Total Energy Services Inc.

Total Energy Services Inc. v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-02-02
Neutral citation
2024 TCC 12
File numbers
2016-367(IT)G
Judges and Taxing Officers
Frank J. Pizzitelli
Subjects
Income Tax Act
Decision Content
Docket: 2016-367(IT)G
BETWEEN:
TOTAL ENERGY SERVICES INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on June 20, 2022 to June 24, 2022 and June 27, 2022 to June 29, 2022 at Calgary Alberta and continuation of Appeal heard January 15, 2024 and January 16, 2024, at Edmonton, Alberta
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Jehad Haymour
Wesley Novotny
Sophie Virji
Anna Lekash
Counsel for the Respondent:
Matthew Turnell
Neva Beckie
Alexander Wind
Eric Brown
JUDGMENT
The appeals are dismissed.
Costs are awarded to the Respondent. The parties shall have until March 4, 2024 to reach an agreement on costs, failing which the Respondent shall have a until April 4, 2024 to serve and file written submissions on costs and the Appellant shall have 30 days following the service of the Respondent’s submissions above to file and serve a written response. Any such submission shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing limits, costs shall be awarded to the Respondent as set out in the Tariff.
Signed at Ottawa, Canada, this 2nd day of February 2024.
“F.J. Pizzitelli”
Pizzitelli J.
Citation: 2024 TCC 12
Date: 20240202
Docket: 2016-367(IT)G
BETWEEN:
TOTAL ENERGY SERVICES INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
[1] The Appellant appeals from the Minister’s notice of reassessment dated August 27, 2015 denying the deduction of non-capital and other losses and deductions for the 2010 and 2011 taxation years on the basis of the application of the General Anti Avoidance Rules (GAAR) under s.245 of the Income Tax Act (the “Act”). More specifically the Appellant was denied the deduction of non‑capital losses of $2,878,871 in 2010 and non-capital losses of $26,196,711, SR&ED expenditures of $23,229,238 and net capital losses of $347,424 in 2011 - all being or relating to the tax attributes acquired by the Appellant from an unrelated party.
[2] This is another loss–trading case.
Overview:
[3] While the factual details can be overwhelming and appropriate relevant facts will be analysed in more detail in the analyses portions of this decision, a more concise view of the transactions in play are useful from the beginning. I will divide them into two parts to essentially reflect the two main parties involved in these transactions. I will also give a more simplistic bird’s eye view of these transactions and the result they achieved that is the subject matter of this appeal.
The Seller
[4] On the one hand, we have two individuals, a Mr. Tonken and Mr. Mathews, who through several corporate entities were in the business of identifying failed corporations through their contacts in the investment community, inserted themselves into their management and used their expertise to effect steps necessary to essentially clean them for acquisition by other viable companies looking to use their public existence to facilitate the raising of capital or to access their tax losses or other attributes.
[5] In the case at hand, these gentlemen identified Xillix Biotechnologies Corp. (“Xillix”), a widely held public company with no ascertainable controlling shareholder or group of shareholders, as a failed medical imaging company that had a large pool of unused non-capital losses and other tax attributes involved here. It had sought protection under the Companies’ Creditors Arrangement Act (“CCAA”) of British Columbia and given the opportunity to develop a reorganization plan by the BC Supreme Court to maximize value for its stakeholders.
[6] Through Cavalon Capital Partners Ltd (“Cavalon”) an agreement dated July 9, 2007 was made with Xillix (the “Investment Agreement”) to invest $4.4 million dollars in Xillix by way of convertible debenture, based on paying $0.055 per dollar of its usable tax losses of $84 million, of which $3.6 million was to pay off its creditors remaining after the sale of its other assets satisfied other secured creditors and $800,000 was to be retained as capital to maintain itself as a publicly traded company with its listing on a stock exchange, including paying salaries to the aforementioned gentlemen, until a sale transaction of its attributes was complete.
