DAMIS PROPERTIES INC., Appellant, v. HER MAJESTY THE QUEEN,, 2021 TCC 24

Source: Tax Court of Canada

Date: 2021-03-24

Jurisdiction: Federal

Docket: 2016-4783(IT)G

Citation: 2021 TCC 24

Opinion

Docket: 2016-4783(IT)G BETWEEN: DAMIS PROPERTIES INC., Appellant, and HER MAJESTY THE QUEEN, Respondent . Appeal heard on common evidence with the appeals of Sabel Investments II-A Limited (2016-4785(IT)G), Zagjo Holdings Limited (2016-4787(IT)G), Devamm Investments II-A Limited (2016-4788(IT)

G) and Microbjo Properties Inc. (2016-4789(IT)

G) on March 11 to 12, 2020 and September 21 to 23, 2020, at Toronto, Ontario Before: The Honourable Justice John R. Owen Appearances : Counsel for the Appellant: Yves St-Cyr Jacob Yau Counsel for the Respondent: Natalie Goulard Dominic Bédard-Lapointe Simon Vincent Alain Gareau AMENDED JUDGMENT In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under

section 160 of the Income Tax Act is vacated. The Appellant has 30 days from the date of this judgment to make a single submission regarding costs and the Respondent has 15 days to respond to that submission. The submissions on costs shall not exceed ten pages for the Appellant and ten pages for the Respondent. The Amended Judgment is issued in substitution for the Judgment dated March 24, 2021. The Amended Judgment corrects the order of Appellant’s counsel. Signed at Ottawa, Canada, this 26 th day of March 2021. “J.R. Owen” Owen J.

Docket: 2016-4785(IT)G BETWEEN: SABEL INVESTMENTS II-A LIMITED, Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeal heard on common evidence with the appeals of Damis Properties Inc. (2016-4783(IT)G), Zagjo Holdings Limited (2016-4787(IT)G), Devamm Investments II-A Limited (2016-4788(IT)

G) and Microbjo Properties Inc. (2016-4789(IT)

G) on

March 11 to 12, 2020 and September 21 to 23, 2020, at Toronto, Ontario Before: The Honourable Justice John R. Owen Appearances : Counsel for the Appellant: Yves St-Cyr Jacob Yau Counsel for the Respondent: Natalie Goulard Dominic Bédard-Lapointe Simon Vincent Alain Gareau AMENDED JUDGMENT In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under

Docket: 2016-4787(IT)G BETWEEN: ZAGJO HOLDINGS LIMITED, Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeal heard on common evidence with the appeals of Damis Properties Inc. (2016-4783(IT)G), Sabel Investments II-A Limited (2016-4785(IT)G), Devamm Investments II-A Limited (2016-4788(IT)

G) and Microbjo Properties Inc. (2016-4789(IT)

In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under

Docket: 2016-4788(IT)G BETWEEN: DEVAMM INVESTMENTS II-A LIMITED, Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeal heard on common evidence with the appeals of Damis Properties Inc. (2016-4783(IT)G), Sabel Investments II-A Limited (2016-4785(IT)G), Zagjo Holdings Limited (2016-4787(IT)

G) and Microbjo Properties Inc. (2016-4789(IT)

Appellant, and HER MAJESTY THE QUEEN, Respondent. Appeal heard on common evidence with the appeals of Damis Properties Inc. (2016-4783(IT)G), Sabel Investments II-A Limited (2016-4785(IT)G), Zagjo Holdings Limited (2016-4787(IT)

G) and Devamm Investments II-A Limited (2016-4788(IT)

Citation: 2021 TCC 24 Date: 20210324 Docket: 2016-4783(IT)G BETWEEN: DAMIS PROPERTIES INC., Appellant, and HER MAJESTY THE QUEEN, Respondent; Docket: 2016-4785(IT)G, AND BETWEEN: SABEL INVESTMENTS II-A LIMITED, Appellant, and

HER MAJESTY THE QUEEN, Respondent; Docket: 2016-4787(IT)G, AND BETWEEN: ZAGJO HOLDINGS LIMITED, Appellant, and HER MAJESTY THE QUEEN, Respondent; Docket: 2016-4788(IT)G, AND BETWEEN: DEVAMM INVESTMENTS II-A LIMITED, Appellant, and HER MAJESTY THE QUEEN, Respondent; Docket: 2016-4789(IT)G AND BETWEEN: MICROBJO PROPERTIES INC., Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Owen J. I. Introduction [ 1 ] These appeals address the income tax consequences to the five Appellants under

section 160 of the Income Tax Act (the " “ITA” " ) and under the general anti-avoidance rule in

section 245 of the ITA (the " “GAAR” " ) of transactions undertaken by the Appellants to increase the after-tax return of the Appellants from a sale of farmland in Brampton (the " “farmland” " ) owned by five general partnerships (the " “general partnerships” " ), which were in turn owned as to 99.99% by the Appellants—each Appellant owning a 99.99% interest in one of the five general partnerships. [ 2 ] At the commencement of the hearing, the parties agreed that the appeals of all the Appellants would be heard on common evidence but that to avoid repetition the evidence would be directed only to the transactions undertaken by Microbjo Properties Inc. ( " “MPI” " ) and Damis Properties Inc. ( " “DPI” " ) (the " “reference transactions” " ). [ 3 ] The transactions undertaken by each Appellant, all of which took place in 2006, isolated the proceeds and income from the sale of the farmland in a newly incorporated subsidiary of each Appellant (individually, a " “subsidiary” " and collectively, the " “subsidiaries” " ).

Each Appellant then sold its subsidiary to Wilshire Technology Corporation ( " “WTC” " ), a corporation incorporated by an unrelated person to acquire the shares in all the subsidiaries. [ 4 ] At the time the shares in the subsidiaries were sold to WTC, three of the subsidiaries held only cash and two of the subsidiaries held cash and an intercompany receivable. [ 5 ] Microbjo (Chinguacousy) Inc. ( " “MCI” " ) (owned by MPI) is representative of the two subsidiaries that held cash and an intercompany receivable and 1685471 Ontario Inc. ( " “471” " ) (owned by DPI) is representative of the three subsidiaries that held only cash.

[ 6 ] Accordingly, the reference transactions collectively address the two ways in which the transactions occurred.

The parties agreed that the decision of the Court in respect of the reference transactions would determine the result in all five appeals. [ 7 ] The reference transactions are described in detail in partial agreed statements of fact (the " “PASFs” " ) filed with the Court in respect of the appeals by DPI and MPI, copies of which are appended to these reasons as Appendix A and Appendix B, respectively. [ 8 ] Each of the PASFs references documents in a joint book of documents for the appeal to which the PASF applies.

The parties agreed that the documents in the joint books are authentic and relevant and the joint books were entered into evidence holus-bolus on that basis (exhibits AR-1 and AR-2) subject, of course, to the subsequent exercise of the Court’s discretion to exclude all or part of a particular document under the applicable rules of evidence. All other exhibits were entered into evidence individually as the hearing progressed. [ 9 ] The transactions described in the PASFs can be summarized as follows: A.

Prior to the closing on January 16, 2006 of the sale of the farmland by the general partnerships, have each Appellant incorporate a new taxable Canadian corporation ( i . e ., the subsidiaries), issue one class B share in the subsidiary to the Appellant for nominal consideration, transfer the Appellant’s 99.99% general partnership interest in its general partnership to the subsidiary for 100 common shares in the subsidiary and jointly elect with the subsidiary under subsection 85(1) of the ITA to have the Appellant’s proceeds of disposition and the subsidiary’s cost of the general partnership interest be equal to the adjusted cost base to the Appellant of that partnership interest.

B. Close the sale of the farmland by the general partnerships, deposit the proceeds from the sale in the bank account of the general partnerships and, in the case of two of the general partnerships, lend a significant portion of the proceeds to the Appellant or to the parent corporation of the Appellant. C. Following the May 31 year end of the general partnerships, allocate each subsidiary’s 99.99% share of the partnership’s income from the sale of the farmland to the subsidiary. D. Distribute from the general partnerships to each subsidiary either cash or cash and an intercompany receivable. E.

