The taxpayer (3295) was a holding company with a minority shareholding in a target company (Holdings) with a low ACB, whereas the holding company (Micsau) holding shares in 3295 had a high ACB for its shares. Unfortunately, the majority shareholder of Holdings (RoundTable), who initially handled the negotiations, only negotiated a sale of the shares of Holdings to Novartis by its two shareholders, and did not present alternatives that would have permitted Micsau to use its high ACB in the shares of 3295. Once those negotiations were completed, Micsau was able to speak to Novartis, and negotiated that it could sell its shares of Holdings through a Newco (4244 referred to below).
Under that plan:
- Micsau created a sister company (4244) to 3295 to which it transferred newly-created preference shares of 3295 having an ACB (of $31.5M) equal to their redemption amount in exchange for full-ACB shares of 4244.
- 3295 then transferred its Holdings shares to 4244 on a partial s. 85 rollover basis in exchange for Class D and common shares, and realized a capital gain corresponding to the capital gain (of $53M) that it would have realized had it sold its 3295 shares to Novartis; this capital gain was reflected in the full-ACB (of $57M) Class D shares which it received from 4244, whereas its common shares of 4244 had a high FMV (of $31.5M) and nominal ACB.
- 3295 redeemed the preference shares held by 4244 (see 1 above) for a $31.5M note, and elected for the resulting $31.5M deemed dividend to be a capital dividend paid to 4244.
- 4244 redeemed $31.5M of the low-ACB common shares that it had issued to 3295 in Step 2 for a $31.5M note, and elected for the resulting $31.5M deemed dividend to be a capital dividend paid to 3295.
- Then the two notes were set off, Micsau transferred its shares of 4244 to 3295, and 3295 sold the shares of 4244 to Novartis at no further capital gain.
Goyette JA found that in determining “whether transactions forming part of a series are abusive, one must consider the ‘entire series of transactions’ or its ‘overall result’” (para. 46) and that, here, the overall result of the series was the same as if Micsau had sold its 3295 shares to Novartis.
Furthermore, the Tax Court had erred in considering that the cross-redemption capital dividend (Steps 3 and 4) reduced the capital gain that 3295 would have realized from disposing of its commons shares in 4244 immediately before the dividend, i.e., the capital gain would have been the same if Novartis had purchased the 4244 shares without the cross-redemption. Thus, the “series’ overall result [was] consistent with the object, spirit and purpose of the capital gains regime as previously identified by this Court—that is, to tax real economic gains: Triad Gestco … “ (para. 54).
In addition,”courts consider alternative transactions’ tax consequences when determining whether tax avoidance is abusive” (para. 58). The Tax Court had erred in failing to consider four alternative transactions which would have produced the same tax result (of using the high outside tax basis in 3295 shares) as those implemented (which in fact had been presented by Micsau to RoundTable but with RoundTable not having put them to Novartis): Micsau selling its shares in 3295 to Novartis; 3295 amalgamating with Holdings, and Micsau selling its Amalco shares to Novartis; a tuck-under transaction (i.e., Micsau making a taxable sale of its 3295 shares to Holdings for high ACB shares of Holdings, selling those shares to Novartis, with 3295 then being wound up on a rollover basis under s. 88(1) into Holdings; and Micsau selling its shares in 3295 to RoundTable, which would wind–up 3295 and bump the ACB of the Holdings’ shares under s. 88(1)(d) before their sale to Novartis.
Goyette JA stated that these transactions were relevant because they were: available under the Act; realistic alternatives; commercially similar to the subject transactions and with similar tax results; and reflected a similar absence of abuse, i.e., they “would have enabled Micsau to realize its high ACB without attracting the application of the GAAR: (para. 61(e).)