After becoming insolvent, a company ("Standard") in the mortgages business established a partnership, transferred a mortgage portfolio to the partnership and, prior to the end of the partnership's first fiscal year, sold its 99% direct interest in the partnership to the taxpayer who then sold a portion of its partnership interest to other parties. S.18(13) deemed the partnership to have the same cost amount for the portfolio as Standard, with the result that losses generated on the sale of the portfolio were allocated to the taxpayer and the other partners, rather than to Standard.
Although, in the view of the majority, the transactions did not result in a misuse of subsection 18(13) having regard to the policy of that provision (which was to preclude the transferor from realizing a loss on a disposition of non-capital property to a non-arm's length transferee, and to preserve the loss for recognition on a later occasion by the transferee), the transactions resulted in an abuse having regard to the general policy of the Act against the trading of non-capital losses by corporations, subject to specific limited circumstances. Accordingly, the denial of the losses to the taxpayer under s. 245 was confirmed. Rothstein J.A. noted that the Court should proceed cautiously in carrying out the unusual duty imposed upon it under s. 245(4) to invoke policy to override the words Parliament had used.