The appellant (Harvard Properties) and the other corporate co-owners of a Calgary shopping mall received an unsolicited proposal from a third party (“Abacus”) to purchase their shopping mall through a share sale transaction but at a price representative of what its value would have been in an asset sale and, thus, at a premium to what its value would be expected to be in a share sale. The proposal contemplated that the co-owners would transfer their interests on a s. 85(1) rollover basis to respective Newcos formed by them in consideration for the mortgage assumption and for voting and non-voting shares, followed by a sale of their Newco voting shares to an Abacus subsidiary (NH Properties), representing a significant portion of the sale price. The Newcos would then sell the shopping centre to a third-party real estate company (Bentall) for the calculated value. The proposal implied that the Newcos’ recapture and capital gain upon selling the low tax basis shopping centre to Bentall would be sheltered in some manner during the Newco taxation years commencing with their acquisition of control. They then sold their Newco non-voting shares to NH Properties for the balance of the purchase price at no gain due to an ACB step-up, pursuant to a stated capital increase coming out of the newly-created capital dividend accounts of the Newcos.
Real estate counsel for the vendors negotiated that these transactions would all occur in one closing, and the consideration received by the vendors for their Newco voting shares was mostly in the form of promissory notes given by NH Properties, that were paid to them by direction out of the Bentall sales proceeds.
Boyle J referred (at para. 140) to the finding in Microbjo that the purpose of the arm’s length test is to render assurances that the terms reflect ordinary commercial dealings, and that ”[s]uch assurances cannot be found unless parties not only seek a profit, but also transact with their own property or money with the result that what is at stake is their own patrimony or property” and, in that regard, found (at para. 165) that the co-owners were “wilfully blind” to the proposition that the “source of the co-owners’ premium and Abacus’ anticipated profit was generated by the transactions giving rise to a tax liability that would not be paid.”
In finding that the vendors, and Abacus and NH Properties, were not dealing with each other at arm’s length, Boyle J stated (at paras. 155, 161):
Given the agreement for Abacus to pay a premium to the co-owners to purchase the co-owners’ interests … the steps and the amounts in the series of transactions cannot be considered to reflect ordinary commercial dealings. …
Harvard Properties, Abacus and NH Properties clearly acted together to dictate [the] Newcos’ actions from their inception and throughout the closing of this series of transactions.
In finding that the cash proceeds received by Harvard Properties exceeded the FMV of the Newco shares sold by it, Boyle J found (at para. 166) that Harvard Properties had failed to establish any value for the shares, stating (at para. 174):
There appears to be little to no chance that any arm’s length party unrelated to these transactions would agree to accept, much less pay for, the HP Newco shares at the relevant time as the Newcos would moments in time later have no assets, no business, and the possibility of a significant liability for their roles in these transactions … .
Similarly, he found that the promissory notes had no value.
Accordingly, s. 160 applied to the transactions in the cash amounts referenced by him, subject to a determination in still-pending proceedings as to the quantum of any unpaid tax liability of NH Properties.