In Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232, the CRA reassessed a series of transactions that resulted in an amalgamated company (Amalco) accessing substantial tax losses of an unrelated predecessor company (Lossco). In short, the plan of arrangement transactions involved (1) a large number of new investors (New Investors) subscribing for treasury shares of Lossco, (2) Lossco amalgamating with a target company (Target) which earlier arranged to acquire certain resource properties, and (3) Amalco acquiring those resource properties in part with the cash received from the New Investors. Amalco then subsequently used the prior losses of Lossco. At trial, the Crown supported the CRA’s reassessment to deny the losses to Amalco on three alternate grounds: sham, acquisition of control of Lossco by a “group of persons”, and the general anti-avoidance rule in s. 245 (the “GAAR”). Briefly:
- The Tax Court disagreed with the Crown on the first two grounds. The transactions did not involve any deceit (a prerequisite to find a sham), and the New Investors did not constitute a “group of persons” in tax law (see paragraphs 55 and 60). Furthermore, a pre-ordained series of transactions being effected through a plan of arrangement is “…a common feature of modern corporate law” (see paragraph 58).
- Surprisingly the Tax Court agreed with the Crown that the GAAR did apply to deny the carry-over Lossco’s losses into Amalco. The Court concluded under s. 245(4) that the transactions abusively “circumvented” the specific deeming rule in s. 256(7)(b)(iii), which would have deemed an acquisition of control of Lossco on the amalgamation if the New Investors had instead invested in Target and not Lossco before the amalgamation (see paragraphs 102 and 111).
- The taxpayer will likely appeal this decision. In my view, the Tax Court erred in its finding of an “avoidance transaction” in s. 245(3). The New Investors acquired shares in Lossco because it was in their own individual self-interest to do so (see paragraph 61). It is not permissible in law to recharacterize or compare this actual transaction with some alternate transaction (i.e., a direct investment in the Target instead) for the purpose of finding an avoidance transaction in s. 245(3): see paragraph 73, and Canada Trustco Mortgage Co. v. The Queen, 2005 SCC 54, where the Supreme Court of Canada said at paragraph 30:
… Subsection 245(3) does not permit the “recharacterization” of a transaction for the purposes of determining whether or not it is an avoidance transaction. In other words, it does not permit a transaction to be considered to be an avoidance transaction because some alternative transaction that might have achieved an equivalent result would have resulted in higher taxes.