The non-capital losses of $90M, and other tax attributes (the “Tax Attributes”) of the taxpayer, were effectively sold to arm’s length investors pursuant to transactions under which:
- The existing shareholders of the taxpayer exchanged their shares for shares of a “Newco” under a Plan of Arrangement
- A venture capital company facilitator (Matco) entered into an “Investment Agreement” with the taxpayer and Newco pursuant to which Matco (principally in consideration for $3M in cash) acquired a debenture of the taxpayer that was convertible into shares representing 79% of its equity shares but only 35% of its voting shares.
- The taxpayer then transferred its assets (including the proceeds of issuing the debenture) and its liabilities to Newco, so that it now was an empty shell except for its tax attributes.
- Matco then identified a mutual fund management company which wanted to effect a public offering of shares of the taxpayer and use the proceeds (of $100M) for a new bond trading business to be carried on in the taxpayer – a transaction which then proceeded.
Rowe J indicated (at para. 81) that that s. 111(5) “indicates Parliament’s focus on circumstances in which there is a shift in the locus of control, rather than, for example, high turnover in the shares of a publicly traded company (Silicon Graphics…) and (at para. 88) that it addresses where “the identity of those behind the corporation has changed” and “functions so that the tax benefits associated with those losses will not benefit a new shareholder base carrying on a new business.”
In finding that the transactions (which he described, at para. 6, as “narrowly circumventing the text of s. 111(5)”) did not accord with the rationale of s. 111(5), so that the use of the tax attributes had been properly denied under s. 245(2), Rowe J stated (at paras. 124, 126, 128):
[T]he appellant was gutted of any vestiges from its prior corporate “life” and became an empty vessel with Tax Attributes. …
Moreover, the shareholder base of the taxpayer underwent a fundamental shift throughout the transactions … .
Matco achieved the functional equivalent of … an acquisition of [de jure] control through the Investment Agreement, while circumventing s. 111(5), because it used separate transactions to dismember the rights and benefits that would normally flow from being a controlling shareholder.
Use of the Tax Attributes was properly denied pursuant to s. 245(2).