Damis Properties Inc. v. The Queen

Damis Properties Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-03-26
Neutral citation
2021 TCC 24
File numbers
2016-4783(IT)G, 2016-4785(IT)G, 2016-4787(IT)G, 2016-4788(IT)G, 2016-4789(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Docket: 2016-4783(IT)G
BETWEEN:
DAMIS PROPERTIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Sabel Investments II-A Limited (2016-4785(IT)G), Zagjo Holdings Limited (2016-4787(IT)G), Devamm Investments II-A Limited (2016‑4788(IT)G) and Microbjo Properties Inc. (2016-4789(IT)G) on
March 11 to 12, 2020 and September 21 to 23, 2020, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Yves St-Cyr
Jacob Yau
Counsel for the Respondent:
Natalie Goulard
Dominic Bédard‑Lapointe
Simon Vincent
Alain Gareau
AMENDED JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under section 160 of the Income Tax Act is vacated. The Appellant has 30 days from the date of this judgment to make a single submission regarding costs and the Respondent has 15 days to respond to that submission. The submissions on costs shall not exceed ten pages for the Appellant and ten pages for the Respondent.
The Amended Judgment is issued in substitution for the Judgment dated March 24, 2021. The Amended Judgment corrects the order of Appellant’s counsel.
Signed at Ottawa, Canada, this 26th day of March 2021.
“J.R. Owen”
Owen J.
Docket: 2016-4785(IT)G
BETWEEN:
SABEL INVESTMENTS II-A LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Damis Properties Inc. (2016-4783(IT)G), Zagjo Holdings Limited (2016-4787(IT)G), Devamm Investments II-A Limited (2016‑4788(IT)G) and Microbjo Properties Inc. (2016-4789(IT)G) on
March 11 to 12, 2020 and September 21 to 23, 2020, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Yves St-Cyr
Jacob Yau
Counsel for the Respondent:
Natalie Goulard
Dominic Bédard‑Lapointe
Simon Vincent
Alain Gareau
AMENDED JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under section 160 of the Income Tax Act is vacated. The Appellant has 30 days from the date of this judgment to make a single submission regarding costs and the Respondent has 15 days to respond to that submission. The submissions on costs shall not exceed ten pages for the Appellant and ten pages for the Respondent.
The Amended Judgment is issued in substitution for the Judgment dated March 24, 2021. The Amended Judgment corrects the order of Appellant’s counsel.
Signed at Ottawa, Canada, this 26th day of March 2021.
“J.R. Owen”
Owen J.
Docket: 2016-4787(IT)G
BETWEEN:
ZAGJO HOLDINGS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Damis Properties Inc. (2016-4783(IT)G), Sabel Investments II-A Limited (2016-4785(IT)G), Devamm Investments II-A Limited (2016‑4788(IT)G) and Microbjo Properties Inc. (2016-4789(IT)G) on
March 11 to 12, 2020 and September 21 to 23, 2020, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Yves St-Cyr
Jacob Yau
Counsel for the Respondent:
Natalie Goulard
Dominic Bédard‑Lapointe
Simon Vincent
Alain Gareau
AMENDED JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under section 160 of the Income Tax Act is vacated. The Appellant has 30 days from the date of this judgment to make a single submission regarding costs and the Respondent has 15 days to respond to that submission. The submissions on costs shall not exceed ten pages for the Appellant and ten pages for the Respondent.
The Amended Judgment is issued in substitution for the Judgment dated March 24, 2021. The Amended Judgment corrects the order of Appellant’s counsel.
Signed at Ottawa, Canada, this 26th day of March 2021.
“J.R. Owen”
Owen J.
Docket: 2016-4788(IT)G
BETWEEN:
DEVAMM INVESTMENTS II-A LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Damis Properties Inc. (2016-4783(IT)G), Sabel Investments II-A Limited (2016-4785(IT)G), Zagjo Holdings Limited (2016-4787(IT)G) and Microbjo Properties Inc. (2016-4789(IT)G) on
March 11 to 12, 2020 and September 21 to 23, 2020, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Yves St-Cyr
Jacob Yau
Counsel for the Respondent:
Natalie Goulard
Dominic Bédard‑Lapointe
Simon Vincent
Alain Gareau
AMENDED JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under section 160 of the Income Tax Act is vacated. The Appellant has 30 days from the date of this judgment to make a single submission regarding costs and the Respondent has 15 days to respond to that submission. The submissions on costs shall not exceed ten pages for the Appellant and ten pages for the Respondent.
