In September, 2007, most of the equity of an insolvent public corporation (“Xillix”) was acquired by the company (“Nexia”) of two individuals involved in acquiring and selling loss companies. As a result, Nexia held all of non-voting common shares of Xillix (representing 80% of its equity), 45% of its voting common shares and a non-interest-bearing demand loan owing by Xillix (now called “Biomerge”). The individuals then identified an income fund (“Total”) which was becoming subject to tax under the “SIFT” rules and was interested in accessing the Biomerge losses. In May 2009, a plan of arrangement was implemented under which the Total units were exchanged for new common shares of Biomerge, the existing voting common shares of Biomerge were largely cashed-out, and Total was wound-up into Biomerge (now, “New Total”) pursuant to s. 88.1(2). The former Total unitholders held 99.8% of the equity of New Total.
In following Deans Knight (as well as MMV) in finding that these transactions were an abuse of s. 111(5), Pizzitelli J stated (at para. 112):
[T]he reality of what happened here is that a willing seller in the business of selling tax attributes of failed companies takes the reins of such a company and markets and sells them to a willing unrelated buyer for use against their income. If these are not the type of transactions Parliament sought to stop by the enactment of the loss streaming rules in s.111(5) and parallel provisions, I don’t know what are.
In rejecting the New Total position (quoted at para. 114) that while “there were detailed rules in subsection 111(5) that dealt with the streaming of losses for corporations there were no such rules or evident policy related to the streaming of losses of trusts,” he noted inter alia that the transaction entailed the acquisition of a corporate lossco that effectively was merged with the corporate operating subsidiary of Total and that the subsequent introduction of s. 256(7)(c.1) “serves to clarify the policy as well as provide automatic denial of such losses rather than resorting to the GAAR” (para. 126).