This was a companion case to Triad Gestco.
The taxpayer, which had realized a capital gain of $2,974,386, transferred cash and marketable securities with a value of $3 million to a newly-incorporated subsidiary ("Newco") as the subscription price for common shares of Newco. Newco then paid a stock dividend to the taxpayer consisting of preferred non-voting shares having a nominal paid-up capital and a total redemption value (in the hands of the initial holder) of $3 million, thereby effecting a "value shift" away from the common shares. Special voting shares of Newco having nominal value were issued to a trust for members of the family of the sole shareholder of the taxpayer ("Mr. Cross"). The taxpayer then sold the common shares of Newco to a second family trust for the sum of $100 and claimed a capital loss of nearly $3 million.
Paris J. denied the capital loss under s. 245(2). The taxpayer had clearly engaged in an avoidance transaction, and the transaction was an abuse of s. 38(b) of the Act. He stated (at TCC paras. 90, 92):
I find that the Respondent has shown that the purpose of paragraph 38(b) is to recognize economic losses suffered by a taxpayer on the disposition of property. The Respondent has also shown that despite the repeal of subsection 55(1) [a provision specifically aimed at stopping artificial capital losses such as surplus-stripping], the policy of the Act is still to disallow the artificial or undue creation or increase of a capital loss, which underlines the intention to allow capital losses only to the extent that they reflect an underlying economic loss. ...
These transactions did not reduce the Appellant's economic power in the manner contemplated by Parliament in allowing for the deduction of capital losses.
In accordance with its conclusions in Triad Gestco, the Court of Appeal affirmed Paris J.'s reasoning. Furthermore, in response to the taxpayer's argument that the main purpose of the transaction was to effect creditor protection for Mr. Cross, Sharlow J.A. stated (at FCA para. 20):
I am unable to accept this argument. In my view, Justice Paris followed the correct approach when he determined the purpose of the series of transactions on an objective basis – that is, by ascertaining objectively the purpose of each step by reference to its consequences – rather than on the basis of the subjective motivation of Mr. Cross, or his subjective understanding of what may or may not have been required to achieve creditor protection.