Harvard Properties Inc. v. The King

Harvard Properties Inc. v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-10-28
Neutral citation
2024 TCC 139
File numbers
2017-4387(IT)G
Judges and Taxing Officers
Patrick J. Boyle
Subjects
Income Tax Act
Decision Content
Docket: 2017-4387(IT)G
BETWEEN:
HARVARD PROPERTIES INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on November 14-17, 21-24 and 28, 2022 and December 5-6, 2023 at Toronto, Ontario
Before: The Honourable Justice Patrick Boyle
Appearances:
Counsel for the Appellant:
Al Meghji
Theodore Stathakos
David Jacyk
Counsel for the Respondent:
Justine Malone
Rosemary Fincham
Ian Moffat
JUDGMENT
This Court orders that the appeal is to be dismissed in accordance with the attached Reasons to the extent of any liability of NH Properties described in section 160 once that amount is determined.
The respondent is entitled to costs in accordance with the Reasons.
Signed at Ottawa, Canada, this 28th day of October 2024.
“Patrick Boyle”
Boyle J.
Citation: 2024 TCC 139
Date: 20241028
Docket: 2017-4387(IT)G
BETWEEN:
HARVARD PROPERTIES INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
I. Introduction 2
II. The Evidence 7
A. Maurice Bundon 7
B. Tina Svedahl 11
C. Dennis Auger 17
D. Lorne Paperny 22
E. Mark Zivot 24
F. Don Kowalenko 25
G. Scott Exner 26
H. Mark Weston 29
III. Factual Analysis and Findings 30
IV. The Bifurcated Issues 36
V. Section 160 Transferee Liability - Law and Analysis 36
The Purpose of Section 160 - The Livingston Decision 37
Microbjo/Damis Properties 40
The Transferred Property in Issue 47
The Non–Arm’s Length Relationship Between the Co-owners and NH Properties 50
The Value of the Newco Shares 53
Directly or Indirectly 60
VI. The General Anti-Avoidance Rule, GAAR - Law and Analysis 61
The SCC Trilogy’s Analytical Matrix 61
Tax Benefits and Avoidance Transactions 67
Misuse and Abuse 68
The Text, Context and Purpose of Section 160 68
Abusive Tax Avoidance 69
Determining the Reasonable Tax Consequences 70
Is GAAR Statute-Barred? 71
VII. Conclusion and Disposition 73
APPENDIX A 77
(1) ABACUS LETTER OF INTENT 77
(2) CO-OWNERS LETTER OF INTENT 82
APPENDIX B – AUGER TAX MEMO 86
APPENDIX C – SECTION 2 SPA – TRANSACTIONS 89
APPENDIX D – WESTON SHARE VALUATION EXCERPTS 93
I. Introduction [1] The appellant Harvard Properties Inc. (“Harvard Properties”) held a 50 percent undivided interest in Calgary’s North Hill Shopping Centre. The other 50 percent undivided interest was held by a bare trustee numbered company for the equal benefit of Harvard Properties’ four co-owners of the shopping centre, which were not related to it. That numbered company also held Harvard Properties’ interest as bare trustee.
[2] In 2005 the co-owners were approached directly by a broker representing a potential purchaser of the shopping centre. Neither Harvard Properties nor any of the other co-owners had been interested in selling the shopping centre prior to that approach. The interested potential purchaser turned out to be an entity, Abacus, that was virtually unknown to the co-owners[1]. The sale was to be structured as a share sale, however, the share purchase price was to be a function of a calculated Purchase Value of the assets of the shopping centre had it been sold in an asset sale. The transactions essentially closed as initially outlined and as set out in the negotiated Share Purchase Agreement (“SPA”). They included a rollover of the co-owners’ shopping centre interests to new corporations (the “Newcos”) at the assets’ adjusted cost base, and the sale of those Newcos to Abacus or its designate which would then sell the shopping centre assets to a third party.
[3] Money received from the third party purchaser of the shopping centre was used by Abacus to pay for the Newco shares. The co-owners did not know or inquire how Abacus would pay, shelter, avoid or eliminate the tax liability on the taxable income triggered by that sale of their shopping centre to the third party, nor did they make inquiries. The co-owners had been advised by their tax accountant to make appropriate inquiries of this nature. There are documented concerns by the co-owners from the outset with Abacus’s credibility and whether it would honour its obligations under its proposed purchase arrangement.
