MIL (Investments) S A v. The Queen

MIL (Investments) S A v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2006-08-18
Neutral citation
2006 TCC 460
File numbers
2004-3354(IT)G
Judges and Taxing Officers
Ronald D. Bell
Subjects
Income Tax Act
Decision Content
Docket: 2004-3354(IT)G
BETWEEN:
MIL (INVESTMENTS) S.A.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on July 17, 18, 19, and 20, 2006 at Vancouver,
British Columbia
By: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
Warren J.A. Mitchell, Q.C.
Matthew Williams
Counsel for the Respondent:
Robert Carvalho
David Jacyk
Michael Taylor
____________________________________________________________________
AMENDED JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1997 taxation year is allowed and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the Reasons for Judgment.
The Appellant is entitled to costs.
This further Amended Judgment and Amended Reasons for Judgment are issued in substitution for the Amended Judgment and Amended Reasons for Judgment issued the 5th day of September, 2006.
Signed at Ottawa, Canada, this 27th day of September, 2006.
"R.D. Bell"
Bell, J.
Citation:2006TCC460
Date: 20060927
Docket: 2004-3354(IT)G
BETWEEN:
MIL (INVESTMENTS) S.A.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Bell, J.
ISSUE
[1] The issue is:
Whether the Appellant is exempt from Canadian income tax in respect of the capital gain of $425,853,942 arising in its 1997 taxation year on the sale of shares of Diamond Field Resources Inc. by virtue of the Canadian Income Tax Act and theConvention Between Canada and The Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital ("Treaty").
GENERAL
[2] All section numbers refer to sections of the Income Tax Act ("Act") unless otherwise specified.
[3] The Canada-Luxembourg Tax Convention is referred to as the Treaty.
[4] I shall summarize, for ease of comprehension, the facts upon which my conclusions are based. Those facts, together with related facts, are set forth in Appendix A and Appendix B attached hereto and forming part of these Reasons for Judgment. They include the PARTIAL AGREED STATEMENT OF FACTS filed by counsel, a presentation of oral and documentary evidence produced at the hearing, and a lengthy quote from a Management Information Circular, more fully described below.
FACTS
[5] Jean-Raymond Boulle ("Boulle"), in 1993, began acquiring shares of Diamond Field Resources Ltd. ("DFR"), a public company incorporated in Canada and traded on the Toronto Stock Exchange.
[6] On March 10, 1993, Boulle transferred his DFR shares, being 29.4% of those issued, to the Appellant, a newly incorporated Cayman Islands company, wholly owned by him.
[7] Prior to November 1994, DFR acquired, explored and developed diamond properties. By sheer chance it discovered a major deposit of nickel, copper and cobalt near Voisey's Bay, Labrador ("Property").
[8] The Property attracted so much interest that DFR was contacted by 18 mining companies from around the world. In March, 1995, the stock traded at $19 or $20 per share.
[9] Boulle and Robert Friedland ("Friedland") together had about 30% of DFR, Robertson Stephens Funds ("Stephens") had 10% and Ed Mercaldo ("Mercaldo")[1] had 1.5%. Their collective total could not have blocked a hostile takeover.
[10] In that month, Teck Corporation ("Teck") paid $108,000,000 for 10% of DFR, did not require the appointment of a director, agreed to provide extensive technical advice and assured DFR it could do maximum drilling and exploration for at least three or four summers without DFR having to raise more money. Within one week after this transaction it was trading at $47 per share.
[11] Teck entered into a voting trust with Friedland, and alternatively, Boulle, if Friedland was not available, to vote its DFR shares with management on any major issue, thus avoiding a potential hostile takeover. DFR also had a "stand still" agreement with Teck under which Teck agreed not to buy more shares without DFR's permission.
[12] In order to develop the Property, DFR then hired, inter alia, Dr. John Paterson ("Paterson") a Ph.D. metallurgist from Queen's University, as Executive Vice President and Cliff Carson ("Carson") as President, a former Vice President of Marketing at Falconbridge Limited ("Falconbridge").
[13] In May 1995, Inco Limited ("Inco"), of whom Mike Sopko ("Sopko") was Chairman and Chief Executive Officer, was interested in acquiring 100% of the Voisey's Bay interest but Mercaldo, effectively rejecting such a sale, said:
we still felt that we had just scratched the surface as to the potential of Voisey's Bay
[14] However, DFR was willing to sell Inco a minority stake in the Property. In order to maintain control, DFR sold, under a June 8, 1995 agreement, effective June 28, 1995, 25% of the shares of its new wholly owned subsidiary corporation Voisey's Bay Nickel Company Limited ("VBNC") to which DFR had transferred the Property. Inco entered into a "stand still" agreement whereby it agreed not to acquire any DFR shares, other than the 2,000,000 shares described below, until certain events occurred. Inco paid DFR with $386,700,000 preferred shares, paid $25,000,000 to VBNC for funding costs, including obtaining marketing rights for 25 years, et cetera. The foregoing funds being in US dollars, Inco's investment, according to Mercaldo, amounted to well over $700,000,000 Canadian.
