The taxpayer, which was directed and controlled by Mr. Cohen, and which had realized a capital gain of approximately $8 million, transferred $8 million of assets to a newly-incorporated subsidiary ("Rcongold") in consideration for the issuance of common shares. Rcongold declared a stock dividend of $1 on its common shares, which was payable through the issuance of 80,000 non-voting preferred shares with an aggregate redemption price of $8,000,000 and (presumably) a stated capital of $1. An unrelated individual settled, with $100, a trust of which Mr. Cohen was a beneficiary, so that under the "affiliate" definition then in effect it was an un-affiliated trust. The taxpayer then sold its common shares of Rcongold to the trust for $65 and claimed a capital loss of $7,999,935, which permitted it to offset the realized capital gain through a loss carry-back.
After noting (at para. 39) that after the taxpayer's disposition of its common shares it "was neither richer nor poorer," Noël J.A. (while citing Ramsay) stated (at para. 41) that "the capital gain system is generally understood to apply to real gains and losses" as contrasted to "paper gains or losses" (para. 44), so that, under the general capital loss provisions of the Act, there was:
relief as an offset against capital gain where a taxpayer has suffered an economic loss on the disposition of property... [and] offsetting a capital gain with the paper loss that was claimed [here] results in an abuse and a misuse of [these] relevant provisions... . (Para. 50.)
The Court found that the trial judge erred in his alternative finding that s. 40(2)(g)(i) reflects a general policy against the deduction of losses "within an economic unit" (paras. 54-56). Finally, although there was a corresponding accrued but unrealized gain on the taxpayer's preferred shareholding, the taxpayer had not "put forth a credible scenario indicating that the preferred shares were to be sold" (para. 59).
The taxpayer's appeal was dismissed.