The Amended Judgment is issued in substitution for the Judgment dated March 24, 2021. The Amended Judgment corrects the order of Appellant’s counsel.
Signed at Ottawa, Canada, this 26th day of March 2021.
“J.R. Owen”
Owen J.
Docket: 2016-4789(IT)G
BETWEEN:
MICROBJO PROPERTIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Damis Properties Inc. (2016-4783(IT)G), Sabel Investments II-A Limited (2016-4785(IT)G), Zagjo Holdings Limited (2016-4787(IT)G) and Devamm Investments II-A Limited (2016‑4788(IT)G) on
March 11 to 12, 2020 and September 21 to 23, 2020, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Yves St-Cyr
Jacob Yau
Counsel for the Respondent:
Natalie Goulard
Dominic Bédard‑Lapointe
Simon Vincent
Alain Gareau
AMENDED JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal is allowed and the assessment under section 160 of the Income Tax Act is vacated. The Appellant has 30 days from the date of this judgment to make a single submission regarding costs and the Respondent has 15 days to respond to that submission. The submissions on costs shall not exceed ten pages for the Appellant and ten pages for the Respondent.
The Amended Judgment is issued in substitution for the Judgment dated March 24, 2021. The Amended Judgment corrects the order of Appellant’s counsel.
Signed at Ottawa, Canada, this 26th day of March 2021.
“J.R. Owen”
Owen J.
Citation: 2021 TCC 24
Date: 20210324
Docket: 2016-4783(IT)G
BETWEEN:
DAMIS PROPERTIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2016-4785(IT)G,
AND BETWEEN:
SABEL INVESTMENTS II-A LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2016-4787(IT)G,
AND BETWEEN:
ZAGJO HOLDINGS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2016-4788(IT)G,
AND BETWEEN:
DEVAMM INVESTMENTS II-A LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2016-4789(IT)G
AND BETWEEN:
MICROBJO PROPERTIES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Owen J.
I. Introduction
[1] These appeals address the income tax consequences to the five Appellants under section 160 of the Income Tax Act (the “ITA”) and under the general anti-avoidance rule in section 245 of the ITA (the “GAAR”) of transactions undertaken by the Appellants to increase the after-tax return of the Appellants from a sale of farmland in Brampton (the “farmland”) owned by five general partnerships (the “general partnerships”), which were in turn owned as to 99.99% by the Appellants—each Appellant owning a 99.99% interest in one of the five general partnerships.
[2] At the commencement of the hearing, the parties agreed that the appeals of all the Appellants would be heard on common evidence but that to avoid repetition the evidence would be directed only to the transactions undertaken by Microbjo Properties Inc. (“MPI”) and Damis Properties Inc. (“DPI”) (the “reference transactions”).
[3] The transactions undertaken by each Appellant, all of which took place in 2006, isolated the proceeds and income from the sale of the farmland in a newly incorporated subsidiary of each Appellant (individually, a “subsidiary” and collectively, the “subsidiaries”). Each Appellant then sold its subsidiary to Wilshire Technology Corporation (“WTC”), a corporation incorporated by an unrelated person to acquire the shares in all the subsidiaries.
[4] At the time the shares in the subsidiaries were sold to WTC, three of the subsidiaries held only cash and two of the subsidiaries held cash and an intercompany receivable.
[5] Microbjo (Chinguacousy) Inc. (“MCI”) (owned by MPI) is representative of the two subsidiaries that held cash and an intercompany receivable and 1685471 Ontario Inc. (“471”) (owned by DPI) is representative of the three subsidiaries that held only cash.
[6] Accordingly, the reference transactions collectively address the two ways in which the transactions occurred. The parties agreed that the decision of the Court in respect of the reference transactions would determine the result in all five appeals.
[7] The reference transactions are described in detail in partial agreed statements of fact (the “PASFs”) filed with the Court in respect of the appeals by DPI and MPI, copies of which are appended to these reasons as Appendix A and Appendix B, respectively.
[8] Each of the PASFs references documents in a joint book of documents for the appeal to which the PASF applies. The parties agreed that the documents in the joint books are authentic and relevant and the joint books were entered into evidence holus-bolus on that basis (exhibits AR-1 and AR-2) subject, of course, to the subsequent exercise of the Court’s discretion to exclude all or part of a particular document under the applicable rules of evidence. All other exhibits were entered into evidence individually as the hearing progressed.
