The taxpayers, who were holding companies for partnerships that had recently agreed to sell their farmlands to third parties, were approached by an independent third party (WTC), who proposed that they transfer their partnership interests on a rollover basis to respective Newcos which, after the closing of the farmland sales and after WTC had taken brief de facto control of those subsidiaries and purported to generate “tax shelter” for them, would be sold by the taxpayers to WTC for cash sales prices that reflected a premium over the cash sales proceeds from the farmland sales. Such premium reflected a sharing (on a 46/54 basis) of the purported (but bogus) elimination by WTC of the Newco’s tax liability from the sale.
Noël C.J. found that the transfer of the cash sales proceeds from WTC to the taxpayers was a non-arm’s length transaction to which s. 160 applied. Accordingly, each taxpayer was liable for the tax debt of the respective Newco to the extent of the purchase price received by it in excess of the after-tax value of the assets of the Newco (i.e., for an amount equaling approximately half of its tax debt).
However, Noël C.J. rejected the Crown’s argument that GAAR should be applied to make each taxpayer liable for all of the tax debt of the respective Newco. He found no reversible error in the Tax Court’s finding that the taxpayers “did not undertake the transactions in order to avoid the application of subsection 160(1)” (para. 98).