Birchcliff Energy Ltd. v. The Queen

Birchcliff Energy Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2017-11-24
Neutral citation
2017 TCC 234
File numbers
2012-1087(IT)G
Judges and Taxing Officers
Gaston Jorré
Subjects
Income Tax Act
Decision Content
Docket: 2012-1087(IT)G
BETWEEN:
BIRCHCLIFF ENERGY LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the Appellant:
Patrick Lindsay
Jean-Philippe Couture
Counsel for the Respondent:
Robert Carvalho
Neva Beckie
Jonathan Wittig
JUDGMENT
In accordance with the attached reasons for judgment, the appeal from the reassessment made under the Income Tax Act for the 2006 taxation year is dismissed with costs to the Respondent.
Signed at Ottawa, Ontario, this 24th day of November 2017.
“Gaston Jorré”
Jorré J.
Citation: 2017 TCC 234
Date: 20171124
Docket: 2012-1087(IT)G
BETWEEN:
BIRCHCLIFF ENERGY LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction[1] [1] This is primarily, but not exclusively, a case about the general anti‑avoidance rule (GAAR).
[2] Veracel Inc. was incorporated in 1994; its business was to develop, manufacture and market automated medical diagnostic instruments. It ran into difficulties and filed a proposal under the Bankruptcy and Insolvency Act in 2002; the proposal was accepted and carried out. It ceased its medical business in 2002.
[3] Birchcliff was incorporated in 2004 and in February 2005 it entered into a letter agreement to purchase certain oil and gas properties for some $2.75 million.
[4] Subsequently at the beginning of March 2005 Birchcliff entered into a letter agreement for the purchase of oil and gas properties known as the Devon properties for some $255 million.
[5] Later in 2005 Veracel and Birchcliff amalgamated and continued using the name Birchcliff. There were many steps leading to that amalgamation including steps to obtain additional capital and resulting in the creation of Class B shares of Veracel just before the amalgamation. Those steps are set out below.
[6] Generally, I shall refer to Birchcliff after the amalgamation as the amalgamated company.
[7] Just before the amalgamation Veracel had various tax attributes including some $16 million in non-capital losses (business losses). In filing its 2006 tax return the Appellant claimed those non-capital losses.
[8] The Minister of National Revenue reassessed to deny those losses leading to the dispute before the Court.
[9] It is useful at this point to set out certain portions of the Income Tax Act (Act) relating to losses.[2] In reproducing the provisions I have deleted much of the wording that has no application here so as to highlight the essence of the provisions that are relevant to this appeal.
[10] Firstly, there is paragraph 111(1)(a) as well as subsection 111(5):
Losses deductible
111(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as the taxpayer may claim of the taxpayer’s
Non-capital losses
(a) non-capital losses for the 10 taxation years immediately preceding and the 3 taxation years immediately following the year;
. . .
Idem
(5) Where, at any time, control of a corporation has been acquired by a person or group of persons, no amount in respect of its non-capital loss . . . for a taxation year ending before that time is deductible by the corporation for a taxation year ending after that time and no amount in respect of its non-capital loss . . . for a taxation year ending after that time is deductible by the corporation for a taxation year ending before that time . . .
[11] Paragraph 111(1)(a), together with other provisions, permits the carryback or carryforward of unused business losses (non‑capital losses) over a period of time. Subsection 111(5) limits the ability to do so where there has been a change of control of the corporation.
[12] Secondly, paragraph 256(7)(b) sets out rules regarding change of control when there is an amalgamation of corporations:[3]
Acquiring control
(7) For the purposes of subsections . . ., sections 111 . . . and this subsection,
(a) control of a particular corporation shall be deemed not to have been acquired solely because of
(i) the acquisition at any time of shares of any corporation by
(A) a particular person who acquired the shares from a person to whom the particular person was related (otherwise than because of a right referred to in paragraph 251(5)(b)) immediately before that time,
(B) a particular person who was related to the particular corporation (otherwise than because of a right referred to in paragraph 251(5)(b)) immediately before that time,
. . .
(ii) the redemption or cancellation at any particular time of, or a change at any particular time in the rights, privileges, restrictions or conditions attaching to, shares of the particular corporation or of a corporation controlling the particular corporation, where each person and each member of each group of persons that controls the particular corporation immediately after the particular time was related (otherwise than because of a right referred to in paragraph 251(5)(b)) to the corporation
(A) immediately before the particular time, or
. . .