[7] In return, Cavalon would be able to convert 94.5% ($4,160,000) of its debenture into 45% of the voting shares and 100% of a newly created class of non‑voting shares so as to give it 80% of the equity in Xillix with the balance of the debenture loan remaining turned into a $240,000 non-interest bearing unsecured demand loan. In addition, the officers and directors of Xillix would resign and be replaced by nominees of Cavalon, i.e. the aforementioned gentlemen and their friendly nominees, and the name of the corporation would be changed from Xillix to Biomerge Industries Ltd. (“Biomerge”) and be delisted from the TSX and relisted to the smaller NEX exchange, a subboard of the TSX Venture exchange that did not have a minimum listing requirement. There was no difference in the underlying rights of the voting and newly created non–voting common shares, other than the vote, so both participated equally via dividends and distribution on any wind-up. The parties understood this was to avoid a change in control to preserve the losses of Xillix.
[8] Another of the gentlemen’s corporations, which had the ability to borrow funds, and in fact did, to allow the loan to Xillix to be made, Nexia Biotechnologies Inc., bought the shares of Cavalon, which had no other assets other than its rights in the agreement with Xillix, and then amalgamated with Cavalon to form Nexia Biotechnologies Ltd. (“Nexia”) and became the successor to Cavalon in the Investment Agreement.
[9] Before completion of the agreement, the CEO of Xillix died and Xillix was placed into Receivership with Mr. Vermette of PWC, who had acted as Monitor beforehand. The remaining officers and directors of Xillix resigned at such time and in order to continue its corporate existence and meet its securities and other regulatory requirements, as well as have someone sign the necessary documents to complete the agreement and restructuring plan, Messrs. Tonken and Mathews agreed to act as directors and officers before completion thus enabling them to complete the plan.
[10] The Restructuring plan that gave affect to the above agreement was completed on September 24, 2007, after an amendment dated September 7, 2007 requested by Cavalon, that changed the original Restructuring plan approved by the Court to delete the requirement for Xillix to be first placed then removed from bankruptcy and that amended the terms of the non-voting shares so as to delete their convertibility feature into voting shares. The latter was done to ensure de jure control would not be acquired by the issuance of such shares. The Court approved the Restructuring plan as amended and dispensed with the approval of the then existing shareholders of Xillix on the basis they would have received no payout from the plan. The evidence of Mr. Tonken was that the only chance the original shareholders had in obtaining any value for their investment in Xillix was on a sale of its tax attributes via the completion of the Investment Agreement and restructuring contemplated therein. They had no choice and went along.
[11] Messrs. Tonken and Mathews then proceeded to market Xillix through the investment community as a cleansed entity no longer carrying on business, having its tax attributes and public company existence as its only assets, and having no other debts or obligations other than to Nexia who now held 45% of the voting shares, 100% of the non-voting common shares and 80% of its total equity and the aforementioned demand promissory note for $240,000.00.
[12] The above transactions are generally described by the parties in their pleadings and argument as the CCAA Plan transactions and I will refer to them as the CCAA transactions or series.
The Buyer:
[13] On the other hand, we have an Income Trust by the name of Total Energy Services Trust (“Total”), an Alberta mutual fund trust whose units were listed and traded on the TSX, which conducted its businesses of contract drilling services and the manufacture and rental of equipment to the gas and oil exploration and production companies in western Canada through its direct and indirect subsidiaries; mainly Total Energy Services Limited (“TESL”).
[14] Due to changes in the Act, which proposed to level the playing field between Income Trust structures and Corporations by imposing additional taxes on Income Trusts through what are generally described as the SIFT Rules in the Act, Total decided it would convert to a corporate structure to: remain competitive from a tax perspective and in its ability to raise funds on the market, retain some of its major investors who threatened to sell their interest if there was no corporate conversion, and address concerns that the new rules would restrict growth by limiting its ability to undertake significant acquisitions. This was noted by the CEO of Total, Mr. Halyk but disputed by the Respondent.
[15] Lo and behold, Total was introduced to Biomerge through the efforts of intervening investment advisors and, after exploring other possibilities, decided Biomerge was exactly the type of entity it would prefer to merge with using the trust unit for shares exchange method provided by the SIFT Rules, it being a clean corporation with no creditors or active business and with the benefit of having been cleaned through the CCAA Court ordered process, not to mention the fact it had valuable tax attributes in the nature of unused losses and deductions.
