The five respondents were holding corporations that indirectly owned—each through a 99.99% interest in five respective partnerships—a parcel of Ontario farmland. Shortly after agreeing to sell their undivided interests in the farmland to an arm’s length purchaser and before the closing date of January 16, 2006, an independent third party (WTC) approached the respondents and proposed a “package deal” which required the respondents to move their partnership interests on a rollover basis to a newly formed single-purpose subsidiary, having the partnerships close the sale of the farmland for cash and allocating the gain to the subsidiaries, which then increased the stated capital of their shares. Following a two-day interim period during which WTC was given effective control of the subsidiaries and purported to have the subsidiaries purchase Class 12 property, WTC then acquired the shares of the subsidiaries (pursuant to the exercise by the respondents of a share put option) for a price equal to their pre-tax value (i.e., the cash proceeds) minus 54% of the tax liability on the sale, and used the cash of the subsidiaries to pay that sale price.
The subsidiaries did not challenge CRA’s denial of their deductions to offset the partnership sale gains allocated to them (which essentially were bogus claims), and the respondents were assessed under s. 160 for the totality of the subsidiaries’ unpaid tax debt. Such assessments were made on the basis that a transfer took place when the cash belonging to the subsidiaries ended up in the hands of the respondents and that the consideration given by the respondents in return (the shares of the subsidiaries) had no value.
Noël C.J. found that the transfer of cash from the subsidiaries to the respondents consisted of a transfer of cash from the subsidiaries to WTC, which was a non-arm’s length transfer occurring for no consideration (and, thus, subject to s. 160) and a second transfer of the cash from WTC to the respondents, to which s. 160 applied if the respondents did not deal at arm’s length with WTC. In finding that the second transfer (the sale of the subsidiaries’ shares) also was not factually a transaction between parties dealing with each other at arm’s length, Noël C.J. stated (at paras. 81, 85-86):
[B]ecause they were splitting amounts earmarked to pay a tax liability that was bound to become a tax debt rather than their own money, the resulting split does not provide the assurance that it reflects an ordinary commercial dealing between parties acting in their separate interests. Specifically, the tension that provides that assurance did not exist to the extent that it would had the parties been dealing with their own money. …
Quite clearly, the fact that the parties were splitting money that was not theirs and believed that they could profit without putting at risk their own patrimony or property took away one of the fundamental safeguards that is inherent in an arm’s length relationship.
Further, once the respondents were swayed to buy into WTC’s plan by the thought of turning an unexpected profit out of their crystallized tax liability through what they viewed as a risk-free exercise, they became the instruments through which WTC, acting as the sole mastermind, would lay its hands on the $1.3 million [equal to the tax liability], isolate it with the remaining cash in the subsidiaries and share it with the respondents in the proportion that it imposed.
Accordingly, each respondent was liable for the tax debt of the subsidiary to the extent of the purchase price received by it in excess of the after-tax value of the assets of the subsidiary (i.e., for an amount equaling 46% of the subsidiary’s tax debt). In rejecting the Crown’s submission that each respondent was liable for all of the subsidiary’s tax debt, Noël C.J. found (at para. 95) that the phrase “consideration given” reflects “Parliament’s intention to limit the derivative liability of transferees to the monetary advantage that they derive from the transfer”.