October 07, 2011

Mara Properties Ltd. (Appellant) v. Her Majesty the Queen (Respondent)

96 DTC 6309
Supreme Court of Canada
May 21, 1996

(Court File No. 24684.)

Deductions — Business losses — Corporate taxpayer a real estate developer realizing a loss on its disposition of land acquired from its subsidiary on the winding-up thereof — Whether such land forming part of taxpayer’s trading inventory — Whether taxpayer entitled to compute loss on disposition of land using actual cost thereof to its subsidiary — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 9(1), 18(1)(a), 88(1)(a), 88(1)(c); 88(1.1)(e) and 245(1).

In its 1982 tax return, the corporate taxpayer, a real estate developer, reported a loss arising from the sale of land (“the land”) which it had acquired from one of its subsidiaries, F Ltd., upon the winding-up of the latter. In computing this loss, the taxpayer had deducted from its proceeds of disposition of the land the deemed cost thereof under paragraph 88(1)(a)(iii) of the Act. This figure was the actual cost of the land to F Ltd., which was also a real estate development company. In allowing the taxpayer’s appeal from the Minister’s disallowance of its loss claim, the Tax Court of Canada found that subsection 88(1) of the Act expressly applied, notwithstanding any other provision of the Act (93 DTC 1449). In the Tax Court’s view, therefore, subsection 9(1) and paragraph 18(1)(a) of the Act did not preclude the taxpayer from computing the loss in issue as it had. In addition, the Tax Court found that, although the transaction was tax-driven, there was no sham involved, so that the “artificial reduction” rules of section 245 of the Act (as they were then worded) were also inapplicable. The Crown’s appeal to the Federal Court of Appeal (McDonald, J.A. dissenting) was allowed (95 DTC 5168). That Court found that the land had not become part of the taxpayer’s inventory, so that the resulting loss on the taxpayer’s disposition thereof was not a deductible business loss. The taxpayer appealed to the Supreme Court of Canada.

Held: The taxpayer’s appeal was allowed. The conclusions reached by the Tax Court and by McDonald, J.A. of the Federal Court of Appeal were the correct ones. The land retained its character as inventory in the taxpayer’s hands. The judgment of the Tax Court was restored accordingly.