The taxpayer 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's subscription for an additional $200,000 was acknowledged to be "window dressing" to give the common shares some value.) The taxpayer (which was involved in the business of trading securities) disposed of the common shares to a family trust in consideration for their depleted value and reported a business loss.
Mainville J.A. found that the transactions were abusive of ss. 3, 4, 9, and 111. He stated (at para. 62):
The fundamental rationale underlying these provisions is that, in order to be used for taxation purposes, business losses must be grounded in some form of economic or business reality. As noted in Canderel at para. 53, "[i]n seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer's profit for the year." That same common sense principle applies to a business loss, thus harmonizing the concept of business loss with the related concept of profit under the Act.
The Court concluded that the taxpayer's transactions were "nothing more than a paper shuffle," that "nothing was gained or lost," and that it would "defeat the underlying rationale of sections 3, 4, 9 and 11" for such paper losses to avoid "the payment of taxes otherwise owed on the profits resulting from the real-world business operations of Global" (para. 66-68).
The Minister argued in the alternative that no business loss had in fact occurred, given that the shares had not been acquired as inventory or as part of an adventure in the nature of trade. These arguments had not been raised at trial and entailed new evidence, and were therefore disallowed (paras. 35-37).