Tax - Income Tax - Tax avoidance
Company V 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 between corporations involved issuance of Class B shares of V to shareholders, which were converted to shares of amalgamated company. V claimed losses on 2006 return and Minister re-assessed and denied losses. Taxpayer unsuccessfully appealed and even though transaction was not found to be sham, it was found that general anti-avoidance rule (GAAR) applied. Ability of amalgamated corporation to use V’s losses was tax benefit, as 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, constituted abuse of provision. Taxpayer appealed. Appeal dismissed. Policy underlying s. 256(7)(iii)(B) of Income Tax Act would dictate that there was acquisition of control of V in this situation, therefore transactions were abuse of this provision. As result, GAAR applied and restrictions in s. 111(5) of Act were applicable in determining what non-capital losses incurred by V, taxpayer was entitled to claim. Since business that gave rise to non-capital losses incurred by V was not being carried on in 2005 or 2006, taxpayer was not entitled to claim these non-capital losses.
Birchcliff Energy Ltd. v. R. (2019), 2019 CarswellNat 2047, 2019 FCA 151, Johanne Gauthier J.A., David Stratas J.A., and Wyman W. Webb J.A. (F.C.A.); affirmed (2017), 2017 CarswellNat 6871, 2017 CarswellNat 9711, 2017 TCC 234, 2017 CCI 234, Gaston Jorré J. (T.C.C. [General Procedure]).
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