The appellants, were private companies controlled by a resident individual (Grenon), whose RRSP held 58% of the units of a publicly traded income fund (“FMO”). They engaged in a series of transactions that were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts (“CDAs”), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day.
In very general terms, significant elements of the series of transactions included:
- Grenon’s RRSP transferring its units of FMO to a newly-formed unit trust (“TOM” – which was found in Grenon not to qualify as a mutual fund trust) – in exchange for units of TOM representing close to 100% of the issued and outstanding TOM units.
- The appellants acquiring such FMO units from TOM in consideration for issuing $161M in promissory notes.
- Various transaction being engaged in “beneath” FMO that resulted in capital gains being realized on the indirect transfer of subsidiary entities to a new unit trust (“New FIF”) that was intended to be the replacement public vehicle for FMO and those gains being allocated to or otherwise realized by FMO.
- The public transferring their units of FMO to New FIF in exchange for units of New FIF.
- After various steps to clean up the structure, FMO distributing essentially all its assets (being units of New FIF) to the appellants, and treating this as a distribution of the capital gains realized by it as described above. (This was the capital gain referred to above that was treated as CDA additions to be distributed.)
- The units of FMO being repurchased by FMO for nominal consideration. The appellants had full (FMV) cost for their FMO units when acquired in step 2, and the capital gains distributions did not reduce the ACB of their units by virtue of s. 53(2)(h)(i.1)(A) and (B)((I). Accordingly, such repurchases resulted in the realization of largely offsetting capital losses (and, in light of the intervening distribution of the transitory increase to their CDAs, also resulted in negative CDAs.)
In finding that the appellants had not acquired the FMO units in step 2 above (which continued to be beneficially owned by the RRSP) and, therefore, did not realize a capital loss in step 6 above, Smith J stated (at paras. 174, 176):
Since it was intended, as admitted by the Appellants, that the FMO units allegedly acquired from TOM on December 23, 2005 would be repurchased for cancellation on December 28, 2005 resulting in the alleged capital losses, I find as a fact that the Appellants had “absolutely no discretion” ... as to the disposal of those units. The only role of the Appellants was to hold legal title to the units for a few days. I find that those units were to be held on a bare trust basis only to be disposed of a few days later at a substantial loss. It was understood that the Appellants would not take any other steps. All of these transactions were pre-ordained. …
[I]t cannot be said that the Appellants enjoyed “the three key attributes of ownership, namely, risk, use and possession” … .