On December 28, increase the stated capital of the 100 common shares held by each Appellant in its subsidiary to an amount approximating the expected sale price of the shares in the subsidiary in order to increase the adjusted cost base of those shares by the same amount. F.

On December 29, enter into a share put agreement with WTC pursuant to which each Appellant could put the shares in its subsidiary to WTC for a price equal to the after-tax value of the subsidiary plus 46% of the tax liability of the subsidiary resulting from the allocation by the general partnership to the subsidiary of the income from the sale of the farmland. G. On December 29, have the director and officer of the subsidiary resign and be replaced by Craig Nerland, the nominee of WTC. H.

On December 31, exercise the put and close the sale of the shares in the subsidiary to WTC with WTC using the cash or receivable in the subsidiary to discharge the payment of the purchase price immediately after the transfer of the purchased shares. [ 10 ] The Minister of National Revenue (the " “Minister” " ) assessed each Appellant under subsection 160(1) of the ITA for the income tax liability of that Appellant’s subsidiary (the " “underlying tax liability” " ) for its taxation year ending December 31, 2006 (the " “taxation year” " ) [1] determined without regard to a deduction for capital cost allowance claimed by each subsidiary for the taxation year that, if allowed, would have reduced each subsidiary’s income to nil. [ 11 ] The Appellants submit that the Minister has not established the existence of the underlying tax liability of the subsidiaries for the taxation year, and that even if that liability did exist, three of the four conditions for the application of subsection 160(1) have not been met: there was no transfer of property from the subsidiaries to the Appellants; even if there was a transfer, the subsidiaries and the Appellants were dealing at arm’s length at the time of the transfer; and, the fair market value of the consideration given by the Appellants equalled or exceeded the fair market value of the property transferred by the subsidiaries. [ 12 ] In the alternative, the Minister assessed the Appellants under the GAAR.

The Respondent submits that the transactions summarized above were avoidance transactions that resulted directly or indirectly in an abuse of

section 160 of the ITA. The Appellants submit that the transactions were ordinary commercial transactions to which

section 160 simply does not apply and therefore there is no abuse. The relevant statutory provisions are reproduced in Appendix C to these reasons. II. The Witnesses [ 13 ] Five fact witnesses and one expert witness testified for the Appellants. No witnesses testified for the Respondent. [ 14 ] The fact witnesses are: A. Michael Naiberg, a member of the family that owns MPI and various related companies . In 2006, Mr. Naiberg was a director of MPI and the sole director, president and secretary of MCI. B. Howard Meyer, a former member by marriage of the family that owned DPI and various related companies.

In 2006, Mr. Meyer was a director of DPI and the sole director, president and secretary of 471. C. Paul Bleiwas, a tax lawyer with Goodman & Carr LLP ( " “G&C” " ) in 2006 who advised MPI and Devamm Investments II-A Limited ( " “DIL” " ) regarding the transactions. Another lawyer with G&C advised the other three Appellants regarding the transactions in issue. D. David Steinberg, a chartered professional accountant with RSM Richter LLP in 2006 who prepared pro forma financial statements and tax-related calculations for MPI.

E. Craig Nerland, a director of WTC during the period in issue and the individual appointed as the sole director of the subsidiaries on December 29, 2006. [ 15 ] In addition, Helen Mallovy Hicks of PricewaterhouseCoopers LLP was qualified as an expert in share valuation. Ms. Hicks provided expert opinion evidence regarding the fair market value of the shares held in the subsidiaries immediately prior to the sale of those shares to WTC on December 31, 2006.

The valuations disregarded any transactions that occurred in the subsidiaries after December 29, 2006—that is, transactions effected in the subsidiaries by WTC. III. The Evidence of the Witnesses A. Mr. Michael Naiberg and Mr. Howard Meyer [ 16 ] In the 1950s, Mr. Naiberg’s grandfather (the original principal of MPI) and two other individuals (the original principals of DPI and Sabel Investments II-A Limited ( " “SIL” " )) started a real estate development company called the Nu Style Group, which built houses for sale, built apartment buildings and acquired land for development.

These activities were sometimes carried on in partnership with others, including DIL and Zagjo Holdings Limited ( " “ZHL” " ). [ 17 ] In the 1970s, the Appellants and others acquired the farmland (known as the Chinguacousy farmland) for the purpose of developing the farmland into residential properties at some point in the future. [ 18 ] In 2005, the Appellants held an aggregate 70% interest in the farmland through five general partnerships as follows: A. MPI through the Irber II Partnership as to a 16 2/3% undivided interest in the farmland . B.

DPI through the Damis II Partnership as to a 16 2/3% undivided interest in the farmland. C. SIL through the Sabel II Partnership as to a 16 2/3% undivided interest in the farmland. D. DIL through the Devamm II Partnership as to a 10% undivided interest in the farmland. E. ZHL through the Zagjo II Partnership as to a 10% undivided interest in the farmland. [ 19 ] At some point in 2005, the Appellants and the persons that owned the remaining 30% of the farmland (collectively, the " “owners” " ) determined that they were unlikely to agree on how and when to develop the farmland.

The owners decided that the best course of action was to offer the farmland for sale through a public auction. [ 20 ] The owners retained counsel other than G&C to carry out the auction and sale of the farmland. On December 8, 2005, each of the five partnerships executed an agreement to sell its interest in the farmland to one of the owners that is not an Appellant in these appeals. The sales of the farmland by the partnerships closed on January 16, 2006. [ 21 ] G&C provided advice to the Appellants regarding post-sale planning.

This advice included the plan to carry out the transactions summarized in the introduction

section of these reasons (the " “plan” " ). G&C provided the advice separately to each of the Appellants. The Appellants did not meet to discuss the plan and no Appellant took the lead with G&C, but the plan was discussed in conversations among the Appellants. [ 22 ] Mr. Naiberg could not recall the specific advice given by G&C or any details regarding the plan. He testified that G&C presented the plan to MPI and that he accepted the plan based on G&C’s recommendation. [2] In cross-examination, Mr. Naiberg described the plan as a packaged proposal that came from G&C.

He also testified that his father had been a tax lawyer with G&C for many years prior to 2006 and that he would have been a point of contact with G&C and would have had questions regarding the plan. [ 23 ] Mr. Naiberg testified that the intercompany receivable held by MCI resulted from the fact that MCI did not have a bank account so Irber II Partnership advanced the funds from the sale of the farmland to Microbjo Holdings Inc. ( " “MHI” " ) as a non-interest bearing loan and MHI invested the cash in short-term debt. The Irber II Partnership subsequently distributed an intercompany receivable to MCI. Mr.

Naiberg testified that pooling surplus funds in MHI was standard practice for the related group of companies under MHI. [ 24 ] In cross-examination, Mr. Naiberg was asked why the Irber II Partnership lent $3,254,012 to MHI, leaving behind $767,000 of the proceeds received by the partnership from the sale of the farmland. Mr. Naiberg could not recall the reason. Mr. Naiberg also could not recall if there was a connection between the amount of the intercompany receivable and the amount WTC agreed to pay MPI for its shares in MCI. [ 25 ] In cross-examination, Mr.

Naiberg was asked about the reason for incorporating MCI and transferring MPI’s interest in the Irber II Partnership to MCI on a " “rollover” " basis. Mr. Naiberg repeatedly stated that these steps were done on the advice of G&C and that he did not know the specific reason for these steps. [ 26 ] Mr. Naiberg agreed with counsel for the Respondent that the only purpose of MCI was to hold MPI’s share of the farmland by acquiring its interest in the Irber II Partnership and to hold the proceeds from the sale by the partnership of its interest in the farmland. [ 27 ] In re-examination, Mr.

Naiberg agreed with counsel for the Appellants that MPI’s interest in the Irber II Partnership was transferred to MCI to isolate in MCI the proceeds and income from the sale of the farmland. [ 28 ] In cross-examination, Mr. Naiberg agreed that MCI had a tax liability from the sale of the farmland by the Irber II Partnership of approximately $1,300,000. [ 29 ] Mr. Naiberg was asked if there was a commercial reason for selling the shares in MCI to WTC. Mr. Naiberg stated that the advice was that some taxes could be saved by selling MCI to WTC.