[16] Accordingly, Total entered into an Arrangement Agreement with Biomerge pursuant to which a Plan of Arrangement set out the numerous steps to occur on an effective date that would: amend the Deed of Trust of Total to allow its trust units to be transferred to Biomerge, create articles of continuance for Biomerge (from BC to Alberta) that would provide for a new class of common shares (“New Common Shares”) that would be exchanged for the trust units and a portion of the existing voting common shares of Biomerge, exchange the 29,050,000 outstanding trust units of Total on a one for one basis to 29,050,000 New Common Shares of Biomerge, provide that the total of 248,941,152 existing common voting shares of Biomerge would be exchanged for $702,293 in cash and 56,730 New Common Shares, cash out the existing 435,647,055 non-voting common shares of Biomerge for $1,695,185, deposit with its solicitors in trust, a sum of cash of $1,247,401 equal to Biomerge’s liabilities in return for a demand promissory note , change the name of Biomerge to Total Energy Services Inc. (“New Total”) and replace the existing officers and directors of Biomerge with the officers and directors of TESL, the earlier referred to subsidiary of Total.
[17] It should be noted that the total consideration to be paid to the shareholders of Biomerge through a combination of cash and shares of New Total was $3.9 million negotiated by the parties based on paying $0.052 per dollar on the total of non-capital losses and SR&ED expenditures in the Biomerge tax pool.
[18] The above arrangements and transactions became effective May 20, 2009 after approval of the Total Plan of Arrangement by the Court of Queen’s Bench of Alberta on May 15, 2009 and New Total commenced trading on the TSX after substituting old Total’s listing for New Total. At this time 99.8% of the equity in New Total belonged to the original trust unit holders of Total and only 0.2% to the then shareholders of Biomerge.
[19] After May 20, 2009, Total (and its sub-trusts) were wound up pursuant to s.88.1(2) of the Act as result of which the assets of Total Trust, mainly its shares in and debenture loan to its subsidiary, TESL, became the assets of New Total.
[20] On January 1, 2010, New Total and TESL amalgamated into the Appellant, Total Energy Services Inc. so that the tax pools of New Total and TESL became those of the Appellant, including obviously the tax pools that had belonged to Biomerge traced back to Xillix that were denied by the Minister here.
[21] Total Trust expended approximately $4.8 million inclusive of the $3.9 million consideration to Biomerge shareholders discussed above and the transaction costs to implement the transactions here.
[22] This group of transactions are referred to by the parties as the Total Arrangement or Total Conversion transactions and I will henceforth refer to them at the Total Conversion transactions or series.
Bird’s Eye View:
[23] In my view, the above CCAA transactions and Total Conversion transactions reflect a vendor of inactive but existing shell corporations, with tax losses and securities exchange registrations, marketing and selling such attributes on the open market to a willing and unrelated buyer, who ended up acquiring and using such losses against its income from a business totally different from that of the original corporation, almost entirely for the benefit of new shareholders. The role of this Court will be to determine whether any of such transactions which gave rise to the aforesaid result violates the GAAR.
GAAR
[24] Section 245 of the Act is the GAAR. Although I will refer to the specific provisions in more detail during this analysis, there is no dispute that it is well established law that three conditions must be me for the GAAR to apply:
(1) Was there a tax benefit?
(2) Was there an avoidance transaction or a series of transactions that included an avoidance transaction that resulted in the tax benefit; and,
(3) Were any of the avoidance transactions abusive?
[25] In this case, there is no dispute that we are not dealing with a sole transaction but a series of transactions so my reference to the applicable GAAR provisions will reflect that.
[26] I will address each of the conditions specifically and set out the position of the parties thereon within that analysis.
(1) Was there a tax benefit? [27] The Appellant concedes in argument that the use of the Biomerge tax attributes in 2010 and 2011 by the Appellant that resulted in the reduction of tax was a tax benefit and the subject matter of the Minister’s reassessment in this appeal.