[4] The Canada Revenue Agency (“CRA”) reassessed the Abacus side of the structured series of interdependent and related corporate reorganization and sale steps. Abacus is disputing its reassessments, but at this time that dispute is unresolved and the tax has not been paid on the Abacus side.
[5] CRA has assessed Harvard Properties and the other co-owners of the shopping centre under the non-arm’s length joint and several liability provisions in section 160 of the Income Tax Act (the “Act”) for an amount that CRA maintains the co-owners directly or indirectly received upon the sale of the shares through which they held their interests in the shopping centre. The amount is approximately $6.5 million.
[6] The respondent maintains that, if it is concluded that section 160 does not apply, the general anti-avoidance rule (“GAAR”) in section 245 does apply.
[7] Justice MacPhee of this Court issued a bifurcation order in 2021 removing the issue of the Abacus tax liability, if any, from the hearing that I am now deciding. While both parties agreed to a bifurcation, they could not agree to its terms and a contested motion resulted. The effect of the bifurcation order is that the amount of Abacus’ unpaid tax liability, if any, which is the cap on any section 160 assessment of a transferee, is not being determined at this stage and time in this appeal. Abacus’ own tax plan and its tax liability from the sale of the shopping centre as part of these interrelated and interdependent transactions involving the shopping centre are not relevant to this decision. No evidence was heard concerning Abacus’ tax liabilities at the time of the transactions in issue in this proceeding on the bifurcated issues.[2] [3]
[8] The legal issues in this trial on the bifurcated issues are very similar to those in the tax appeal known as Damis Properties Inc. v. The Queen, 2021 TCC 24 in this Court and as Canada v. Microbjo Properties Inc., 2023 FCA 157 in the Federal Court of Appeal (FCA). Of course the transactions and the other facts and evidence herein differ from those in Damis/Microbjo. The hearing dates in this trial preceded the release of the FCA decision in Microbjo. Following the close of evidence, it was agreed that oral argument would be rescheduled following the release of Microbjo by the FCA and that supplemental written argument could be filed addressing it.
[9] As explained in detail below, I have concluded that section 160 is triggered by these transactions as the co-owners, including Harvard Properties, and the Abacus group were not dealing at arm’s length, and the co-owners, including Harvard Properties, received amounts exceeding the fair market value of their shares through which they held their interests in the shopping centre.
[10] If the application of section 160 was successfully avoided by these transactions, I have concluded that the GAAR would apply as the series of transactions involved avoidance transactions that gave rise to and resulted in the abuse of section 160.
[11] This proceeding was heard over eleven days. The pleadings comprised a Notice of Appeal, Reply, Answer, Amended Reply, Answer to Amended Reply, Amended Answer to Amended Reply and a Further Amended Reply. Another amendment to the Further Amended Reply was allowed on a contested motion at the opening of the first hearing week. The contents of both the Books of Documents and Books of Authorities are measured in feet. Written Argument was 2 inches thick.
[12] The evidence in this trial included a limited Partial Agreed Statement of Facts. Harvard Properties’ Chief Operating Officer, who had previously been its Senior Vice President Real Estate (Maurice Bundon) testified. The Chief Executive Officer of the Hill family-owned parent holding company, who was also the Vice President of Investments for Harvard Developments[4] which was the Harvard company responsible for acquisitions and divestitures and the parent of Harvard Properties, and previously Controller of the Harvard group’s property management company that was responsible for managing North Hill Shopping Centre (Tina Svedahl) testified. Harvard Properties also called the external tax advisor who was a chartered professional accountant (“CPA”) from a major accounting firm whom the co-owners had consulted regarding the tax consequences of the shopping centre sale as it was being negotiated to Abacus (Dennis Auger of the accounting firm KPMG). The appellant also called both its commercial real estate lawyer and Abacus’ commercial real estate lawyer to testify to the closing documents, steps and flow of funds (Scott Exner of MLT Aikins and Don Kowalenko of Dentons).
