CASE STUDY #9
Recommended Solution:
(1) Review of the Act:
There are no specific provisions within the Act which
would disallow A from making the successor election
(paragraph 66.7(7)(e)) to transfer its resource pools to
the third party. (2) Identification of a Tax Benefit:
A large proportion of the resource pool relates to the
mining properties which will be retained by A. The pool
should be apportioned between the mining properties and
the oil and gas properties whereas, as structured by A,
the entire pool would be transferred with its sale of the
oil and gas properties. (3) Identification of an Avoidance Transaction:
In this case there appears to be a series of transactions
where A transfers mining properties to a wholly-owned
subsidiary under subsection 85(1) of the Act.
Immediately thereafter, A sells its oil and gas business
and A wishes to make a successor election under paragraph
66.7(7)(e) to transfer its resource pools to the third
party. If the primary purpose of the transfer of mining
properties is to meet the conditions required for
eligibility for the successor election then it would be
reasonable to conclude that there exists an avoidance
transaction. If A can demonstrate that the purpose of
the series of transactions is primarily for bona fide
business purposes then the existence of an avoidance
transaction may be questionable. It is essential to
review all of the facts in order to determine which of
all of the reasons for exercising the transaction would
qualify as the primary purpose. Based upon the limited
facts available, the limitation as a result of the right
of first refusal could be eliminated through another
alternative thus making it very difficult for A to argue
that this could be the primary purpose of the series of
transactions. Since it is given that the primary purpose of this
particular series of transactions is to meet the
successor rules that all or substantially all of its
resource properties be sold to the successor. The
subsection 85(1) rollover would constitute an avoidance
transaction for the purposes of subsection 245(3). (4) Misuse or Abuse of the Act:
In this series of transactions, the entire pool
would be transferred with its sale of the oil and gas
properties. Normally as a matter of Departmental policy,
an apportionment of the resource pool costs between the
mining properties and the oil and gas properties would be
acceptable. However, as a policy matter,000166
it is considered to be a misuse of the provisions of the
Act to allocate the entire pool exclusively to the oil
and gas properties. The utilization of a subsection
85(1) transfer in order to circumvent the conditions
present within paragraph 66.7(7)(e) would constitute a
misuse of the provisions of the Act. (5) Application of GAAR:
In assessing the transaction, we would deny the successor
election under paragraph 66 7(7)(e) and re-instate the
pool in A.000167