[28] While it is clear this first condition has been met, I believe it is important to note that the Respondent describes the tax benefit as “the preservation, carry‑forward and use of the Biomerge Tax Attributes” in paragraph 27 of its written submissions as well as paragraph 11(uu) of the Reply. As the Appellant’s counsel had pointed out in argument, only the use of these attributes can be considered the tax benefit for the purpose of this appeal. The legislative changes made by Parliament in Budget 2022 to amend the definition of “tax benefit” to include the preservation and carry-forward of tax attributes did not form part of the definition of “tax benefit” applicable to this appeal. The applicable definition reads as follows:
245(1)…a reduction, avoidance or deferral of tax or other amount payable under this Act…
[29] Clearly, this definition contemplates that the tax attributes must have been used as confirmed by the Federal Court of Appeal in the decisions of Wild v. Canada, 2018 FCA 114 at paragraphs 30-39 and Gladwin Realty Corporation v. Canada 2020 FCA 142 at paragraph 47.
(2) Was there a series of transactions that included avoidance transactions that resulted in the tax benefit? [30] Section 245(3) defines “avoidance transaction” as a transaction that results in a tax benefit, either by itself or as part of a series of transactions “unless the transaction may reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit”. [See Canada Trustco Mortgage Co. V Canada 2005 SCC 54 (“Canada Trustco”) at par 22 and Copthorne Holdings Ltd. V Canada 2011 SCC 63 (“Copthorne”) at par 39]
[31] A “transaction” is widely defined to include an arrangement or an event in s.245(1) of the Act.
[32] It is also established law that the burden is on the taxpayer to refute the Minister’s assumption regarding the primary purpose of the series and of each transaction forming part of the series and that only one transaction in the series must be found to be an avoidance transaction in order to satisfy the requirements of s.245(3) [See Copthorne at par 63 and 64].
[33] It is agreed that the Court must determine: 1. what transactions make up the relevant series of transactions for the purposes of the GAAR analyses and whether the Tax benefit resulted from such series, and 2. whether every transaction within that series was undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit.
Series of transactions that resulted in a Tax Benefit
[34] As set out in Copthorne at par 43, citing OSFC Holdings Ltd. V Canada, 2001 FCA 260 at paragraph 24, the starting point is the common law series where each transaction is preordained to produce the final result.
[35] At the beginning of this decision, reference is made to two sets of transactions the parties generally refer to as the CCAA transactions and the Total Conversion transactions. The parties generally agree that these each constitute a series of transactions with few minor exceptions; namely that according to the Appellant, some of the transactions in the CCAA transactions should not be included in that series if it becomes part of a larger series under s.248(10) to be discussed herein. There were other Transactions the parties referred to as the “Other Transactions” which are not necessary to set out in detail here as they are not consequential to the determination of this matter.
[36] There is no dispute that each of the aforesaid series would only be separate Common Law Series and do not form part of one large Common Law Series so there is no need to reference the Appellant’s argument in this respect although its essentially uses similar arguments with respect to the real dispute.
[37] The real dispute between the parties centers on the issue of whether the two Common Law Series are joined in their entirely or only partially pursuant to Section 248(10) of the Act, which serves to expand a common law series.
[38] Section 248(10) provides:
For the purposes of this Act, where there is reference to a series of transactions or events, the series shall be deemed to include any related transactions or events completed in contemplation of the series.
[39] The Respondent takes the position that both common law series are joined in their entirety pursuant to Section 248(10) while the Appellant argues only the transactions that preserved the reporting issuer status and eliminated the claims of creditors should be added and not any of the CCAA transactions that involved preserving the Biomerge Tax attributes including any of the Cavalon/Nexia’s investment and ownership interest in Biomerge (originally Xillix).
[40] The Appellant’s arguments are two-fold. First, the Appellant argues that since there is no material judicial consideration of the term “related” as referenced in the phrase “related transactions or events” that we must use the basic principles of interpretation to find that the term must have meaning and that the dictionary definitions of Black’s Law Dictionary and Webster’s Dictionary of the English language which define “related” means that related transactions must mean that only transactions that are connected in some way, or have a relationship to the Total Conversion transactions should be considered related transactions under S.248(10).