[9] The transactions described in the PASFs can be summarized as follows:
A. Prior to the closing on January 16, 2006 of the sale of the farmland by the general partnerships, have each Appellant incorporate a new taxable Canadian corporation (i.e., the subsidiaries), issue one class B share in the subsidiary to the Appellant for nominal consideration, transfer the Appellant’s 99.99% general partnership interest in its general partnership to the subsidiary for 100 common shares in the subsidiary and jointly elect with the subsidiary under subsection 85(1) of the ITA to have the Appellant’s proceeds of disposition and the subsidiary’s cost of the general partnership interest be equal to the adjusted cost base to the Appellant of that partnership interest.
B. Close the sale of the farmland by the general partnerships, deposit the proceeds from the sale in the bank account of the general partnerships and, in the case of two of the general partnerships, lend a significant portion of the proceeds to the Appellant or to the parent corporation of the Appellant.
C. Following the May 31 year end of the general partnerships, allocate each subsidiary’s 99.99% share of the partnership’s income from the sale of the farmland to the subsidiary.
D. Distribute from the general partnerships to each subsidiary either cash or cash and an intercompany receivable.
E. On December 28, increase the stated capital of the 100 common shares held by each Appellant in its subsidiary to an amount approximating the expected sale price of the shares in the subsidiary in order to increase the adjusted cost base of those shares by the same amount.
F. On December 29, enter into a share put agreement with WTC pursuant to which each Appellant could put the shares in its subsidiary to WTC for a price equal to the after-tax value of the subsidiary plus 46% of the tax liability of the subsidiary resulting from the allocation by the general partnership to the subsidiary of the income from the sale of the farmland.
G. On December 29, have the director and officer of the subsidiary resign and be replaced by Craig Nerland, the nominee of WTC.
H. On December 31, exercise the put and close the sale of the shares in the subsidiary to WTC with WTC using the cash or receivable in the subsidiary to discharge the payment of the purchase price immediately after the transfer of the purchased shares.
[10] The Minister of National Revenue (the “Minister”) assessed each Appellant under subsection 160(1) of the ITA for the income tax liability of that Appellant’s subsidiary (the “underlying tax liability”) for its taxation year ending December 31, 2006 (the “taxation year”) [1] determined without regard to a deduction for capital cost allowance claimed by each subsidiary for the taxation year that, if allowed, would have reduced each subsidiary’s income to nil.
[11] The Appellants submit that the Minister has not established the existence of the underlying tax liability of the subsidiaries for the taxation year, and that even if that liability did exist, three of the four conditions for the application of subsection 160(1) have not been met: there was no transfer of property from the subsidiaries to the Appellants; even if there was a transfer, the subsidiaries and the Appellants were dealing at arm’s length at the time of the transfer; and, the fair market value of the consideration given by the Appellants equalled or exceeded the fair market value of the property transferred by the subsidiaries.
[12] In the alternative, the Minister assessed the Appellants under the GAAR. The Respondent submits that the transactions summarized above were avoidance transactions that resulted directly or indirectly in an abuse of section 160 of the ITA. The Appellants submit that the transactions were ordinary commercial transactions to which section 160 simply does not apply and therefore there is no abuse. The relevant statutory provisions are reproduced in Appendix C to these reasons.
II. The Witnesses
[13] Five fact witnesses and one expert witness testified for the Appellants. No witnesses testified for the Respondent.
[14] The fact witnesses are:
A. Michael Naiberg, a member of the family that owns MPI and various related companies. In 2006, Mr. Naiberg was a director of MPI and the sole director, president and secretary of MCI.
B. Howard Meyer, a former member by marriage of the family that owned DPI and various related companies. In 2006, Mr. Meyer was a director of DPI and the sole director, president and secretary of 471.
C. Paul Bleiwas, a tax lawyer with Goodman & Carr LLP (“G&C”) in 2006 who advised MPI and Devamm Investments II-A Limited (“DIL”) regarding the transactions. Another lawyer with G&C advised the other three Appellants regarding the transactions in issue.
D. David Steinberg, a chartered professional accountant with RSM Richter LLP in 2006 who prepared pro forma financial statements and tax-related calculations for MPI.