(b) where at any time 2 or more corporations (each of which is referred to in this paragraph as a “predecessor corporation”) have amalgamated to form one corporate entity (in this paragraph referred to as the “new corporation”),
(i) control of a corporation is deemed not to have been acquired by any person or group of persons solely because of the amalgamation unless it is deemed by subparagraph 256(7)(b)(ii) or 256(7)(b)(iii) to have been so acquired,
(ii) a person or group of persons that controls the new corporation immediately after the amalgamation and did not control a predecessor corporation immediately before the amalgamation is deemed to have acquired immediately before the amalgamation control of the predecessor corporation . . . (unless the person or group of persons would not have acquired control of the predecessor corporation if the person or group of persons had acquired all the shares of the predecessor corporation immediately before the amalgamation), and
(iii) control of a predecessor corporation and of each corporation it controlled immediately before the amalgamation is deemed to have been acquired immediately before the amalgamation by a person or group of persons
(A) unless the predecessor corporation was related (otherwise than because of a right referred to in paragraph 251(5)(b)) immediately before the amalgamation to each other predecessor corporation,
(B) unless, if one person had immediately after the amalgamation acquired all the shares of the new corporation’s capital stock that the shareholders of the predecessor corporation, or of another predecessor corporation that controlled the predecessor corporation, acquired on the amalgamation in consideration for their shares of the predecessor corporation or of the other predecessor corporation, as the case may be, the person would have acquired control of the new corporation as a result of the acquisition of those shares, or
(C) unless this subparagraph would, but for this clause, deem control of each predecessor corporation to have been acquired on the amalgamation where the amalgamation is an amalgamation of
(I) two corporations, or
(II) two corporations (in this subclause referred to as the “parents”) and one or more other corporations (each of which is in this subclause referred to as a “subsidiary”) that would, if all the shares of each subsidiary’s capital stock that were held immediately before the amalgamation by the parents had been held by one person, have been controlled by that person;
. . .
[13] I would note certain aspects of the rules under paragraph 256(7)(b).
[14] There is no change of control as a result of an amalgamation unless one of subparagraph 256(7)(b)(ii) or 256(7)(b)(iii) deems such a change of control to occur.[4]
[15] In this case, clause 256(7)(b)(iii)(B) is very important; the portion of the text that matters here is:[5]
(7) For the purposes of . . . sections 111 . . .
. . .
(b) where at any time 2 or more corporations (each of which is referred to in this paragraph as a “predecessor corporation”) have amalgamated to form one corporate entity (in this paragraph referred to as the “new corporation”),
. . .
(iii) control of a predecessor corporation . . . is deemed to have been acquired immediately before the amalgamation by a person or group of persons
. . .
(B) unless, if one person had immediately after the amalgamation acquired all the shares of the new corporation’s capital stock that the shareholders of the predecessor corporation . . . acquired on the amalgamation in consideration for their shares of the predecessor corporation . . . the person would have acquired control of the new corporation as a result of the acquisition of those shares, or
. . .
[16] The test in subparagraph 256(7)(b)(iii) can be described as follows.
[17] Where there is an amalgamation of two corporations, there is a deemed change of control of a predecessor corporation immediately before the amalgamation unless one of the three exceptions in clauses (A), (B) or (C) applies.
[18] Here the only exception that can come into play is clause (B). The test must be considered in relation to each of the predecessor corporations.
[19] The exception requires that one perform the following hypothetical exercise. One assumes that a single person, immediately after the amalgamation, acquired all the shares of the amalgamated corporation acquired by the shareholders of one particular predecessor corporation on the amalgamation. If that single person then controls the amalgamated corporation the exception applies and there is no deemed change of control of the particular predecessor corporation.
[20] For example, suppose that predecessor companies A and B amalgamate. Let us further suppose that Mr. X acquires all the shares in the amalgamated company acquired by the shareholders of predecessor company A. If as a result Mr. X controls the amalgamated company, then there is no deemed change of control of predecessor company A immediately before the amalgamation.
[21] On the other hand, if Mr. X acquires all the shares in the amalgamated company acquired by the shareholders of predecessor company A and Mr. X does not, as a result, control the amalgamated company then there is a deemed change of control of predecessor company A immediately before the amalgamation.
[22] Another way of describing the rules in paragraph 256(7)(b) is:
1. Generally, when two unrelated companies amalgamate, the Act will, in effect, deem one of the two predecessor companies to have acquired control of the other just before the amalgamation.