[15] At that time, Inco bought 1,297,000 DFR shares from Stephens for cash and the Appellant exchanged, under section 85.1, 703,000 DFR shares for 1,401,218 common shares of Inco.
[16] Prior to that date, the Appellant had 11.9% and Boulle had 0.485% of the DFR shares and after that date the Appellant's shareholding was 9.817%.
[17] On July 17, 1995, the Appellant was continued in Luxembourg.
[18] Between August 14, 1995 and August 17, 1995, the Appellant disposed of the 1,401,218 common shares of Inco for proceeds of $65,466,895 and claimed exemption from Canadian tax on the resulting capital gain of $64,982,713 under Article 13 of the Treaty.
[19] The Appellant was not reassessed in Canada on that gain and paid no tax in Luxembourg because the cost basis of the share for the Luxembourg tax purposes was the value at the time of the continuance which exceeded the sale price.
[20] On September 14, 1995, the Appellant disposed of 50,000 DFR shares for $4,525,000 with an adjusted cost base of $32,444 and claimed exemption from Canadian tax on the gain of $4,492,556 under Article 13 of the Treaty. It was not assessed in Canada respecting that gain and paid no tax in Luxembourg.
[21] Mercaldo testified that after the sudden and tragic death of Paterson in October, 1995, the DFR directors:
realized that it was going to be very difficult to maintain our independence with this key person gone, although we were going to give it the best try possible. ... I was in ... after we buried John, in early October, I was in Toronto and I visited with Mike Sopko over lunch, and as I said, John had been a friend of his, and I told Mike
'you know, Mike, we thought you're wanting to take the whole company, but if there was ever a time that we might consider something like that, it would be now, since John is gone.'
[22] In December 1995, Inco made an offer of $31 ($124) per share which DFR rejected.[2]
[23] In mid January 1996, Falconbridge made an offer of $36.50 ($146) per share which the DFR directors voted to accept and to recommend to its shareholders.
[24] The day before the DFR shareholders' vote on the proposed Falconbridge deal, Inco increased its offer of $43.50 ($174) per share.
[25] On May 22, 1996, the DFR shareholders approved the Inco acquisition of all DFR shares to take effect on August 21, 1996. The Appellant received proceeds of disposition in the amount of $427,475,645 for its DFR shares.
[26] The Appellant claimed an exemption from Canadian tax on the resulting capital gain of $425,853,942 under Article 13 of the Treaty. This gain is the subject of the appeal.
ANALYSIS AND CONCLUSIONS
Application of Section 245 to Tax Treaties
[27] The issue, restated, is:
1. Does section 245 apply to deny the exemption from tax on a capital gain of $425,853,942 arising in the Appellant's 1997 taxation year on the sale of DFR shares pursuant to the Treaty? ("Sale")
2. If not, is there an inherent anti-abuse rule in the Treaty which would deny that exemption?
[28] Section 4.1 of the Income Tax Conventions Interpretation Act, R.S.C., 1985, c I-4 and section 245 of the Act were retroactively amended effective September 12, 1988 to make explicit reference to tax treaties.44
[29] In Canada Trustco v. Canada, 2005 DTC 5523, the Supreme Court of Canada, in paragraph 7, said:
In our view, this amendment to s. 245 serves inter alia to make it clear that the GAAR applies to tax benefits conferred by Regulations enacted under the Income Tax Act.
[30] These amendments, made in 2005, are retroactive to transactions completed some 17 years ago. Retroactive legislation, although within the power of Parliament is legal but undesirable. [3] The inappropriateness of reassessing taxpayers who completed transactions in accordance with the law in force at the time of those transactions without any expectation of adverse retroactive effect is self-evident.
[31] In my view, the impact of the amendments to section 245 is that tax treaties must be interpreted in the same manner as domestic legislation when analyzing potentially abusive avoidance transactions.
[32] This analysis considers two sales which will, at this point, be dealt with separately.
