A corporation (“Kinderock”) owned by the taxpayer and his wife applied, commencing on October 4, 2007, to the Saskatchewan government for various potash permits. During the application period, the taxpayer agreed with a semi-retired tax accountant (Carsen) and a former securities broker (Devine) to jointly pursue a potash venture using the permits. In early November 2007, the three of them agreed on the outline of plan for avoiding the two-year hold period under the qualified small business corporation share definition.
As a result:
- The taxpayer incorporated a new corporation (Devonian) on November 22, 2007.
- On December 7, 2007, a new limited partnership was formed between Kinderock as the general partner and three limited partners (the Gillen Family Trust, the Devine Family Trust and the Carson Family Trust).
- On December 7, 2007, the Limited Partnership transferred beneficial ownership of the rights to the pending permits (the “Purchased Applications and Purchased Permits”) to Devonian (while retaining legal title in trust for Devonian until the permits were granted) in consideration for Devonian agreeing to issue 999 shares.
On February 15, 2008, the Limited Partnership entered into an option agreement to sell its Devonian shares to a third-party purchaser for $15 million, with the option being deemed to be exercised once the Saskatchewan government granted the permits, which occurred on and before April 9, 2008.
In finding that the test in s. 110.6(14)(f)(ii) was not satisfied (so that the Devonian shares did not constitute qualified small business corporation shares), D'Arcy J stated (at paras 127-8):
…[W]hile the Limited Partnership may have carried on an active business after December 7, 2007, the Limited Partnership did not use the Purchased Applications and Purchased Permits in that business.
It acquired the Purchased Applications and Purchased Permits from Kinderock on December 7, 2007 and then instantly sold the same property to Devonian. In such a situation, it cannot be said that the Limited Partnership used the Purchased Applications and the Purchased Permits in an active business. As a result, subparagraph 110.6(14)(f)(ii) did not apply since the Limited Partnership did not dispose of all or substantially all of the assets that it used in an active business.