E. Craig Nerland, a director of WTC during the period in issue and the individual appointed as the sole director of the subsidiaries on December 29, 2006.
[15] In addition, Helen Mallovy Hicks of PricewaterhouseCoopers LLP was qualified as an expert in share valuation. Ms. Hicks provided expert opinion evidence regarding the fair market value of the shares held in the subsidiaries immediately prior to the sale of those shares to WTC on December 31, 2006. The valuations disregarded any transactions that occurred in the subsidiaries after December 29, 2006—that is, transactions effected in the subsidiaries by WTC.
III. The Evidence of the Witnesses
A. Mr. Michael Naiberg and Mr. Howard Meyer
[16] In the 1950s, Mr. Naiberg’s grandfather (the original principal of MPI) and two other individuals (the original principals of DPI and Sabel Investments II-A Limited (“SIL”)) started a real estate development company called the Nu Style Group, which built houses for sale, built apartment buildings and acquired land for development. These activities were sometimes carried on in partnership with others, including DIL and Zagjo Holdings Limited (“ZHL”).
[17] In the 1970s, the Appellants and others acquired the farmland (known as the Chinguacousy farmland) for the purpose of developing the farmland into residential properties at some point in the future.
[18] In 2005, the Appellants held an aggregate 70% interest in the farmland through five general partnerships as follows:
A. MPI through the Irber II Partnership as to a 16 2/3% undivided interest in the farmland.
B. DPI through the Damis II Partnership as to a 16 2/3% undivided interest in the farmland.
C. SIL through the Sabel II Partnership as to a 16 2/3% undivided interest in the farmland.
D. DIL through the Devamm II Partnership as to a 10% undivided interest in the farmland.
E. ZHL through the Zagjo II Partnership as to a 10% undivided interest in the farmland.
[19] At some point in 2005, the Appellants and the persons that owned the remaining 30% of the farmland (collectively, the “owners”) determined that they were unlikely to agree on how and when to develop the farmland. The owners decided that the best course of action was to offer the farmland for sale through a public auction.
[20] The owners retained counsel other than G&C to carry out the auction and sale of the farmland. On December 8, 2005, each of the five partnerships executed an agreement to sell its interest in the farmland to one of the owners that is not an Appellant in these appeals. The sales of the farmland by the partnerships closed on January 16, 2006.
[21] G&C provided advice to the Appellants regarding post-sale planning. This advice included the plan to carry out the transactions summarized in the introduction section of these reasons (the “plan”). G&C provided the advice separately to each of the Appellants. The Appellants did not meet to discuss the plan and no Appellant took the lead with G&C, but the plan was discussed in conversations among the Appellants.
[22] Mr. Naiberg could not recall the specific advice given by G&C or any details regarding the plan. He testified that G&C presented the plan to MPI and that he accepted the plan based on G&C’s recommendation. [2] In cross-examination, Mr. Naiberg described the plan as a packaged proposal that came from G&C. He also testified that his father had been a tax lawyer with G&C for many years prior to 2006 and that he would have been a point of contact with G&C and would have had questions regarding the plan.
[23] Mr. Naiberg testified that the intercompany receivable held by MCI resulted from the fact that MCI did not have a bank account so Irber II Partnership advanced the funds from the sale of the farmland to Microbjo Holdings Inc. (“MHI”) as a non-interest bearing loan and MHI invested the cash in short-term debt. The Irber II Partnership subsequently distributed an intercompany receivable to MCI. Mr. Naiberg testified that pooling surplus funds in MHI was standard practice for the related group of companies under MHI.
[24] In cross-examination, Mr. Naiberg was asked why the Irber II Partnership lent $3,254,012 to MHI, leaving behind $767,000 of the proceeds received by the partnership from the sale of the farmland. Mr. Naiberg could not recall the reason. Mr. Naiberg also could not recall if there was a connection between the amount of the intercompany receivable and the amount WTC agreed to pay MPI for its shares in MCI.
[25] In cross-examination, Mr. Naiberg was asked about the reason for incorporating MCI and transferring MPI’s interest in the Irber II Partnership to MCI on a “rollover” basis. Mr. Naiberg repeatedly stated that these steps were done on the advice of G&C and that he did not know the specific reason for these steps.
