The appellant (“MPP”) was an insolvent, publicly traded, mining company with accumulated non-capital and net capital losses of $9.7 million and $72.7 million, respectively. 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 and income from portfolios of rental properties, transactions were implemented, beginning in October 1997 which, in general outline, included the following:
- The common shares of the existing shareholders were exchanged for preferred shares and Class B voting common shares;
- Through a series of transactions, those shareholders’ preferred shares were effectively replaced by shares of a subsidiary of MPP to which it had transferred its mining assets (with that subsidiary then being amalgamated with third-party mining company), so that MPP was now an empty shell; and
- 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, so as to pay them for the losses. Taking into account the Class B shares held by friendly parties, such as directors, Madison and Vanac effectively had more than half the voting rights and, conversely, a significant portion of the public shareholders did not exercise their voting rights.
Regarding the denial of MPP’s losses under s. 245(2), MPP argued that it had received no tax benefit from the use of non-voting shares because, even if Madison and Vanac each had received only shares in the form of Class B voting shares, each would have acquired 46.4% of the MPP equity, so that neither would have acquired de jure control of MPP. Graham J rejected this submission on the basis that Madison and Vanac had been acting in concert in the transactions, so that, under this alternate scenario, there would have been an acquisition of control of MPP by a group of persons, thereby resulting in the application of s. 111(4). In particular, they had acted together to execute a sophisticated and artificial series of transactions to achieve the objective of gaining access to the MPP losses while effectively controlling it.
Graham J went on to find that the transactions were an abuse of the object and spirit of s. 111(4).