Magren Holdings Ltd. v. The Queen

Magren Holdings Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2022-04-01
Neutral citation
2021 TCC 42
File numbers
2017-486(IT)G, 2017-605(IT)G, 2017-606(IT)G
Judges and Taxing Officers
Guy R. Smith
Subjects
Income Tax Act
Decision Content
Dockets: 2017-486(IT)G;
2017-605(IT)G;
2017-606(IT)G
BETWEEN:
MAGREN HOLDINGS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
2176 INVESTMENTS LTD. (as successor to Grencorp Management Inc.,
successor to 994047 Alberta Ltd.),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
MAGREN HOLDINGS LTD.
(Successor by amalgamation to 1052785 Alberta Ltd.),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of
James T. Grenon v. Her Majesty the Queen – 2014-3401(IT)G and The RRSP Trust of James T. Grenon (552-53721) by its Trustee CIBC Trust Corporation v. Her Majesty the Queen – 2014-4440(IT)G
Appeals heard on February 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 2019 and September 9, 10, 11, 12, 13, 2019, at Winnipeg, Manitoba.
Before: The Honourable Justice Guy R. Smith
Appearances:
Counsel for the Appellants:
Cy M. Fien
Brandon Barnes Trickett
Ari M. Hanson
Aron W. Grusko
Counsel for the Respondent:
Ifeanyi Nwachukwu
Tanis Halpape
Christopher Kitchen
Jeremy Tiger
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeals from the Notices of Reassessment made by the Minister of National Revenue on November 18, 2016 in respect of the 2006 taxation year, pursuant to subsection 184(2) of the Income Tax Act, are hereby dismissed with costs to the Respondent.
The parties will have 60 days from the date of hereof to provide written submissions regarding costs. Such submissions shall not exceed 15 pages for each party but shall, on consent of the parties, incorporate submissions on costs in the appeals of James T. Grenon; 2014-3401(IT)G and The RRSP Trust of James T. Grenon by its Trustee CIBC Trust Corporation; 2014-4440(IT)G.
Signed at Ottawa, Canada this 24th day of June 2021.
“Guy R. Smith”
Smith J.
Citation: 2021 TCC 42
Date: 24062021
01042022
Dockets: 2017-486(IT)G;
2017-605(IT)G;
2017-606(IT)G
BETWEEN:
MAGREN HOLDINGS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
2176 INVESTMENTS LTD. (as successor to Grencorp Management Inc.,
successor to 994047 Alberta Ltd.),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
MAGREN HOLDINGS LTD.
(Successor by amalgamation to 1052785 Alberta Ltd.),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Smith J.
I. OVERVIEW
[1] The appellants herein (the “Appellants”) were Canadian-controlled private corporations directly or indirectly controlled by one James T. Grenon (“Grenon”). As a result of a series of transactions that occurred on the same day, the Appellants reported capital gains of $226,258,087 and capital losses of $224,762,077 under Part I of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the “ITA”). They then declared a series of dividends of $109,720,500 and elected pursuant to subsection 83(2) that they be deemed to be capital dividends payable from their respective capital dividend accounts. Capitals dividends in that amount were later paid out to Grenon personally.
[2] The Minister of National Revenue (the “Minister”) reassessed the Appellants to reduce the capital gains and capital losses described above to nil and issued notices of assessment pursuant subsection 185(1) on the basis that the dividends were subject to Part III tax on excess dividends.
[3] The Minister has taken the position that a series of transactions were undertaken in order to artificially manufacture the capital gains and offsetting capital losses leading to the alleged additions to the capital dividend accounts of the Appellants and the payment of non-taxable capital dividends to their respective shareholders and eventually to Grenon personally.
[4] The Minister has argued that the steps undertaken to implement the series of transactions were legally ineffective or were a sham and a misrepresentation. In the alternative, the Respondent has relied on the general anti-avoidance rule (“GAAR”) as set out in section 245 of the ITA.
[5] The appeals herein were heard on common evidence with the appeals of James T. Grenon v. The Queen, 2014-3401(IT)G (the “Grenon Appeal”) and The RRSP Trust of James T. Grenon (552-53721) by its Trustee CIBC Trust Corporation v. The Queen, 2014-4440(IT)G (the “RRSP Trust Appeal”).
[6] Reasons for Judgment in those appeals were issued in 2021 TCC 30 (the “TCC Decision”) with an indication that reasons for judgment in connection with the Appellants herein would be delivered separately.
