In McLarty v. The Queen, 2014 TCC 30, the Crown took another run at a tax-structured acquisition of seismic data, having previously lost at the Supreme Court of Canada in respect of a reassessment of the same taxpayer for an earlier taxation year (2008 SCC 26). This time, the Crown advanced different legal arguments – and lost again. The Crown argued, in part, that the transaction was a “sham”: in particular, that a limited recourse promissory note issued as partial consideration for the seismic data was never intended to be paid (paragraphs 14(o) through 14(q)). In rejecting this argument, the Tax Court of Canada said:
- The Crown cannot apply the doctrine of sham to only part of a transaction, while considering another part of the same transaction to be valid and effective. That is, the Crown could not accept the cash portion of consideration paid for the seismic but reject the promissory note portion as a sham (paragraph 78).
- A limited recourse promissory note is – by its very nature – an enforceable legal obligation which ultimately might not be realized upon. Accordingly, possible non-repayment of such a note could not be advanced as evidence of a sham (paragraph 82).
- The transactions were not mere window dressing. The legal rights and obligations created were not different from the actual legal rights and obligations of the parties (paragraph 88; Stubart Investments Ltd. v. The Queen and Snook v. London and West Riding Investments, Ltd.).