The appellant was the limited partner of a partnership (“SEC”) that had become insolvent during efforts to relaunch a paper mill close to the City of Chandler. A Plan of Arrangement concluded after the commencement of CCAA proceedings contemplated that the mill would be sold to a corporation (SDEIC) formed by the City. The appellant and other creditors of SEC agreed to lend money to SDEIC to finance cost of acquiring and starting-up the mill. The appellant and other creditors of SDEIC then agreed with SDEIC that in the event of a sale of the mill by SDEIC, any resulting loan repayment proceeds would be invested for priority participating units in an LP to be formed having similar objects to SDEIC (being economic development of the Chandler region).
SDEIC was unsuccessful in relaunching the mill, and two years later agreed to sell it to a third party (“Vantek”). A new agreement was entered into under which the appellant and the other creditors of SDEIC would pay the loan repayment proceeds received by them on the Vantek sale to the City of Chandler and the City would provide charitable receipts therefor.
After having cited Martin v. Dupont, 2016 QCCA 47 at paras. 28-31 for the proposition that for there to be a gift there must be “a transfer of property of a donor to a donee without the donor receiving equivalent consideration in return” and that “the donor must have the actual intention to part with the transferred property for the benefit of the donee without receiving a benefit in return” (para. 37), and in finding (respecting the first test) that the appellant had received consideration equal to the two resulting “gifts” by it to the City of $7.2 million and $2.1 million, Ouimet J stated (at paras. 45-6, TaxInterpretations translation):
When the appellant proposed to SDEIC and the City of Chandler to pay these sums to the City of Chandler, the obligation of the appellant towards SDEIC still existed. This obligation did not cease to exist until the moment that SDEIC and the City of Chandler accepted that these amounts would be paid to the City of Chandler. Effectively, the proposition advanced to SDEIC and the City of Chandler was to pay to the City of Chandler the sums of $7,188,435 and $2,078,922 “in lieu” of investing those amounts in a limited partnership.
Since the payment of the sums … to the City of Chandler had the effect of freeing the appellant of its obligation to negotiate in good faith to create a limited partnership, the consideration received by the appellant in exchange for such payment was the amount by which that obligation was extinguished.
After noting (at para. 51) that Hébert v. Giguère [2003] R.J.Q. 89 found that the “fact that a person is relieved of an obligation constitutes a benefit,” Ouimet J found that the above facts indicated the receipt by the appellant of an advantage such that the second “psychological” test for “gift” also was not satisfied.
Accordingly, the two “gifts” were not deductible under s. 110.1(1)(a).