[7] In these Reasons for Judgment, the three corporate appellants will be referred to collectively as the “Appellants” or separately as Magren Holdings Ltd (“Magren”), 1052785 Alberta Ltd. (“105”) and 994047 Alberta ltd. (“994”), being the corporate names of the Appellants when the series of transactions occurred.
[8] All legislative provisions refer to the ITA. Unless explicitly set out in these Reasons for Judgment, they are set out in the attached Annex A.
II. THE ASSESSMENTS
[9] On October 15, 2013, the Minister issued Notices of Reassessment pursuant to Part I of the ITA (the “Part I Reassessments”) denying the capital gains and capital losses and reducing them to nil. These assessments were notifications that no tax was payable. They have not been appealed and are not directly the subject matter of these appeals.
[10] The Minister then issued Notices of Assessment on January 24, 2014 and February 18, 2014 pursuant to subsection 185(1) of the ITA on the basis that the capital dividends declared by the Appellants were in fact excess dividends subject to Part III tax as described in subsection 184(2) . Notices of Reassessment were issued on November 18, 2016 (the “Part III Reassessments”) to reduce the tax rate resulting from a legislative change. [1]
[11] The Part III Reassessments are the subject matter of these appeals.
III. THE ISSUES
[12] The Court finds that the following issues need to be addressed:
Whether the Part III Reassessments are statute-barred and therefore invalid and without legal force, as argued by the Appellants, on the basis that the Part I Reassessments were statute-barred;
Whether the Part III Reassessments are void ab initio, invalid and without legal force, as argued by the Appellants, on the basis that the Minister failed to issue only “one” assessment for each election filed and failed to proceed “with all due dispatch”, as required by subsection 185(1) of Part III;
Whether the series of transactions that are alleged to have given rise to the subject capital gains and capital losses, were legally effective or were a sham and a misrepresentation;
Whether the series of transactions that are alleged to have given rise to the subject capital gains and capital losses resulted in additions to the Appellants’ respective capital dividend accounts or whether they were excess dividends subject to Part III tax pursuant to subsection 184(2);
If the Court concludes that the capital dividends were excess dividends pursuant to subsection 184(2), whether the Appellants are entitled to rely on the ‘protective’ elections filed pursuant to subsection 184(3) to have the excess dividends treated as ordinary taxable dividends;
Whether the series of transactions are subject to GAAR.
IV. BACKGROUND FACTS
[13] Certain background facts that are material to these appeals were considered in the TCC Decision, notably in paragraphs 10 to 99. What follows is a summary of the evidence and relevant conclusions reached by the Court.
[14] Grenon had accumulated substantial assets in a self-directed RRSP (the “RRSP Trust”) and CIBC Trust Corporation acted as Trustee. The assets held in the RRSP Trust included units of Foremost Industries Income Fund (“FMO”), a publicly traded mutual fund trust established in 2001 of which Grenon was a trustee. The RRSP Trust held 58% of the units and the remaining units were widely-held.
[15] In 2003, Grenon undertook steps to establish several income funds (the “Income Funds”) relying on the exempt distribution rules of the provinces of Alberta and British Columbia (“BC”). As the promoter and initial trustee of these funds, he purported to issue units of each Income Fund to 171 investors, each of whom were required to acquire a minimum of 100 units at $7.50 per unit for total consideration of $750 per Income Fund. Grenon and legal entities owned or controlled by him also participated and acquired several blocks of units as part of the first distribution.
[16] Following the closing of the exempt distributions and filing of the required reports with the Alberta and BC securities commissions, Grenon arranged for the RRSP Trust to subscribe for and acquire in excess of 99% of the units of the Income Funds, thus establishing effective control positions, as further explained in the TCC Decision. He continued to act as trustee of the Income Funds or directed who would act in that capacity.
[17] It is not disputed that Grenon intended from the beginning to structure the Income Funds as qualified investments for RRSP purposes. This was his stated objective and one of the key issues considered in the TCC Decision was whether they met the definition of a “mutual fund trust” as defined in the ITA and Regulations. Grenon and CIBC Trust took the position that the Income Funds were qualified investments for RRSP purposes. The Minister did not agree.
[18] The Court concluded that the steps undertaken by Grenon to establish the Income Funds as a mutual fund trust were legally ineffective such that the RRSP Trust had in fact acquired units of non-qualified investments, as defined in the ITA.