[41] The Appellant’s position seems to be predicated on their submission that the only reason they entered into the deal with Biomerge was to access a cleansed corporation with reporter issuer status. With all due respect, this position totally ignores the overwhelming evidence that the acquisition of Biomerge tax attributes was, at the very least, a significant portion of the Total Conversion series and one of the reasons for the transactions; putting aside for the moment whether it was the primary reason. The Appellant sought out companies with significant losses, based its price on $0.052 per dollar of tax attributes, required a minimum of at least $70 million dollars in such attributes as a condition of closing, undertook due diligence with respect to their availability for use and negotiated with the principals and representatives of Nexia in relation thereto. Accordingly, any transaction within the CCAA transactions that related to the preservation of the Biomerge Tax attributes was extremely relevant using the Appellant’s own rationale. The preservation of Biomerge tax attributes had great relevance to Total.
[42] Moreover, the Investment Agreement pursuant to which Cavalon (later Nexia) was to inject $4.4 million dollars into Xillix of which $3.6 million was to be used to “cleanse” it by paying off creditors is the same agreement that provided for the ability to convert such debt to shares that took place pursuant to the Restructuring Plan. I fail to see how these transactions are not related.
[43] Secondly, the Appellant argues that since the Trust Conversion Rules (SIFT) rules were released 9 months after the September 24, 2007 date when the CCAA transactions were completed there was no way for Biomerge to contemplate being involved in a trust conversion or how conversions would be effected. In earlier argument pertaining to delineating the Common Law Series, the Appellant also made reference to the fact that none of Xillix, Cavalon, Nexia or their principals had any knowledge of Total at the time the CCAA transactions were undertaken or completed.
[44] In Copthorne, at paragraphs 42-54, the SCC analysed in detail the second condition for applying GAAR and clearly provided material judicial consideration of related transactions or events completed in contemplation of the series per 248(10) of the Act. At paragraph 54 the SCC states:
[54]… nothing suggests that the related transaction must be completed in contemplation of a subsequent series. The context of the provision is to expand the definition of a series which is an indication against a narrow interpretation.
[45] In fact, at paragraph 56 the SCC stated that the language of s.248(10) allows either a prospective or retrospective connection of a related transaction to a common law series.
[46] In determining whether a related transaction was done in contemplation of another series, the SCC in Copthorne, paragraphs 46-47 stated that:
[46]………. “The Court is only required to consider” whether the series was taken into account when the decision was made to undertake the related transaction in the sense it was done “in relation to” or “because of” the series.
[47] Although the “because of” or “in relation to” test does not require a strong nexus, it does require more than a “mere possibility” or a connection with “an extreme degree of remoteness”…… Each case will be decided on its own facts…. In the end, it will be the “because of” or “in relation to” test that will determine, on the balance of probabilities, whether a related transaction was completed in contemplation of a series of transactions.
[47] In the case at hand, whether looking at it from a prospective or retrospective manner, it is clear that it is only “because of” the CCAA transactions in preserving the tax attributes of Biomerge and placing it in inventory for future sale that Total was able to acquire the tax attributes and it is only “because of” these transactions and events that Biomerge was able to sell them on the open market.
[48] Consequently, I find all the CCAA transactions are part of the Total Conversion common law series in their entirety pursuant to s.248(10). Since the Tax Benefit occurred within the Total Conversion series it also occurred within the expanded series.
(3) Primary Purpose of Avoidance Transactions [49] As earlier indicated, s.245(3) defines an “avoidance transaction” as a transaction that results in a tax benefit, either by itself or as part of a series of transactions, “unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit.”
