An insolvent trust company ("STC") transferred a portfolio of mortgages with unrealized losses to a partnership of which a wholly-owned subsidiary was a general partner and in which it received a 99% interest ("Partnership A"). S. 18(13) deemed the cost of the mortgages to be the same to Partnership A as their cost to STC. STC sold its partnership interest in Partnership A to a second partnership ("Partnership B") of which the taxpayers were members. Partnership A realized the losses on the mortgage portfolio, allocated 90% of the loss to Partnership B which, in turn, allocated those losses to its partners including the taxpayers.
In finding that the transactions defeated the purposes of s. 18(13) and the partnership provisions of the Act, the Court stated (at para. 58):
"Section 18(13) preserves and transfers a loss under the assumption that it will be realized by a taxpayer who does not deal at arm's length with the transferor. Parliament could not have intended that the combined effect of the partnership rules and s. 18(13) would preserve and transfer a loss to be realized by a taxpayer who deals at arm's length with the transferor."
McLachlin CJ went on to note, having regard to Partnership A not in any real sense having a business that was carried on in common by its partners (para. 62):
The abusive nature of the transactions is confirmed by the vacuity and artificiality of the non-arm’s length aspect of the initial relationship between Partnership A and STC.