[19] Further and in the alternative, the Court concluded that Grenon’s attempt to establish the Income Funds as investments that were to be acquired by the RRSP Trust and then actively managed and controlled by him as the annuitant thereof was abusive and contrary to the GAAR in that it contravened the object, spirit and purpose of the RRSP regime and in particular subsection 146(4) which seeks to prohibit an RRSP from carrying on “any business or businesses in the year” that are not at arm’s length from the annuitant. In particular, it provides that all income generated by such investments (including 100% of capital gains) is taxable income that does not accrue in the RRSP on a tax-exempt basis.
[20] The particular Income Fund that is relevant to these appeals was known as the Tom 2003-4 Income Fund (“TOM”) established on March 14, 2003 by deed of trust pursuant to the laws of Alberta. As with all the other Income Funds, it purported to issue units to 171 investors thus raising capital of approximately $128,250.
[21] On November 14, 2005, the RRSP Trust subscribed for 3,821,850 units of TOM for total consideration of $152,874,000. In satisfaction thereof, TOM accepted a transfer-in-kind of the FMO units held by the RRSP Trust. As a result, the RRSP Trust owned approximately 99.5% of the units of TOM and the remaining 0.5% were held by the initial 171 investors, as noted above.
[22] Although the Appellants had initially described this transaction as a “sale” by “the Grenon RRSP (…) of its 11,077,827 units in FMO to [TOM] for $152,874,000 (…)” paid “by the issuance of units in [TOM]”, I accept their closing submissions that this transaction is more accurately described as an exchange or transfer-in-kind that did not increase the value of the RRSP Trust.
[23] I find that there was no evidence of an actual sale or similar transaction and as far as Grenon was concerned, the units of TOM (and indeed the units of all the other Income Funds in which the RRSP Trust had acquired units) were part of his RRSP Trust holdings. There was no suggestion that by acquiring units in TOM or by transferring the units of FMO, Grenon had effected a withdrawal from the RRSP Trust.
[24] The Minister has acknowledged that the units of FMO, as a publicly traded mutual fund trust, were a qualified investment as defined in the ITA but has taken the position that the units of TOM issued to the RRSP Trust in exchange for the FMO units were not a qualified investment because they failed to meet the definition of a “mutual fund trust”. This is consistent with the conclusion reached in the TCC Decision that as a result of the exchange transaction described above, the RRSP Trust had in fact acquired a non-qualified investment having a fair market value of $152,874,000. However, as noted above, even as a non-qualified investment, the units of FMO transferred to TOM had not been withdrawn from the RRSP Trust. It was clear from Grenon’s testimony that he understood that a withdrawal from his RRSP would have been a taxable event.
[25] In any event, it is not disputed that following the exchange transaction, TOM held 11,077,827 units of FMO representing approximately a 58% interest and the public unitholders continued to hold 7,838,612 units representing a 42% interest.
[26] FMO did not carry on any business activities and the exchange transaction described above did not have the effect of modifying its structure or its underlying assets. It held the units of Foremost Ventures Trust (“FVT”).
[27] As described by the Appellants, FVT “directly or indirectly (…) invested in partnerships from which it earned income” and these partnerships “manufactured, sold and serviced heavy all-terrain vehicles, drilling equipment and other products used in mineral exploration, water well drilling, industrial construction, transportation and the energy and environmental industries”. It is not disputed that FVT was a unit trust within the meaning of subsection 108(2) of the ITA.
[28] FVT owned 99.9% of the units in Foremost Universal Limited Partnership (“FULP”), a limited partnership under the laws of Alberta that was one of its operating partnerships. FVT and FMO also directly or indirectly owned another limited partnership known as Foremost Industries Limited Partnership (“FILP”).
V. THE RELEVANT TRANSACTIONS
[29] The Court did not have the benefit of an agreed statement of facts but considered the testimony of Grenon as well as the documentary evidence. Bruce MacLennan also testified but indicated that although he had participated in various capacities in the FMO reorganization, he had generally relied on Grenon. None of the other fact witnesses described in the TCC Decision were questioned on the FMO reorganization.
[30] The Court also considered the expert evidence of Alan B. Martyszenko but for reasons set out in Annex B that are incorporated into these Reasons for Judgement, I find that his testimony and the Report should be rejected on the basis that it was neither relevant nor necessary. Alternatively, I find that it should be given little or no weight.