[13] The appellant also called a CPA from another accounting firm as a valuation expert (Mark Weston of Davidson & Co.) to provide his opinion on the values of the shares of the Newco that Harvard Properties disposed of (“HP Newco”) that had been both issued and disposed of in the closing. His report and his testimony were of very little probative value, if any, principally because (i) he accepted the information that he had been provided by Harvard Properties as facts to be assumed that HP Newco’s cash and near cash assets had a fair market value equal to their face amount, (ii) he did not attempt to corroborate the information he was given or to reconcile it with the documents made available to him, and (iii) he did not discount or otherwise address the fair market value of those assets to reflect the fact that the obligor’s sole assets were cash or near cash virtually all of which was restricted by agreement, by irrevocable directions and by the escrowed closing arrangements and trust accounts and could not be used for purposes other than to go to the co-owners to fund Abacus’ purchase of the shares of the Newcos. The failure to corroborate the information provided by Harvard Properties left him opining that a $16.5 million alleged and recorded intercompany loan from Abacus to HP Newco was worth the stated amount, yet there is no evidence that there was ever such an intercompany loan. These are the hallmarks of a made as instructed report.
[14] No witness unrelated to the co-owners was called to testify regarding the range of capitalization rates on arm’s length direct sales of comparable shopping centres, or regarding how indirect sales of shopping centres by selling shares of the company owning it are valued in the market. The statements in the Harvard memo on credibility of Abacus do not address shopping centres in Alberta and, in any event, are at least double hearsay that is attributed to someone whose knowledge and experience is not known to the Court. The Court has no reliable evidence of the fair market value of the shopping centre.
[15] Harvard Properties’ position is that it and the other co-owners dealt at arm’s length with the Abacus entities involved, and that the amount in the Abacus/Bentall asset purchase transaction was the arm’s length fair market value of the shopping centre. The appellant knew that the value of the shopping centre was in issue. The appellant did not call anyone from Abacus or its broker who approached the co-owners, or anyone from Bentall, the purchaser who owned the shopping centre at the end of the integrated, simultaneous closing. The Court is left with only the co-owners’ version and their documents in evidence.
[16] While not evidence, Harvard’s counsel, a tax litigator, provided the Court with a “visual aid” that purported to show that the net proceeds to Harvard Properties and the other co-owners that they received on their tax planned, stepped sale transaction as completed was the same as they would have had they sold the shopping centre assets. That is, it purported to show that Harvard and the other co-owners did not receive what they were offered and was agreed to - a share sale at an asset price which included a premium above their shares’ value computed otherwise. I did not find this visual aid to be helpful as its reliability was not established. It was assembled and presented by counsel. I accept that counsel used the appropriate amounts stated in the closing documents for each receipt, distribution and other amount. However, that still leaves the valuation issue described above. Further, appellant’s counsel did not walk through any part of this document with the appellant’s real estate or commercial lawyers who testified, nor with their tax accountant witness, nor even with their Harvard Properties’ witnesses who were very experienced in real estate transactions, nor with anyone else who testified. The Court has no idea if everything that should be considered or accounted for in making such a comparative analysis and should appear on that visual aid is there, nor whether anything that should not be considered or accounted for is not on that list. Given the facts and circumstances of this proceeding, I might have expected a proper expert opinion and report of some sort addressing this, such as a forensic accounting exercise (which might also have addressed the relevant legal restrictions on cash assets described above as well as their impact on valuations). That would have allowed the Court to address these questions based on evidence. It would also would have allowed the respondent to introduce its own evidence in response, whether through the appellant’s expert, or by calling its own witnesses. (That would still have left unaddressed whether the calculated “Purchase Value” Abacus offered and was accepted reflected the fair market value.)
[17] The respondent did not call any witnesses in this proceeding.
II. The Evidence A. Maurice Bundon [18] Harvard Properties is part of the Hill Companies Group of private companies held by Regina’s Hill family. It is a diversified family business involved in real estate, utilities, media, radio broadcasting, insurance and other financial services, and manufacturing. It operates in Western Canada, principally Alberta, Manitoba, and Saskatchewan, as well as in the US state of Arizona. Harvard Properties is the company in Hill Companies Group that owns the group’s Alberta properties. It owned other real estate than the North Hill Shopping Centre including residential and office buildings.
[19] In 2005 Mr. Bundon was the Chief Operating Officer (“COO”) and Senior Vice President of Harvard Properties. He had previously been Senior Vice President Real Estate. He has been with Hill Companies Group for more than 40 years.