[26] Mr. Naiberg agreed with counsel for the Respondent that the only purpose of MCI was to hold MPI’s share of the farmland by acquiring its interest in the Irber II Partnership and to hold the proceeds from the sale by the partnership of its interest in the farmland.
[27] In re-examination, Mr. Naiberg agreed with counsel for the Appellants that MPI’s interest in the Irber II Partnership was transferred to MCI to isolate in MCI the proceeds and income from the sale of the farmland.
[28] In cross-examination, Mr. Naiberg agreed that MCI had a tax liability from the sale of the farmland by the Irber II Partnership of approximately $1,300,000.
[29] Mr. Naiberg was asked if there was a commercial reason for selling the shares in MCI to WTC. Mr. Naiberg stated that the advice was that some taxes could be saved by selling MCI to WTC.
[30] Mr. Naiberg was asked why a share put agreement was used rather than a direct sale of the shares in MCI. Mr. Naiberg agreed with counsel for the Respondent that it was a specific mechanic to reduce the tax on the income from the sale of the farmland but he did not know specifically why the sale of the shares in MCI was done that way. Mr. Naiberg stated that the deal with WTC was different from the normal purchase and sale agreements he would deal with.
[31] Mr. Naiberg agreed with counsel for the Respondent that the price received by MPI for its shares of MCI exceeded the after-tax value of MCI by approximately $600,000 and that this amount related to the tax savings on the sale of the farmland.
[32] Mr. Naiberg was asked why MPI elected Craig Nerland as a director of MCI on December 29, 2006 while MPI still controlled MCI. Mr. Naiberg testified that once the share put agreement was executed, he had no interest in what happened to MCI because he had the option to sell the shares of MPI two days later. He also stated that he had no idea what Mr. Nerland was going to do with MCI.
[33] Mr. Meyer testified that after the agreement to sell the farmland was executed by the Damis II Partnership, G&C presented DPI with a plan to increase the after-tax amount received by DPI as a consequence of the sale of the farmland by the partnership. Mr. Meyer described his objective as maximizing the return from the sale of the farmland to the family and stated that he was satisfied that the plan presented by G&C would accomplish that result.
[34] In cross-examination, Mr. Meyer repeatedly stated that he did not ask questions but relied on the advice he was given and that he did not recall the details. He stated that “some structure was put together in order to see that all the families could optimize their dollars”. [3] He also stated the following:
The structure was told to us by our team [of advisers], and they put the structure in place. So I have no knowledge as to, well, why the pieces were put the way they were put. It wasn’t my department. My department was to take the advice, listen to the other families, all agree. And sign it. [4]
. . .
. . . what I have a recollection of is that there was a specific structure and timing that everything had to take place, and that the lawyers came to us, brought documents, told us what had to be signed, when and where, and that is the way it was done – period. [5]
[35] Mr. Meyer was asked why Damis Holdings Limited (“DHL”) deposited funds with G&C rather than DPI. [6] Mr. Meyer confirmed that DHL owned all the shares in DPI, but he did not know why DHL transferred funds to G&C rather than DPI. [7]
[36] Mr. Naiberg and Mr. Meyer each testified that they had not heard of WTC or Craig Nerland prior to the execution of the documents implementing the sale of the shares in the subsidiaries to WTC in December 2006, that they did not meet with anyone from WTC at any time, and that the closing of the sale of the subsidiaries to WTC did not occur in the presence of WTC.
[37] Mr. Naiberg and Mr. Meyer also testified that they had no contemporaneous knowledge of the transactions that WTC caused to be carried out in MCI and 471 after they had resigned as directors on December 29, 2006. Their only knowledge came from these appeals.
[38] Mr. Naiberg and Mr. Meyer each acknowledged in cross-examination that they had received requirement letters from the Canada Revenue Agency (“CRA”) and both stated that they passed the letters on to their professional advisers and did not review the responses.
B. Mr. Paul Bleiwas
[39] Mr. Bleiwas testified that he provided advice regarding the plan to MPI and DIL and that Earl Miller, another partner at G&C at the time, was the primary contact for the other Appellants.
[40] Mr. Bleiwas’s primary contact on the WTC [8] side of the transaction was Robert J. MacRae, a lawyer based in Vancouver. Mr. Bleiwas knew of Mr. MacRae for one or two years prior to December 2006 and he knew of his involvement in one or two similar transactions undertaken by other lawyers at G&C. Mr. Bleiwas never met Mr. MacRae in person and communicated with Mr. MacRae only by telephone and e-mail.