[31] The description of the series of transaction described herein as the FMO reorganization is drawn primarily from the Appellant’s testimony and the description set out in the Notices of Appeal. The Respondent’s version and assumption of facts relied upon will be reviewed below.
(1) FMO Reorganization According to the Appellants
[32] Following the transfer of the FMO units from the RRSP Trust to TOM, Grenon undertook a series of transactions that would lead to the establishment of a new publicly traded mutual fund trust to be known as Foremost Industries Income Fund (“FIF”). It would acquire the assets and assume the liabilities of the underlying operating partnerships. FMO would then cease operations and be wound-up.
[33] It was intended that the new structure would essentially replicate FMO and that all existing unitholders would simply exchange units on a one-for-one basis. FVT would be replaced by a new venture trust to be known as Foremost Commercial Trust (“FCT”). The operating partnership known as FILP would be replaced by Foremost Industries LP (“New FILP”) and FULP would be replaced by Foremost Universal LP (“New FULP”). The following table describes the relevant entities:
Existing entities (FMO)
New Structure (FIF)
FMO
FIF
FVT
FCT
FULP
New FULP
FILP
New FILP
[34] The steps required to implement the reorganization were set out in a Notice of Special Meeting to Unitholders (the “Special Meeting”) signed on November 29, 2005 by Grenon as trustee of FMO with a proposed meeting of December 28, 2005. It included an Information Circular and Proxy Statement (the “Information Circular”) and Reorganization Agreement (the “Reorganization Agreement”). A subsequent reorganization agreement was signed on December 28, 2005 (the “Reorganization Amendment Agreement”).
[35] A summary of the proposed transactions explained that “[t]he purpose” was “to effect a reorganization and restructuring of the Fund in a manner that provides equitable treatment among the Unitholders and maintains the business and goodwill of the Fund”. The objectives were listed as being i) “to simplify, somewhat, the organizational and governance structure of the fund”; ii) to “increase the cost for tax purposes of business assets (…)”; and iii) to increase the trading liquidity of the new units “to attract a wider retail investor base beyond the current concentration in tax deferred plans” also described as “exempt plans”.
[36] Unitholders were required to choose between either “Option 1” and “Option 2”. Option 1 was the default selection but it also applied automatically for all units held in exempt plans. It was described as the “First Stage Disposition” whereby units in FMO would be exchanged for units of the new fund on a “one-for-one basis”. Option 2 was described as “the Second Stage Disposition” whereby new units would be distributed “following a number of steps” again on a one-for-one basis.
[37] Unitholders who selected Option 1 were advised that this could trigger tax consequences including a potential capital gain or capital loss based on the difference between the adjusted cost base of their units in FMO and the fair market value of the new units of FIF issued in exchange on a one-for-one basis.
[38] Unitholders who selected Option 2 were advised that they too would receive new units on a one-for-one basis “following the completion of a number of steps.” It was explained that they would “be distributed the assets of [FMO], consisting of all the issued and outstanding [FVT] units, on a pro rata basis” and as a result “will be allocated substantially all of the income of the Fund and all of the income of [FVT], and will be subject to taxation on such amounts”.
[39] It was further explained that as a result of this, the unitholders who selected Option 2 would, “over the course of the Reorganization”, receive “all of the issued and outstanding trust units of” FVT and, consequently “would be allocated all of the income from FVT, which income [would] be paid in the form of New Units” and that they would be subject to additional taxable income “as compared to Unitholders who have elected to participate in the Reorganization through Option 1”. This recital concluded with an explanation that “it is expected that Unitholders will only elect Option 2 if they have very unusual tax circumstances” and that “due in part to the additional tax liability” those “who elect not to participate in Option 1 above (…) were urged to seek independent tax advice.”
[40] With the exception of the units held by TOM, all public unitholders of FMO either selected Option 1 or were deemed to have done so as explained above.
[41] Grenon admitted in cross-examination that at least one unitholder had chosen Option 2 but that he had contacted that individual to explain that this was likely not a good financial decision since he would have to report additional income. The unitholder in question eventually agreed to select Option 1.
[42] I note at this point that Grenon’s testimony on this issue was not entirely convincing. Despite his repeated assertions that all unitholders were at liberty to choose Option 2, the Court finds that he actually wanted them to choose Option 1. I also find that the language of the Information Circular was crafted to ensure that most if not all unitholders would choose Option 1.