[20] Harvard Properties’ policy was not to sell assets and, with two very limited exceptions, it held onto its properties. North Hill Shopping Centre was a large part of its portfolio. In addition to Harvard Properties’ 50 percent of the shopping centre, another Harvard company in the Hill Companies Group provided all of the property management services for the shopping centre which generated additional revenues.
[21] In early March 2005 Mr. Bundon and the other co-owners received a copy of an unsolicited letter of intent (the “Abacus LOI”) from a broker who had sent it to one of the co-owners. He said that Harvard Properties had not mentioned the property to brokers, nor was it otherwise looking for purchasers. None of the other co-owners were otherwise looking to sell either to any of the witnesses’ knowledge. Mr. Bundon spoke to Paul Hill and Tina Svedahl; Mr. Hill told him that they were not selling because they generally do not sell.
[22] Mr. Bundon said that he understood that Abacus was behind the offer in the Abacus LOI and expected it to be the purchaser.
[23] Mr. Bundon said that he did not know that the SPA was for the sale of shares not assets; he said that he did not know the difference between asset sales and share sales. He acknowledged that he understood the plan was for Harvard Properties and the co-owners to use newly incorporated companies to sell the shopping centre in the agreed series of transactions. He said this did not involve any tax plan. Given his experience, the documents in evidence and the testimony of others, I do not find these statements to be credible.
[24] Mr. Bundon said he would not have reviewed the SPA in any detail but would have relied on their in-house counsel. Notably their in-house counsel did not testify. Mr. Bundon also said that Tina Svedahl was closer to the deal than he was and that she reported to him, and that all of the key decisions in Harvard Properties were made collaboratively among him, Ms. Svedahl and Mr. Hill. He described Ms. Svedahl as having extensive knowledge in the purchase of properties and said he trusted her.
[25] The price offered by Abacus was discussed only among him, Ms. Svedahl and Mr. Hill. They did not try to negotiate the price in the LOI prepared by the co-owners in response to the Abacus LOI to his knowledge. Mr. Bundon said that, if there were any conversations between Abacus and Harvard Properties, they would have been Ms. Svedahl’s conversations. The second LOI, prepared by Harvard Properties and the co-owners, (the “Co-owners’ LOI”) did not change the offered “Purchase Value” in the initial LOI received from Abacus, nor did it change the offered ROI return on investment or the offered capitalization rate to be used to calculate the Purchase Value. This was in late March. Mr. Bundon did not know anything more about Abacus when the Co-owners’ LOI was sent or when it was signed by all parties. The two LOIs are Appendix A hereto.
[26] Mr. Bundon said that Harvard Properties had decided to sell certainly by early June when it signed the SPA, but he did not recall how much earlier that decision had been made. Clearly Harvard Properties intended to sell by late March when it signed the Co-owners’ LOI. Once the SPA was signed, they were legally committed to it.
[27] The co-owners learned in August that Bentall, not Abacus, would be acquiring the shopping centre. Until then Harvard Properties never thought someone other than Abacus would be the buyer according to Mr. Bundon. Absent Harvard Properties in-house counsel’s testimony, and given the totality of the evidence I do have, I am not at all prepared to reach any such conclusion on a balance of probabilities.
[28] August is also when Harvard Properties found out that it would not be permitted to hold a 20 percent interest in the new ownership of the shopping centre, and that Harvard’s property management services would not be continuing.
[29] Mr. Bundon said that he was not involved with Mr. Auger’s tax memo or advice. He said he did not know if KPMG was giving assistance or advice to the co-owners, that Harvard Properties had not used KPMG for tax previously, and that he did not know if Harvard Properties even had a tax person they went to. This, even though both LOIs specify that upon execution of the LOI “the parties shall work in good faith towards structuring a tax efficient transaction that shall ensure the vendor financial results that are at least equivalent to the financial results received from a direct asset sale of the property for a value of $90 million”. Mr. Bundon testified that he was not involved in any conversation “if there was one” concerning tax structuring, and that he thought it unlikely that Ms. Svedahl discussed it with Mr. Hill without him either. It can be noted that Mr. Hill was also not called to testify.
