594710 BRITISH COLUMBIA LTD., Appellant, v. HER MAJESTY THE QUEEN,, 2016 TCC 288

Docket: 2013-4033(IT)G BETWEEN: 594710 BRITISH COLUMBIA LTD., Appellant, and HER MAJESTY THE QUEEN, Respondent . Appeal heard on May 9 to 12, 2016, at Vancouver, British Columbia Before: The Honourable Eugene P. Rossiter, Chief Justice Appearances : Counsel for the Appellant: Steven Cook S. Natasha Reid Counsel for the Respondent: Robert Carvalho Perry Derksen Whitney Dunn JUDGMENT The appeal from the assessment made under the Income Tax Act for the 2006 taxation year is allowed and the decision of the Minister of National Revenue is vacated with costs to the Appellant.

Signed at Ottawa, Canada, this 15th day of December, 2016. “E.P. Rossiter” Rossiter C.J. Outline of Reasons I. Overview: 1 II. Facts: 2 A. General: 2 B. The Partnerco Reassessment: 14 C. The Appellant’s Reassessment: 14 III. Issues: 15 IV. Analysis: 16 A. Compliance with the Large Corporation Rules: 16 B. Compliance of Assessments with applicable limitation period: 19 C. Other Questions as to Validity of the Assessments: 22

D. Application of the GAAR: 24

(1) General Principles . 24

(2) Partnerco Reassessment 28 (

a) Existence of a Tax Benefit 28 (

b) Existence of an Avoidance Transaction . 30 (

c) Misuse or abuse . 30 (

i) Section 111 . 31 (ii) Subsections 69(11) & 83(2.1) 36 (iii)

Section 103 . 37 (iv) Other Provisions . 38 (

d) Reasonable tax consequences . 41

(3) Holdco Assessment 43 (

a) Existence of a Tax Benefit 43 (

i) Issuance of stock dividends . 44 (ii) Redemption of the preferred shares . 45 (iii) Purchase of Partnerco and the Nuinsco Loan . 47 (

b) Existence of an Avoidance Transaction . 50 (

c) Misuse or abuse . 50 (

i) The Purpose of

Section 160 . 50 (ii) Abuse of

section 160 . 53 V. Conclusion . 56 Citation: 2016 TCC 288 Date: 20161215 Docket: 2013-4033(IT)G BETWEEN: 594710 BRITISH COLUMBIA LTD., Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Rossiter C.J. I. Overview: [ 1 ] This case concerns a tax plan allegedly straddling the line between astute and abusive tax avoidance. [ 2 ] This tax plan involved a host of players. At the bottom was a partnership engaged in the business of real estate. The partnership had four corporate limited partners and one general partner. Each limited partner was wholly owned by a different holding corporation.

The holding corporations in turn were wholly owned, each by a different member of the De Cotiis family. The Appellant is one of these holding corporations.

[ 3 ] In the absence of any planning, the partnership’s income would have been allocated to its corporate partners, who would have paid tax thereon. Instead, the plan allowed the cash from the partnership to be extracted tax-free to the holding corporations, while for tax purposes the partnership’s income was allocated almost entirely to an arm’s length corporation. This arm’s length corporation had accumulated losses and resource expenses sufficient to reduce the tax payable on that income. [ 4 ] In deciding the outcome of this case, I have to determine the correctness of two applications by the Minister of the general anti-avoidance rule (“GAAR”), contained in

section 245 of the Income Tax Act (“the Act ”). [1] The first application occurred at the limited partner level, where the Minister applied the GAAR on the basis that the tax plan abused a general policy in the Act against “reverse loss trading” or “reverse resource deduction trading”. As a result, the Minister allocated the partnership income back to the limited partners. On the basis of the consequent tax debt arising in the hands of the limited partners, the Minister applied the GAAR at the holding corporation level, reassessing the Appellant under the GAAR on the basis that the Appellant circumvented and abused

section 160 of the Act , which, had it applied, would have caused the Appellant to be jointly and severally liable for the tax debt of its wholly owned subsidiary (who was a limited partner). As a result, the Minister applied the GAAR to hold the Appellant so liable under

section 160 of the Act . [ 5 ] The Appellant’s tax liability under its GAAR reassessment is predicated on the GAAR having been applied correctly in the reassessment of the limited partner, of which it was the owner. The correctness of both reassessments is at issue. The Respondent must win on both in order for the appeal to be dismissed. [ 6 ] For the reasons that follow, I would allow the appeal and vacate the assessment of the Appellant. II. Facts: A.

General: [ 7 ] The parties filed an Agreed Statement of Facts on April 28, 2016, which was supplemented during the course of the trial by brief viva voce evidence and a few discovery read-ins. [ 8 ] Onni Halifax Development Limited Partnership (“HLP”) was a limited partnership created on July 16, 2003, to carry out a strata development project called the Marquis Grande. [ 9 ] The Marquis Grande was a project of the Onni Group, a group of companies in business of real estate development. The principals of the Onni Group are the four De Cotiis siblings and their father.

One of the siblings, Rossano De Cotiis, wholly owned the Appellant, a Canadian-controlled private corporation (“CCPC”) incorporated in 1999. The Appellant in turn wholly owned 671705 British Columbia Ltd., incorporated on June 17, 2003. 671705 British Columbia Ltd. held a 24.975 percent limited partnership interest in HLP, entitling it to a corresponding percent of HLP’s income or loss. It had three other limited partners, each indirectly owned by another sibling using an analogous ownership structure to Rossano’s.

The sole business of each of the partner corporations was participation in HLP. [ 10 ] The general partner of HLP was Onni Development (Halifax) Corp (“GPCo”). GPCo was wholly owned by Rossano and held a 0.1 percent general partnership interest in HLP. [ 11 ] In

summary, there were four separate limited partners, each owning a 24.975 percent limited partnership interest in HLP. “Partnercos” in the plural refers to these limited partners collectively, while “Partnerco” in the singular refers to 671705 British Columbia Ltd. Each of the Partnercos was wholly owned by a separate holding corporation, one of which was the Appellant. “Holdcos” in the plural refers to these holding corporations collectively.

The ownership structure may be described as follows: Ownership structure Individual owners Sibling 1 ↓ Sibling 2 ↓ Sibling 3 ↓ Sibling 4 ↓ Holding corporations (“Holdcos”) 594710 BC Ltd. (Appellant) ↓ ↓ 594702 BC Ltd ↓ 594705 BC Ltd ↓ 594708 BC Ltd ↓ Partner corporations (“Partnercos”) 671705 BC Ltd. (Partnerco) ↓ GPCo ↓ Onni Deal 671711 BC Ltd ↓ 671709 BC Ltd ↓ 671706 BC Ltd ↓ Limited partnership HLP [ 12 ] 0757588 B.C.

Ltd. (“Onni Newco”) was incorporated on May 12, 2006 and its shares were held equally by the Holdcos. [ 13 ] Nuinsco Resources Limited (“Nuinsco”) is a Canadian public corporation that eventually purchased all the shares of the Partnercos. Nuinsco’s business was mining. The parties are agreed that it dealt at arm’s length with the Holdcos at all material times. At

the beginning of its taxation year ending December 31, 2006, Nuinsco had non-capital losses of approximately $3.4 million and resource-related deductions of approximately $18.85 million available from prior taxation years. Nuinsco’s resource-related deductions were from Canadian exploration expenses (“CEE”) and Canadian development expenses (“CDE”). During its 2006 taxation year, Nuinsco incurred additional CEE of $3.6 million.

These amounts are collectively referred to as the “tax pools”. [ 14 ] The fiscal year ends of the entities involved were as follows: Holdcos December 31 Partnercos April 30 HLP May 31 Nuinsco December 31 [ 15 ] As of May 25, 2006, six of the strata units developed in the Marquis Grande remained unsold. HLP’s income for the 2006 fiscal period as of May 25, 2006 was projected to be $12,999,076. These projections were made up of accrued income of $12,136,180, plus projected income of at least $863,546 from the sale of six remaining units.