2. The process of determination is carried out in the following way.
3. One, in effect, assumes, hypothetically, that each predecessor had a single shareholder.
4. If the shareholder of a particular predecessor has control of the amalgamated company, then that particular predecessor is deemed to have acquired control of the other predecessor just before the amalgamation.
5. However, there is one narrow exception. If neither of the two hypothetical shareholders would have control of the amalgamated company, then there is no deemed change of control of either predecessor.[6]
[23] One might think about this as a rule about which a predecessor company, if any, took control of the amalgamated company.
[24] Broadly, the position of the Appellant is: Veracel decided to restart, operating a new business, acquired additional financing through the issuance of Class B shares and proceeded to amalgamate with predecessor Birchcliff.[7] Given that, at law, the rights and obligations of the predecessor corporations continue in the amalgamated company it is perfectly normal that the tax attributes of Veracel, including the losses, are available to the amalgamated company.[8]
[25] Further, because of the number of votes in the amalgamated company acquired by the Class B shareholders, under the hypothetical test in clause 256(7)(b)(iii)(B), if a single person had acquired all the shares of the amalgamated corporation acquired by the shareholders of Veracel, that person would have had control of the amalgamated corporation. As a consequence the exception in that clause applies and there was no change of control of Veracel immediately prior to the amalgamation.
[26] If for some reason one must ignore the shares of the amalgamated company acquired by the Class B shareholders, then a single person that acquired only the shares in the amalgamated company acquired by the Veracel shareholders, other than the Class B shareholders, would not have acquired control of the amalgamated company. As a consequence, there would be a deemed change of control of Veracel immediately prior to the amalgamation.
[27] The Respondent makes three alternative submissions in support of the denial of the loss claimed in 2006. Summarily, they are as follows.
[28] Firstly, the Class B shares were a sham and in applying the test for the exception in clause 256(7)(b)(iii)(B) one should disregard the Class B shares.
[29] Secondly, in the alternative, the Class B shareholders acquired control of Veracel immediately before the amalgamation.[9]
[30] Thirdly, in the further alternative, the Respondent submits that the general anti‑avoidance provision in section 245 of the Act applies and that the appropriate tax consequence that flows therefrom is to deny the losses.
Facts and Findings of Facts [31] Three witnesses testified: David Tonken, Susan Mak and James Surbey. Voluminous documentation was introduced.
[32] David Tonken is in business in Alberta.[10] He has created capital pool companies that facilitate private firms going public. He also does consulting and agreed in cross‑examination that tax monetization was a minor part of what he did. He has carried out his business activities together with his partner, Greg Matthews, for many years. Together they had a company, Cavalon Capital Partners, through which they carried out many of their activities.[11]
[33] At some point in 2004 David Tonken received a copy of a February 24, 2004 letter from Veracel seeking proposals for use of its tax losses.[12] The letter is reproduced further below. Mr. Tonken was very excited when he received the letter; he saw this as a good opportunity because it appeared that Veracel was proceeding very professionally and had already done many things that would facilitate any transaction involving Veracel.
[34] He and his partner became very involved with Veracel and played an important role in these transactions. There is a first transaction that they tried to arrange for Veracel. That first transaction was unsuccessful.[13]
[35] David Tonken subsequently made the first approach to Birchcliff by phoning James Surbey.[14]
[36] Later we will see that David Tonken and Greg Matthews received significant shares from Veracel. When asked what he did to receive the shares, Mr. Tonken stated that he and Mr. Matthews spent about a year working on the transaction and paid for about $20,000 of expenses.
[37] Susan Mak is an employee of Olympia Trust Company. She testified as to the role of Olympia Trust in the issuance of subscription receipts for the Class B shares, as escrow agent for the proceeds of the issuance of the subscription receipts, in the issuance of the Class B shares and in the conversion of the Class B shares into common shares of the amalgamated company. There is substantial additional detail about these steps below.
[38] James Surbey was at the relevant times the vice-president of corporate development and the corporate secretary of Birchcliff.
[39] The parties provided the Court with the following:
Partial Agreed Statement of Facts
The parties agree for the purposes of the determination of the issues herein that the following facts may be accepted as evidence without further proof thereof. Numerical references in brackets refer to the relevant tab in the Agreed List of Documents.
Veracel
1. Veracel Inc. (“Veracel”) was incorporated on August 10, 1994 as Morphometric Technologies Inc. under the Business Corporations Act of Ontario.