[50] The Minister assumed that the transactions between Xillix and Cavalon, including the initial letter agreements, the January 3, 2007 Letter Agreement accepted by Xillix, the Investment Agreement of Cavalon dated July 9, 2007, as amended and the completion of the transactions pursuant to the Restructuring Plan described in the earlier overview of this decision, was to monetize and ultimately sell the tax attributes of Xillix. The evidence overwhelmingly supports this. Reference to the desire to do so is found in the reports of Mr. Vermette, the PWC monitor and then Receiver appointed for Xillix. The affidavits of Mr. Gannon, the CEO of Xillix during the CCAA proceedings before his death speak to Cavalon’s interest in acquiring Xillix’s tax losses and refer to Cavalon as the “Tax Purchaser”. The evidence of Mr. Tonken was that Cavalon was in the business of acquiring failed companies and marketing and selling their attributes, including tax attributes.
[51] Moreover the Restructuring Plan approved steps that were carried to completion that had only a tax purpose, which include:
(1) Xillix’s articles were amended to create an unlimited number of non‑voting shares with the same economic attributes as the voting common shares, in that they both participated equally as to dividends and rights on distributions but were clearly needed to allow Nexia to convert most of its debenture in a manner to avoid obtaining de jure control. As stated earlier, after the debenture conversion, Nexia ended up with 45% of the voting shares, 100% of the non-voting common shares and 80% of the equity interest in Xillix. Mr. Tonken acknowledged the need to avoid a change in control. Clearly, as in the case of Madison Pacific Properties Inc. V Canada 2023 TCC 180 (“MP Properties”), the logical conclusion is that the creation and issuance of these non-voting shares was to avoid Nexia obtaining de jure control and hence preserve the losses.
(2) At the request of Cavalon, the initial Investment Agreement and Restructuring plan was amended to remove the convertibility feature in the non-voting common shares into common shares to avoid those shares being treated as voting shares under s.256(8) of the Act and thus avoid de jure control. This event had only a tax purpose.
[52] In analysing the CCAA transactions it is absolutely clear that the entire purpose of most of the transactions therein was to preserve and monetize the Biomerge tax attributes. Practically speaking, what else do you do with an entity that was an empty shell that had ceased carrying on business and no longer even had a place from which to conduct business with no assets other than its tax attributes and reporting issuer status with registration on the NEX exchange, a small subboard of TSX Ventures? The only evidence of the latter was from Mr. Tonken who testified that a clean public company with reporting issuer status and exchange registration would be worth about $250,000. There was no mention of whether the lower status of the NEX exchange would affect this, but it is clear the primary remaining assets were the $75 million plus level of tax attributes at that time.
[53] I also agree with the Respondent’s argument that the onus was on the Appellant to show the CCAA transactions had primarily a non-tax purpose and it neither pleaded any material facts in this regard nor made any argument to rebut the Minister’s assumption in this regard other than to suggest in argument that the primary purpose of the transactions to complete the “cleansing” portion of the CCAA transactions was to eliminate Biomerge’s liabilities and preserve it as an ongoing concern; totally ignored the remaining transactions that I have found to be avoidance transactions, instead focusing only on the Total Conversion transactions.
[54] While it is not necessary for me to consider whether any of the Total Conversion transactions would be an avoidance transaction due to the requirement that only one of the transactions in the expanded series of transactions had to be primarily for a non-tax purpose, I believe it would be appropriate to address the arguments of the parties in this regard.
[55] In essence, the Appellant argues that the Total Conversion transactions were undertaken solely to effect the conversion of the Trust to a corporation to avoid the tax consequences of the SIFT rules earlier discussed and that the tax benefit from the Biomerge attributes were just “gravy” as Mr. Halyk testified. Moreover argues the Appellant, the selection of Biomerge as the conversion candidate is a “choice” not an avoidance transaction, relying on Spruce Credit Union v. the Queen 2012 TCC 357, confirmed by the FCA 2014 FCA 143 [Spruce].
