The Minister invoked the general anti-avoidance rule to reassess the taxpayer on a series of surplus-stripping transactions. The taxpayer had subscribed for common shares of a new subsidiary for approximately $5.6 million, which then declared a stock dividend in the form of preferred shares having $56 of paid-up capital and a $5.6 million redemption price. Consequently, the value of the common shares was largely eliminated. The taxpayer disposed of the common shares in consideration for their depleted value and reported a business loss.
The trial judge rejected the Minister's argument that the transactions were abusive of the Income Tax Act as a whole. On appeal to the Court of Appeal, the Minister raised several new arguments, including that:
- the transactions were abusive of ss. 3, 4, 9 and 111, an underlying policy of which is that business loss claims should reflect actual losses;
- the taxpayer's purported losses were not business losses, given that the shares were not acquired as inventory or as part of and adventure or concern in the nature of trade (see "Rollover and other non-trading transactions"); and
- to the extent that the taxpayer had any losses, they were capital in nature.
The Court found that, pursuant to s. 152(9), the Minister was free to introduce the first argument at the Court of Appeal but not the second and third. While the first argument entailed a pure question of law, the latter arguments entailed mixed questions of fact and law "for which an evidentiary basis was not established in the Tax Court of Canada" (para. 37).
The Court of Appeal proceeded to grant the Minister's appeal based on the first argument, but awarded costs to the taxpayer.