If this income was allocated directly to the Partnercos at HLP’s fiscal year end, then each Partnerco would have realized $3,246,694 of income, resulting in tax payable of $1,107,772. In other words, net of tax, each Partnerco would have received $2,138,922. [ 16 ] Instead, the following transactions were undertaken: [2] Step 1 : On May 25, 2006 the Appellant subscribed for ten additional common shares of Partnerco for $15,391, paid for by set-off against a debt owed by Partnerco to the Appellant.

Partnerco Additional common shares issued in payment of debt owing $15,931 But for the application of the GAAR, the tax consequence arising from the capitalization of the $15,931 debt owing by Partnerco to the Appellant would have been to increase the ACB of the common shares held by the Appellant in Partnerco by $15,931. Step 2 : On May 25, 2006, HLP lent $2,118,510 in cash to each Partnerco (the “Partnerco Loan”). The four Partnerco Loans totalled $8,474,040.

Step 3 : Partnerco declared and paid a series of sequential stock dividends to the Appellant, totalling 2,118,510 Class A Preferred Shares to the Appellant, each with paid-up capital and redemption amount of $1.00 per share (the “First Stock Dividend”). The aggregate amount of the First Stock Dividend ($2,118,510) represented the estimated after-tax value of the issued shares of Partnerco and was approximately equal to Partnerco’s after-tax share of HLP’s projected income.

The parties agree that the Partnerco Loan was made before the First Stock Dividend was issued. [3] The parties also agree that at the time the assessment of the Appellant, the Minister accepted that the fair market value of the First Stock Dividend was $2,118,510, which was equivalent to the estimated fair market value of the issued common shares of each Partnerco as of May 25, 2006. Before After The Appellant The Appellant

p/s c/s p/s Partnerco Partnerco But for the application of the GAAR, the tax consequences arising on the payment of the First Stock Dividend were as follows:

a) the issuance of Class A Preferred Shares resulted in a dividend to the Appellant of $2,118,510;

b) the amount of the dividend was includable in the taxable income of the Appellant, but also deductible in computing taxable income as an intercorporate dividend;

c) the Appellant was deemed to have acquired the Class A Preferred Shares at an ACB of $2,118,510. Step 4 : On May 25, 2006 Partnerco used the proceeds from the Partnerco Loan to redeem the Class A Preferred Shares issued in the First Stock Dividend for $2,118,510. Before After The Appellant The Appellant Redemption of 2,118,510 Class A shares by payment of $2,118,510

Partnerco Partnerco c/s p/s c/s Ellipse: HLP Ellipse: HLP Loan of $2,118,510 But for the application of GAAR, the tax consequences of redemption of the Class A Preferred shares were as follows:

a) there was no deemed dividend received by the Appellant;

b) the Appellant disposed of its Class A Preferred shares with ACB of $2,118,510 for proceeds of disposition of $2,118,510, resulting in no gain or loss. Step 5 : The following additional transactions were undertaken:

a) On May 25, 2006, Onni Development loaned $3,051,400 to HLP (the “ODC Loan”). The unsold strata units held by HLP were provided as security for the ODC Loan.

b) On May 25, 2006, HLP entered into a management agreement with Onni Property Management, a member of the Onni Group, under which Onni Property Management would provide certain marketing and management services to HLP relating to, inter alia , the sale of the unsold strata units and remedial work.

c) On May 29, 2006, HLP entered into a Put Agreement (the “Put Agreement”) with Onni Newco, under which HLP acquired an option to sell its remaining inventory of strata units to Onni Newco at an aggregate price of $3,051,400. Step 6 : On May 26, 2006, Partnerco declared a stock dividend to the Appellant, paid by issuing 851,863 Class A Preferred Shares with aggregate paid-up capital and a redemption amount of $851,863 (the “Second Stock Dividend”). Similar to the issuance of the First Stock Dividend, the tax consequences but for the application of the GAAR were as follows:

a) the issuance of the Second Stock Dividend resulted in a dividend to the Appellant of $851,863. This amount was includable in the income of the Appellant, but also deductible in computing taxable income as an intercorporate dividend;

b) the Appellant was deemed to have acquired the Class A Preferred Shares at an ACB of $851,863. Step 7 : The Nuinsco Acquisition On May 29, 2006, each Holdco (including the Appellant) sold all of the shares of its respective Partnerco to Nuinsco (the “Nuinsco Acquisition”). In particular, each Holdco sold its Class A Preferred Shares received from the Second Stock Dividend for $851,863 and the common shares of its Partnerco for $15,391. Concurrently, Nuinsco acquired all of the shares of GPco for $1.

Nuinsco Partnerco Partnerco The aggregate cost to Nuinsco of the share purchases was $3,469,017. [4] Step 8 : At the time of the Nuinsco Acquisition, Halifax LP had cash on hand of $4,443,957. On May 29, 2006, HLP agreed to loan this amount to Nuinsco, and on May 30, 2006, advanced such amount (the “Nuinsco Loan”). At all material times, Nuinsco was not related to, and dealt at arm’s length with, the Holdcos for the purposes of the Act .

Before After The Appellant $851,863 + $15,391 Sale of common and Class A Preferred Shares Ellipse: Halifax LP Ellipse: Halifax LP $4,443,397 cash on hand $4,443,397 cash on hand 6 strata units 6 strata units But for the application of the GAAR, the following tax consequences arose:

a) The Appellant realized proceeds of $851,863 for its Class A Preferred Shares of Partnerco and proceeds of $15,931 for its common

shares of Partnerco, but no gain or loss was realized since the ACB equaled the proceeds of disposition for both classes of shares;

b) There was an acquisition of control of Partnerco by Nuinsco on May 29, 2006 such that Partnerco had a deemed year end on May 28, 2006; and,

c) No income from HLP was allocable to Partnerco for its taxation year now ending May 28, 2006. Step 9 : On May 30, 2006, each Partnerco was wound up into Nuinsco. Consequently, Nuinsco assumed the liabilities of each Partnerco and was admitted as the sole limited partner of HLP. Nuinsco’s indebtedness to HLP totalled $12,917,997. [5] Step 10 : On May 31, 2006, HLP allocated its net income of $12,136,180 to Nuinsco and GPCo in accordance with their partnership interests. But for the application of GAAR, the tax consequences would be as follows: a) $12,124,045 or 99.9% would be allocated to Nuinsco;

b) Nuinsco would be entitled to deduct CEE of $9,198,443 when determining income and also entitled to deduct available non-capital losses of $3,398,699 when computing taxable income for its 2006 year. c) $12,136 or 0.1% would be allocated to GPCo.

a) May 30 Wind up of Partnercos into Nuinsco Partnerco 671709 671708 671706 99.9%

b) May 31 Nuinsco is Ellipse: HLP allocated HLP income: $12,124,045 (99.9% of $12,136,180) Step 11 : On June 1, 2006 each Partnerco was dissolved.

Step 12 : On June 1, 2006, HLP declared distributions to Nuinsco and GPCo as follows: • $12,041,997 was distributed to Nuinsco, satisfied by set-off against the debt owing by Nuinsco to HLP, which would reduce the debt to $876,000; and, • $12,054 was distributed to GPCo, satisfied by assigning a portion of Nuinsco’s indebtedness to GPCo (this would further reduce Nuinsco’s indebtedness to HLP to $863,946) Step 13 : Between June 14 and 16, 2006, HLP sold its remaining six units by transferring one unit to an arm’s length purchaser and exercising its option to sell the other five units to Onni Newco.

Consequently, HLP realized net income of $863,546, as projected, in its fiscal year starting June 1, 2006. HLP allocated the net income of $863,546 to Nuinsco and GPCo in accordance with their partnership interests (99.9% to Nuinsco and 0.1% to GPCo). Step 14 : On June 26, 2006, HLP declared the following distributions: • $400 to Nuinsco as a return of capital contribution • $862,683 to Nuinsco, satisfied by set-off against Nuinsco’s indebtedness to the HLP • $863 to GPCo, satisfied by assigning to GPCo Nuinsco’s indebtedness to HLP.