[30] Mr. Bundon testified that Ms. Svedahl and legal counsel attended to settling the SPA, and that he does not remember being told why it was structured as a share sale. He did not know if his in-house counsel drafted the SPA or who had the lead on drafting it. He does not know if Ms. Svedahl negotiated with Abacus directly or through the other 50 percent co-owners’ entity – RonMoor Group. However, he understood Ms. Svedahl/RonMoor negotiated the SPA with Abacus. The SPA was not discussed within Harvard Properties to his knowledge. He did not engage in any negotiations about the $90 million price and does not recall any discussions about it.
[31] When pressed in cross-examination with Ms. Svedahl’s sworn answers on discovery in which she said Mr. Bundon was responsible for negotiating the deal, and was responsible for negotiating the value of the shares sold in the series of transactions, he explained that he did sign off on the $90 million purchase value but that he did not negotiate, he only signed off on the number. He added that he did not have the knowledge to allocate or split that value among the different steps in their series of transactions, quipping “I did not pay any attention to these numbers.”
[32] Mr. Bundon said that he did not read the SPA and that he did not consult with anyone on tax advice, nor did anyone else at Harvard Properties to his knowledge. He did not know who was instructing their legal counsel at MLT on this transaction, including on the tax issues but he believed that it was their in-house counsel.
[33] Mr. Bundon does not know who asked that a tax indemnity be obtained from Abacus, has no knowledge of that, and does not recall ever discussing it with Ms. Svedahl or Mr. Hill.
[34] When asked how he could adamantly maintain that this was not a tax plan, his answer was “I don’t know, I am just that kind of guy, I feel comfortable”.
[35] Mr. Bundon frequently could not recall things and qualified his answers to say that was all that he could recall. This raises some concerns with the reliability, and perhaps credibility, of his testimony. His answers on key high level management issues such as whether he was overseeing or negotiating this deal or Ms. Svedahl was, and the extent to which she kept him informed of key aspects, differ from Ms. Svedahl’s testimony and her answers on discovery. Mr. Bundon repeatedly responded with answers that distanced himself from being able to answer the questions asked of him. That compounds these concerns and raises questions about the reliability, and perhaps credibility, of Ms. Svedahl as well. All of this is even further compounded by the fact that neither Paul Hill nor Harvard Properties’ in-house counsel was called by the appellant to help the Court try to reconcile these concerns.
B. Tina Svedahl [36] Ms. Svedahl is the Chief Executive Officer of Harvard Diversified Enterprises Inc., the holding company that holds the Hill family’s varied businesses. She is a CPA and has been with Hill Companies Group since 1999 when the property management company she had been a part of for years was merged into the Harvard group. In 2005 she was Harvard Developments’ Vice President Investments, responsible for acquisitions and divestitures of real estate and using her financing and mergers and acquisition expertise for the Hill Companies Group.
[37] Ms. Svedahl described how the senior leadership in Hill Companies Group work collaboratively in an informal, flat manner. She said she would meet regularly and talk informally with Mr. Bundon whose office was on the same floor as hers.
[38] She testified that as VP Investments, she was responsible for divestitures so she would have been responsible for taking lead on the sale of the sale of North Hill Shopping Centre. Mr. Bundon gave her a copy of the Abacus LOI and she reviewed it at the time. She made handwritten notes on it. Her understanding was that another co-owner, Mr. Paperny, provided it to Mr. Bundon. She did not know Mr. Bob Young at Colliers International, the broker. She did not know who Abacus was. She searched Abacus, pulled up a couple of pages of names and concluded that it appeared to be an investment company of some sort. She made no other meaningful inquiries.
[39] She described a one-page Harvard memo from Paul Hill to her and Mr. Bundon headed “Credibility of Abacus” dated in March. Mr. Hill spoke to one of his contacts at Kingston Capital about this unknown Abacus. Mr. Hill’s memo reports that his contact did not know Abacus either, but his partner did and that partner “knows the person who runs Abacus and thinks highly of him.” Mr. Hill’s memo reports that his contact was to speak with their partner “Monday and send me an email as to whether they [Abacus] are likely to do what they say they will do.”