[ 30 ] Mr. Naiberg was asked why a share put agreement was used rather than a direct sale of the shares in MCI. Mr. Naiberg agreed with counsel for the Respondent that it was a specific mechanic to reduce the tax on the income from the sale of the farmland but he did not know specifically why the sale of the shares in MCI was done that way. Mr. Naiberg stated that the deal with WTC was different from the normal purchase and sale agreements he would deal with. [ 31 ] Mr.

Naiberg agreed with counsel for the Respondent that the price received by MPI for its shares of MCI exceeded the after-tax value of MCI by approximately $600,000 and that this amount related to the tax savings on the sale of the farmland. [ 32 ] Mr. Naiberg was asked why MPI elected Craig Nerland as a director of MCI on December 29, 2006 while MPI still controlled MCI. Mr. Naiberg testified that once the share put agreement was executed, he had no interest in what happened to MCI because he had the option to sell the shares of MPI two days later. He also stated that he had no idea what Mr.

Nerland was going to do with MCI. [ 33 ] Mr. Meyer testified that after the agreement to sell the farmland was executed by the Damis II Partnership, G&C presented DPI with a plan to increase the after-tax amount received by DPI as a consequence of the sale of the farmland by the partnership. Mr. Meyer described his objective as maximizing the return from the sale of the farmland to the family and stated that he was satisfied that the plan presented by G&C would accomplish that result. [ 34 ] In cross-examination, Mr.

Meyer repeatedly stated that he did not ask questions but relied on the advice he was given and that he did not recall the details. He stated that " “some structure was put together in order to see that all the families could optimize their dollars”. " [3] He also stated the following: The structure was told to us by our team [of advisers], and they put the structure in place. So I have no knowledge as to, well, why the pieces were put the way they were put. It wasn’t my department. My department was to take the advice, listen to the other families, all agree.

And sign it. [4] . . . . . . what I have a recollection of is that there was a specific structure and timing that everything had to take place, and that the lawyers came to us, brought documents, told us what had to be signed, when and where, and that is the way it was done – period. [5] [ 35 ] Mr. Meyer was asked why Damis Holdings Limited ( " “DHL” " ) deposited funds with G&C rather than DPI. [6] Mr. Meyer confirmed that DHL owned all the shares in DPI, but he did not know why DHL transferred funds to G&C rather than DPI. [7] [ 36 ] Mr. Naiberg and Mr.

Meyer each testified that they had not heard of WTC or Craig Nerland prior to the execution of the documents implementing the sale of the shares in the subsidiaries to WTC in December 2006, that they did not meet with anyone from WTC at any time, and that the closing of the sale of the subsidiaries to WTC did not occur in the presence of WTC. [ 37 ] Mr. Naiberg and Mr. Meyer also testified that they had no contemporaneous knowledge of the transactions that WTC caused to be carried out in MCI and 471 after they had resigned as directors on December 29, 2006. Their only knowledge came from these appeals. [ 38 ] Mr.

Naiberg and Mr. Meyer each acknowledged in cross-examination that they had received requirement letters from the Canada Revenue Agency ( " “CRA”) " and both stated that they passed the letters on to their professional advisers and did not review the responses. B. Mr. Paul Bleiwas [ 39 ] Mr. Bleiwas testified that he provided advice regarding the plan to MPI and DIL and that Earl Miller, another partner at G&C at the time, was the primary contact for the other Appellants. [ 40 ] Mr. Bleiwas’s primary contact on the WTC [8] side of the transaction was Robert J. MacRae, a lawyer based in Vancouver. Mr.

Bleiwas knew of Mr. MacRae for one or two years prior to December 2006 and he knew of his involvement in one or two similar transactions undertaken by other lawyers at G&C. Mr. Bleiwas never met Mr. MacRae in person and communicated with Mr. MacRae only by telephone and e-mail. [ 41 ] Mr. Bleiwas became aware of Craig Nerland’s involvement with WTC in December 2006. Mr. Bleiwas did not meet Craig Nerland in person. [ 42 ] Mr.

Bleiwas testified that G&C presented the plan to the Appellants shortly after the agreements to sell the farmland were executed by the general partnerships in December 2005. [ 43 ] In his examination in chief and cross-examination, Mr. Bleiwas provided an explanation for some of the transactions comprising the plan. [ 44 ] MCI was incorporated and MPI’s interest in the Irber II Partnership was transferred to the subsidiaries because WTC required the corporation being purchased ( i.e. , MCI) to be a single purpose corporation with only cash or near cash assets.

MPI did not meet this criterion because it had other assets. [ 45 ] On December 28, 2006, prior to the sale of the shares in MCI to WTC, the stated capital of the shares in MCI was increased by $3,053,000 to $3,336,643 through a series of special resolutions by MPI in its capacity as the sole shareholder of MCI. The increase in stated capital resulted in a commensurate taxable dividend and an increase in MPI’s adjusted cost base [9] in its shares in MCI. Mr. Bleiwas described this as a standard pre-sale technique. [ 46 ] On December 29, 2006, Mr.

Naiberg resigned his position as the sole director of MCI and MPI elected Craig Nerland as his replacement. Mr. Bleiwas testified that this step was insisted upon by WTC in order to allow WTC to enter into " “some kind of arrangements with respect to the company [MCI] to make their planning work.” " [10]

[ 47 ] Mr. Bleiwas stated that the views of MPI’s corporate counsel ( i.e. , other lawyers at G&

C) were obtained and that he believed that the principal reason the arrangement was acceptable to them was that MPI could put the shares in MCI to WTC two days later " “so it didn’t really matter what the directors [sic] did or didn’t do during that short period of time.” " [11] [ 48 ] Mr. Bleiwas testified that the representation of MPI in the share put agreement with WTC regarding the assets of MCI was amended at the last minute to reflect the fact that MCI had cash and an intercompany receivable rather than just cash. Mr.

Bleiwas explained that MPI’s corporate banking practice was to consolidate its investable cash and that to do that a substantial portion of the cash from the sale of the farmland was lent by the Irber II Partnership to MHI. Mr. Bleiwas described this as " “very standard banking practice for them” " . [12] He thought that the receivable was not converted back to cash before the sale of MCI because that would have triggered a penalty on the term deposit. [ 49 ] With respect to the amount of the intercompany receivable, Mr.

Bleiwas testified that MPI was aware of the purchase price to be paid for the shares of MCI and that the $767,000 left in cash was roughly 54% of the $1,302,731 tax liability in MCI because of the sale of the farmland. [13] [ 50 ] Mr. Bleiwas testified that the financial terms were set by WTC from the outset and that the deal was presented to MPI on a take-it-or- leave-it basis. Any negotiation that occurred related only to the timing of the transactions. [ 51 ] In cross-examination, Mr.

Bleiwas testified that it was obvious that WTC would need to do something in MCI to reduce MCI’s tax liability but that he had no specific knowledge of what that something was. He also stated that G&C did not provide a written tax opinion to MPI, that there was nothing controversial about the transactions and that the verbal advice given was not lengthy or complicated. He described the steps as a rollover, an allocation of partnership income, an increase in stated capital and a share sale. [ 52 ] Mr.

Bleiwas was asked whether there was consideration for the assignment of the $3,253,687 receivable held by MCI from MCI to WTC on December 31, 2006. Mr. Bleiwas stated that it was not up to him to know whether there was consideration for that assignment but noted that the PASF indicated that this assignment was booked as a loan from MCI to WTC. Paragraph x) of the PASF states that the aggregate of the receivable and $83,603 (i.e., $3,337,723—the amount of the purchase price paid by WTC to MPI) was recorded as accounts receivable of MCI in

Schedule 100 of its T2 tax returns for 2007 to 2012. [ 53 ] When directed by counsel for the Respondent to the assignment executed by MCI in favour of WTC (tab 25 of AR-1) and the assignment by WTC in favour of MPI (tab 27 of AR-1), and the absence of any mention of consideration in the former assignment, Mr. Bleiwas stated " “Well, the purpose of this is not to document the entire arrangement regarding the receivable. All it is is an assignment. It’s just the direction to the parties to do something. It’s not a full contract, if you like.” " [14] Mr.

