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.
After finding that s. 160 applied to these 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, on the basis inter alia that Harvard Properties was not dealing at arm’s length with NH Properties, Boyle J found, in the alternative, that if the series of transactions had avoided the application of s. 160, there was an abusive avoidance of s. 160 through the structuring of a supposed arm’s-length through a sale of the voting shares of the Harvard Properties’ Newco (HP Newco) before the asset sale, capital dividend and sale of the non-voting Newco shares. He J stated (at para. 206):
[I]f these avoidance transaction steps in the series succeeded in changing Harvard Properties’ relationship to its controlled subsidiary, HP Newco, in the midst of the single closing into an arm’s length relationship and instead of when the closing was complete, and that in turn led to Harvard Properties being arm’s length with NH Properties, the results of these impugned avoidance transactions are a section 160 hat trick or trifecta of abuse. They accomplished what section 160 sought to prevent – its application, they defeated its underlying rationale, and they circumvented its application.
Furthermore, Boyle J considered that the reasonable way in the circumstances to deny the tax benefit was to treat s. 160 as applying to the extent of the shortfall in consideration given on the transfer (para. 208).