The result of these distributions was to reduce Nuinsco’s debt to HLP to nil, and to increase Nuinsco’s debt to GPCo to $12,917. Step 15 : On June 28, 2006, GPCo declared a dividend to Nuinsco of $8,483, paid by set-off against Nuinsco’s debt of $12,917. The remaining $4,434 owed to GPCo represented GPCo’s estimated tax liability on its 0.1% share of the HLP income. Step 16 : On June 28, 2006, HLP was dissolved. [ 17 ] The Minister assumed that these transactions formed a pre-ordained series of transactions.

Additionally, the Minister assumed that all of the aforementioned steps were avoidance transactions. [6] The parties agree that the following steps formed a series of transactions for the purposes of the GAAR: steps 1, 2, 3, 4, 5a, 5b, 5c, 6, 7, 8, 9, 10, 11, the exercise of the Put Agreement and the allocation of HLP’s income from the sale of its remaining inventory in step 13, 14, and 16. [ 18 ] Evidence was given by Mr.

Les Fovenyi, the current Chief Operating Officer of the Onni Group, in relation to the strategies of the Onni Group before 2000 and after 2011, those being the periods of time during which he was involved with the Onni Group. He was not employed by the Onni Group during the period of time during which the transactions occurred. [ 19 ] Based on his testimony and supporting documentary evidence, it appears that the limited partnership structure was adopted from the beginning and throughout the years in question for several reasons: A.

The use of a corporation instead of a partnership in the past was problematic because dissenting shareholders could cause severe financial problems; B. There was a desire to mitigate the risk as to which parties would participate in which project; C. A general Partnerco could exercise a fair degree of control over the development and ensure the project was finished. D. There were nuances put into the limited partnership agreement, since the partners were family.

There was a provision regarding excess capital, whereby any partner who refused to put up additional capital that might be required for a project, agreed to allow other partners to contribute that capital for them and to earn a 20 percent return on that excess capital injection. There was a provision prohibiting any partner from placing any lien on the project at any time for any reason prior to its completion. E.

The individual principals held shares of the Partnercos through a holding corporation to mitigate risk, since the principals were very hands-on throughout their participation in various development projects. F. Capital preservation, financing, and flexibility was important. There were multiple risks involved in projects, from market risk to financing risk, so there was a need for a structure known in secondary lending markets in case capital needed to be raised quickly.

[ 20 ] As the Appellant has sought to argue that both the reassessment of Partnerco and the assessment of the Appellant were statute- barred, I will set out the facts relating to both reassessments. B. The Partnerco Reassessment: [ 21 ] The parties agree that there was an acquisition of control of Partnerco by Nuinsco on May 29, 2006. But for the application of the GAAR, Partnerco would have had a shortened taxation year from May 1, 2006 to May 28, 2006 (the “Initial Period”) pursuant to subsection 249(4) of the Act . [ 22 ] Partnerco duly filed a tax return for the Initial Period, reporting no income.

The Minister initially assessed this fiscal period on December 21, 2006. The parties agree that, but for the application of GAAR, the normal reassessment period for this fiscal period expired on December 21, 2009. [ 23 ] As Partnerco was dissolved on June 1, 2006, a tax return was also filed for the period from May 29, 2006 to June 1, 2006 (the “Second Period”), in which no income was reported.

The Minister initially assessed this fiscal period on February 27, 2007. [ 24 ] Throughout the Second Period, Partnerco was no longer a CCPC, as it was owned by Nuinsco, a public corporation. [ 25 ] The Minister reassessed Partnerco on February 23, 2011 (the “Partnerco Reassessment”). In it, the Minister applied GAAR to include what would have been Partnerco’s share of HLP’s income had the tax plan not been carried out. This income inclusion totalled $3,246,694. This income was included for a notional taxation period purporting to span from May 1, 2006 to June 1, 2006. C.

The Appellant’s Reassessment: [ 26 ] In its tax return for the year ending December 31, 2006, the Appellant reported nil income from the First and Second Stock Dividends and from the disposition of its shares of Partnerco to Nuinsco. [ 27 ] The Appellant was initially assessed on August 15, 2007.

Consequently, the normal reassessment period expired on August 15, 2010. [ 28 ] On August 3, 2010, the Appellant filed a waiver of the normal reassessment period pursuant to subparagraph 152(4)(a)(ii) of the Act . [ 29 ] On November 7, 2011, the Appellant filed a notice of revocation of waiver, and the Minister acknowledged receipt of such notice on November 14, 2011. Pursuant to subsection 152(4.1) of the Act , the revocation became effective on May 7, 2012. [ 30 ] The Minister assessed the Appellant again on July 11, 2013 (the “Holdco Assessment”). It is this assessment that is under appeal.

In it, the Minister applied GAAR on the basis that the Appellant abused

section 160 of the Act . In the result,

section 160 was applied to the Appellant to hold it jointly and severally liable for Partnerco ’ s tax debt under the Partnerco Reassessment. The Appellant’s Reassessment assessed an aggregate amount of $1,801,406.62 of tax, interest, and penalties. [ 31 ] The Appellant filed a Notice of Objection on July 23, 2013. The Appellant was a large corporation during its 2006 taxation year. III.

Issues: [ 32 ] The issues that I must decide are: • Whether the Appellant’s failure to raise the issue of the validity of the Partnerco Reassessment or the Holdco Assessment in its Notice of Objection precludes it from raising this issue before the Court; • If not, whether the Partnerco Reassessment or the Holdco Assessment is statute-barred; • Whether the GAAR was applied properly in the Partnerco Reassessment to include $3,246,694 in Partnerco’s income; and, • If so, whether the GAAR was applied properly in the Holdco Assessment to cause the Appellant to be liable under subsection 160(1) for Partnerco’s tax liability. [ 33 ] If the Appellant wins on any of the last three issues, the appeal must be allowed and the Holdco Assessment vacated.

IV. Analysis: A. Compliance with the Large Corporation Rules: [ 34 ] The Appellant has raised the question of whether the Partnerco and Holdco assessments were issued outside the normal reassessment period for their respective taxpayers. If so, the Appellant submits that they would be void absent compliance with subsection 152(4). [ 35 ] The Respondent has objected to the Appellant’s raising this argument on the basis that it did not form part of the issues raised in

its Notice of Objection.

As the issue in question was not provided for in the manner stipulated by subsection 165(1.11) of the Act , the Appellant is alleged to be precluded from raising on appeal whether the reassessments were statute-barred, pursuant to subsection 169(2.1). [ 36 ] The relevant provisions of the Act read as follows: Assessment and reassessment 152(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if (

a) the taxpayer or person filing the return (

i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or (ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year; or (

b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and (

i) is required pursuant to subsection (6) or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, (ii) is made as a consequence of the assessment or reassessment pursuant to this paragraph or subsection (6) of tax payable by another taxpayer, (iii) is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length, (iii.1) is made, if the taxpayer is non-resident and carries on a business in Canada, as a consequence of (

A) an allocation by the taxpayer of revenues or expenses as amounts in respect of the Canadian business (other than revenues and expenses that relate solely to the Canadian business, that are recorded in the books of account of the Canadian business, and the documentation in support of which is kept in Canada), or (

B) a notional transaction between the taxpayer and its Canadian business, where the transaction is recognized for the purposes of the computation of an amount under this Act or an applicable tax treaty. (iv) is made as a consequence of a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada or a government of a state, province or other political subdivision of any such country, (

v) is made as a consequence of a reduction under subsection 66(12.73) of an amount purported to be renounced under

section 66, or (vi) is made in order to give effect to the application of subsection 118.1(15) or (16). … Objections by large corporations 165(1.11) Where a corporation that was a large corporation in a taxation year (within the meaning assigned by subsection 225.1(8)) objects to an assessment under this Part for the year, the notice of objection shall (

a) reasonably describe each issue to be decided; (

b) specify in respect of each issue, the relief sought, expressed as the amount of a change in a balance (within the meaning assigned by subsection 152(4.4)) or a balance of undeducted outlays, expenses or other amounts of the corporation; and (

c) provide facts and reasons relied on by the corporation in respect of each issue. … Limitation on appeals by large corporations 169(2.1) Notwithstanding subsections (1) and (2), where a corporation that was a large corporation in a taxation year (within the meaning assigned by subsection 225.1(8)) served a notice of objection to an assessment under this Part for the year, the corporation may appeal to the Tax Court of Canada to have the assessment vacated or varied only with respect to (

a) an issue in respect of which the corporation has complied with subsection 165(1.11) in the notice, or (

b) an issue described in subsection 165(1.14) where the corporation did not, because of subsection 165(7), serve a notice of objection to the assessment that gave rise to the issue

and, in the case of an issue described in paragraph (a), the corporation may so appeal only with respect to the relief sought in respect of the issue as specified by the corporation in the notice. [ 37 ] In Blackburn Radio [7] and in Canadian Marconi [8] the FCA confirms that an out of time assessment is void.