Bleiwas also stated that he did not think it was important that WTC give consideration to MCI for the receivable. C. Mr. David Steinberg [ 54 ] Mr. Steinberg testified that in 2006 his then accounting firm RSM Richter LLP were the accountants for MPI and the Irber II Partnership. [ 55 ] Mr. Steinberg testified that Mr. Bleiwas provided him with the relevant transaction steps in an e-mail dated December 19, 2006 and he provided various numbers to Mr.

Bleiwas in an e-mail dated December 20, 2006. [15] [ 56 ] The accounting staff at RSM Richter LLP prepared draft pro forma financial statements for MCI for the period January 10, 2006 through December 31, 2006. [16] The Notice to Reader is dated December 20, 2006 and states that the draft statements are based on information provided by management. Mr. Steinberg stated that he had no communication with WTC or Mr. MacRae prior to the closing on December 31, 2006. [ 57 ] Mr.

Steinberg testified that in 2007 he was asked to prepare and file the tax returns of MCI for its 2006 taxation year but he refused because MCI was no longer a client of RSM Richter LLP as a result of the sale to WTC. Instead he provided MCI’s business number and miscellaneous other information to Mr. MacRae. [17] Mr. Steinberg testified that he had no other communications with Mr. MacRae and that he had no information regarding transactions in MCI effected by WTC. D. Mr. Craig Nerland [ 58 ] Mr. Craig Nerland qualified as a chartered accountant in 1977. Around 1986, Mr.

Nerland left public practice as a chartered accountant and started to work in other areas including two years with Revenue Canada. From 2005 to 2017, Mr. Nerland was the controller at a group of architectural firms in British Columbia. [ 59 ] Mr. Nerland testified that in 2005, he was approached by his brother, Philip Gordon Nerland, to act as a director of various corporations, one of which was WTC, that were acquiring computer software. In exchange, he received a fee for his services. Mr.

Nerland testified that his brother worked with a tax lawyer in Vancouver called Robert MacRae. [ 60 ] In cross-examination, Mr. Nerland stated that he was not a hands-on director, that he was not involved in the day-to-day operations of WTC and that his duties involved " “looking at things that have been done and signing documents that were required to be signed” " . [18] He also stated that he was not an officer of WTC and did not know who was an officer of WTC. [ 61 ] Mr. Nerland understood that the transactions involved the acquisition of computer software.

He testified that he had no knowledge of how interested parties were identified or who brought the interested parties to WTC. He stated that his brother would advise him that " “we have a tax deal” " and " “we need you to sign some documents” " . [19] [ 62 ] Mr. Nerland was asked to describe the transactions entered into by WTC in more detail. He suggested that WTC purchased class 12 computer software and sold interests in the software to other persons. Upon being presented with the PASF, Mr.

Nerland agreed that his description of the transactions was incorrect and that in fact WTC purchased corporations under a share put agreement. Mr. Nerland stated that there was always a share put agreement.

[ 63 ] Mr. Nerland could not recall why a share put agreement was required or how the purchase price was determined. He also did not know the reason for the key terms of the share put agreement or why WTC agreed to pay more than the net value of MCI for the shares in MCI. [ 64 ] Mr. Nerland was asked how WTC benefitted from the transactions and he stated: So a corporation, the guys vending the land, wished to find a means to shelter their income. They did so. They paid us money.

We ran through this series of transactions, for which I got a tiny bit of money, my brother Philip I assume got some money, the lawyer was paid, et cetera. End result was the land vendors ended up getting a shelter or the gain on the sale of the farmlands, and I gather that's what they were attempting to do. [20] When asked why it was necessary to go beyond selling the software, Mr. Nerland stated that he did not know and that he could not recall. [ 65 ] Mr. Nerland testified that the corporations purchased by WTC would continue to exist for a number of years but that he did not know what happened to them. Mr.

Nerland was asked what happened between the parties following the purchase and he stated the following: " “What happens -- I mean, the companies were acquired under the Wilshire banner, and as far as I know, the company, Microbjo in this case, or MCI, that would be the end of it, as far as I knew” " . [21] [ 66 ] Mr. Nerland also stated that he had no communication with Michael Naiberg and that " “there was no communication, as far as I can recall” " . [22] Mr. Nerland also stated that he had no involvement with G&C. [ 67 ] Counsel for the Respondent presented Mr.

Nerland with a 2014 letter addressed to him in which the CRA requested information. After reviewing the letter with counsel, Mr. Nerland speculated that he may have been a director of as many as 50 corporations. Mr. Nerland stated that he resigned as a director of all the corporations in October 2014 and that he did not know what happened to the corporations after that date. [ 68 ] Mr. Nerland stated that he sent the CRA letter to Robert MacRae to " “help me craft the responses to Mr. Lee” " . [23] [ 69 ] Mr.

Nerland was asked about Securitas Video Corp ( " “Securitas” " ) and about the software purchase by MCI from Securitas. He stated that he did not know anything about Securitas or about the software or what it did. [ 70 ] Mr. Nerland was asked if there were any payments to Securitas for the software. Mr. Nerland responded that he did not recall any payments on the notes issued to Securitas and that the interest on the notes was accrued but not remitted.

When asked if there were payments other than by way of promissory note, he stated that there were no payments of cash and that any other payments would have been made by cheque on the lawyer’s trust account as MCI did not have a bank account. [ 71 ] Mr. Nerland was asked if he could " “tell us anything about . . . NG Global Marketing Corp.” " He stated that he could not. [24] Mr. Nerland also did not have any knowledge of the marketing services agreement with NG Global Marketing Corp. ( " “NG Global” " ) other than that NG Global agreed to market the software globally.

He stated that he had not seen the marketing agreements. [ 72 ] Mr. Nerland stated that he did not know if any marketing was ever conducted by NG Global. He also stated that he did not recall any marketing reports being prepared even though the service contract required annual reports. [ 73 ] Mr. Nerland was asked about the 2006 tax return filed by MCI. Mr. Nerland acknowledged that he signed the return and that he was the contact person named on the return. However, he stated that a Vancouver accounting firm prepared the return. Mr.

Nerland stated that he would review the return of MCI and other returns to confirm that the corporation had no tax liability. [ 74 ] Mr. Nerland testified that he satisfied himself that he was not personally liable as a result of being a director of WTC because it had no employees and no sales that would attract GST. Mr. Nerland also stated that he did not believe there were any activities in WTC but that he did not recall. [25] Mr. Nerland did not know why the 2006 tax return of MCI was filed on November 16, 2009. [ 75 ] Mr. Nerland was asked why Mr.

Naiberg resigned as a director and officer of MCI on December 29, 2006 and why he was elected as a director on that same date. He responded that it was because his brother asked him to become a director to do the transactions. He provided the same response as to why he was appointed president and secretary of MCI. [ 76 ] Mr. Nerland was asked who signed the software purchase agreement with Securitas. Mr. Nerland stated that he did not know, that as far as he was aware he had never met anyone from Securitas and that he did not participate in any negotiations regarding the agreement.

He believed that his brother defined the terms of the agreement. Mr. Nerland did state that he had met one individual from the British Virgin Islands who was introduced as a friend of his brother and whom he believed may have been behind the various offshore companies. [ 77 ] Mr. Nerland also stated that he did not believe that any compensation for the purchase of the software changed hands other than the note for $8.1 million.

He did not know if MCI made money from the software, but he stated that he had no reason to believe that the financial statements for 2007 to 2012 that showed zero revenue were incorrect. [ 78 ] Mr. Nerland was asked whether the assignment by MCI to WTC of the $3.253 million receivable owed by MHI to MCI was for consideration and Mr. Nerland stated that he did not recall. Mr.

