Veracel and the PB. The Tax Court Judge did not err in concluding that anyone paying for a subscription receipt was seeking to acquire shares in the amalgamated company. The transactions completed in this case were contrary to the object and spirit of s. 256(7)(b)(iii)(B) of the Act which would dictate that there was an acquisition of control of Veracel in this situation. Therefore, the transactions were an abuse of this provision. The GAAR applied. Since the business that gave rise to the non-capital losses incurred by Veracel was not being carried on in 2005 or 2006, the appellant was not entitled to claim these non-capital losses.

Birchcliff Energy Ltd. v. Canada, [2019] F.C.J. No. 613, Federal Court of Appeal, J. Gauthier, D.W. Stratas and W.W. Webb JJ.A., May 16, 2019. Digest No. TLD-June242019008