[40] I infer from this memo that Mr. Hill, Mr. Bundon and Ms. Svedahl shared concerns about Abacus’ credibility and whether it had the ability and/or integrity to honour its commitments. According to Ms. Svedahl, Mr. Hill would not generally make such inquiries or write memos about them. Mr. Bundon testified that Mr. Hill’s memo was in response to Mr. Bundon’s concerns about not knowing who Abacus was.
[41] I did not hear from Mr. Hill at all, no follow up memo from Mr. Hill nor email from his contact at Kingston Capital was put in evidence, and none was described, nor was any other explanation given by Mr. Bundon, Ms. Svedahl or anyone else. I therefore infer from this that, if any further information was received by Mr. Hill, it did not allay Harvard Properties’ concerns with Abacus’ credibility and that it may not do what it says it will. Harvard Properties proceeded forward to negotiate and close with Abacus nonetheless.
[42] Ms. Svedahl said Mr. Bundon was primarily dealing with the Abacus LOI and the Co-owners’ LOI and with Harvard Properties’ negotiations for a continuing 20 percent interest in, and property management contract for, the shopping centre, along with some other aspects of the deal. She said she only had the lead in closing the deal after the LOI was signed by the parties, and that she kept Mr. Bundon aware of the deal’s progress throughout her lead.
[43] In her examination for discovery Ms. Svedahl clearly stated that Mr. Bundon was responsible for negotiations and that no one else was, including her. In cross-examination when this was put to her, she said she understood the question on discovery to pertain only to negotiating the LOI. Nothing in those parts of her discovery transcript that are in evidence support her now stated view by reference to either any particular time frame or to the signing by the parties of the Co-owners’ LOI as amended, or otherwise. Her explanation at trial of her conflicting answers serves to heighten the Court’s concern with conflicting testimony from the same witness on the same point.
[44] Ms. Svedahl explained that the two-and-a-half page April memo from the co-owners’ outside tax accountant, Mr. Auger, was obtained “because Abacus was proposing a share sale.” This Auger tax memo is Appendix B hereto. She said that Harvard Properties and its co-owners and their advisers did not make any inquiries as a result of the final paragraph of Mr. Auger’s advice that Harvard Properties and the other co-owners should consider “to what extent do the [co-owners] want to know how Abacus is sheltering/eliminating the recapture and federal capital gain income”, and “but you still may wish to understand enough to satisfy yourselves that there is not an undue amount of risk or exposure”. Ms. Svedahl said she shared the memo with Mr. Bundon and briefed him on its contents. Harvard Properties’ only action in that regard was to require the secured tax indemnity agreement from Abacus.
[45] Ms. Svedahl said Harvard Properties was aware in early September that the Bentall companies would be the third party purchaser of the North Hill Shopping Centre. In the March LOIs the purchaser is described as “Abacus Capital Corporation or its assignee”. The April memo Mr. Auger wrote shortly after ascertaining the steps from Abacus refers to the shopping centre being sold to “an affiliate of Abacus or a third party”. The August closing documents simply refer to the “purchaser” of the shopping centre. I accept that Harvard Properties and the other co-owners may not have been aware that Bentall would be the third party purchaser of the North Hill Shopping Centre until August or September. However, I am not able to conclude on a balance of probabilities that they believed until then that Abacus or an affiliate of Abacus, and not some third party, would be the purchaser of North Hill Shopping Centre. It was clear that (i) both LOIs contemplated an assignee, not an affiliate; and (ii) none of the co-owners knew anything about Abacus and had no thought that they otherwise owned and/or operated shopping centres.
[46] I infer from the totality of the evidence the fact that it had been contemplated since the Abacus LOI was received in March that the North Hill Shopping Centre itself would likely be bought by an existing shopping centre developer, owner and/or operator. Indeed, Mr. Hill’s March memo about Abacus’ credibility says his contact at Kingston Capital was to be finding out more information about Abacus’ recent involvement in a retail asset redevelopment project and sharing what he learned with him of Abacus’ involvement in that transaction. There is no suggestion in the evidence that Abacus bought or operated that shopping centre or any other, or had any resources, including financial resources, with which to do so.