2. Veracel’s business was to develop, manufacture and market automated diagnostic instruments for medical applications (the “Medical Business”).
3. In April 2001, the company changed its name to Veracel.
4. On November 15, 2002, Veracel filed a proposal under the [Ontario][15] Bankruptcy and Insolvency Act that was accepted by the Ontario Superior Court of Justice. [2] On November 19, 2003, the Trustee certified that Veracel had fully performed the proposal.
5. Veracel ceased its Medical Business in 2002. No income was earned from the Medical Business after 2002.
6. In February 2004, Veracel solicited proposals in connection with its existing tax attributes. [4] Soon thereafter, Veracel started to work with David Tonken and Greg Matthews.
7. On November 5, 2004, Veracel, David Tonken, Greg Matthews and Emerging Equities Inc. executed a letter agreement in connection with a proposed transaction. [5] The proposed transaction was not completed.
8. As at the end of 2004, Veracel had the following tax attributes: non-capital losses of $16,226,489; scientific research and experimental development expenses of $15,558,003; and, investment tax credits of $1,874,979 (the “Tax Attributes”).
9. The issued and outstanding Veracel shares, as at December 31, 2004, consisted of 10,280,461 Common Shares and 7,299,424 Class A Preference Shares. [9; 44, Exhibit B]
10. Class A Preference shareholders were entitled to receive notice of and attend meetings, and vote at such meetings, on a 1:1 basis with holders of Common Shares. [64]
11. Veracel shareholders included the Business Development Bank of Canada, Ontario Development Corp., AGF and HSBC. [44, Exhibit B]
Birchcliff
12. On July 6, 2004, Birchcliff was incorporated as 1116463 Alberta Ltd. That company changed its name to Birchcliff Energy Ltd. on September 10, 2004.
13. On January 18, 2005, Scout Capital Corp. (“Scout”), a publicly listed company, amalgamated with the company then named Birchcliff Energy Ltd. (the “Scout Amalgamation”). The amalgamated company adopted the name Birchcliff Energy Ltd. (“Birchcliff”). When Birchcliff and Veracel amalgamated on May 31, 2005, as set out below, that company also adopted the name Birchcliff Energy Ltd. (“Amalco”).
14. On January 19, 2005, the common shares of this newly amalgamated company were listed for trading on the TSX Venture Exchange under the trading symbol “BIR”.
15. The Scout Amalgamation was done by way of a court approved Plan of Arrangement and involved the issuance of subscription receipts. [11]
16. David Tonken was the President and CEO of Scout from 1998 to 2002.
17. David Tonken is the brother of Jeff Tonken, the President and CEO of Birchcliff and of Amalco.
Purchase of initial oil and gas property
18. On February 14, 2005, Birchcliff entered into a letter agreement to purchase properties in the Peace River Arch area of Alberta for $2.75 million.
19. This purchase closed on May 5, 2005.
Agreement to purchase major oil and gas property
20. On March 9, 2005, Birchcliff entered into a letter agreement in connection with the purchase of oil and natural gas properties in the Peace River Arch area of Alberta for $255 million (the “Devon Properties”). [14] The related purchase agreement was executed on March 29, 2005 for a purchase price of $243 million.
21. It was anticipated that the acquisition of the Devon Properties would close on or before May 31, 2005.
22. Birchcliff approached several financial institutions including Scotia Capital in connection with financing the acquisition of the Devon Properties.
23. On March 29, 2005 Birchcliff and Scotia Capital signed a Commitment Letter wherein Scotia Capital committed financing in the form of a Revolving Loan in the amount of $70 million and a Bridge Loan in the amount of $149 million, to purchase the Devon Properties. [21] The Bridge Loan was never advanced.
24. KPMG prepared a schedule of revenue and expense for the Devon Properties identifying that, in 2004, the Devon Properties generated revenue exceeding $85 million which, after the payment of royalties and operating costs, generated net profit of more than $50 million. [10]
Veracel and Birchcliff sign a letter agreement
25. David Tonken brought Veracel and Birchcliff together for a possible transaction. He contacted Jim Surbey at Birchcliff and discussed Veracel’s situation with him. [132, 133]
26. On March 18, 2005, Birchcliff directors approved of entering into a purchase agreement for the Devon Properties and approved a proposed Arrangement Agreement with Veracel. [19]
27. Negotiations between Veracel and Birchcliff included the exchange of draft agreements, and revisions to such agreements, in correspondence dated March 21, 23, and 29, 2005.