[56] That case involved the determination by the Tax Court whether a dividend paid by an entity known as STAB to its members, which consisted of all BC credit unions who are required by law to be members and shareholders thereof, for the purpose of putting them in funds to pay an extraordinary assessment issued by the entity known as CUDIC attracted the GAAR. The Minister took the position that the dividend should be re-characterized as a refund of premiums paid and thus be taxable treating the dividend as an abusive avoidance transaction. STAB was the central credit union under BC legislation that is designated the stabilization authority for and required to supervise credit unions in BC. STAB is itself funded by contributions from credit unions as member premiums. CUDIC was the entity that in BC is required to maintain a deposit insurance fund to protect consumers against losses on their deposits funded by assessments against credit unions which occurred here to satisfy the higher fund thresholds resulting from legislative changes.
[57] The Court decided this single transaction was not an avoidance transaction and had a clear non-tax purpose. Stab was clearly exercising its duty to stabilize it credit union members and whether the amounts to do so were a dividend or refund the amount of its payment would have been the same.
[58] At paragraphs 91 to 93 of Spruce, Boyle J. stated:
[91] In this case, the overall transaction of STAB paying dividend amounts to its member credit unions was clearly done for the purpose of putting the member credit unions in funds to pay the CUDIC assessments and reducing STAB’s deposit protection and stabilization funds to the lesser required level following CUDIC’s extraordinary assessment. This is clearly a bona fide non-tax purpose. An “overall non-tax objective of transferring funds from STAB to CUDIC “is admitted by the Respondent.
[92] Unlike in Copthorne, in this case no step was inserted or undertaken primarily for the purpose of being able to obtain a desired or preferred tax result.
[93] The act of choosing or deciding between or among alternative available transactions or structures to accomplish a non-tax purpose, based in whole or in part upon differing tax results of each, is not a transaction. Making a decision cannot be an avoidance transaction.
[59] This was not a series of transaction case as the Respondent has pointed out in argument and in Spruce only the dividend transaction was in issue and no extra steps were involved. Indeed at paragraph 101 of Spruce, the Court stated:
[101] overall, I am unable to identify any step or transaction undertaken other than for a primary non-tax purpose. This is in contrast with, for example, Copthorne, where the Appellant had to convert its pre-existing parent subsidiary structure to a sister company structure as a preliminary or intervening separate step in order to position itself to obtain the tax benefit sought. In this case there was no such step or transaction done primarily for that purpose.
[60] The Appellant did not elaborate further on this issue in argument other than to conclude a choice is not a transaction and so the selection of Biomerge itself cannot be an avoidance transaction. Implied in the Appellant’s position is of course, the Duke of Westminster principle and the ability of taxpayers to make business decisions that result in most favourable tax consequences to them and a caution against interfering with commercial decisions. The Appellant however has staged this argument in the context of arguing there was no primarily tax reasons for any of the Total Trust Conversion transactions.
[61] Here I believe there is ample evidence to justify the Respondent’s position that the primary purpose of the Conversion Transactions, including the choice of Biomerge, were primarily for a tax purpose and that there are steps or transactions undertaken for a primary a tax purpose.
[62] Indeed at paragraph 60 of the FCA decision in Spruce, the Court specifically stated that the existence of an alternative transaction is a factor that can be considered even though a comparison between transactions accomplishing equivalent results other than tax is not itself sufficient to establish an avoidance transaction, otherwise the existence of alternative transactions with greater tax consequences would render the Duke of Westminster principle meaningless.
[63] In paragraph 61, the Federal Court of Appeal went on to acknowledge that the “need to determine the ‘primary’ purpose implies that multiple purposes can coexist and that both tax and non-tax purposes can be intertwined.” And in paragraph 62, the Court, relying on the Supreme Court decision in Canada Trustco, stated that “where there is an avoidance transaction a Tax Court judge must consider and weigh all the evidence to determine whether it is reasonable to conclude that the transaction was not undertaken or arranged primarily for a non‑tax purpose.”
[64] Accordingly, it is clear that simply saying that a choice is not a transaction and thus not an avoidance transaction is simply not always true and will depend on all the evidence to be weighed.