Section 169.1 is only aimed at precluding the TCC from doing anything but vacating or varying an assessment or reassessment. The TCC cannot vary or vacate an assessment or reassessment if it is void because it is void from the beginning and does not exist – the assessment or reassessment is simply not given effect. [ 38 ] Also subsection 152(8) does not apply to an out of time assessment as per Lornport Investments . [9] B. Compliance of Assessments with applicable limitation period: [ 39 ] The Appellant would contend that the Partnerco reassessment is statute-barred. The issue is a relatively straight-forward matter of statutory

interpretation and its application to the facts. [ 40 ] The Appellant’s position on this issue is that subsection 152(4) limits the Minister’s power to raise a reassessment “after the taxpayer’s normal reassessment period in respect of the year”. The Appellant submits that the Partnerco reassessment is in respect of Partnerco’s two taxation periods up to June 1, 2006. While the Appellant’s arguments seek to interpret the phrase “in respect of” so as to show that the Partnerco reassessment is in respect of the Initial Period, this approaches the question without the full context of subsection 152(4). [ 41 ] Subsection 152(4) reads as follows: Assessment and reassessment

(4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if (

a) the taxpayer or person filing the return (

i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or (ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year; or (

b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and (

i) is required pursuant to subsection (6) or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, (ii) is made as a consequence of the assessment or reassessment pursuant to this paragraph or subsection (6) of tax payable by another taxpayer, (iii) is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length, (iii.1) is made, if the taxpayer is non-resident and carries on a business in Canada, as a consequence of (

A) an allocation by the taxpayer of revenues or expenses as amounts in respect of the Canadian business (other than revenues and expenses that relate solely to the Canadian business, that are recorded in the books of account of the Canadian business, and the documentation in support of which is kept in Canada), or (

B) a notional transaction between the taxpayer and its Canadian business, where the transaction is recognized for the purposes of the computation of an amount under this Act or an applicable tax treaty. (iv) is made as a consequence of a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada or a government of a state, province or other political subdivision of any such country, (

v) is made as a consequence of a reduction under subsection 66(12.73) of an amount purported to be renounced under

section 66, or (vi) is made in order to give effect to the application of subsection 118.1(15) or (16). [ 42 ] The numerous references to "the year" in this provision all refer to the same year; specifically, "the year" takes its meaning from the beginning of the subsection, which refers to the "taxation year" for which the Minister may otherwise "at any time make an assessment, reassessment […, etc.]".

Thus, when the subsection refers to a “year” in respect of which the Minister may be precluded from assessing after the normal reassessment period, it is referring to this taxation year (in our case, the Partnerco taxation year ending June 1, 2006). [ 43 ] The question then becomes whether the Partnerco reassessment is also a reassessment for the Initial Period. The language “in respect of” may only be of use to the Appellant if it is first demonstrated that the Partnerco reassessment amounts to a reassessment of

both the Initial Period and the Notional Period. [ 44 ] The Partnerco reassessment is unquestionably a reassessment for Partnerco’s taxation year ending June 1, 2006.

In invoking the GAAR to determine the tax consequences to Partnerco as if that taxation year had begun on May 1, 2006, was the Minister assessing for a different taxation year than that assessed on February 27, 2007? [ 45 ] The Partnerco reassessment is a reassessment for the taxation year ending June 1, 2006, and this is not altered by the fact that the Minister has reassessed Partnerco to include the tax consequences of transactions that would have otherwise fallen outside of the taxation year. [ 46 ] The Partnerco reassessment is not a reassessment of Partnerco’s taxation year ending May 28, 2006.

As a result, the issuance of the Partnerco reassessment, if it is a reassessment for the year ending June 1, 2006, and not an additional assessment, nullifies the assessment dated February 27, 2007. [10] It does not have the effect of nullifying the assessment of Partnerco made December 21, 2006, for the taxation year ending May 28, 2006.

As there was no income declared by Partnerco in that period, it is not necessary to consider how the Minister ought to take into account taxes owing under another assessment in determining the reasonable tax consequences of a proper GAAR reassessment. [ 47 ] I would have therefore concluded that the Partnerco reassessment was valid and timely. [ 48 ] The Appellant also contends that the Holdco Assessment was a reassessment of its 2006 taxation year and not an assessment under

section 160. As such, the Appellant submits that it was issued outside of the normal reassessment period, which it submits is contained in

section 152. For reasons elaborated in the next section, I find this argument linked to the “stacking” of GAAR assessments on top of each other, and I deal with it below. C. Other Questions as to Validity of the Assessments: [ 49 ] The Appellant has submitted that the reassessment made of it is invalid for several additional reasons.

Among other reasons, it has submitted that it cannot be assessed for liability under GAAR as a consequence of an amount of tax owing due to the invocation of the GAAR against another taxpayer. [ 50 ] More specifically, the Appellant points to the wording of subsection 245(2) of the Act , noting that the tax consequences to be determined as a result of its operation should deny a tax benefit that, “but for this section, would result, directly or indirectly, from that [avoidance] transaction or from a series of transactions that includes that transaction.” The Appellant is of the view that this mandates the Court to apply the GAAR to it in a manner that ignores the application of

section 245 to Partnerco (or, presumably, any other taxpayer). [ 51 ] I disagree. The Appellant overlooks the fact that the Minister is to assess or reassess each taxpayer separately under the Act , even related parties. While the Minister cannot stack GAAR assessments with respect to the same taxpayer, the Appellant’s

interpretation would require the Court to take notice of how the Act applies to a third party to the proceeding in interpreting how the Act applies to the taxpayer before the Court without any explicit mandate to do so.

Simply because the Appellant is entitled in this derivative liability assessment to contest the validity of the Partnerco reassessment does not mean that the Appellant is thereby entitled to conflate the two assessments in interpreting the Act . [ 52 ] The Supreme Court of Canada, in Copthorne , identified the framework through which the GAAR should be applied, as follows: [11] 72 The analysis will then lead to a finding of abusive tax avoidance: (1) where the transaction achieves an outcome the statutory provision was intended to prevent; (2) where the transaction defeats the underlying rationale of the provision; or (3) where the transaction circumvents the provision in a manner that frustrates or defeats its object, spirit or purpose ( Trustco , at para. 45; Lipson , at para. 40 ).

These considerations are not independent of one another and may overlap. At this stage, the Minister must clearly demonstrate that the transaction is an abuse of the Act, and the benefit of the doubt is given to the taxpayer. [ 53 ] The question is therefore whether, read without reference to subsection 245(2) of the Act , there would be a tax benefit accruing to the Appellant as a result of an avoidance transaction or as a result of a series of transactions of which an avoidance transaction is part. The Appellant’s

interpretation could result in the Minister being unable to prevent abusive tax avoidance so long as it is subsidiary to and arising out of another abusive tax avoidance transaction. [ 54 ] The phrase “but for this section” contained in

section 245 provides that the assessment of any tax benefit is done without factoring in the automatic application of subsection 245(2). This avoids the internal contradiction that would otherwise arise. [ 55 ] Furthermore, I accept that the tax consequences of the application of the GAAR to the Appellant may only be determined through the methods cited in subsection 245(7) of the Act . One of them can conceivably be an assessment under subsection 160(2) of the Act .