(1) the roll-over by the Appellant of some of its DFR shares for Inco shares on June 8, 1995, and
(2) the sale by all shareholders, including the Appellant, of DFR shares in August 1996. The taxation of the gain respecting the Saleis the subject of this appeal.
[33] Paragraph 17 of Canada Trustco sets out the general framework of a section 245 analysis:
The application of the GAAR involves three steps. The first step is to determine whether it is a 'tax benefit' arising from a 'transaction' under s. 245(1) and (2). The second step is to determine whether the transaction is an avoidance transaction under s. 245(3), in the sense of not being 'arranged primarily for bona fide purposes other than to obtain the tax benefit. The third step is to determine whether the avoidance transaction is abusive under s. 245(4). All three requirements must be fulfilled before GAAR can be applied to deny a tax benefit.
[34] The term "tax benefit" is defined in s. 245 (1) as:
a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty.
[35] Appellant's counsel's written brief states that:
For the purposes of this Appeal, the Appellant admits that in this case the application of the Treaty afforded the Appellant a tax benefit.
[36] Section 245(3) defines "avoidance transaction" as follows:
An avoidance transaction means any transaction
a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
The Sale
[37] Respecting the non-tax reasons for the Sale, the sale of DFR shares to Inco was a sale by all shareholders. This was a result of the bidding war between Inco and Falconbridge, Inco's final offer of approximately $4.6 billion dollars eventually being accepted by the DFR shareholders.
[38] The Management Information Circular ("Circular") involving Inco and DFR, which set out the terms of the offer, provided that 75% of the shares voted at a meeting of shareholders for the purpose of approving Inco's offer must be obtained. At that time, the shares of DFR held by Friedland, Boulle, Teck and Inco were as follows:
Friedland 12.9%
Boulle 9.6%[4]
Teck 10.9%
Inco 7.3%
This Circular was part of a series of documents outlining in detail Inco's proposed purchase of all shares of DFR. Attached as Appendix B and forming part of these Reasons for Judgment is a copy of pages 29 through 36 of that Circular, entitled BACKGROUND TO THE ARRANGEMENT.
[39] The above group, with the addition of Mercaldo, held 41.4% according to the Circular. It said that:
Friedland, Boulle and Mercaldo declared their interest... and refrained from voting on the transaction. The Board of Directors then unanimously accepted the Inco proposal and approved the execution, delivery and performance of the Arrangement Agreement.
[40] Prior to the directors' vote to recommend the Inco offer to DFR shareholders, DFR received oral opinions from both Nesbitt Burns and First Boston that the offer would be fair to shareholders other than Inco. Boulle did not have the ability to organize and effect a favourable vote for the sale to Inco, not being entitled to vote on the directors' recommendation, and being a minority shareholder. In any event, in the circumstances, it is unimaginable that Boulle could have persuaded sophisticated shareholders such as Inco, Teck, Friedland and Mercaldo, to vote in favour of the Sale simply because he alone might enjoy a tax benefit.
[41] I have determined, therefore, that it is reasonable to conclude that the Sale, on its own, was undertaken or arranged primarily for a bona fide purpose other than to obtain the tax benefit.
Series Of Transactions
[42] I now turn to a consideration of the Respondent's definition of the series of transactions ("Series"). The Respondent has included in the series the June 8, 1995 rollover of 703,000 shares of DFR to Inco for 1,401,218 common shares of Inco, and two other transactions, the final Sale being excluded. Respondent's counsel's written submission states:
The following transactions resulted, directly or indirectly, in a tax benefit to the Appellant and are the avoidance transactions in this case:
a) the reduction of the Appellant's and Boulle's combined ownership of DFR to below 10% in June 1995;
b) the Final Dividend; and
c) the continuation of the Appellant into Luxembourg;
(collectively, the "Transactions")
Accepting the Series as submitted by Respondent's counsel as consisting of the aforesaid three transactions, is that series, or any transaction in that series, an avoidance transaction within the meaning of paragraph 245(3)(b)?
[43] Paragraphs 27-32 in Canada Trustco, are of great assistance in the consideration of this question. The pertinent portions read as follows:
5.4.2 Primarily for Bona Fide Purposes
[27] According to s. 245(3), the GAAR does not apply to a transaction that "may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit". If there are both tax and non-tax purposes to a transaction, it must be determined whether it was reasonable to conclude that the non-tax purpose was primary. If so, the GAAR cannot be applied to deny the tax benefit.
[28] While the inquiry proceeds on the premise that both tax and non-tax purposes can be identified, these can be intertwined in the particular circumstances of the transaction at issue. It is not helpful to speak of the threshold imposed by s. 245(3) as high or low. The words of the section simply contemplate an objective assessment of the relative importance of the driving forces of the transaction.