[65] In the case at hand, I find that there is overwhelming evidence to support the Respondent’s position that the Total Conversion series as a whole and individual transactions within that series were undertaken primarily for tax purposes – to access the Biomerge tax attributes in a manner that avoided the application of s.111(5) of the Act. Such evidence includes the following:
(1) Notwithstanding Mr. Halyk’s testimony that all options were considered and analysed before deciding on selecting Biomerge as the conversion candidate, it is clear from the testimony of Mark Kearl, the CFO, that he was instructed only to consider targets with tax loss attributes and only interviewed this type of candidate.
(2) The notes of Mr. Kearl put in evidence demonstrate the willingness of the Appellant to “walk” from the deal if there was not a sufficient level of tax attributes that would make it “worth our while” and in fact the Arrangement Agreement was conditional upon there being a minimum of $70 million in such usable tax attributes.
(3) The $3.9 million price or total consideration to be given to the Biomerge shareholders was calculated on a price of $0.052 per dollar of the non‑capital loss and SR&ED deduction tax attributes available only.
(4) There is overwhelming evidence the Appellant conducted serious due diligence to confirm the existence, quantity and use of the tax attributes, through independent accountants and their own solicitors. The evidence is that the total closing costs of the transaction, excluding the $3.9 million above, including accounting and legal fees was approximately $900,000.00, a significant amount evidencing their focus on the tax attributes. The volume of due diligence evidence focusing on the tax attributes was huge.
(5) There was no price allocated to Biomerge’s reporting issuer status and public exchange registration which renders the suggestion that the primary purpose of the transaction was to use a cleansed corporation having such status not credible.
(6) The evidence of Mr. Tonken was that the cost of acquiring a clean corporation with such issuer status was about $250,000. It begs the question why such a conversion candidate was not pursued or why it did not simply incorporate a new corporation as these options would have accomplished their non-tax purpose if that was the primary purpose.
(7) There was no evidence given by the Appellant as to why they needed to acquire a public corporation with issuer status when Total already possessed issuer status in the larger provinces and substituted its own public listing status for the new entity resulting from the series, (namely the Appellant), rather than that of Biomerge. There was also no evidence of what value or use they made or would have made of any such Biomerge issuer status. Total was already registered on the more valuable TSX while Biomerge was registered on the lower NEX and no evidence was given to suggest it could not have substituted that TSX registration into a new corporation or other target at less cost.
(8) Although the Appellant’s concerns with respect to the SIFT rules and the choice to convert Total Trust to a corporation were business reasons, there is no evidence of any urgency to do so out of Mr. Halyk’s stated fear that “the normal growth” guidelines in those rules would hinder growth. There was no evidence of an acquisition or acquisitions in the works or contemplated that could lead to equity issuances of $50 million in any given year or the doubling of its market capitalization from October 1, 2006, the start of the CCAA transactions to 2010, when the Total Conversion transactions were completed. That would have exposed the Appellant to the consequences of the SIFT distribution tax at an earlier stage than 2011. Frankly, if there was any such concern, it begs the question as to why the Appellant would not have simply bought a public shell company or incorporated a new one earlier.
[66] Although the above should be sufficient to demonstrate the overall avoidance character of the series in question, it should be noted that unlike Spruce Credit relied upon by the Appellant above, there were indeed steps inserted into an otherwise commercial transaction that I agree were avoidance transactions. These include the step to cash out the Biomerge non-voting shares and the partial cash‑out of the voting shares which were exchanged for part-cash and shares in New Total which clearly served to eliminate the bulk of the interest held by the original shareholders of Biomerge, including most of the majority interest indirectly held by Tonken and Mathews through Nexia. This was not just an exchange of shares and trust units but a cash out of most of the prior shareholders’ interest in Biomerge such that they only held 0.2% of the equity interest in New Total while the Total unit holders ended up with 99.8%.
[67] It is clear that concerns about the application of the SIFT Rules in 2011 were secondary to the primary purpose of this Total Conversion series: the buying and selling of tax attributes.
[68] As earlier mentioned, the sole purpose of the additional step of creating a new class of non-voting shares by Xillix to issue to Nexia, within the expanded series, was to transfer most of the equity interest in Xillix to Nexia in a manner that avoided Nexia acquiring de jure control. Nexia ended up with 80% of the equity in the publically traded