By invoking the GAAR, the Minister is able to ensure that the Appellant is rendered liable under subsection 160(1) for the tax debt of Partnerco as part of the reasonable tax consequences designed to prevent the abusive tax avoidance in question. Following the recognition of this liability, the Minister may properly assess the Appellant under subsection 160(2). This is what the Minister did in this case. D. Application of the GAAR:

(1) General Principles [ 56 ] One of the most recent concise summaries of the applicable principles involving the GAAR is contained in the decision of the Ontario Court of Appeal in Inter-Leasing : [12]

49 For the GAAR to apply, there must be: (1) a tax benefit resulting from a transaction or part of a series of transactions; (2) an avoidance transaction in the sense that the transaction cannot be said to have been reasonably undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit and (3) abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit or purpose of the provisions relied on by the taxpayer. 50 The onus is on the Respondent to establish that the tax avoidance was abusive.

If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer. 51 As explained at para. 66 of Canada Trustco, courts must apply a purposive approach in interpreting the provisions giving rise to the tax benefit: 4. The courts proceed by conducting a unified textual, contextual and purposive analysis of the provisions giving rise to the tax benefit in order to determine why they were put in place and why the benefit was conferred. The goal is to arrive at a purposive

interpretation that is harmonious with the provisions of the Act that confer the tax benefit, read in the context of the whole Act . 52 After the object, spirit or purpose of a

section is determined, a transaction may be found to be abusive in one of three ways described in Lipson , at para. 40 : where the result of the avoidance transaction (

a) is an outcome that the provisions relied on seek to prevent; (

b) defeats the underlying rationale of the provisions relied on; or (

c) circumvents certain provisions in a manner that frustrates the object, spirit or purpose of those provisions. [Citations omitted.] [ 57 ] In Canada Trustco , McLachlin C.J. and Major J. emphasized that the GAAR is to be used as a provision of last resort. [13] Since non-tax purposes to a transaction may exist in what may otherwise appear to be an avoidance transaction, the Court must weigh the totality of the evidence with a view to making an objective finding of which purposes were primary based on the reasonableness of that evidence.

The mere assertion however by the taxpayer that non-tax purposes were of primary concern is insufficient to discharge the evidentiary burden on that taxpayer. [14] [ 58 ] As held by the Supreme Court in Copthorne , “it is necessary to determine if there was a series, which transactions make up the series, and whether the tax benefit resulted from the series” if the Minister assumes that the tax benefit resulted from a series of transactions. [15] A series of transactions resulting in a tax benefit “will be caught by s. 245(3) unless each transaction within the series could ‘reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain [a] tax benefit’.

If any transaction within the series is not undertaken primarily for a bona fide non-tax purpose, that transaction will be an avoidance transaction.” [16] [ 59 ] In Triad Gestco TCC , [17] the taxpayer, which was directed and controlled by one Mr. Cohen and which had realized a capital gain of approximately $8 million, transferred $8 million of assets to a newly-incorporated subsidiary in consideration for the issuance of common shares.

This subsidiary declared a stock dividend of $1 on its common shares, which was payable through the issuance of 80,000 non-voting preferred shares with an aggregate redemption price of $8,000,000. An unrelated individual settled, with $100, a trust of which Mr. Cohen was a beneficiary, so that under the "affiliate" definition then in effect it was an un-affiliated trust.

The taxpayer then sold its common shares of the subsidiary to the trust for $65 and claimed a capital loss of $7,999,935, which permitted it to offset the realized capital gain through a loss carry-back. [ 60 ] The Tax Court found that the declaration by the subsidiary of a stock dividend payable in preferred shares was an avoidance transaction undertaken to shift the value of the subsidiary out of the common shares and into the preferred shares. This would allow for a latent capital loss that could be claimed on the disposition of the common shares later in the series of transactions.

The Court also concluded that the settlement of the trust and the subsequent sale of the common shares to the trust were both avoidance transactions designed to realize a capital loss on the sale of the common shares while avoiding the application of the stop loss rules in subparagraph 40(2)(g)(

i) of the Act . [18] On appeal, Noël JA (as he then was) noted that the parties had conceded that the Tax Court had correctly concluded on the existence of an avoidance transaction. [19] [ 61 ] In Global Equity , [20] the taxpayer subscribed for common shares of a new subsidiary for approximately $5.6 million, which then declared a stock dividend in the form of preferred shares having $56 of paid-up capital and a $5.6 million redemption price. Consequently, the value of the common shares was largely eliminated.

The taxpayer's subscription for an additional $200,000 was acknowledged to be "window dressing" to give the common shares some value. The taxpayer, which was involved in the business of trading securities, disposed of the common shares in consideration for their depleted value and reported a loss.

The Tax Court concluded that these were avoidance transactions, despite the assertions of the taxpayer that creditor protection was the primary motivation. [21] While Mainville JA reversed the Tax Court on its conclusion as to the application of the GAAR, he noted that the taxpayer had not contested the existence of the avoidance transactions and that there was ample evidence on the nature of the transactions in question. [22] [ 62 ] In 1207192 Ontario , the Federal Court of Appeal gave further instruction on the identification of an avoidance transaction.

It noted that subsection “245(3) requires a determination of the primary purpose of the transaction or series of transactions that is alleged to comprise the avoidance transaction. […] The burden is on the taxpayer to establish that a particular transaction or series of transactions was undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit [ Canada Trustco ] at paragraph 66 ).” [23] This Court must determine “the purpose of the series of transactions on an objective basis - that is, by ascertaining objectively the purpose of each step by reference to its consequences - rather than on the basis of the subjective motivation of” the parties or their subjective understanding of what may or may not have been required to achieve a given bona fide non-tax purpose. [24] [ 63 ] An established principle arising out of Canada Trustco is that in cases other than a reduction in taxable income, the existence of

a tax benefit can be established by comparison with an alternative arrangement. The magnitude of any such benefit is irrelevant at this stage of the analysis. [25] The burden is on the taxpayer to refute the Minister’s assumption of a tax benefit. [26] [ 64 ] A tax benefit may be found even if no reduction in tax payable occurs during the year under appeal.

For instance, the taxpayer in Triad was benefited insofar as it could carry back the capital loss incurred to a previous tax year. [ 65 ] The Supreme Court in Copthorne held that the analysis must be linked to alternative arrangements that would have been reasonable to carry out: 35 As found in Trustco , the existence of a tax benefit can be established by comparison of the taxpayer's situation with an alternative arrangement (para. 20). If a comparison approach is used, the alternative arrangement must be one that "might reasonably have been carried out but for the existence of the tax benefit" (D. G.

Duff, et al., Canadian Income Tax Law (3rd ed. 2009), at p. 187). By considering what a corporation would have done if it did not stand to gain from the tax benefit, this test attempts to isolate the effect of the tax benefit from the non-tax purpose of the taxpayer. [27]

(2) Partnerco Reassessment [ 66 ] I will deal with the Partnerco Assessment first, since the Holdco Assessment is predicated on the GAAR having been properly applied in the Partnerco Assessment to cause Partnerco to have a tax debt. If Partnerco did not properly have a tax debt, then the Holdco Assessment cannot give rise to a tax liability for the Appellant. (

a) Existence of a Tax Benefit [ 67 ] The Appellant submits that this Court should conduct the analysis of whether a tax benefit arose on the facts by comparing this situation to one in which Nuinsco had acquired Partnerco without being able to utilize its tax attributes to shelter the income received from HLP.

It submits that the tax benefit arising out of the Transactions accrued to Nuinsco insofar as it would have been unable to shelter the income received from HLP without winding up the Partnercos before June 1. [ 68 ] The Respondent submits that the comparison should be made with the alternative in which Nuinsco never acquired Partnerco. In such a situation, Partnerco would have received and paid tax on the distributions from HLP.