[43] Grenon was also cross-examined on the objectives of the reorganization. When asked to confirm that it was primarily undertaken to trigger dispositions that would ultimately result in additions to the capital dividend accounts of the Appellants, Grenon simply responded “that there were other reasons”. On this issue, I find that Grenon was evasive and not entirely forthcoming on the true purpose or objective of the reorganization.
(2) Transfer of FMO units (58%) from TOM to the Appellants
[44] On December 23, 2005, that is prior to the Special Meeting, the Appellants collectively acquired all the units of FMO held by TOM for an aggregate purchase price of $160,628,000 (calculated at $14.50 per unit) and issued demand promissory notes personally guaranteed by Grenon in satisfaction of the purchase price, as follows:
Corporation
# of Units Acquired
Promissory Note
105
3,323,348
$48,188,000
Magren
2,769,457
$40,157,000
994
4,985,022
$72,283,000
Total
11,077,827
$160,628,000
(3) Transactions that took place on December 28, 2005
[45] A number of transactions were to occur on December 28, 2005 as described in paragraphs 2.1(a) to (p) of Appendix A of the Reorganization Agreement. These steps were scheduled to occur every 15 minutes commencing at 11:00 a.m. and ending at 5:00 p.m.
[46] The public unitholders transferred their units of FMO to FULP and received new units of FIF in exchange. The Appellants then collectively purchased the FMO units for an aggregate purchase price of $114,718,000 (calculated at $14.635 per unit) and issued demand promissory notes to TOM, again guaranteed by Grenon, on account of the purchase price, as follows:
Corporation
Units purchased from FULP
Promissory Note
Total FMO units held
105
2,351,584
$34,415,400
5,674,932
Magren
1,959,653
$28,679,500
4,729,110
994
3,527,375
$51,623,100
8,512,397
Totals
7,838,612
$114,718,000
18,916,439
[47] At this point, the Appellants collectively held 100% of the units of FMO.
[48] FMO then transferred all the units of FVT to TOM for $232,313,070. In satisfaction of the purchase price, TOM transferred the demand promissory notes that it had received from the Appellants having a face value of $160,628,000 and issued a demand promissory note of $71,685,070 for the balance.
[49] The Appellants claim that the disposition of the FVT units resulted in a capital gain of $215,239,000 for FMO and that, for the 2005 taxation year, FMO had realized other capital gains such that it reported total capital gains of $237,071,000.
[50] FMO allocated capital gains of $226,258,087 to the Appellants, as its unitholders, and made additional distributions of $50,583,923, as follows:
Recipient
Allocation of capital gains
Additional distributions
Total Distribution
105
$67,877,426
$15,175,175
$83,052,600
Magren
$56,564,522
$12,645,987
$69,210,509
994
$101,816,139
$22,762,761
$124,578,900
Total
$226,258,087
$50,583,923
$276,842,009
[51] The Appellants then added one-half of the capital gains allocated to them by FMO to their respective capital dividend accounts as follows:
Recipient unit holders
Allocation of capital gains
Addition to capital dividend account
105
$67,877,426
$33,938,712
Magren
$56,564,522
$28,282,261
994
$101,816,139
$50,908,069
Total
$226,258,087
$113,129,042
[52] The Appellants argue that the adjusted cost base of the FMO units was the total purchase price of the units acquired from TOM and FULP (as acquired from the public unitholders), less the amount of the excess distributions received, all of which was calculated as follows:
ACB of FMO Units Held
ACB of FMO Units Held
ACB of FMO Units Held
ACB of FMO Units Held
ACB of FMO Units Held
105
$48,188,000
$34,415,400
($15,175,175)
$67,428,225
Magren
$40,157,000
$28,679,500
($12,645,988)
$56,190,512
994
$72,283,000
$51,623,100
($22,762,726)
$101,143,338
Total
$160,628,000
$114,718,000
($50,583,923)
$224,762,077
[53] The Appellants argue that since FMO derived its value from FVT and the underlying operating partnerships and since FVT had been transferred to TOM, the units of FMO had a nominal value. The next step involved the repurchase by FMO of those units for cancellation resulting in a capital loss for the Appellants.
[54] The FMO units held by 105 were repurchased for an aggregate purchase price of $6 resulting in a capital loss of $67,428,410. The units held by Magren were repurchased for an aggregate purchase price of $5 resulting in a capital loss of $56,190,330 and the units held by 994 were repurchased for an aggregate purchase price of $9 resulting in a capital loss of $101,142,608. The Appellants collectively retained about 100 units having only a nominal value.