[47] When asked in direct questioning, Ms. Svedahl said that she was not aware that Abacus was essentially selling a tax plan and that there was no reason that she was aware that anyone at Harvard should think this. This appears to be at least somewhat at odds with the co-owners seeking and obtaining Mr. Auger’s tax advice on the “Abacus proposal” promptly following receipt of the Abacus LOI, which advice begins with “in general terms the Abacus proposal converts a sale of the underlying property into a share sale for the vendors.” It does not address the tax considerations of a sale of the shopping centre, nor the differing results or considerations of a share sale versus a sale of the shopping centre itself. By its terms, it only goes through each of the steps in the Abacus proposal to convert a sale of the underlying property into a share sale and specifically how those tax considerations allow Abacus to pay the co-owners a premium that he goes on to describe.
[48] In cross-examination, Ms. Svedahl said her involvement in negotiations did not involve any of the steps taken to close their sale of the shopping centre but was limited to the adjustments and calculations involved in completing the steps. While she reviewed the steps, she does not recall how the steps came about and does not know how the steps were determined as their advisers worked on it. In response to my question, she could not recall if the legal and tax advisers ever sought any instruction from her with respect to, how to, or whether to, negotiate any of these steps, or to propose they ask for these steps on behalf Harvard Properties and or the other co-owners.
[49] Ms. Svedahl said that the allocation of the consideration between the Newcos’ Class A voting shares and the Class B non-voting shares was determined on their behalf by Mr. Auger. In her examination for discovery, she again said Mr. Bundon was responsible for negotiating the deal in response to a question about this very allocation between the two classes of shares. She no longer recalls her conversation with Mr. Bundon in 2019 to satisfy her undertaking on discovery. Her earlier answer did not refresh her memory, was not acknowledged by her to be presumed correct, nor did she change her answer that it was only Mr. Auger.
[50] Ms. Svedahl’s repeated inability to recall things when asked in cross-examination stands in contrast to her almost never being unable to recall things clearly when asked in chief.
[51] Ms. Svedahl could not recall if she participated in negotiating the tax indemnity required by the vendors to deal with the tax risks to them of the Abacus proposal, nor who at Harvard Properties said they required the tax indemnity. She said she did not even know what the specific tax risks were that required the indemnity. She appeared uncomfortably awkward at this stage of her cross-examination trying to explain her prior inconsistent statements on discovery, and differing recollections in chief and in cross.
[52] Ms. Svedahl did not recall if the tax lawyer at MLT or the CPA Mr. Auger was responsible for the reference to the section 160 risk as an indemnified assessment in the tax indemnity agreement. She was uncertain of the context in which the section 160 risk became part of the tax indemnity. Nor could she recall any such thing regarding the references to section 83(2.1) and GAAR in the definition of indemnified assessment in that indemnity. She did not know how the amount of the letter of credit was determined that secured the indemnity. She could not recall who was involved with or negotiated the tax indemnity document. She did understand that the tax indemnity was secured by amounts received from Bentall after the step in which Abacus controlled the shares of the Newcos. While she described the amounts as having been received for the shopping centre after Abacus controlled the Newcos, when asked the significance of that change of control occurring when it did, Ms. Svedahl would not agree that the timing of that change of control was of any importance. When asked again about its importance, she said she had no recollection and no understanding but had relied on their advisers.
[53] It can be noted that Harvard Properties did make a claim under the tax indemnity agreement in respect of the section 160 assessment in issue in this proceeding. That was done only after it was agreed the letter of credit securing the indemnity could be released. Abacus denied the claim under the indemnity, and has not paid it. No steps have been taken by Harvard Properties to sue or otherwise enforce its claim against Abacus under this indemnity.
[54] With respect to the SPA closing, Ms. Svedahl said she followed what the transactions were, but not why they were set out and agreed to. She acknowledged that the SPA specifies a sale of the shopping centre assets by the Newcos to a third party purchaser, that this was to occur after Abacus bought the voting shares of the Newcos, and that those Bentall purchase monies were used in part to pay Harvard Properties and the other co-owners. She explained “I don’t understand the tax piece of the transaction.” Section 2 of the SPA listing the transactions in their series is Appendix C hereto.
[55] Ms. Svedahl confirmed that she understood that, had Abacus not sold the shopping centre to the third party, Harvard Properties and the other co-owners could not get paid. The co-owners needed the shopping centre to be sold to the third party to get paid for their indirect interests in the shopping centre.