Nerland was also asked about two debt refinancing agreements dated January 31, 2007—one entered into by MCI and one entered into by 471 —that suggested payments had been made on the $8.1 million software purchase notes but he stated that he did not know where the payments came from and he did not recall why the agreements were necessary. [ 79 ] Mr. Nerland was asked about a software purchase agreement dated May 30, 2007 entered into by MCI that indicated that MCI had sold its interest in the computer software purchased from Securitas to a numbered company for $9 million. [26] Mr.

Nerland had no explanation for, and no recollection of, the sale or the lack of any change in the financial statements of MCI reflecting the sale. He also did not know why this sale was not reported in the 2007 T2 tax return of MCI. E. Ms. Helen Mallovy Hicks

[ 80 ] Ms. Helen Mallovy Hicks testified regarding the fair market value as of December 31, 2006 of the shares held by the Appellants in the subsidiaries disregarding any transactions effected in the subsidiaries by WTC after December 29, 2006. [ 81 ] Ms. Mallovy Hicks opined that of three possible valuation methods, the asset-based approach was most suitable in the circumstances.

That approach yielded a median value for the shares in each subsidiary essentially equal to the cash, or cash and receivable, held by the particular subsidiary less the tax liability of the subsidiary resulting from the sale of the farmland. [27] [ 82 ] Ms. Mallovy Hicks’s valuations also considered the value of the intercompany receivables held by MCI and another subsidiary and concluded that the value of these receivables was equal to their face amount. [ 83 ] The Respondent did not challenge Ms. Mallovy Hicks’s evidence. IV. The Positions of the Parties A.

The Appellants’ Position [ 84 ] The Appellants challenge the correctness of the assessments of the subsidiaries’ 2006 taxation years. The tax liability of the subsidiaries for the taxation year has not been established by the Respondent because the Respondent failed to call the CRA auditor and failed to present the basis on which the CRA issued the assessments. [ 85 ] If the subsidiaries are found to be liable for the tax assessed by the Minister for their 2006 taxation years, three of the four requirements for the application of subsection 160(1) to the Appellants have not been met.

Specifically, there has been no transfer of property from the subsidiaries to the Appellants directly or indirectly in any manner whatever, the Appellants dealt at arm’s length with WTC at the time of any transfer of property that could be traced to the subsidiaries, and the Appellants gave consideration for that property equal to the value of the property. [ 86 ] With respect to the application of the GAAR, the tax benefit alleged by the Respondent assumes the application of subsection 160(1).

The Respondent cannot recharacterize the relevant series of transactions to establish the existence of a tax benefit. [ 87 ] If, however, a tax benefit is found to exist, the only transactions that are relevant to determining whether that benefit accrued to the Appellants are the transactions commencing with the incorporation of the subsidiaries and ending with the payment by WTC of the purchase price for the shares held by the Appellants in the subsidiaries. [ 88 ] The Respondent cannot recharacterize the relevant series to fit the transactions within the ambit of subsection 160(1) and maintain on that basis that a tax benefit has accrued to the Appellants.

If on the basis of a textual, contextual and purposive

interpretation of subsection 160(1) the subsection does not apply to the Appellants, then there can be no tax benefit that accrued to the Appellants by virtue of the non- application of subsection 160(1) to the relevant transactions. [ 89 ] While there may have been tax benefits as a result of the relevant series of transactions such as the reduction of the capital gain on the sale of the shares in the subsidiaries to WTC by virtue of the increase in stated capital effected prior to the sale, the Respondent has not identified any benefit other than the non-application of subsection 160(1). [ 90 ] The Respondent cannot recharacterize the relevant series to establish that there was an avoidance transaction.

The relevant series was entered into for bona fide non-tax purposes: to realize a financial gain on the sale of the shares in the subsidiaries. Any tax liability existed only in the subsidiaries and therefore it cannot be said that the Appellants undertook or arranged the relevant series in order to obtain a tax benefit. [ 91 ] In the event that the Court finds a tax benefit and an avoidance transaction, there has been no abuse. The fact that

section 160 did not apply to the Appellants is not in and of itself sufficient to find abuse. The text of subsection 160(1) is conclusive of the underlying rationale of the provision. The Appellants did not abuse the provisions of the ITA relied upon to carry out the relevant transactions and subsection 160(1) operated exactly as it should have having regard to its underlying rationale. B. The Respondent’s Position [ 92 ] The Respondent submits that she does not bear any onus with respect to the correctness of the assessments of the subsidiaries’ 2006 taxation years.

Under the share put agreement, the Appellants could have reviewed the tax returns of the subsidiaries for 2006 but chose not to do so. In any event, the Respondent submits that on the basis of the evidence of what did happen in the subsidiaries after December 29, 2006, the subsidiaries were barred from claiming capital cost allowance for their 2006 taxation year because they did not meet the requirement in paragraph 1102(1)(

c) of the Income Tax Regulations (the " “ITR” " ), they did not meet the requirements in subsection 13(24) of the ITA and/or the software acquired by the subsidiaries was not available for use at the end of 2006. [ 93 ] With respect to subsection 160(1), the Respondent submits that all the conditions for its application to the Appellants have been satisfied. [ 94 ] Subsection 160(1) requires that the subsidiaries transferred property directly or indirectly in any manner whatever.

Having regard to the broad scope of the words " “property” " and " “transfer” " , for a transfer of property within the meaning of the provision to occur all that is required is for a transferor to deal with property so as to divest itself of the property and vest the property in the transferee. The transfer may be direct, or it may be circuitous. In this case, the subsidiaries indirectly transferred property—cash or cash and a receivable—to the Appellants through WTC. [ 95 ] Subsection 160(1) requires the amount that may be assessed under the provision to be reduced by the consideration given for the property.

The phrase " “consideration given” " , when interpreted in accordance with the approach mandated by the Supreme Court of Canada, must, in the present factual context, mean " “consideration given to the transferor” " as any other

interpretation would defeat the purpose of

subsection 160(1) by allowing the subsidiaries to impoverish themselves to the detriment of the CRA. The subsidiaries transferred property to WTC in return for no consideration. [ 96 ] There is no evidence that a loan existed between the subsidiaries and WTC other than the tax returns filed by the subsidiaries, and the return for 2006 was not filed until late in 2009. If, however, a loan did exist, it was a sham as WTC and the subsidiaries had no intention that the amount of the loan be repaid.

Alternatively, the loans from the subsidiaries to WTC were worthless as, given the terms of the loans and the identity of the debtor, no arm’s length person would pay for the loans. [ 97 ] The Appellants and the subsidiaries were not dealing at arm’s length at the time of the transfer. The Appellants directed the relevant transactions for the subsidiaries and the subsidiaries did not act in their own interests at any time during the negotiations. The Appellants and the subsidiaries acted in concert to indirectly transfer the assets of the subsidiaries to the Appellants.

The negotiations leading to the planning, putting into effect and managing of a common interest do not transform those negotiations into evidence of independent interests. Even if de jure control of the subsidiaries was transferred to WTC prior to the transfer, the Appellants controlled the exercise of the put and forced the execution of the preordained transactions. Finally, the Appellants and WTC acted in concert to direct the subsidiaries to indirectly transfer their assets to the Appellants.

Consequently, the Appellants, WTC and the subsidiaries were not dealing at arm’s length. [ 98 ] With respect to the GAAR, the relevant series of transactions commences with the incorporation of the subsidiaries and ends with the closing of the sale of the shares in the subsidiaries by the Appellants to WTC ( i.e. , the relevant series is as identified by the Appellants). [ 99 ] The existence of a tax benefit may be established by comparison with an alternative transaction.

In this case, the alternative transaction that might reasonably have been carried out but for the existence of the tax benefit is a distribution of the assets in the subsidiaries to the Appellants by way of a dividend. [ 100 ] The Minister may assume the facts that give rise to the existence of an avoidance transaction and the onus falls on the appellant to show that the assumptions of fact are not correct. The Appellants have not met their onus of showing that the primary purpose of the following transactions was to avoid liability for the subsidiaries’ tax under subsection 160(1): [28] A.

