The appellant (“MPP”) was an insolvent, publicly traded, mining company with accumulated net capital losses of $72.7 million. In order for two companies (“Madison” and “Vanac,” which dealt with each other and MPP at arm’s length) to access those losses and shelter gains from portfolios of rental properties, transactions were implemented, which first entailed the existing MPP mining business being transferred to a subsidiary, whose shares were effectively spun-off to the existing shareholders. Now that MPP was an empty shell, Madison and Vanac transferred respective portfolios of rental properties to MPP in consideration for the assumption of liabilities and for the issuance of a mixture of Class B voting shares and Class C non-voting shares (with the same attributes other than being generally non-voting) so that Madison and Vanac collectively held (and in equal proportions, after giving effect to some catch-up transactions to equalize those holdings) 46.6% of the voting rights and 92.8% of the equity of MPP. This transaction deliberately overvalued the shares that were so issued by MPP to Madison and Vanac so as to effectively transfer around $2.8 million of equity value to the existing public Class B common shareholders of MPP, thereby paying them for the losses.
After finding that MPP had received a tax benefit, and regarding the abuse test under s. 245(4), Graham J concluded (at para. 185):
Subsection 111(4) is supposed to prevent a corporation from being acquired by unrelated parties in order to deduct its unused net capital losses against new capital gains for the benefit of its new shareholders. The series of transactions completely frustrated that purpose.
In this regard, after having noted (at para. 170) that “the majority in Deans Knight highlighted that, while there had been no acquisition of control, there had been ‘the functional equivalent of such an acquisition of control’ by the company who effected the series of transactions (Matco)”, he indicated that:
- “[T]the Madison-Vanac Group fundamentally transformed the Appellant” (para. 184)
- “They structured the series of transactions in a way that ensured they would receive substantially all of the benefit from the application of those losses to a completely new business” (para. 184).
- “[T]hey selected the share compensation that they received in a way that ensured that, absent very unlikely circumstances, they could control the Appellant as if they had de jure control without actually taking that control” (par. 184). (For instance, taking into account the Class B shares held by friendly parties, such as directors, they effectively had more than half the voting rights and, conversely, a significant portion of the public shareholders did not exercise their voting rights.)