[41] Mr. Bleiwas became aware of Craig Nerland’s involvement with WTC in December 2006. Mr. Bleiwas did not meet Craig Nerland in person.
[42] Mr. Bleiwas testified that G&C presented the plan to the Appellants shortly after the agreements to sell the farmland were executed by the general partnerships in December 2005.
[43] In his examination in chief and cross-examination, Mr. Bleiwas provided an explanation for some of the transactions comprising the plan.
[44] MCI was incorporated and MPI’s interest in the Irber II Partnership was transferred to the subsidiaries because WTC required the corporation being purchased (i.e., MCI) to be a single purpose corporation with only cash or near cash assets. MPI did not meet this criterion because it had other assets.
[45] On December 28, 2006, prior to the sale of the shares in MCI to WTC, the stated capital of the shares in MCI was increased by $3,053,000 to $3,336,643 through a series of special resolutions by MPI in its capacity as the sole shareholder of MCI. The increase in stated capital resulted in a commensurate taxable dividend and an increase in MPI’s adjusted cost base [9] in its shares in MCI. Mr. Bleiwas described this as a standard pre-sale technique.
[46] On December 29, 2006, Mr. Naiberg resigned his position as the sole director of MCI and MPI elected Craig Nerland as his replacement. Mr. Bleiwas testified that this step was insisted upon by WTC in order to allow WTC to enter into “some kind of arrangements with respect to the company [MCI] to make their planning work.” [10]
[47] Mr. Bleiwas stated that the views of MPI’s corporate counsel (i.e., other lawyers at G&C) were obtained and that he believed that the principal reason the arrangement was acceptable to them was that MPI could put the shares in MCI to WTC two days later “so it didn’t really matter what the directors [sic] did or didn’t do during that short period of time.” [11]
[48] Mr. Bleiwas testified that the representation of MPI in the share put agreement with WTC regarding the assets of MCI was amended at the last minute to reflect the fact that MCI had cash and an intercompany receivable rather than just cash. Mr. Bleiwas explained that MPI’s corporate banking practice was to consolidate its investable cash and that to do that a substantial portion of the cash from the sale of the farmland was lent by the Irber II Partnership to MHI. Mr. Bleiwas described this as “very standard banking practice for them”. [12] He thought that the receivable was not converted back to cash before the sale of MCI because that would have triggered a penalty on the term deposit.
[49] With respect to the amount of the intercompany receivable, Mr. Bleiwas testified that MPI was aware of the purchase price to be paid for the shares of MCI and that the $767,000 left in cash was roughly 54% of the $1,302,731 tax liability in MCI because of the sale of the farmland. [13]
[50] Mr. Bleiwas testified that the financial terms were set by WTC from the outset and that the deal was presented to MPI on a take-it-or-leave-it basis. Any negotiation that occurred related only to the timing of the transactions.
[51] In cross-examination, Mr. Bleiwas testified that it was obvious that WTC would need to do something in MCI to reduce MCI’s tax liability but that he had no specific knowledge of what that something was. He also stated that G&C did not provide a written tax opinion to MPI, that there was nothing controversial about the transactions and that the verbal advice given was not lengthy or complicated. He described the steps as a rollover, an allocation of partnership income, an increase in stated capital and a share sale.
[52] Mr. Bleiwas was asked whether there was consideration for the assignment of the $3,253,687 receivable held by MCI from MCI to WTC on December 31, 2006. Mr. Bleiwas stated that it was not up to him to know whether there was consideration for that assignment but noted that the PASF indicated that this assignment was booked as a loan from MCI to WTC. Paragraph x) of the PASF states that the aggregate of the receivable and $83,603 (i.e., $3,337,723—the amount of the purchase price paid by WTC to MPI) was recorded as accounts receivable of MCI in Schedule 100 of its T2 tax returns for 2007 to 2012.
[53] When directed by counsel for the Respondent to the assignment executed by MCI in favour of WTC (tab 25 of AR-1) and the assignment by WTC in favour of MPI (tab 27 of AR-1), and the absence of any mention of consideration in the former assignment, Mr. Bleiwas stated “Well, the purpose of this is not to document the entire arrangement regarding the receivable. All it is is an assignment. It’s just the direction to the parties to do something. It’s not a full contract, if you like.” [14] Mr. Bleiwas also stated that he did not think it was important that WTC give consideration to MCI for the receivable.
