The taxpayer and another wholly-owned subsidiary (“Taylor”) of the same corporation (“PIRG”) were the 5% and 95% partners, respectively, of a partnership, with an October 31 year end, which was engaged in developing a Vancouver condominium project. In October 2006, after virtually all of the profits from the development had been realized, PIRG transferred the shares of Taylor to a “Lossco” with which it dealt at arm’s length (“Meston”), with Taylor then being wound-up into Meston. For the taxation year of the partnership ending on October 31, 2006, 95% and 5% of the partnership income was allocated to Meston and the taxpayer, respectively.
D’Arcy J noted that the taxpayer accepted that s. 103(1) applied because the allocation to Meston “was principally motivated by tax” (para. 55). In applying s. 103(1) to confirm the assessment by the Minister which allocated 95% of the partnership profit for that year (minus the amount of a “deal fee” paid to Meston) to the taxpayer, D’Arcy J found:
- What was a “reasonable” allocation in accordance with s. 103(1) was a question of fact.
- As Meston became a partner after over 99% of the partnership profits had been earned, so that it would be unreasonable to allocate 95% of those profits to Meston, the question then became as to how the 95% of the profits should be allocated as between Taylor and the taxpayer.
- Taylor was a “shell corporation” with “no physical assets, employees, or bank accounts,” whose “only asset was its interest in the Partnership” and which had not made “any significant financial contributions to the Partnership” (paras. 90-91).
- The taxpayer “unlike Taylor [was] a corporation of substance” with “between 21 and 32 employees,” some of whom managed the development (para. 76).
- The taxpayer also helped finance the development and guaranteed (along with other group members, but not Taylor) project bank loans.
- Although the individual shareholder of PIRG testified that he provided his services on behalf of Taylor, he was paid millions in salary by the taxpayer, and nothing by Taylor.