The Respondent states that the only net benefit received by Nuinsco was the deal fees paid to it by the Appellant. [28] [ 69 ] Furthermore, the Respondent submits that Partnerco would have been liable for the tax payable on amounts received from HLP, making Partnerco a tax debtor during the tax period in which it would have received such amounts. As a result, the Appellant would have been liable for this unpaid tax debt up to and including the amounts transferred to it from Partnerco during that same or a following tax period. As a result, the Respondent submits that the Appellant avoided the application of

section 160 of the Act by engaging in a series of transactions leading to the change of control of Partnerco and the consequent deemed year end prior to the distribution of income from HLP. [ 70 ] I note the wording of “tax benefit” in subsection 245(1) of the Act , as well as the wording of subsection 245(2).

In neither provision does it explicitly require that the “tax benefit” in question accrue to the person to whom the tax consequences are re- determined by virtue of the invocation of the GAAR. [ 71 ] I also note the decision of Justice Bell in Univar . [29] In that case, the taxpayer incorporated a Barbados subsidiary using borrowed money to subscribe for the shares of that subsidiary, which in turn used the proceeds to purchase from the American parent of the taxpayer an interest-bearing note owing to that parent by one of its wholly-owned European subsidiaries.

Bell J. accepted evidence of the taxpayer's officers that there was never any intent for the taxpayer to itself acquire the note.

Accordingly, there was no tax avoided through the incorporation of the Barbados subsidiary and the receipt of tax-free dividends by the taxpayer from that subsidiary, funded out of the interest payments made on the note. [ 72 ] I conclude, like he did, that the “only alternate arrangement that can be considered is the possibility of the alleged avoidance transaction not having occurred.” [30] The Appellant has failed to demonstrate how the scenario in which Nuinsco acquires the Partnercos and does not utilize its tax attributes to shelter the income from HLP is a reasonable one on the facts.

It is likely that the deal fees would have been much higher in such an eventuality in order to compensate Nuinsco for the tax debt arising out of the tax payable on the Partnercos’ HLP income. If such were the case, then this presumably would have affected at a certain point the willingness of the Appellant to enter into the transaction.

Absent the potential access to Nuinsco’s tax attributes to shelter the income from HLP, there is insufficient evidence before me to conclude that the Appellant and Nuinsco would have conducted the transactions at issue. [ 73 ] If the alleged avoidance transaction had not occurred, the distributions from HLP would have been taxable in the hands of Partnerco. The taxation of these amounts in the hands of Nuinsco created a tax benefit. As a result, I conclude that a tax benefit arose out of these transactions. (

b) Existence of an Avoidance Transaction [ 74 ] As set out earlier, the parties agree that many of the transactions form a series of transactions for the purposes of the GAAR. [ 75 ] The avoidance transaction requirement will be met if the series resulted in a tax benefit and if even one of the transactions in this series cannot reasonably be considered to have been undertaken for a bona fide non-tax purpose. [ 76 ] The Minister has assumed that every transaction in the series was not carried out for a bona fide non-tax purpose.

The Appellant does not appear to argue otherwise, but instead submits that the series of transactions did not result in a tax benefit. Since I have already found that there was a tax benefit, this argument is accordingly rejected as well.

[ 77 ] Apart from this, the Appellant does single out one aspect of the series. According to the Appellant, the Respondent asserts that the selection of May 29, 2006 as a closing date was an avoidance transaction, an assertion that must be rejected because the choice of date on which a transaction is completed is not a “transaction” at all. However, this mischaracterizes the Respondent’s argument.

The Respondent’s actual argument is that, among the other transactions in the series, the sale of the shares of Partnerco by the Appellant to Nuinsco was an avoidance transaction, and that the timing of that share sale supports this argument. I would agree. On the evidence, I cannot conclude that Nuinsco and the Appellant would have undertaken the share sale but for the possibility of using Nuinsco's tax attributes, nor has the Appellant argued otherwise. (

c) Misuse or abuse [ 78 ] As outlined earlier, this step proceeds in two parts: first, the provisions giving rise to the tax benefit are interpreted textually, contextually and purposively in order to determine their object, spirit or purpose. Next, I am to determine whether that object, spirit or purpose has been abused in this case. [ 79 ] Here, the Respondent bears the onus. [ 80 ] The Respondent alleges that there is a general policy in the Act aimed at preventing loss sharing between unrelated taxpayers, and that the transactions at issue circumvent this policy.

In the course of laying out this argument, the Respondent analyzes several statutory provisions, which I will in turn outline. [ 81 ] However, I note at the outset a fatal shortcoming of the Respondent's argument; it fails to fully analyze the provisions associated with the obtaining of the tax benefit. It is those provisions that must be interpreted textually, contextually and purposively.

As held in Copthorne , "[w]hat is not permissible is basing a finding of abuse on some broad statement of policy, such as anti-surplus stripping, which is not attached to the provisions at issue." [31] LeBel J. in Lipson emphasized again the importance of identifying the provisions associated with the tax benefit and to consider whether those provisions were abused. [32] (

i) Section 111 [ 82 ] As a starting point, the Respondent refers to subsections 66.7(10) and 111(5). [ 83 ] I will analyze only subsection 111(5), a more general loss streaming provision, as subsection 66.7(10) is an analogous provision dealing with resource expenses. [ 84 ] Subsections 111(1) and 111(5) of the Act read as follows: 111(1) Losses deductible - For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as the taxpayer may claim of the taxpayer’s (

a) non-capital losses - non-capital losses for the 20 taxation years immediately preceding and the 3 taxation years immediately following the year; (

b) net capital losses - net capital losses for taxation years preceding and the three taxation years immediately following the year; (

c) restricted farm losses - restricted farm losses for the 20 taxation years immediately preceding and the 3 taxation years immediately following the year, but no amount is deductible for the year in respect of restricted farm losses except to the extent of the taxpayer’s incomes for the year from all farming businesses carried on by the taxpayer; (

d) farm losses - farm losses for the 20 taxation years immediately preceding and the 3 taxation years immediately following the year; and (

e) limited partnership losses - limited partnership losses in respect of a partnership for taxation years preceding the year, but no amount is deductible for the year in respect of a limited partnership loss except to the extent of the amount by which (

i) the taxpayer’s at-risk amount in respect of the partnership (within the meaning assigned by subsection 96(2.2)) at the end of the last fiscal period of the partnership ending in the taxation year exceeds (ii) the total of all amounts each of which is (

A) the amount required by subsection 127(8) in respect of the partnership to be added in computing the investment tax credit of the taxpayer for the taxation year, (

B) the taxpayer’s share of any losses of the partnership for that fiscal period from a business or property, or (

C) the taxpayer’s share of (

I) the foreign resource pool expenses, if any, incurred by the partnership in that fiscal period, (II) the Canadian exploration expense, if any, incurred by the partnership in that fiscal period, (III) the Canadian development expense, if any, incurred by the partnership in that fiscal period, and (IV) the Canadian oil and gas property expense, if any, incurred by the partnership in that fiscal period.

… 111(5) Idem [business or property losses] - Where, at any time, control of a corporation has been acquired by a person or group of persons, no amount in respect of its non-capital loss or farm loss for a taxation year ending before that time is deductible by the corporation for a taxation year ending after that time and no amount in respect of its non-capital loss or farm loss for a taxation year ending after that time is deductible by the corporation for a taxation year ending before that time except that (

a) such portion of the corporation’s non-capital loss or farm loss, as the case may be, for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a business and, where a business was carried on by the corporation in that year, such portion of the non-capital loss as may reasonably be regarded as being in respect of an amount deductible under paragraph 110(1)(

k) in computing its taxable income for the year is deductible by the corporation for a particular taxation year ending after that time (

i) only if that business was carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular year, and (ii) only to the extent of the total of the corporation’s income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services; and (

b) such portion of the corporation’s non-capital loss or farm loss, as the case may be, for a taxation year ending after that time as may reasonably be regarded as its loss from carrying on a business and, where a business was carried on by the corporation in that year, such portion of the non-capital loss as may reasonably be regarded as being in respect of an amount deductible under paragraph 110(1)(

k) in computing its taxable income for the year is deductible by the corporation for a particular year ending before that time (

i) only if throughout the taxation year and in the particular year that business was carried on by the corporation for profit or with a reasonable expectation of profit, and (ii) only to the extent of the corporation’s income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services. [ 85 ] Losses can be carried forward or backward under paragraph 111(1)(a).