[55] The Appellants indicate that the following table summarizes the capital gains allocated to them by FMO, the additions made to their respective capital dividend accounts and the capital losses arising from the repurchase of the FMO units:
Appellants
Capital gain allocated by FMO
Addition to capital dividend account
Capital loss on repurchase of FMO units
105
$67,877,426
$33,938,712
($67,428,410)
Magren
$56,564,522
$28,282,261
($56,190,330)
994
$101,816,139
$50,908,069
($101,142,608)
Total
$226,258,087
$113,129,042
($224,761,348)
[56] These transactions were reported by the Appellants in their respective T2 Returns under Part I of the ITA for the taxation years ending on December 31, 2005 for 994 and June 15, 2006 for 105 and Magren.
[57] Notices of Assessment were issued in due course on the following dates:
Appellants
Date of Notice of Assessment
105
December 8, 2006
Magren
December 18, 2006
994
August 8, 2006
(4) Transactions that took place after December 28, 2005
[58] What follows is the Appellants’ description of the payment of the capital dividends made by the Appellants to the holders of its common or preferred shares, as summarized in the table below. On January 27, 2006, 994 declared and paid two separate dividends and elected pursuant to subsection 83(2) of the ITA that they be treated as capital dividends payable from its capital dividend account. These dividends were in the amounts of $44,000,000 and $3,500,000 for a total of $47,500,000.
[59] On June 14, 2006, Magren declared and paid three separate dividends and elected pursuant to subsection 83(2) of the ITA that they be paid as capital dividends from its capital dividend account. These dividends were in the amounts of $25,453,000, $1,414,500 and $1,414,500 for a total of $28,282,000.
[60] On June 14, 2006, 105 declared and paid three separate dividends and elected pursuant to subsection 83(2) of the ITA that they be paid as capital dividends from its capital dividend account. These dividends were in the amounts of $30,544,500, $1,697,000 and $1,697,000 for a total of $33,938,500.
Payee
Date of declaration
Total dividends from CDA
994
January 27, 2006
$47,500,000
Magren
June 14, 2006
$28,282,000
105
June 14, 2006
$33,938,500
Total
$109,720,500
(5) The Respondent’s Assumptions
[61] The Minister’s assumptions are set out in subparagraphs 15(a) to (mmm) of the Fresh as Amended Replies dated November 18, 2018.
[62] A document referred to as “New Appendix B” was attached to the amended Replies. It was intended to describe the various steps undertaken in the FMO reorganization. The slides numbered from 1 to 20 are attached hereto as Annex C. In cross-examination, Grenon agreed that these slides (except slides 18 and 19) described the various steps undertaken but in greater detail. It is understood that the slides contain allegations of mixed law and fact.
[63] The Minister has assumed that Magren and 105 were wholly-owned by 217675 Oil & Gas Ltd. (“217”) and that 994 was owned by Grencorp Management Inc. (“GMI”). 217 and GMI were wholly-owned or controlled by Grenon.
[64] The Minister has assumed broadly that the FMO reorganization involved an exchange on a one-for-one basis for new units of FIF that was intended to have the same underlying assets and undertakings and that the primary purpose of the series of transactions was to trigger the capital gains that would be allocated to the Appellants and lead to the payment of capital dividends, as described above.
[65] The Respondent has assumed broadly that the steps undertaken after the transfer of the FMO units from the RRSP Trust to TOM, were legally ineffective or were a sham and a misrepresentation. In particular, the Minister has assumed (as confirmed in the TCC Decision) that the units of TOM issued to the RRSP Trust in exchange for the units of FMO were not a qualified investment for RRSP purposes. The Minister has also assumed that this transfer involved a transfer of legal title but that there was no change of beneficial ownership since the FMO units remained beneficially owned by the RRSP Trust and thus by Grenon as the annuitant thereof.
[66] Moreover, the Minister has assumed that the transfer of the FMO units from TOM to the Appellants was a sham transaction intended to trigger the capital gains and payment of the capital dividends and that the various demand promissory notes issued by the Appellants and personally guaranteed by Grenon, including the notes for $160,628,000 and $114,718,000, were “fictitious” since it was never intended that they be used other than “for set-off purposes”.
