A Calgary shopping mall was sold by Harvard Properties and the other co-owners to a third party (“Abacus”) in a share sale transaction but at a price representative the mall’s asset value and, thus, at a premium to its share-sale value. This was accomplished by transferring their co-ownership interests on a s. 85(1) rollover basis to respective Newcos (“HP Newco”, in the case of Harvard Properties) in consideration inter alia for voting and non-voting shares, followed by a sale of those voting shares to an Abacus subsidiary (NH Properties) for promissory notes for under half of the sale price. The Newcos then sold the shopping centre to a third party (Bentall), and the co-owners then sold their Newco non-voting shares to NH Properties for the balance of the purchase price (receiving, by direction, the Bentall sales proceeds), 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 for these transactions to all occur in one integrated interdependent closing.
The s. 160 assessment of Harvard Properties turned in part on the assumption that it was not dealing at arm’s length with NH Properties. In this regard, 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 Harvard Properties 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.
Boyle J went on to find that s. 160 applied.