The ability to do so is limited by subsection 111(5) where there is a change of control. Specifically, non-capital losses may not be carried forward following an acquisition of control unless the business in which the losses were incurred continues to be carried on for profit or with a reasonable expectation of profit, and then only to the extent of income from that particular business or a similar business.

The relevant portion of the definition of "loss restriction event", found in subsection 251.2(2), refers to the situation where "the taxpayer is a corporation and at that time control of the corporation is acquired by a person or group of persons". [ 86 ] The Respondent provides a textual, contextual and purposive analysis of subsection 111(5). The Respondent is of the view that the application of subsection 111(5) was circumvented in circumstances where it should have applied.

My review of that analysis leads me to conclude that subsection 111(5) was not relied on in the transactions in question and was not circumvented. As a result, I cannot accord to it the primary importance ascribed to it in the Respondent’s arguments. [ 87 ] Subsection 111(5) was never contemplated to apply to a situation where it is the entity with accrued losses (Nuinsco) that acquires another entity.

To put it another way, I am unconvinced that subsection 111(5) applies to profit trading with a loss corporation acquirer such that it can even be said that the parties relied on subsection 111(5) in transacting as they did. [ 88 ] Subsection 111(5) restricts the loss carryforward of a target corporation's pre-acquisition losses to offset the same corporation's post-acquisition income, or the carryback of the target corporation's post-acquisition losses to offset its pre-acquisition income.

These appear to me to be specific circumstances in which the corporation being acquired cannot use its own losses to offset its own income. In our case, Nuinsco carried forward its losses from before it acquired Partnerco to offset its later income, allocated to itself by virtue of it becoming a partner of HLP after acquiring and winding up Partnerco. Nuinsco is the acquiring corporation rather than the target corporation—it did not undergo a loss restriction event.

The application of subsection 111(5) is entirely predicated on finding such an event to have occurred. [ 89 ] Partnerco did undergo a loss restriction event, but there is no indication in subsection 111(5) that it was meant to prevent the acquiring party from using its own losses against post-acquisition income allocable to that acquiring corporation indirectly due to its acquisition of the target corporation.

The attribution of the income from HLP to Nuinsco and its utilization of its prior non-capital losses against such income did not circumvent subsection 111(5), and Partnerco complied with the wording of the subsection but did not rely on its effect. [ 90 ] While I admit that the distinction is a fine one between a transaction that offends the purpose or rationale of a provision in a manner that circumvents it and a transaction that falls outside the scope of that provision altogether, the representations of both parties have convinced me that this is the latter case.

Briefly said, subsection 111(5) precludes certain forms of loss trading. It does not deal with profit or gain trading, except insofar as it generally precludes the target’s own post-acquisition losses from offsetting pre-acquisition income.

As a result, this is distinguishable from the situation in which a taxpayer unexpectedly relies on a loophole contained in a provision so as to circumvent the provision’s attempt to implement the policy that Parliament intended, either by its enactment or by that of the wider legislative scheme of which it is a component. [ 91 ] I am reinforced in this conclusion by considering the purpose of subsection 111(5), as outlined in the parties’ submissions and in the caselaw.

In noting the broadest ambit of that with which subsection 111(5) could be said to deal, the SCC stated that “the general purpose of s. 111(5) may be to prevent the transfer of non-capital losses from one corporation to another”. [33] To draw the net of

subsection 111(5) wider still would be to expand subsection 111(5) to cover both the transfer of losses and of income from one corporation to another. Justice Campbell in Loyens rejected a similar overbroad

interpretation of the purpose of subsection 111(5). [34] [ 92 ] The Respondent refers to OSFC Holdings , where the FCA found that a general policy against loss trading among corporations had been abused. [35] However, our case does not involve loss trading like that seen in OSFC Holdings . In OSFC Holdings , a corporation transferred accrued losses on a portfolio to another corporation, and this latter corporation used those losses to offset its own income.

In our case, a corporation with accrued losses acquired a corporation in order to become a partner and be allocated partnership income, against which it deducted those accrued losses. Our situation is a case of profit trading rather than loss trading. While, as noted above, subsection 111(5) is important to the broader GAAR analysis, the transactions in question do not rely on that provision.

The Supreme Court has been clear, most recently in Copthorne , that the GAAR analysis seeks to interpret the provisions actually relied on by the taxpayer with a view to discerning their underlying purpose. [ 93 ] Therefore, the usefulness of subsection 111(5) to the Respondent's position is limited to showing the broader context of the Act together with the provisions actually relied on by Partnerco, and that subsection 111(5) is evidence of a general policy against loss trading that was abused by the transactions at issue. (ii) Subsections 69(11) & 83(2.1) [ 94 ] The Respondent also refers to subsections 69(11) and 83(2.1). [ 95 ] Subsection 69(11) prevents the tax-deferred transfer of property to an unaffiliated person where that transfer is made for the purpose of having accrued gains on the property sheltered by deductions available to the unaffiliated person.

Subsection 69(11) is specific in its application, requiring an initial disposition of property at less than fair market value and a subsequent disposition within three years of that property or substituted property. Subsection 83(2.1) is an anti-avoidance rule targeting situations where shares of a corporation are acquired for the purpose of receiving a capital dividend. [ 96 ] I do not find these provisions relevant to the case at bar.

These provisions were not relied upon by Partnerco or Nuinsco to obtain the tax benefit, nor has the Respondent convinced me that they form part of the context in the textual, contextual, and purposive analysis of the provisions relied on in any meaningful way. As stated in Copthorne , " not every other

section of the Act will be relevant in understanding the context of the provision at issue. Rather, relevant provisions are related 'because they are grouped together' or because they “work together to give effect to a plausible and coherent plan”. [36] (iii)

Section 103 [ 97 ] The Respondent also referred to subsections 103(1) and 103(1.1). These are anti-avoidance provisions allowing the Minister to reallocate partnership income or losses (or other relevant amounts) in a manner different than that set out in the partnership agreement. Looking at subsection 103(1), the Minister is permitted to do this where “the principal reason for the agreement may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under this Act ”.

These provisions also were not relied upon in obtaining the tax benefit, but they clearly do form part of the context of the partnership provisions. [ 98 ] These provisions target partnership agreements that are tax-motivated or that are unreasonable.

This Court refused to apply subsection 103(1) to a situation where the allocation initially specified in the partnership agreement was not tax-motivated but a subsequent acquisition of a partnership interest was tax-motivated. [37] On the other hand, this Court has also found that upon the entry of a new member to a partnership, the reasonableness of an allocation scheme should be determined based on how the members at that time use the scheme, even if the allocation scheme was the same before and after the entry. [38] [ 99 ] In this case, the allocation scheme in the HLP partnership agreement had not changed since the creation of the partnership.

According to the scheme, profit and losses would be allocated according to the capital contributions of the partners. There is no indication that this scheme was chosen for tax purposes or that it was unreasonable. [ 100 ] After Nuinsco became a limited partner of HLP, the membership at that time consisted of Nuinsco as a 99.9% limited partner and GPCo (who was wholly owned by Nuinsco) as a 0.1% general partner. Income was allocated in proportion to the parties’ interests in the partnerships.

