October 07, 2011

Hollinger Inc. (Appellant) v. Her Majesty the Queen (Respondent)

98 DTC 1913
Tax Court of Canada
August 5, 1998

(Court File No. 94-1429(IT)G.)

Deductions — Capital losses — In a complex series of transactions taking place during December 1986, corporate taxpayer acquiring certain corporate shares with a very high adjusted cost base (“ACB”), and reselling them for a nominal value — Whether resulting capital loss deductible under the provisions of the Act as they then read — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 40(2)(e), 53(1)(f.1), 53(1)(f.2), 55(1), 85(4)(a), 85(4)(b), 88(1)(a) and 88(1)(c).

Coseka owned all of the shares of Coseka Resources (U.S.A.) Limited (“Coseka U.S.”) Coseka’s ACB of its shares of Coseka U.S. was high, although those shares had only a nominal value. In addition, if Coseka had sold the shares, the resulting capital loss would have been of no value to it because it had no offsetting capital gains. Some means, therefore, had to be found to turn the potential capital loss to account. The corporate taxpayer had ample capital gains. Accordingly, in a series of transactions taking place during December 1986, 52% of the shares of Coseka U.S. were moved down to a second-tier subsidiary (“353380” ). The resulting three-company chain (Coseka U.S. and the two subsidiaries) was then sold to the taxpayer for $4,000,000, the first two companies in the chain were collapsed, and, as a result, the taxpayer acquired the said Coseka U.S. shares with Coseka’s ACB in them. It then sold these for $20 to a numbered corporation at arm’s length with Coseka (“341063”), realizing an economic loss of $3,999,980. In filing its 1986 return, the taxpayer claimed a capital loss of $113,723,980, and an allowable capital loss of $56,861,990. This calculation was based on an ACB to the taxpayer of $113,724,000 (i.e., approximately 52% of $217,000,000) for its Coseka U.S. shares, and on a proceeds of disposition figure of $20 therefor. Following the Minister’s disallowance of the said loss claim, the taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was allowed. The whole scheme had no commercial purpose, although each of the series of transactions culminating in the sale by the taxpayer of the Coseka U.S. shares to 341063 was legally binding, and gave rise to genuine legal relationships. No sham was involved, although the Income Tax Act was subsequently amended to prevent this sort of loss transfer. All of that said, the ACB figure used by the taxpayer required a downward adjustment to $92,000,000. It had been admitted that the ACB of all of the shares of Coseka U.S. fell in a range between $178,000,000 and $217,000,000, but in the absence of any evidence by the taxpayer to justify a higher figure than $178,000,000, that figure should stand, and 52% thereof was approximately $92,000,000. Furthermore, when the Coseka U.S. shares were sold by Coseka to 353380, paragraph 85(4)(b) of the Act did not apply and paragraphs 85(4)(a) and 53(1)(f.1) did apply. When 353380 was liquidated into the taxpayer, its ACB of the shares of Coseka U.S. became the ACB thereof to the taxpayer by reason of subsection 88(1) of the Act. Hence, when the taxpayer disposed of those shares for $20, it sustained a capital loss equal to the difference between the ACB to it thereof and its proceeds of disposition thereof. Nor did the artificial or undue reduction provisions of subsection 55(1) of the Act apply, inasmuch as the taxpayer itself had done nothing to create or increase the inherent loss, or the loss ultimately sustained by it (applying the ratio used by the Federal Court of Appeal in The Queen v. Nova Corporation of Alberta 97 DTC 5229). The Minister had also argued: (a) that there had been no “disposition” by Coseka of its shares of Coseka U.S. to 353380 in the absence of any change in the beneficial ownership thereof; and (b) that such shares were not capital property, having become worthless. Both of these arguments were untenable. As a result of all of the foregoing, the Minister was ordered to reassess accordingly.