C. Mr. David Steinberg
[54] Mr. Steinberg testified that in 2006 his then accounting firm RSM Richter LLP were the accountants for MPI and the Irber II Partnership.
[55] Mr. Steinberg testified that Mr. Bleiwas provided him with the relevant transaction steps in an e-mail dated December 19, 2006 and he provided various numbers to Mr. Bleiwas in an e-mail dated December 20, 2006. [15]
[56] The accounting staff at RSM Richter LLP prepared draft pro forma financial statements for MCI for the period January 10, 2006 through December 31, 2006. [16] The Notice to Reader is dated December 20, 2006 and states that the draft statements are based on information provided by management. Mr. Steinberg stated that he had no communication with WTC or Mr. MacRae prior to the closing on December 31, 2006.
[57] Mr. Steinberg testified that in 2007 he was asked to prepare and file the tax returns of MCI for its 2006 taxation year but he refused because MCI was no longer a client of RSM Richter LLP as a result of the sale to WTC. Instead he provided MCI’s business number and miscellaneous other information to Mr. MacRae. [17] Mr. Steinberg testified that he had no other communications with Mr. MacRae and that he had no information regarding transactions in MCI effected by WTC.
D. Mr. Craig Nerland
[58] Mr. Craig Nerland qualified as a chartered accountant in 1977. Around 1986, Mr. Nerland left public practice as a chartered accountant and started to work in other areas including two years with Revenue Canada. From 2005 to 2017, Mr. Nerland was the controller at a group of architectural firms in British Columbia.
[59] Mr. Nerland testified that in 2005, he was approached by his brother, Philip Gordon Nerland, to act as a director of various corporations, one of which was WTC, that were acquiring computer software. In exchange, he received a fee for his services. Mr. Nerland testified that his brother worked with a tax lawyer in Vancouver called Robert MacRae.
[60] In cross-examination, Mr. Nerland stated that he was not a hands-on director, that he was not involved in the day-to-day operations of WTC and that his duties involved “looking at things that have been done and signing documents that were required to be signed”. [18] He also stated that he was not an officer of WTC and did not know who was an officer of WTC.
[61] Mr. Nerland understood that the transactions involved the acquisition of computer software. He testified that he had no knowledge of how interested parties were identified or who brought the interested parties to WTC. He stated that his brother would advise him that “we have a tax deal” and “we need you to sign some documents”. [19]
[62] Mr. Nerland was asked to describe the transactions entered into by WTC in more detail. He suggested that WTC purchased class 12 computer software and sold interests in the software to other persons. Upon being presented with the PASF, Mr. Nerland agreed that his description of the transactions was incorrect and that in fact WTC purchased corporations under a share put agreement. Mr. Nerland stated that there was always a share put agreement.
[63] Mr. Nerland could not recall why a share put agreement was required or how the purchase price was determined. He also did not know the reason for the key terms of the share put agreement or why WTC agreed to pay more than the net value of MCI for the shares in MCI.
[64] Mr. Nerland was asked how WTC benefitted from the transactions and he stated:
So a corporation, the guys vending the land, wished to find a means to shelter their income. They did so. They paid us money. We ran through this series of transactions, for which I got a tiny bit of money, my brother Philip I assume got some money, the lawyer was paid, et cetera. End result was the land vendors ended up getting a shelter or the gain on the sale of the farmlands, and I gather that's what they were attempting to do. [20]
When asked why it was necessary to go beyond selling the software, Mr. Nerland stated that he did not know and that he could not recall.
[65] Mr. Nerland testified that the corporations purchased by WTC would continue to exist for a number of years but that he did not know what happened to them. Mr. Nerland was asked what happened between the parties following the purchase and he stated the following: “What happens -- I mean, the companies were acquired under the Wilshire banner, and as far as I know, the company, Microbjo in this case, or MCI, that would be the end of it, as far as I knew”. [21]
[66] Mr. Nerland also stated that he had no communication with Michael Naiberg and that “there was no communication, as far as I can recall”. [22] Mr. Nerland also stated that he had no involvement with G&C.
[67] Counsel for the Respondent presented Mr. Nerland with a 2014 letter addressed to him in which the CRA requested information. After reviewing the letter with counsel, Mr. Nerland speculated that he may have been a director of as many as 50 corporations. Mr. Nerland stated that he resigned as a director of all the corporations in October 2014 and that he did not know what happened to the corporations after that date.
