October 07, 2011

Her Majesty the Queen (Appellant) v. Nova Corporation of Alberta (Respondent)

97 DTC 5229
Federal Court of Appeal
May 1, 1997

(Court File No. A-454-95.)

Avoidance — “Artificial or undue” reduction of income — In two unrelated transactions, corporate taxpayer acquiring control of two numbered corporations holding corporate shares with high ACB’s and nominal market values — Whether substantial losses realized by taxpayer on immediate disposition of such shares in purely tax-driven transactions “artificially or unduly” increasing its losses for tax purposes — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 39(1)(b), 40(1)(b), 40(2)(e), 53(1)(f.1), 54(a), 55(1)(c), 55(2), 85(4)(a), 88(1)(a), 88(1)(c), 111(1)(b), 111(8)(a), 111(5.1), 111(5.2) and 245(1).

In two separate but similarly structured transactions taking place during 1986, the corporate taxpayer acquired the shares of two numbered corporations. In both transactions matters were arranged in such a way that the taxpayer acquired certain corporate shares held by each of these two numbered corporations at a very substantial adjusted cost base to itself. Upon disposing of such shares a very short time later at nominal values, the taxpayer realized, in both cases, substantial allowable capital losses for 1986, which it sought to carry back to 1985. Upon reassessment such carryback was disallowed by the Minister, relying on the “artificial or undue” reduction provisions of subsection 55(1) of the Act. The taxpayer’s appeal to the Tax Court of Canada was allowed (95 DTC 599) on the basis that the taxpayer had done nothing to contrive, create, or simulate an increase in the amount of its losses on its sale of the corporate shares in question at nominal values. The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was dismissed, albeit reluctantly. The taxpayer had done nothing either to create or to increase the loss in issue in the manner formally contemplated by subsection 55(1) of the Act. The ACB’s of the shares in issue were inherited by the taxpayer, and the shares were disposed of for their market value which was nothing. The losses claimed by the taxpayer, therefore, came about through the operation of the Act, and were not “artificial or undue”, which was the reasoning adopted by the Federal Court of Appeal in Mara Properties Limited v. The Queen. Put another way, the taxpayer and the corporations from which it had acquired the shares of the numbered corporations had, in each case, simply structured themselves and their actions so as to capitalize on a window of opportunity left open in the Act. Hence, although it was disturbing that the taxpayer could avoid paying $10 million in tax by implementing such an intricate pre-meditated scheme, the Act, as it stood at the relevant time, actually caused the inflated deduction to exist. The Minister was ordered to reassess accordingly. Per Desjardins, J.A. dissenting: Admittedly, in IRC v. The Duke of Westminster, the House of Lords held that every man is entitled to order his affairs so that the tax attaching thereto is less than it otherwise would be. However, the anti-avoidance provisions of subsection 55(1) of the Act modify the rules of the game as set out in the Duke of Westminster case. Those provisions applied in this case, and the Minister’s assessment should be affirmed.