The incorporation of the subsidiaries. B. The transfer of the Appellants’ interests in the general partnerships to the subsidiaries on a rollover basis pursuant to subsection 85(1) of the ITA. C. The increase of the stated capital of the shares in the subsidiaries held by the Appellants. D. The conclusion of the share put agreements on December 29, 2006. E. The exercise of the put by the Appellants on December 31, 2006. F. The assignment of the property of the subsidiaries to WTC. G.

The assignment of the property received from the subsidiaries to the Appellants in satisfaction of the purchase price of the shares in the subsidiaries. [ 101 ] For the GAAR to apply, the avoidance transaction(

s) giving rise to the tax benefit must be abusive. An avoidance transaction is abusive if it achieves an outcome the statutory provisions were intended to prevent, defeats the underlying rationale of the provisions, or circumvents the provision in a manner that frustrates or defeats its object, spirit or purpose.

Whether an avoidance transaction is abusive will only become apparent when the transaction is considered in the context of the series of which it is a part and in light of the overall result that is achieved. [ 102 ] In this case, the overall result of the relevant transactions was that the subsidiaries transferred property to the Appellants in a manner that defeated the purpose, or underlying rationale, of subsection 160(1), which is to prevent the subsidiaries from depleting through transfers to non-arm’s length persons the assets available to pay the subsidiaries’ tax liability from the sale of the farmland.

V. Analysis [ 103 ] In Eyeball Networks Inc. v. R. , [29] Noël C.J. summarizes the application and the purpose of subsection 160(1) as follows: Subsection 160(1) provides that when a person transfers property to a non-arm’s length person, the transferee and transferor are jointly and severally liable to pay any amount that the transferor was liable to pay under the Act for the taxation year in which the transfer occurred and any preceding years.

Under paragraph 160(1)( e ), the transferee’s liability is limited to the excess of the fair market value of the property transferred over the fair market value of the consideration given for the property. . . . . . . As affirmed by this Court, the purpose of subsection 160(1) is to protect the tax authorities against any vulnerability that may result from a transfer of property between non-arm’s length persons for a consideration that is less than the fair market value of the transferred property. . . . [30] [ 104 ] Consistent with Noël C.J.’s

summary of the application of subsection 160(1), the subsection can be divided into two parts. The first part, which comprises the text before the mid-amble (i.e., before the words “the following rules apply”), identifies the conditions that must be satisfied for the subsection to apply. The second part, which comprises the text after the mid-amble, describes the rules that apply when the conditions in the first part are satisfied.

I will refer to these two parts as " “part one” " and " “part two” " . [ 105 ] The Respondent argues with respect to the Appellants that on the facts of these appeals the conditions in part one have been met. The Appellants counter that three of the four conditions have not been satisfied.

[106] In argument, the parties described the question of whether the transferee has provided fair market value consideration as a condition forthe application of subsection 160(1). However, on the basis of the text of the mid-amble, paragraph 160(1)(

e) is not a condition for theapplication of the subsection but is one of the rules that applies if the conditions in part one are met. [107] Consequently, the questions raised by the positions of the parties are whether the events in issue fall within the scope of part one and, ifso, what are the consequences to the Appellants under part two. This requires the

interpretation of both parts of subsection 160(1). [108] It is trite to say that subsection 160(1) is to be interpreted in accordance with the modern approach to statutory

interpretation adoptedby the Supreme Court of Canada. The Supreme Court recently reiterated the correct approach in Bell Canada v. Canada (Attorney General),2019 SCC 66: "The scope of the CRTC’s authority under s. 9(1)(

h) is to be determined by interpreting that provision in accordance with the modernapproach to statutory

interpretation. As this Court has reiterated on numerous occasions, this approach requires that the words of the statutebe read “in their entire context and in their grammatical and ordinary sense harmonious with the scheme of the Act, the object of the Act, andthe intention of Parliament” (E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87, as quoted in Rizzo & Rizzo Shoes Ltd. (Re)," (SCC), "[1998] 1 S.C.R. 27"", at para. ""21"", and most recently ""in R. v. Barton, ""2019 SCC 33"", at para. ""71"")."[31] [109] In Canada (Attorney General) v.

Utah, [32] Stratas J.A. emphasizes the need to interpret statutes neutrally, dispassionately, andobjectively: "We determine the authentic meaning of paragraph 3(1)(

a) by taking the plain meaning of its words, seeing them in their proper context, andkeeping front of mind the purposes the provision is to serve: [citations omitted]. We do this neutrally, dispassionately and objectively:[citations omitted]." [33] [110] In Canada Trustco Mortgage Co. v. R., 2005 SCC 54 ("“Canada Trustco”"), the Supreme Court provided the following additionalguidance relating specifically to the

interpretation of the ITA: . . . The

interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find ameaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinarymeaning of the words play[s] a dominant role in the interpretive process. On the other hand, where the words can support morethan one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning,context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of

an Act asa harmonious whole. As a result of the Duke of Westminster principle (Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1(H.L.)) that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable, Canadian tax legislationreceived a strict

interpretation in an era of more literal statutory

interpretation than the present. There is no doubt today that allstatutes, including the Income Tax Act, must be interpreted in a textual, contextual and purposive way. However, the particularityand detail of many tax provisions have often led to an emphasis on textual

interpretation.

Where Parliament has specifiedprecisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended thattaxpayers would rely on such provisions to achieve the result they prescribe. [34] [111] The last sentence of the above quote from Canada Trustco can be restated for present purposes as follows: "“where Parliament hasspecified precisely what conditions must be satisfied for a statutory provision to apply, it is reasonable to assume that Parliament intendedthat taxpayers would rely on those conditions to determine whether the provision applies to them”".

The issue in these appeals is whatprecisely are the conditions in part one that must be met for part two to apply to the Appellants? [112] The relevant text of the

preamble states: "Where a person has . . . transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to . . . a personwith whom the person was not dealing at arm’s length . . ." [35] [113] The

preamble uses the word "“person”" [36] three times. The grammatical and ordinary sense of the text is that the first reference is toa person that has transferred property (the "“transferor”"), the second reference is to a person to whom the property has been transferred (the"“transferee”") and the third reference is again to the transferor. The context and the purpose of subsection 160(1) do not suggest a differentmeaning. [114] For the taxation year in issue, subsection 248(1) defined the word "“property”" as follows: “property” means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting thegenerality of the foregoing, includes (

a) a right of any kind whatever, a share or a chose in action, (

b) unless a contrary intention is evident, money, (

c) a timber resource property, and (

d) the work in progress of a business that is a profession; [115] The definition of "“property”" uses the word "“means”" so the definition is determinative of the meaning of the word for the purposesof the ITA. With respect to paragraph (

b) of the definition, there is nothing in the text, context or purpose of subsection 160(1) to suggest thatthe word "“property”" in that subsection was not intended to include money. [116] The relevant property in these appeals is the cash, or the cash and receivable, held by the subsidiaries on December 29, 2006 when theshare put agreements were executed. [37] I will refer to this cash, or cash and receivable, as the "“Property”". For the purposes of the analysis

required by the

preamble, I see no need to distinguish between the cash, and the cash and receivables, held by the subsidiaries as the expertevidence supports the conclusion that the receivables had a value no less than their face value. [117] The first major point of contention vis-à-vis the

preamble is whether the Property was transferred by the subsidiaries, directly orindirectly, by means of a trust or by any other means whatever, to the Appellants. The Appellants say that it was not, and the Respondentsays that it was. [118] In Eyeball Networks, Noël C.J. observed that "“the concept of ‘series of transactions’ is foreign to subsection 160(1)”" [38] but that thewords of the

preamble "“capture all forms of transfers including those resulting from the combined effect of multiple transactions, whetherpreordained or not.”" [39] [119] The cases interpreting the word "“transfer”" alone have given the word a broad meaning. In David Fasken Estate v. Minister ofNational Revenue, (CA EXC), [1948] Ex CR 580 ("“Fasken Estate”"), President Thorson stated the following at pages 591and 592: The next question is whether there was a transfer of such property from David Fasken to his wife. The word “transfer” is anotherterm of wide meaning. The New English Dictionary gives this meaning of it: 2. Law.