28. On March 29, 2005, a Birchcliff press release announced that Birchcliff had entered into an acquisition agreement for the purchase of the Devon Properties for approximately $240 million. The press release described the Devon Properties and identified that the parties anticipated that the transaction would be completed by May 31, 2005. [25]
29. John Anderson of Veracel sent a letter dated March 29, 2005 to the shareholders of Veracel regarding “Reorganization of Veracel Inc.” [24]
30. On April 1, 2005, Birchcliff and Veracel signed a Letter Agreement. [27]
31. On April 3, 2005, Birchcliff issued a press release announcing that Veracel and Birchcliff had signed the Letter Agreement. [39]
32. By April 4, 2005, the new financing proposed in the letter agreement is being marketed. [34]
Steps to implement letter agreement
33. On April 12, 2005, Olympia Trust Company (“Olympia”) on behalf of Birchcliff advised the TSX Venture Exchange (“TSXV”) and the securities commissions in British Columbia, Alberta, Saskatchewan, Ontario and Nova Scotia that the annual and special meeting was set for May 24, 2005.
34. On April 14, 2005, GMP Securities Ltd. signed a letter of offer to Veracel to agree to place subscription receipts. [32]
35. On April 14, 2005, the Underwriting Agreement became effective, among Veracel and GMP Securities Ltd., as lead underwriter, Sprott Securities Inc. and Scotia Capital Inc. (collectively the “Underwriters”), with respect to an equity financing of up to $136,000,000 plus a further $10,000,000 in a separate flow-through equity financing. [42]
36. On April 18, 2005, Veracel and Birchcliff executed the Arrangement Agreement. Exhibit A to the Arrangement Agreement is the Plan of Arrangement. [44]
37. During April 2005, Veracel received concurrence of shareholders to proceed with the Arrangement Agreement. [40]
Notices and approvals
38. On April 18, 2005, Birchcliff notified the TSXV in connection with the proposed transactions. [45]
39. On April 18, 2005, Veracel notified shareholders of a special meeting in connection with proposed transactions. [46]
40. On April 19, 2005, Birchcliff notified the Alberta Securities Commission (“ASC”) that counsel to Birchcliff would attend the Alberta Court on April 22, 2005 to apply for an Interim Order in connection with the Plan of Arrangement.
41. On April 21, 2005, the Veracel directors approved the Arrangement Agreement, the Private Placement, the “New Equity Financing” and other matters. [47]
42. On April 21, 2005, the Birchcliff directors approved of the Information Circular and other matters. [48]
43. On April 21, 2005, in accordance with the Arrangement Agreement, Birchcliff filed a Petition with the Alberta Court applying for an Interim Order directing that a shareholders meeting be called to vote on the proposed Arrangement. [49] An affidavit of Jim Surbey was filed in connection with this Petition. [52]
44. On April 21, 2005, an MRRS Decision document was issued. [50]
45. On April 22, 2005, the Alberta Court issued the Interim Order.
46. A copy of the Interim Order and related documents [was] provided to the ASC by letter dated April 22, 2005.
47. On April 22, 2005 the Information Circular was published. [51]
48. A corporate administrator from Olympia declared, on May 5, 2005, that the Information Circular and a Proxy were mailed to each Birchcliff Shareholder on April 26, 2005 and confirmation of same was provided to the TSXV and to securities commissions in British Columbia, Alberta, Saskatchewan and Ontario.
49. An April 25, 2005 press release announced that the Underwriters had exercised their option to sell the additional 8 million Veracel Subscription Receipts, to increase the equity financing up to $136,000,000. [54] The Underwriters’ confirmation of same was issued May 4, 2005. [68]
50. On April 26, 2005, Birchcliff by letter applied to the Committee on Uniform Security Identification Procedures (“CUSIP”) for approval of a new CUSIP number for the Common Shares of Amalco that were to be issued in exchange for shares of Veracel and Birchcliff on the amalgamation.
51. The new CUSIP number was issued on May 2, 2005. A specimen Amalco Common Share certificate with the new CUSIP number and a specimen Amalco Series 1 Preferred Share certificate were prepared on May 20, 2005.