[56] With respect to the last sentence of paragraph 2 of both LOIs, Ms. Svedahl was not aware of any tax efficiencies offered or considered by Harvard Properties.
[57] Mr. Auger was involved in determining the co-owners’ proceeds on the transaction as between voting and non-voting shares, the amounts of the capital adjustments and dividends etc. Ms. Svedahl said she got the Harvard Properties numbers that Mr. Auger needed to crunch the needed numbers and that he then gave her the allocation numbers needed for the SPA. She said she would have looked through his calculated amounts but not necessarily understood them.
[58] With respect to Mr. Auger’s April memo to the co-owners discussing the Abacus proposal, Ms. Svedahl said she did not know where he learned what Abacus’ proposed steps in its LOI were, and did not know why Mr. Auger refers to a premium being paid by Abacus to the co-owners to do this deal, but did not ask him where these came from. She could not recall if drafts of the SPA may have been exchanged by the time of Mr. Auger’s April 11th memo.
[59] Ms. Svedahl’s inability to recall so many important aspects of this transaction, including her own role, raises reliability concerns about the Court’s ability to rely on her testimony that is not consistent with and corroborated by others and/or the documents in evidence. Her changing answers between her answers on discovery and her answers in the witness box raise questions of a further erosion of her reliability and/or heightened concerns about her credibility. Her inconsistencies with Mr. Bundon’s testimony raise concerns with respect to the reliability and credibility of both Mr. Bundon and Ms. Svedahl. The concerns that Ms. Svedahl and Mr. Bundon have created with respect to their reliability and their credibility lead me to conclude that it would be wrong to accept their evidence that is not consistent with, and/or corroborated by, other reliable and credible evidence or testimony, and that any such uncorroborated or unsupported testimony from Mr. Bundon and/or Ms. Svedahl should be given little weight when weighing the evidence to determine matters on a balance of probabilities.
[60] Since Mr. Bundon and Ms. Svedahl were the most senior officers at Harvard and jointly responsible for this transaction, and since no one else from Harvard Properties or Hill Companies Group testified, there is little subjective information or evidence from the appellant to consider and weigh in determining the appellant’s objective purpose and reasons for doing this deal in the manner it was done in response to an unsolicited offer from an entity they had never heard of and made little if any inquiries about.
[61] I do not find it credible that senior management responsible for real estate investments at Harvard Properties were unaware of the significant tax and cash flow difference between share purchases and asset purchases for real estate companies. It is simply not credible that Harvard Properties’ senior management, or the other co-owners (at least those who had officers, shareholders or principals testify) were unaware of the great significance to Canadian real estate companies of the contribution of capital cost allowance/tax depreciation on their owned assets to their tax shield and ultimately their overall success. This was spelled out in even greater detail in Mr. Auger’s two-and-a-half page memo which describes this as the very reason that Abacus could pay a premium to the co-owners for a share deal that followed the Abacus proposal.
[62] It is reasonable to assume from this the fact that this difference, and it being the sine quo non of the premium, was also discussed with Harvard Properties and the co-owners from the outset by and with Abacus and/or its advisers, and by Mr. Auger and the co-owners’ other advisers. It is very hard to see how Ms. Svedahl and Harvard Properties’ in-house counsel could have attended to the review and negotiating of the SPA and all of the other closing documents and arrangements without understanding this difference - and Ms. Svedahl has assured the Court she kept Mr. Bundon up to date throughout her involvement.
[63] It appears that Mr. Bundon and Ms. Svedahl read the final paragraph of the Auger tax memo and, at that time, made an informed decision to be willfully blind to how Abacus was planning to deal with its tax liability on the income arising from their series of transactions with the co-owners, apart from worrying about their own tax risks, including section 160, capital dividend treatment, and the GAAR.
C. Dennis Auger [64] During the period in question, Mr. Auger was a CPA and tax partner at the accounting firm KPMG in its Calgary office. He retired from KPMG in 2021.
[65] Mr. Auger described that in early April 2005 he received a copy of the Co-owners’ LOI signed by the parties from Lorne Paperny, a principal of one of the co-owners.
[66] He was aware of its contents before that as he had discussed the Co-owners’ LOI with Mr. Paperny shortly before that date. He became aware that, while not specified in the LOI, this was to be a share sale. He was not involved in d