To convey or make over (title, right or property) by deed or legal process. And Webster’s New International Dictionary, Second Edition, says: 2. To make over the possession or control of, to make transfer of; to pass; to convey, as a right, from one person toanother; as, title to land is transferred by deed. In Gathercole v.

Smith James L.J. spoke of the word “transfer” as “one of the widest terms that can be used” and Lush L.J. said,at page 9: The word “transferable,” I agree with Lord Justice James, is a word of the widest import and includes every meansby which the property may be passed from one person to another. The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from ahusband to his wife that it should be made in any particular form or that it should be made directly.

All that is required is thatthe husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass theproperty from himself to her. The means by which he accomplishes this result, whether direct or circuitous, mayproperly be called a transfer. [Emphasis and double emphasis added.] [120] In the

preamble, the word "“transfer”" is followed by the words "“directly or indirectly, by means of a trust or by any other meanswhatever”". In Eyeball Networks, Noël C.J. observed that "“this broad introductory language is aimed at broadening the notion of transfer”".[40] [121] Although undoubtedly broad, the meaning of the phrase "“directly or indirectly, by means of a trust or by any other means whatever”"is not open-ended but is subject to reasonable limits. In R. v.

Hinchey, (SCC), [1996] 3 SCR 1128, Justice L’Heureux-Dubéstates: I do not agree that the phrase “of any kind” was meant to widen the scope of the provision’s reach. It was not worded or intendedto mean “of whatever amount” or “of any value” such that the recipient of a cup of coffee should come within the confines of thesection. On the contrary, I believe that Parliament’s true intent in adding the words “of any kind” was to trap diverse forms ofbenefits, as opposed to indicating that it would be criminal to accept benefits of any value. . . . . . . I believe that the approach taken in Pezzelato v.

The Queen, 96 D.T.C. 1285 (T.C.C.), in this regard is quite instructive. Thedecision deals with s. 6(1)(

a) of the Income Tax Act, which is concerned with whether a person receives a benefit “of any kindwhatever received or enjoyed . . . in the year in respect of, in the course of, or by virtue of an office or employment”. While the specific facts of Pezzelato are not particularly helpful as the main question was whether it was a benefit received byvirtue of the appellant’s employment, the pragmatic approach taken to the term “benefit of any kind” by Bowman T.C.C.J.merits consideration.

I recognize of course that as a taxation case, this decision deals with markedly different principles; howeverit is interesting in that it states clearly that the term “benefit of any kind” is not unlimited in scope. . . . [41] [122] Other cases have recognized that open-ended language such as "“by any other means whatever”" can be limited in scope. Manrell v. R.,2003 FCA 128 [42] and Aitchison Professional Corporation v.

R., 2018 TCC 131, which interpret the phrase "“a right of any kindwhatever”", are good examples of the courts placing a reasonable limit on such open-ended language where the limit is consistent with atextual, contextual and purposive analysis of the provision in issue.

Placing a reasonable limit on the scope of open-ended language is alsoconsistent with the objective of providing certainty, predictability and fairness in tax law. [123] The question therefore is where does the reasonable limit on the words "“transferred property, either directly or indirectly, by means ofa trust or by any other means whatever,”" fall? [124] In Medland v. The Queen, 98 DTC 6358 (FCA) ("“Medland”"), an individual made mortgage payments to a bank that held a mortgageon a home solely owned by his spouse.

The Court reviewed the facts and decision in Fasken Estate and then stated: The words “indirectly . . . by . . . any other means” in subsection 160(1) of the Act refer to any circuitous way in which propertyof any kind passes from one person to another. In the case at bar, when Mr. Medland made the payments to the mortgagee, he

specified that such money was to be attributed in diminution of the mortgage on the property on which he had no more interest. While it is true that subsection 160(1) of the Act does not contain the words “for the benefit of” or “on behalf of” as found in subsections 15(1) or 74.1(1) or paragraph 224(1.1)(

b) of the Act, the applicant does not deny that she became less indebted by the payments and her equity in the property increased. The means by which this result occurred were monies paid to the Bank which was then transferred by the Bank on the account of the mortgage of a house owned solely by the applicant. The payment to the Bank was simply a conduit through which the funds passed indirectly from her husband to her. The applicant’s submission, that no transfer of property occurred because what Mr.

Medland divested himself was money which monies were never transferred [physically] to the applicant, is without merit. The present scheme, although different from that in Her Majesty the Queen v. Kieboom and White (D.P.) v. Canada , amounts to the same thing. [43] [ 125 ] In Kieboom v. MNR , [1992] 2 C.T.C. 59 #2 (FCA) ( " “Kieboom” " ), Mr. Kieboom owned nine common shares in a corporation and his spouse owned one common share. No other shares were outstanding.

After a new class of common shares was created (the class A common shares), the spouse acquired eight such shares for nominal consideration, which was well below their fair market value. This had the effect of changing the equity ownership in the corporation from 90-10 in favour of Mr. Kieboom to 50-50. [ 126 ] The issue considered by the Court of Appeal that is of interest here is whether Mr.

Kieboom had " “transferred property either directly or indirectly by means of a trust or by any other means whatever to his spouse” " such that an attribution rule applied. [ 127 ] The Court of Appeal reviewed the jurisprudence interpreting the words " “transfer” " and " “property” " and then stated: In this case, therefore, the taxpayer transferred property to his wife, that is, he gave a portion of his ownership of the equity in his company to his wife. The 40 per cent capital interest in his company which he gave to his wife was clearly property.

His beneficial interest in his company was reduced by 40 per cent and hers was increased by 40 per cent. The fact that this transfer of property was accomplished through causing his company to issue shares makes no difference. Subsection 74(1) covers transfers that are made “directly or indirectly” and “by any other means whatever.” The transfer, which in this case was indirect, in that the taxpayer arranged for his company to issue shares to his wife, is nevertheless a transfer from the husband to the wife .

There is no need for shares to be transferred in order to trigger this provision of the Act , as was erroneously concluded by the Tax Court judge. By this transfer of property to his wife, he divested himself of certain rights to receive dividends should they be declared. Hence, when the dividends were paid to the wife in 1982, that was income from the transferred property and was rightly attributable to the taxpayer. In addition, the property transferred to Mrs. Kieboom in 1980 was a portion of his ownership equity. As a result of the transfer, the taxpayer’s entitlement of 40 per cent was transferred to Mrs.

Kieboom. . . . [44] [Emphasis and double emphasis added.] [ 128 ] In my view, Kieboom is the high-water mark of what constitutes a transfer of property from one person to another. [45] Mr. Kieboom’s equity interest in a corporation was diluted and his spouse’s equity interest in the same corporation was increased because Mr. Kieboom " “arranged” " for the corporation to issue eight class A common shares to Mrs. Kieboom. [ 129 ] Two aspects of the Court’s conclusion are of note. [ 130 ] First, the Court finds that Mr.

Kieboom " “arranged” " the transactions that constituted the transfer of the property from himself to his spouse. In my view, this is a

summary of what occurred and is not a condition in the

preamble. The words " “a person has . . . transferred property . . .” " require an objective determination of what has occurred. The words do not require a determination of who brought about what has occurred. [ 131 ] Second, the Court dismisses Mr. Kieboom’s narrow classification of the property in issue as particular shares in the corporation.

This suggests to me that rather than attempting to trace particular property, one must consider all the circumstances and determine whether it is reasonable to conclude that there is a connection between the diminishment of the property of one person and the increase in the property of another person. This is the approach taken in Kieboom and Medland . [ 132 ] The subsidiaries transferred the Property to WTC. WTC in turn transferred approximately 82% [46] of the Property to the Appellants to pay for the shares in the subsidiaries.

These transfers took place one immediately after the other on December 31, 2006 in satisfaction of the terms and conditions of the arrangements between the Appellants and WTC. [47] While the cash payments appear to have taken place on January 2, 2007—the first banking day after the closing—the Appellants’ rights in the Property came into existence on December 31, 2006. [ 133 ] The transfers from the subsidiaries to WTC were brought about by the subsidiaries executing assignments of receivable and/or directions in favour of WTC . [48] The transfers from WTC to the Appellants were brought about by WTC executing assignments of receivable and/or directions in favour of the Appellants. [49] All of these documents were executed by Mr.