[67] Similarly, the Minister has assumed that there was no transfer of beneficial ownership when FMO purported to transfer the units of FVT to TOM since “immediately before and immediately after the sale of FVT, the property remained beneficially owned by Grenon” and as a result there was no disposition and no resulting capital gain that could be allocated to the Appellants. The Minister has also assumed that these transactions were a sham and a misrepresentation.
[68] The Minister has assumed that FMO engaged the services of a transfer agent and depository known as Computershare Investor Services Inc. (“Computershare”) in connection with the exchange of units. It was assumed that Computershare had no record of a transfer of the FMO units from TOM to the Appellants or from FULP to the Appellants nor of a repurchase of those units for cancellation.
[69] The Minister has also assumed that when the RRSP Trust transferred legal title of the FMO units to TOM on November 14, 2005, they had a fair market value of $152,873,000 and a carrying value of $34,663,758, as indicated in the TOM Consolidated financial statements for the year ending December 31, 2005, and that, when legal title to those units was transferred to the Appellants on December 23, 2005, they had a fair market value was $160,628,477 with a carrying value of $35,547,407.
[70] In particular, the Minister has assumed that accounting firm Grant Thornton prepared audited financial statements for TOM for the 2005 calendar year, on the basis that the carrying value of the FMO units was $34,663,758 because there had been no change of beneficial ownership of those units.
[71] The Minister has assumed that on December 28, 2005, the total value of FMO based on a trading value of $14.635 per unit was $276,842,070 and that this included the value of the operating partnerships, namely $221,474,070 for FILP and $55,368,000 for FULP.
[72] The Minister has assumed various steps leading to the transfer of the assets of the operating partnerships to the new operating partnerships. As part of this series of transactions, FULP had subscribed for 18,916,438 new units of FIF to mirror the total outstanding units of FMO. FULP acquired the 7,838,612 units of FMO held by the public unitholders and in exchange, transferred new units of FIF, as contemplated in Option 1.
[73] The Minister has assumed that the Appellants purported to acquire the units of FMO now held by FULP and issued demand promissory notes of $114,718,000 but that, since the underlying assets had already been transferred in the series of transactions noted above, these units no longer had any value since FMO derived its value from the lower-tier operating partnerships that had been transferred to FIF.
[74] The Minister has assumed that the purpose of these transactions was to have the Appellants acquire “additional FMO units with artificially created cost bases so as to facilitate the creation of the claimed capital gain arising from the sale” of FVT to TOM followed by “capital losses realized on the subsequent redemption by FMO of its units” and finally the “addition to” their respective capital dividend accounts.
[75] The Minister has also assumed that FULP and FILP realized other income in the approximate amount of $137 million in 2005 and that this amount was allocated to FVT and finally allocated to TOM and distributed to its unitholders on a pro-rata basis, including the RRSP Trust.
[76] The Minister has assumed that once the Appellants had acquired legal title to 100% of the units of FMO, FMO purported to sell the units of FVT to TOM for $232,313,070 and reported a capital gain of $226,258,086 for its 2005 taxation year. In consideration of this, TOM issued a promissory note of $71,685,000 and transferred the promissory notes totalling $160,628,477 that it had earlier received from the Appellants when they purported to acquire the FMO units on December 23, 2005.
[77] The Minister has assumed that FMO then purported to repurchase all of its units for cancellation (except for 100 units) and that, since FMO had already distributed all of its underlying assets, this resulted in capital losses of $224,761,348 for the Appellants’ that was used to offset the capital gain allocated to them by FMO following the disposition of the FVT to TOM, as described above.
[78] The Minister has assumed that FMO purported to allocate the capital gains to the Appellants as described above. The amount allocated to the Appellants was satisfied by the distribution of 3,042,638 units of FIF (having a value per unit of $14.635) and the promissory notes of $71,685,000 and $160,628,477 noted above. These promissory notes were then cancelled.
[79] The Minister has assumed that the Amended Reorganization Agreement signed on December 28, 2005 was made to amend the steps identified as Article 2.1, paragraphs (a) to (p) of Appendix A of the Reorganization Agreement, purportedly to add a new step (q), but that this additional step was not disclosed to the public unitholders. It involved the legal right of certain unspecified unitholders to acquire the legal obligation of FMO to sell its remaining assets in FVT. The Minister has assumed that the unspecified unitholders were the Appellants.