Further Veracel approvals
52. On April 29, 2005, the shareholders and investors of Veracel met and passed the following resolutions: [56]
a. to elect Robert Allan, John Anderson and David Tonken as directors;
b. to issue 3,775,000 [common shares] to each of David Tonken and Greg Matthews on condition of the Arrangement closing (the “Private Placement”);
c. to amend then terminate the Unanimous Shareholders Agreement;
d. to authorize the Letter Agreement with Birchcliff;
e. to approve the amendment to the articles of Incorporation to create Class B common shares;
f. to transfer all assets to Newco in exchange for Newco shares and then to distribute those shares to Veracel shareholders;
g. to continue to Alberta;
h. to authorize the Arrangement Agreement with Birchcliff;
i. to authorize the “New Equity Financing”; and
j. to waive rights, privileges and conditions attached to Class A Preferred Shareholders.
53. On April 29, 2005, the directors of Veracel passed the following resolutions: [55]
a. to approve the Letter Agreement and Arrangement with Birchcliff;
b. to transfer all assets to Newco in exchange for Newco shares and then to distribute those shares to Veracel shareholders;
c. to authorize David Tonken and John Anderson to implement the “Arrangement”;
d. to issue 3,775,000 [common shares] to each of David Tonken and Greg Matthews; and
e. to authorize the “New Equity Financing”.
54. On April 29, 2005, Veracel filed Articles of Amendment to allow for the issuance of Class B Common Shares.
55. On April 29, 2005, Veracel share certificates were issued representing 3,775,000 [common shares] to each of David Tonken and Greg Matthews in accordance with the Private Placement. [57]
56. On May 2, 2005, Veracel continued from Ontario to Alberta. [64]
Financing to raise $136,000,000
57. On May 2, 2005 Veracel completed a “Due Diligence Questionnaire” for the Underwriters regarding the transaction with Birchcliff. [61]
58. On May 2, 2005 Birchcliff completed a “Due Diligence Questionnaire” for the Underwriters regarding the transaction with Veracel. [62]
59. On May 4, 2005, the Subscription Receipt Indenture among Veracel, the Underwriters and Olympia became effective. [69]
60. On May 4, 2005, the Representation Agreement between Birchcliff and the Underwriters became effective. [70]
61. A memorandum was issued regarding the transfer of $130,500,000, to be received by the Underwriters for the sale of 32,625,000 Subscription Receipts, which provided that, once all parties and counsel agreed the closing documentation had been tabled, such funds would be wire transferred from the Underwriters’ account to Olympia’s account. [73] The other $5,500,000 was to be received from the President’s List subscribers. [67]
62. On May 4, 2005, the Subscription Receipt financing closed and 34,000,000 Subscription Receipts were issued to 133 investors. [111]
63. On May 4, 2005, the closing of the $136,000,000 financing was announced. [71]
64. A Subscription Receipt Agreement was completed by each of the 133 investors [60, 80, 81] and each investor was issued a Subscription Receipt. [58, 66, 77, 78, 82]
65. On May 4, 2005, by Treasury Order, Veracel directed Olympia to issue the Subscription Receipts. [74]
66. On May 4, 2005, Veracel and Olympia acknowledged receipt by Olympia of $136,000,000 in aggregate from the Underwriters ($130,500,000) and from the President’s List subscribers ($5,500,000). [75, 76, 79]
Further Birchcliff approvals
67. On May 10, 2005, Birchcliff warrant holders and stock option holders approved the Arrangement and the Arrangement Agreement. [84, 85]
68. On May 16, 2005, Birchcliff notified the ASC that Birchcliff intended to apply to the Court on May 24, 2005 for a Final Order.
69. On May 24, 2005, the Birchcliff shareholders’ meeting was held and Olympia, as scrutineer, issued a report identifying that holders of more than 50% of the outstanding shares of Birchcliff attended the meeting in person or by proxy and that 100% of the 54 votes cast were in favour of the Amalgamation and acquisition of the Devon Properties.
Completion of the plan of arrangement and related matters
70. On May 24, 2005, an Affidavit was sworn in support of the Final Order. [90]
71. On May 24, 2005, the Court approved the Final Order, which provided that the Arrangement was approved and would be effective in accordance with its terms, and binding on all persons, upon the filing of the Articles of Arrangement. A copy of the Order was provided to the ASC.