[29] Again, this is a factual inquiry. The taxpayer cannot avoid the application of the GAAR by merely stating that the transaction was undertaken or arranged primarily for a non-tax purpose. The Tax Court judge must weigh the evidence to determine whether it is reasonable to conclude that the transaction was not undertaken or arranged primarily for a non-tax purpose. The determination invokes reasonableness, suggesting that the possibility of different interpretations of the events must be objectively considered.
[30] The courts must examine the relationships between the parties and the actual transactions that were executed between them. The facts of the transactions are central to determining whether there was an avoidance transaction. It is useful to consider what will not suffice to establish an avoidance transaction under s. 245(3). The Explanatory Notes state at p. 464:
Subsection 245(3) does not permit the 'recharacterization' of a transaction for the purposes of determining whether or not it is an avoidance transaction. In other words, it does not permit a transaction to be considered to be an avoidance transaction because some alternative transaction that might have achieved an equivalent result would have resulted in higher taxes.
[31] According to the Explanatory Notes, Parliament recognized the Duke of Westminster principle "that tax planning - arranging one's affairs so as to attract the least amount of tax - is a legitimate and accepted part of Canadian tax law". Despite Parliament's intention to address abusive tax avoidance by enacting the GAAR, Parliament nonetheless intended to preserve predictability, certainty and fairness in Canadian tax law. Parliament intends taxpayers to take full advantage of the provisions of the Income Tax Act that confer tax benefits. Indeed, achieving the various policies that the Income Tax Act seeks to promote is dependent on taxpayers doing so.
[32] Section 245(3) merely removes from the ambit of the GAAR transactions that may reasonably be considered to have been undertaken or arranged primarily for a non-tax purpose. Parliament did not intend s. 245(3) to operate simply as a business purpose test, which would have considered transactions that lacked an independent bona fide business purpose to be invalid.
[44] The first transaction was a sale of 703,000 DFR shares for 1,401,218 common shares of Inco [5] whose value at that time was approximately $65 million dollars. The "roll-over" resulted in a deferral of Canadian tax until such time as MIL sold the Inco shares.
[45] In determining the primary purpose of any transaction the credibility of witnesses is extremely important. Throughout the hearing, I observed and assessed, on a continuous basis, Boulle's demeanor, his delivery, his constant unchanging colour, his facial expressions and the absence of fidgeting, nervous behaviour. I also listened carefully to all his responses, both to the questions of his own counsel and on cross-examination. I concluded that he was credible. Respondent's counsel said that he was not.[6] He submitted that:
... the Appellant's suggestion that it sold the shares to pay off a line of credit is not plausible. At the time of the share exchange the amounts owing were a little over a million dollars in total. At that time, the value of the shares was approximately 65 million dollars. You're going to sell 65 million dollars worth of shares to pay off a one million dollar line of credit?
[46] Boulle's evidence, which I accept, was that he wanted to pay off "over a million dollars of debt" and wanted to "get back to exploring and building mines in Africa." When, on cross-examination it was suggested to him that the credit line was not the main purpose he replied:
I had no other income ... my whole well-being, if you want to call it fortune, was tied up in these shares.
[47] Boulle's rationale for exchanging DFR shares for Inco shares was that he would have been "conflicted" by taking cash, even if available, for his DFR shares at the time he exchanged them for Inco shares. That is consistent with the commercial reality that a co-chairman of the board and major shareholder of DFR would, by selling for cash, if available, give a negative signal to the stock market - especially given the normal securities' legislation requiring disclosure of an "insider" transaction.[7]
[48] The second transaction in that "series", namely, "the Final Dividend" was an arrangement for Luxembourg tax purposes only and had no tax effect whatsoever in Canada.
[49] The final transaction was the continuation of the Appellant to Luxembourg. In addition to the Treaty tax purpose, Appellant's counsel submitted that Luxembourg was a better jurisdiction than the Cayman Islands in which to carry on a mining business in Africa. Shortly after moving the Appellant, Boulle continued another Cayman Islands company, Gondwana, with mining activities in Africa, to Luxembourg for the same reasons.