[80] The Minister has assumed that at the conclusion of the FMO reorganization, The Appellants and TOM retained an approximate 58% interest in aggregate of FIF.
[81] The Minister has assumed that the Appellants then declared and paid dividends as described by the Appellants and filed elections pursuant to subsection 83(2).
[82] The Minister has assumed that on January 30, 2006, GMI declared and paid two capital dividends to Grenon totalling $110,558,119 and that on October 12, 2012 217 declared and paid two capital dividends to Grenon totalling $62,220,500.
[83] The Minister has assumed that the Appellants collectively misrepresented the true nature of the series of transactions comprising the FMO reorganization to the public unitholders and to the Minister and that, what was described as a reorganization undertaken for business purposes, was designed to create the capital dividend account balances for the benefit of the Appellants and ultimately for the benefit of Grenon by the payment of capital dividends on a tax free basis.
VI. PRELIMINARY ISSUES
A. Are the Part III Reassessments statute-barred?
[84] It is not disputed that the Part I Reassessments that denied the subject capital gains and capital losses were in fact notifications that no tax was payable, also known as “nil assessments”, as noted at the outset of these Reasons for Judgment.
[85] The Appellants argue that the Part I Reassessments that purported to reduce the subject capital gains and capital losses to nil were statute-barred because they were issued outside the normal reassessment period, being more than three years after the initial assessments made in 2006. The Appellants argue that the Minister cannot challenge the validity of transactions reported under Part I because they are statute-barred and the requirements of subsection 152(4) have not been met in that “the Appellants have not signed a waiver and there has been no misrepresentation attributable to neglect, carelessness, wilful default or fraud”.
[86] The Appellants argue that the Part III Reassessments that are the subject matter of these appeals are based solely on the Minister’s challenge of the transactions giving rise to the subject capital gains and capital losses reported for Part I purposes in a taxation year that is statute-barred such that the Reassessments are also “statute-barred and (…) therefore invalid and without legal force”.
Position of the Respondent
[87] The Respondent argues that Part III imposes a separate tax, requires separate returns and creates separate timing requirements such that its validity cannot be dependent on the Part I Reassessments. It is argued in any event that the issue before the Court is whether the Part III Reassessments are correct in law and in fact (Superior Filter Recycling v. The Queen, 2006 FCA 248 (para 6)) and that the Court does not have the jurisdiction to deal with nil assessments.
[88] The Respondent adds that in considering the validity of the Part III Reassessments, “it is entirely open to the Court to consider the underlying transactions” even though “the same transactions had tax consequences for the Part I nil Reassessments that are not before the Court.”
[89] The Respondent concludes by indicating that the Part III Reassessments were issued after a review of the notices of objection filed by the Appellants on March 19, 2014 and the Minister had the authority to respond pursuant to subsection 165(3).
Analysis and Conclusion
[90] It is well-established that a taxpayer cannot appeal a nil assessment because no tax is payable. As noted in Bormann v. Canada, 2006 FCA 83, “the jurisprudence is clear that a taxpayer can neither object to nor appeal from a nil assessment” (para. 8). If an amount remains relevant, for example a non-capital loss, the taxpayer may be required to wait “until the year in which that amount is relevant”: Dow Chemical Canada ULC v. The Queen, 2020 TCC 139 (para 68).
[91] Finally, as noted by the Federal Court of Appeal (Noel, J.A., as he then was) in Canada v. Interior Savings Credit Union, 2007 FCA 151 (“Interior Savings”), “the expression nil assessment does not appear anywhere in the Act” but “when dealing with a situation where a person owes no taxes, the Act authorizes the Minister to issue a notice “that no tax is payable” (subsection 152(4))” (para 16). The Court relied on Okalta Oils Limited v. MNR, 55 DTC 1176 (SCC) (p. 1178) where it was explained that this is so because “an assessment which assesses no tax is not an assessment” and an objection that does not relate to an amount claimed as taxes is “lacking the object giving rise to the right of appeal” (para 17).
[92] In this instance, it is not disputed that the Appellants have not filed an appeal in connection with the Part I Reassessments. Had they done so, the Court would likely have been required to apply “the nil assessment jurisprudence” and quash the appeals: Canada (Attorney-General) v. Bruner, 2003 FCA 83 (para 3).
[93] I find that there is no exception for nil assessments that are issued beyond the normal reassessment period because the Court would nonetheless have to conclude that no taxes had been assessed and thus no amount was owed.