72. On May 25, 2005, Veracel directors approved of the form and allotment of the Veracel Class B Common Shares and other matters. [91]
73. On May 25, 2005, Veracel and the Underwriters directed Olympia to deposit the $136,000,000 into Olympia’s account at the Bank of Nova Scotia. [92]
74. On May 30, 2005, Birchcliff directors approved the filing of Articles of Amendment to create Series 1 Preferred Shares dated May 30, 2005. [95]
75. On May 30, 2005, Articles of Amendment were filed, creating Series 1 Preferred Shares, and a Certificate of Amendment was issued by the Alberta Corporate Registrar (the “Registrar”). [96]
76. The Series 1 Preferred Shares provided for redemption and retraction at a price equal to $1,500,000, less certain liabilities, divided by the total number of Veracel Common Shares and Veracel Class A Preference Shares outstanding prior to filing of the Articles of Arrangement. [96]
77. On May 30, 2005, the Depositary Agreement between Veracel and Olympia became effective. [97]
78. Veracel and Birchcliff jointly confirmed for Olympia that the redemption price for the Series 1 Preferred Shares of Amalco was $0.05969 and confirmed the exchange ratio for each holder of Veracel Common Shares and Class A Preference Shares that elected to receive Amalco Common Shares would have an exchange ratio of 1:0.01492. [114]
79. Veracel shareholders issued Letters of Transmittal in order to elect whether to receive Amalco common shares or Amalco Series 1 Preferred Shares. [94]
80. On May 31, 2005, Veracel and the Underwriters issued the Transaction Notice and Direction which is received by Olympia. [102, 103]
81. On May 31, 2005, Birchcliff issued a Certificate, acknowledged by Olympia, confirming that the capital stock of Birchcliff at the close of business on May 30, 2005 continued to consist of 20,248,337 Common Shares.
82. On May 31, 2005, Veracel issued a Certificate, confirming that the issued and outstanding Veracel shares continued to consist of 17,830,461 Common Shares and 7,299,424 Class A Preference Shares for a total of 25,129,885 outstanding shares. [108]
83. On May 31, 2005, Articles of Arrangement were filed by Veracel and Birchcliff and the Registrar confirmed such filings.
84. On May 31, 2005, Gordon Cameron, Werner Siemens, Larry Shaw and Jeffery Tonken signed consents to act as directors of Amalco.
85. On May 31, 2005 John Anderson, Robert Allan, and David Tonken resigned as officers and directors of Veracel. These directors and Veracel signed mutual releases effective on the same day. [107, 109, 110]
86. On May 31, 2005, Olympia acknowledged receipt of the Treasury Order. [116, 117]
87. On May 31, 2005, the Underwriters were paid, and acknowledged receipt of payment [of], their fee of $6,580,475, in accordance with the Underwriters’ agreement with Veracel. [99]
88. On May 31, 2005, Olympia received $1,031,884.87, representing the redemption price for the outstanding Amalco Series 1 Preferred Shares. [100]
89. On May 31, 2005, Amalco filed the Articles of Arrangement [115], Final Order, Plan of Arrangement, and Articles of Amalgamation with the TSXV and the securities commissions in British Columbia, Alberta, Saskatchewan, Ontario and Quebec.
90. On June 3, 2005, Amalco issued a press release announcing that Amalco had completed the Flow-Through Financing. [122]
91. On June 3, 2005, Amalco issued a TSXV Bulletin announcing that Amalco shares were issued in exchange for Veracel and Birchcliff shares and identifying that the Amalco Common Shares would commence trading on the TSXV on June 6, 2005. [123]
Reassessment and related matters
92. The Appellant claimed a portion of the Tax Attributes in its 2006 taxation year.
93. By Notice of Reassessment dated November 30, 2011, the Minister reassessed Birchcliff to disallow the deduction of $16,226,489 of non‑capital losses (the “Reassessment”) claimed in the 2006 taxation year.
94. The Reassessment was based on assumptions related to allegations of sham and acquisition of control. GAAR was not a basis for the Reassessment.
95. The Appellant filed a Notice of Objection dated December 2, 2011.
96. By Notice of Appeal filed March 13, 2012, the Appellant appealed the 2006 taxation year to this Court.
[40] Upon the amalgamation:
1. Shareholders of predecessor Birchcliff received about 20 million common shares of the amalgamated company.
2. The Class B shareholders of Veracel received 34 million common shares of the amalgamated company.
3. Other shareholders of Veracel received about 117,000 common shares of the amalgamated company.[16]
[41] Let us next examine certain aspects of the Class B shares.
[42] Veracel raised funds by creating Class B shares which were sold by subscription. Subscribers received subscription receipts and, once everything was in place to complete the amalgamation at the effective time, the subscription receipts were converted to Class B shares, the two predecessor companies amalgamated and the Class B shares were then converted to shares of the amalgamated company.