There is no indication that, as between Nuinsco and GPCo, this would have been unreasonable. [ 101 ] Where the problem would potentially lie is the allocation scheme as between new and former partners. The partnership’s cash ended up in the hands of a former partner’s parent (the Appellant), while the partnership’s income was allocated to the new member. Is

section 103 indicative of a general policy against allocating profit in this way? The Appellant argues that

section 103 does not concern allocation to former members. I note however paragraph 96(1.01)(a), which deems a partner who ceases to be a member of a partnership partway through a fiscal period to be a member of the partnership at the end of the fiscal period for the purposes of several sections, one of which is 103. To date, paragraph 96(1.01)(

a) has not received judicial consideration. It was open to the Respondent to argue that the combination of paragraph 96(1.01)(

a) and

section 103 demonstrate a general policy against profit trading between new and former members; having failed to do so, it is not for me to expand the lis of the parties. [ 102 ] I conclude that subsections 103(1) and 103(1.1) do not help the Respondent establish a general policy against profit trading. (iv) Other Provisions [ 103 ] I now turn to the provisions that, in my view, actually were relied on to obtain the tax benefit. The transactions directly relied on the operation of subsections 96(1) and 111(1), as well as the related provisions in

section 66.7 permitting the carryover of Canadian exploration expenses and Canadian development expenses. The onus was on the Respondent to show that the object, spirit or purpose of these provisions was abused. The Respondent has failed to do so and therefore has failed to justify the Partnerco reassessment.

[ 104 ] Subsection 96(1) was used to allocate the partnership income to Nuinsco at HLP’s fiscal year end. The Respondent did not provide an analysis of the subsection so as to establish the object, spirit or purpose of this provision. While this would end my inquiry, I would also note my own view that the object, spirit, or purpose of

section 96 was not abused. [ 105 ] Subsection 96(1) sets out the flow-through structure of partnerships.

The income of the partnership is computed as if the partnership were a separate person [39] and as if its taxation year was its fiscal period. [40] The partnership's income or loss is flowed through to its partners in accordance with their share of the partnership, and a partner includes his or her portion of the partnership's income or loss in his or her taxation year containing the partnership's fiscal year end. [41] [ 106 ] Generally, the partnership's income is allocated according to the partnership agreement.

This means that, as in this case, the partnership regime allows the partnership's income to be allocated to an entity that becomes a partner partway through the fiscal period.

In other words, the identity of the partners may change throughout the fiscal year through the purchase and sale of partnership interests, but the allocation of income can be made at the fiscal year end based on membership of the partnership at that time, provided the partnership agreement specifies this. [ 107 ] Textually, this treatment arises from paragraph 96(1)(f), which provides that a partner's income will be computed as if " the amount of the income of the partnership for a taxation year from any source or from sources in a particular place were the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership’s taxation year ends, to the extent of the taxpayer’s share thereof ; [Emphasis added] [ 108 ] "The taxpayer's share thereof" would be determined in accordance with the partnership agreement. [ 109 ] The context of the partnership regime supports this.

Apart from certain provisions governing allocations made to former partners and the anti-avoidance rules in

section 103 (previously discussed), nothing in the partnership regime prevents a partnership agreement from basing its allocation of income on the membership at its fiscal year-end. An example of a provision dealing with income allocation to a former member is subsection 96(1.01). Paragraph 96(1.01)(

a) deems a taxpayer who ceases to be a member of a partnership during a fiscal period to be a member of the partnership at the end of that fiscal period. However, though deemed to be a partner, the former member's allocation of partnership income would still be calculated in accordance with the partnership agreement, subject to the potential application of

section 103. [ 110 ] The purpose of the partnership provisions was canvassed in Mathew , where McLachlin C.J. and Major J. stated that the partnership provisions permit loss sharing among partners in order to promote an organizational structure that allows partners to carry on a business in common. [42] This reasoning would presumably apply to profit sharing as well. However, this neither supports nor negates the notion that the partnership provisions intend that partnership income can be allocated based on membership at the fiscal year end. [ 111 ] The tax plan in Mathew was the same as the one in OSFC Holdings . The plan used the partnership rules in

section 96 in conjunction with subsection 18(13), a stop-loss rule that allowed a portfolio of loans with accrued losses to be transferred to a partnership at cost. McLachlin C.J. and Major J. found that both provisions had been abused. They grounded the abuse on the premise that subsection 18(13) intends those accrued losses to be realized by a non-arm’s length transferee, while they had in fact been transferred to an arm's length party. A partnership structure was used as a vehicle to transfer these losses in a way that was wholly unintended by subsection 18(13).

They held that, " Parliament could not have intended that the combined effect of the partnership rules and s. 18(13) would preserve and transfer a loss to be realized by a taxpayer who deals at arm's length with the transferor. To use these provisions to preserve and sell an unrealized loss to an arm's length party results in abusive tax avoidance under s. 245(4).

Such transactions do not fall within the spirit and purpose of s. 18(13) and s. 96, properly construed." [43] [ 112 ] The abuse in Mathew of the partnership rules was linked to the abuse of subsection 18(13) and identified in light of the acknowledged general legislative policy of prohibiting loss transfers between taxpayers, subject to specific exceptions. In our case,

section 96 for the most part stands alone and the legislative context highlighted by the Respondent does not clearly evidence a policy against profit trading. The partnership provisions and subsection 111(1) were relied on by the parties to the transaction, but I am unconvinced that either set of provisions, acting alone or in concert, has been abused. This distinguishes our case quite clearly from Mathew. [ 113 ] Subsection 111(1) permitted Nuinsco to offset the partnership income with previous losses. Paragraph 111(1)(

a) itself contains no restrictions on the sources of income against which previous losses can be offset. Nuinsco using existing non-capital losses to offset the partnership income does not offend paragraph 111(1)(a). Subsection 111(5) does restrict the use of prior losses where there is an acquisition of control of the corporation that has accrued (or will accrue) those losses, but subsection 111(5) contains specific conditions to its application and, as noted above, it does not evidence a general policy in the Act against profit trading. [ 114 ] To sum up, I do not find in the

section 96 partnership provisions, subsection 111(1), subsection 111(5), or any of the other provisions, the general policy proposed by the Respondent. As I have found that the policy alleged to be abused has not been made out, it follows that the requisite abuse has also not been made out.

This is especially so once one remembers that the Respondent bears the onus of proving abuse, and that "if the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer". [44] The Respondent has failed to discharge that onus, so the taxpayer is certainly entitled to the benefit of the doubt. [ 115 ] Given that I am of the view that the general policy put forwarded by the Respondent is unable to be demonstrated, I find it of little use to go on to consider whether the transactions at issue offended the hypothetical policy proposed by the Respondent.

The absence of evidence of such a policy being my primary concern, it would be improper of me to speculate as to what I would have done had such evidence been before me. (

d) Reasonable tax consequences

[ 116 ] I would however like to address one more area of disagreement between the parties regarding the Partnerco Reassessment. The Appellant argues that if the three requirements of the GAAR are met, then the Minister still erred by failing to determine reasonable tax consequences, contrary to subsection 245(2). [ 117 ] Specifically, the Appellant argues that it was not reasonable for the Minister to ignore the deemed year end arising from Partnerco’s acquisition by Nuinsco, since the Minister could have denied the tax benefit obtained by Partnerco without doing so.

The Minister could have either (1) assessed Nuinsco to deny the deductions it claimed against the partnership income, or (2) included HLP's income in Partnerco’s stub period from May 29 to June 1, 2006, rather than ignoring the deemed year end and including the partnership income in a notional period spanning May 1, 2006 to June 1, 2006. According to the Appellant, the Minister sought to ignore the deemed year end for the purpose of being able to generate a factual foundation for assessing the Appellant under the GAAR and

section 160. [45] [ 118 ] The first proposed alternative would be dependent on my finding that the tax benefit accrued to Nuinsco rather than Partnerco. As I have found that Partnerco received a tax benefit, I accordingly reject this argument. [ 119 ] I find the second alternative compelling. According to subsection 245(2), the Minister is to determine the tax consequences that are reasonable in the circumstances in order to deny the tax benefit resulting from the abusive series of transactions.

The broad definition of “tax consequences” in subsection 245(1), combined with paragraph 245(5)(d), would allow the Minister to ignore the deemed year end in the proper circumstances. Chief Justice Bowman in XCO Investments held that what i

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