[68] Mr. Nerland stated that he sent the CRA letter to Robert MacRae to “help me craft the responses to Mr. Lee”. [23]
[69] Mr. Nerland was asked about Securitas Video Corp (“Securitas”) and about the software purchase by MCI from Securitas. He stated that he did not know anything about Securitas or about the software or what it did.
[70] Mr. Nerland was asked if there were any payments to Securitas for the software. Mr. Nerland responded that he did not recall any payments on the notes issued to Securitas and that the interest on the notes was accrued but not remitted. When asked if there were payments other than by way of promissory note, he stated that there were no payments of cash and that any other payments would have been made by cheque on the lawyer’s trust account as MCI did not have a bank account.
[71] Mr. Nerland was asked if he could “tell us anything about . . . NG Global Marketing Corp.” He stated that he could not. [24] Mr. Nerland also did not have any knowledge of the marketing services agreement with NG Global Marketing Corp. (“NG Global”) other than that NG Global agreed to market the software globally. He stated that he had not seen the marketing agreements.
[72] Mr. Nerland stated that he did not know if any marketing was ever conducted by NG Global. He also stated that he did not recall any marketing reports being prepared even though the service contract required annual reports.
[73] Mr. Nerland was asked about the 2006 tax return filed by MCI. Mr. Nerland acknowledged that he signed the return and that he was the contact person named on the return. However, he stated that a Vancouver accounting firm prepared the return. Mr. Nerland stated that he would review the return of MCI and other returns to confirm that the corporation had no tax liability.
[74] Mr. Nerland testified that he satisfied himself that he was not personally liable as a result of being a director of WTC because it had no employees and no sales that would attract GST. Mr. Nerland also stated that he did not believe there were any activities in WTC but that he did not recall. [25] Mr. Nerland did not know why the 2006 tax return of MCI was filed on November 16, 2009.
[75] Mr. Nerland was asked why Mr. Naiberg resigned as a director and officer of MCI on December 29, 2006 and why he was elected as a director on that same date. He responded that it was because his brother asked him to become a director to do the transactions. He provided the same response as to why he was appointed president and secretary of MCI.
[76] Mr. Nerland was asked who signed the software purchase agreement with Securitas. Mr. Nerland stated that he did not know, that as far as he was aware he had never met anyone from Securitas and that he did not participate in any negotiations regarding the agreement. He believed that his brother defined the terms of the agreement. Mr. Nerland did state that he had met one individual from the British Virgin Islands who was introduced as a friend of his brother and whom he believed may have been behind the various offshore companies.
[77] Mr. Nerland also stated that he did not believe that any compensation for the purchase of the software changed hands other than the note for $8.1 million. He did not know if MCI made money from the software, but he stated that he had no reason to believe that the financial statements for 2007 to 2012 that showed zero revenue were incorrect.
[78] Mr. Nerland was asked whether the assignment by MCI to WTC of the $3.253 million receivable owed by MHI to MCI was for consideration and Mr. Nerland stated that he did not recall. Mr. Nerland was also asked about two debt refinancing agreements dated January 31, 2007—one entered into by MCI and one entered into by 471—that suggested payments had been made on the $8.1 million software purchase notes but he stated that he did not know where the payments came from and he did not recall why the agreements were necessary.
[79] Mr. Nerland was asked about a software purchase agreement dated May 30, 2007 entered into by MCI that indicated that MCI had sold its interest in the computer software purchased from Securitas to a numbered company for $9 million. [26] Mr. Nerland had no explanation for, and no recollection of, the sale or the lack of any change in the financial statements of MCI reflecting the sale. He also did not know why this sale was not reported in the 2007 T2 tax return of MCI.
E. Ms. Helen Mallovy Hicks
[80] Ms. Helen Mallovy Hicks testified regarding the fair market value as of December 31, 2006 of the shares held by the Appellants in the subsidiaries disregarding any transactions effected in the subsidiaries by WTC after December 29, 2006.
[81] Ms. Mallovy Hicks opined that of three possible valuation methods, the asset-based approach was most suitable in the circumstances. That approach yielded a median value for the shares in each subsidiary essentially equal to the cash, or cash and receivable, held by the particular s