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FEDERAL INCOME TAX - Tax avoidance - Series of transactions - Non-arm’s length transactions

Tuesday, March 30, 2021 @ 6:21 AM  


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Appeal by the taxpayer from a Tax Court decision confirming an assessment under s. 160(1) of the Income Tax Act. The appellant, Newco, a non-arm’s length affiliate, Oldco, and their sole shareholder, Piche, undertook a reorganization involving several preordained transactions during which assets of Oldco were transferred to Newco. Piche testified Newco and the conveyance of the transferred property were necessary steps to continue the development and exploitation of a new bidirectional, videoconferencing technology and that the reorganization was undertaken for these primary business reasons. Oldco was associated with the online gaming industry and might have an unsavoury pedigree for the prospective buyers of the new technology. It was thought that a new company not involved in the online gaming industry would be a better vehicle for the new business. The Crown argued the transactions were properly viewed as a series of transactions and that the overall result was that Oldco received insufficient consideration from Newco for the transferred property, thereby triggering Newco’s tax liability under s. 160(1). The Crown argued that although adequate consideration was initially given, this was no longer the case at the end of the series when Oldco was ultimately left without anything of value. The Tax Court judge held that a single transaction entered during the reorganization triggered the application of s. 160(1) and confirmed the assessment on this basis. Acting on his own initiative, the Tax Court judge held that the mutual set-off of the promissory notes in the reorganization was a distinct transaction that gave rise to a transfer for which Oldco was not given adequate consideration. He found that the mutual set-off gave rise to a surrender of a debt without consideration because the Oldco note had a negligible value in comparison to the Newco note.

HELD: Appeal allowed. Neither the overall result of the series nor any of the transactions engaged the application of s. 160(1). The Tax Court judge correctly held that the adequacy of the consideration given must be measured against the value of the property transferred by way of a snapshot taken at the point in time when the transfer took place. It was not disputed that Newco gave Oldco adequate consideration at that time. It was not open to the Tax Court judge to hold that the Newco note had considerable value and that the Oldco note had a nominal value since both were backed by the same assets. The Tax Court judge did not explain why the value of the two notes did not support each other. The Oldco note represented a bona fide debt in the face amount of $30 million. The mutual set-off of the notes had the same effect as if both notes were discharged by cross-payments. The law was clear that the payment of a bona fide debt could not trigger the application of s. 160(1) which was what took place when the notes were discharged. The business objective pursued by Piche could not be achieved without Oldco exercising the option to redeem its class C shares. For that purpose, Oldco had to pay the $30 million redemption price and Newco in turn had to surrender the shares which had a corresponding $30 million value in its hands. What was given by Newco as consideration were shares having a value of $30 million. Section 160(1) had no application when property of identical value was exchanged and did not capture the depletion of corporate assets that resulted from a share redemption.

Eyeball Networks Inc. v. Canada, [2021] F.C.J. No. 79, Federal Court of Appeal, M. Noël C.J. and Y. de Montigny and G.R. Locke JJ.A., January 29, 2021. Digest No. TLD-March292021004