The ultimate controlling family members decided that a Canadian subsidiary ("Copthorne I") should be amalgamated with a wholly-owned subsidiary of Copthorne I ("VHHC Holdings"), whose shares had a nominal fair market value but a paid-up capital of approximately $67 million. (The high paid-up capital of the shares of VHHC Holdings reflected the fact that it had previously been capitalized with those amounts by another family-owned Canadian-resident corporation, before it dissipated that capital through making a bad investment.) In order to preserve the paid-up capital in the shares of VHHC Holdings, the amalgamation was not accomplished as a vertical amalgamation. Instead, Copthorne I sold its shares of VHHC Holdings for a nominal amount to Copthorne I's non-resident parent company prior to a horizontal amalgamation of Copthorne I and VHHC Holdings (and some other Canadian corporations) to continue as Copthorne II.
With a view to effecting a substantial distribution to its non-resident shareholder (and after Copthorne II had amalgamated with another Canadian corporation to continue as Copthorne III), Copthorne III redeemed preferred shares held by the shareholder, with no Part XIII tax being withheld in light of the high paid-up capital of those shares.
After observing that s. 87(3) provides for the cancellation of the paid-up capital of a subsidiary on its vertical amalgamation, Rothstein J. stated (at para. 122):
Having regard to the text, context and purpose of s. 87(3), I would conclude that the object, spirit and purpose of the parenthetical portion of the section is to preclude preservation of PUC of the shares of a subsidiary corporation upon amalgamation of the parent and subsidiary where such preservation would permit shareholders, on a redemption of shares by the amalgamated corporation, to be paid amounts as a return of capital without liability for tax, in excess of the amounts invested in the amalgamating corporations with tax-paid funds.
Accordingly, the GAAR assessment was appropriate (para. 127):
The sale of VHHC Holdings shares to [the shareholder] circumvented the parenthetical words of s. 87(3) and in the context of the series of which it was a part, achieved a result the section was intended to prevent and thus defeated its underlying rationale. The transaction was abusive....