Nerland. [ 134 ] The form that the transfer of the Property from the subsidiaries to the Appellants took is of no consequence. What is of consequence is that approximately 82% of the Property moved from the subsidiaries to the Appellants through WTC. Even though I accept that the transactions were " “ordinary commercial transactions” " as contended by the Appellants, that does not alter what in fact occurred vis-à-vis the Property. [ 135 ] According to the evidence, WTC presented the transactions to the Appellants on a take-it-or-leave-it basis.

The Appellants determined whether the transactions would or would not occur by virtue of their acceptance or non-acceptance of the proposed transactions. Once the Appellants accepted the terms of the transactions, the parties were committed to the transactions that did occur. These transactions had the effect of transferring approximately 82% of the Property from the subsidiaries to the Appellants. [ 136 ] The fact that WTC could have sourced funds otherwise than from the subsidiaries is not relevant to whether the Property was transferred from the subsidiaries to the Appellants.

As well, the fact that the subsidiaries did not participate in the transfer from WTC to the Appellants does not alter the fact that as a consequence of the series of transfers initiated by the subsidiaries through the execution of assignments of receivable and/or directions in favour of WTC, the subsidiaries ceased to hold the Property and the Appellants began to hold

approximately 82% of the Property. [ 137 ] Similarly, the participation of WTC in the indirect transfer of the Property does not alter the basic fact that the Property that was originally in the subsidiaries ended up in the hands of the Appellants. In Medland , Mr. Medland paid money to a bank. The bank in turn applied the money to reduce the liability of Mr. Medland’s spouse on a mortgage held by the bank. The involvement of the bank in the transfer of property from Mr. Medland to his spouse did not affect the Court’s determination that Mr.

Medland had indirectly transferred property to his spouse. [ 138 ] In this case, the connection between the diminishment in the property of the subsidiaries and the increase in the property of the Appellants is clear because the parties agreed to and WTC effected transactions that caused the transfer of the Property at essentially a point in time on December 31, 2006 [50] and because the property that started in the subsidiaries is the same property that ended up in the Appellants (less the portion of the Property retained by WTC). [ 139 ] In conclusion, there is a clear connection between the reduction in the property of the subsidiaries and the increase in the property of the Appellants.

Consequently, I find that the subsidiaries indirectly transferred approximately 82% of the Property to the Appellants on December 31, 2006. [ 140 ] Having found that there was an indirect transfer of property from the subsidiaries to the Appellants, the next point of contention is whether at the time the subsidiaries transferred the Property to the Appellants, each of the Appellants and its former subsidiary was dealing at arm’s length.

This in turn requires a determination of when the transfers of the Property to the Appellants took place. [ 141 ] In Kieboom , the transfer took place when the spouse acquired the eight class A common shares which simultaneously diluted the equity interest of Mr. Kieboom. In Medland , the transfer took place when the bank credited the mortgage account of Mr. Medland’s spouse. In both cases, the acquisition of property by the transferee governed the timing of the transfer. [ 142 ] In Eyeball Networks, Noël C.J. states: " . . . a transfer of property takes place instantaneously both at civil and common law.

The precise and clearly identifiable time when a transfer takes place under both legal systems is the notion that Parliament seized on in providing both that the value of the property is determined “at the time it was transferred” and the value of the consideration given is determined “at that time”. Indeed, construing these words as referring to an elastic notion of time that runs from the beginning to the end of the series of transactions, as the Crown advocates, begs the question as to precisely when the respective values should be determined and compared.

This is significant because the value of property is in constant flux and can vary significantly in very little time. " [51] [ 143 ] In that case, the transfer in issue was a direct transfer by the transferor to the transferee. Hence, there was no need to consider the timing of the transfer itself because the transfer and receipt were simultaneous.

In this case, the transfer occurred in two steps and therefore it is necessary to identify the " “precise point in time” " [52] that the transfer occurred. [ 144 ] When interpreting legislation, " “[i]t is assumed that the legislature is an accomplished user of language and has fully mastered the linguistic conventions through which meaning is communicated to an audience” " . [53] It is therefore instructive to consider the grammatical meaning of the text used by the legislature. [ 145 ] The

preamble uses the phrase " “has transferred” " . The word " “transferred” " is the main verb and is the past participle of the verb " “transfer” " . The word “has” in this context is used as an auxiliary verb. The use of " “has” " coupled with the past participle of the verb " “transfer” " identifies the use of the present perfect tense.

The present perfect tense identifies the completion of the action " “transferred” " and the continuation of that completed action into the present. [ 146 ] Given the use of the present perfect tense, it is reasonable to conclude that a person has transferred property to another person for the purposes of subsection 160(1) only when all the steps required to carry out that transfer have taken place. [54] In some cases, there will be a single step that effects a transfer of property, as in R. v.

Livingston [55] and Kieboom , while in other cases there may be more than one step, as in Medland and in these appeals. [ 147 ] The use of the past tense " “was” " with the present participle " “dealing” " in paragraph 160(1)(

c) indicates the past continuous tense.

This tense is commonly used to describe an action or event that began in the past and was still going on when another action or event occurred—the other action in this case being the transfer of property. [ 148 ] The final step in the transfer of the Property to the Appellants occurred when WTC transferred the Property to the Appellants to pay for the shares of the subsidiaries. [56] Upon conclusion of the final step, the indirect transfer that commenced with the transfer of the Property by the subsidiaries to WTC and ended with approximately 82% of the Property being owned by the Appellants had concluded.

The issue, therefore, is whether at that point in time the Appellants and the subsidiaries were dealing at arm’s length. [ 149 ] The ITA uses two approaches to arm’s length. Under the first approach, persons that are related under rules in the ITA are deemed not to deal with each other at arm’s length. In general, the rules use certain familial relationships and legal (i.e., de jure ) control to determine when persons are related. [ 150 ] During the period that an Appellant owned all the issued shares in a subsidiary, the Appellant had legal control of that subsidiary and was therefore related to that subsidiary.

At the point in time that the Appellant ceased to own any shares in the subsidiary, the Appellant ceased to have legal control of the subsidiary and therefore ceased to be related to the subsidiary. WTC had legal control of the subsidiaries from the time it acquired ownership of the shares in the subsidiaries. [ 151 ] To determine whether two or more persons are related in the circumstances in issue, regard must also be had to paragraph 251(5)(

b) and subsection 256(9). [ 152 ] Paragraph 251(5)(

b) includes a set of rules that treat a person with certain specified rights as if those rights had been exercised. For example, a person that has a right to acquire shares is deemed by subparagraph 251(5)(b)(

i) to " “have the same position in relation to the control of the corporation as if the person owned the shares at that time” " .

[153] The execution by WTC of the share put agreements with the Appellants did not give WTC any right to acquire shares in thesubsidiaries. Control of the put was exclusively with the Appellants. Accordingly, WTC was not deemed by subparagraph 251(5)(b)(

i) toown shares in the subsidiaries by virtue of entering into the share put agreements. [154] Upon the exercise on December 31, 2006 of the put, a binding agreement of purchase and sale was deemed to exist. [57] According tothe PASFs, there was a series of consecutive steps on December 31, 2006 [58] and the final step was concluded upon the payment of thepurchase price by WTC to the Appellants. [59] At that point in time, all of the terms of the sale were met and ownership of the shares in thesubsidiaries passed from the Appellants to WTC. Also at that point in time, WTC acquired control of the subsidiaries.

According to the timestamp on an e-mail from Ruby Wong of G&C, the transactions were completed at or before 12:28 p.m. on December 31, 2006. [60] [155] Subsection 256(9) provides that for the purposes of the ITA (other than for certain specified purposes not relevant here), [61] wherecontrol of a corporation is acquired by a person or group of persons at a particular time on a day, subject to an election being made, control ofthe corporation is deemed to have been acquired at the beginning of that day.

There is no suggestion in the assumed facts or in the oral anddocumentary evidence that elections were filed under subsection 256(9) so I can only conclude that

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