[43] This all takes place instantaneously, and in sequence, in accordance with the plan of arrangement.[17]
[44] The arrangement was designed to ensure that the purchasers of subscription receipts were either going to acquire common shares of the amalgamated company, if everything closed as planned or, if for some reason things went wrong, they would get their money back.
[45] They were never going to benefit from being Class B shareholders of predecessor Veracel, as such.
[46] This is absolutely clear from the documentation. For example, one reads the following in the subscription receipt certificates:[18]
Each Subscription Receipt entitles the Receiptholder:
(a) any time after the Escrow Release Condition occurs at or before the Termination Time, to receive, for no additional consideration and without further action, one fully paid and non‑assessable Class B common share (“Share”) in the capital of the Corporation which will be automatically exchanged for one common share of Amalco pursuant to the Arrangement, subject to adjustment in certain circumstances as more fully described in the Indenture, together with the payment of any Special Amounts; or
[Emphasis added.]
[47] The subscription receipt incorporates by reference the subscription receipt indenture; the indenture has slightly different language to the same effect:[19]
3.2 Issue of Shares
(a) If the Escrow Release Condition occurs, the Issuance Right is deemed to have been exercised and the underlying [Class B] Shares of the Corporation, as constituted before the Effective Time, shall be and shall be deemed to be automatically issued immediately prior to the Effective Time, notwithstanding that certificates representing such Shares may not have been so issued, and the persons to whom such Shares are to be issued shall be deemed to have become the holders of record of such Shares immediately prior to the Effective time.
(b) If the Escrow Release Condition occurs, the holder of a Subscription Receipt . . . shall automatically be entitled from and after the Effective Time a certificate representing the applicable number of Shares of Amalco and a cheque for the Special Amount, if any, without any further action on the part of the Receiptholder.[20]
[Emphasis added.]
[48] Article 2.3 of the indenture also says:[21]
2.3 Receiptholder not a Shareholder
Nothing in this Indenture or in the holding of a Subscription Receipt evidenced by a Subscription Receipt Certificate or otherwise shall confer or be construed as conferring upon a Receiptholder any right or interest whatsoever as a Shareholder, including, but not limited to, the right to vote at, to receive notice of, or to attend, meetings of Shareholders or any other proceedings of the Corporation, or the right to receive any continuous disclosure materials of the Corporation.
[49] Finally, the plan of arrangement approved by the Court of Queen’s Bench of Alberta states:[22]
ARTICLE 3
ARRANGEMENT
3.1 At the Effective Time, each of the events set out below shall occur and be deemed to occur in the sequence set out without further act or formality:
(a) each issued and outstanding Veracel Subscription Receipt shall be, and shall be deemed to be, exchanged for one Veracel Class B Share . . .;
(b) Veracel and Birchcliff shall be amalgamated and shall continue as one corporation and pursuant to the amalgamation of Veracel and Birchcliff:
. . .
(ii) the shares of Veracel and Birchcliff will be exchanged for shares of Amalco as follows:
. . .
B. each issued and outstanding Veracel Class B Share and all rights pertaining to the ownership thereof shall be, and shall be deemed to be, exchanged for one Amalco Common Share . . .;
[Emphasis added.]
[50] It is abundantly clear that anyone paying for a subscription receipt was seeking to acquire shares in the amalgamated company, a company that, as a result of the agreements entered into by predecessor Birchcliff, had already acquired some oil and gas properties and that would be on the verge of acquiring some much bigger oil and gas properties, the Devon Properties — an acquisition to be funded in large measure with the funds raised through the issuance of the Class B shares. They were in no way seeking to acquire an ownership interest in predecessor company B.
[51] It is equally clear that the Class B shares had a very ephemeral existence.[23]
[52] What drove the arrangement agreement, the financing raised by Veracel and the amalgamation agreement between Veracel and predecessor Birchcliff?
[53] The Appellant’s position is that Veracel wanted to restart in the oil and gas business and, indeed, there are many references to restarting in the testimony of David Tonken.
[54] The word “restart” is not, by itself, helpful and I think that it is useful to focus first on what was planned, agreed to and carried out by Veracel leading up to the amalgamation.
[55] Veracel had ceased its business relating to medical diagnostics in 2002.
[56] In the same year, it made a bankruptcy proposal that was accepted. That proposal was carried out in 2003.
[57] Under the arrangem