[50] It is apparent from the evidence that the reason for the sale was to realize a gain on the sale of a small portion of his DFR shares. Boulle was a "paper millionaire" with financial burden, his entire wealth being held in non-liquid shares of DFR. There was always the possibility of a substantial diminution in the value of his investment which had risen inordinately quickly in value. The sale ensured him of financial security, a bona fide purpose, regardless of the success or failure of DFR. This is the "why" for each transaction in the series. The "how" of the series was the implementation of a complex plan formulated by Appellant's Canadian tax counsel. [8]
[51] The Respondent's written submission focuses on the tax plan by saying:
The tax-deferred sale of 703,000 DFR shares is the transaction upon which the Appellant's entire plan was predicated. This transaction was clearly undertaken in anticipation of MIL continuing into a jurisdiction where it could claim a treaty exemption for the future sale of DFR shares. This transaction that enabled MIL to reduce its shareholding in DRF below the 10% threshold in Article 13(4) of the Treaty, which permitted a tax-exempt sale of the DFR shares after continuing in to Luxembourg...
It is clear from those memoranda that the Appellant's decision to sell 703,000 shares was based solely on the need to get under the 10% threshold.
[52] The Appellant submitted that the gain on a sale of DFR shares would have been exempt under the Treaty regardless of the 10% threshold. The reason advanced was that under Article 13 of the Treaty, although the value of the DFR shares was derived principally from "immoveable property" in Canada, the term "immoveable property" did not include property in which the business of the company was carried on.
Respondent's counsel submitted:
whether this is true or not, the important point is that there is no evidence that the Appellant or its advisors believed this at the time, or that it was a consideration in the Appellant's decision to sell the 703,000 shares.
Appellant's counsel responded with:
In all fairness, the great thing about the 10% or substantial interest is that it is a bright line test. The other, you can get into a substantive debate of "Are you carrying on business or are you not?", but the 10% is a bright line test. But we pass both tests.
[53] I find it clear that, despite the possibility of the DFR shares already being exempt under the Treaty, one of the "driving forces" of the transactions was the Appellant's desire to ensure the sale of its shares in a tax effective manner. I conclude, however, that the "how" is subordinate to the "why" of the sale.
[54] This finding is consistent with the established jurisprudence on the legitimacy of seeking out tax planning, for example, Geransky v. H.M.Q., 2001 DTC 243 established that:
... a purely commercial transaction conceived by business persons without any particular tax motivation and carried out with the assistance of tax professionals in a manner that is designed to achieve that result with the least unfavorable tax consequences
is not an avoidance transaction.
This is complemented by the unappealed decision in Evans v. H.M.Q., 2005 DTC 1762 where Chief Justice Bowman of this Court said:
I find as a matter of fact that the primary purpose of the series of transactions with which we are concerned here was to put the corporate funds in Dr. Evans' hands. The method chosen was one designed to enable him to do so at the least tax cost.
and by Jabs Construction Limited v. H.M.Q., 1999 DTC 729 in which this Court said:
Section 245 is an extreme sanction. It should not be used routinely every time the Minister gets upset just because a taxpayer structures a transaction in a tax effective way, or does not structure it in a manner that maximizes the tax.
[55] This principle derives from the seminal case of IRC v. Duke of Westminster (1935), 19 T.C. 490 where Lord Tomlin said:
Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.
[56] As noted earlier at paragraph 31 of Canada Trustcothe Supreme Court of Canada referred to the Explanatory Notes for section 245 saying that Parliament recognized:
... the Duke of Westminster principle 'that tax planning - arranging one's affairs so as to attract the least amount of tax - is a legitimate and accepted part of Canadian tax law'
[57] In light of the foregoing, the Appellant having had a bona fide commercial reason for selling, it was open to it to seek tax advice respecting the appropriate structure for concluding that Sale.
Can the Series include the Sale?
[58] It should be noted that the Minister of National Revenue ("Minister") did not reassess the Appellant in respect of the Series.[9] Now, however, the Respondent seeks to use that very same Series in order to prevent the Salefrom exemption under the Treaty. In attempting to deny the Treaty benefit derived from the Sale, the Respondent has argued that the denial would be a reasonable tax consequence of the Series under subsection 245(2). Counsel submitted that the wording of subsection 245(2) permits the inclusion of the Salesince the income was "sheltered".
Subsection 245(2) reads as follows:
Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.
The terms "tax consequences" and "tax benefit" are defined in subsection 245(1) as:
"tax consequences" to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount;
"tax benefit" means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty;
[59] My reading of the legislation is that "tax consequences" simply refers to the manner in which section 245 can be used to deny an otherwise available tax benefit. This reading is supported by subsection 245(5):
(5) Determination of tax consequences
Without restricting the generality of subsection (2), and notwithstanding any other enactment,
(a) any deduction, exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, exemption or exclusion, any income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be recharacterized, and
(d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,
in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.
(emphasis added)
[60] The tax benefit for the Respondent's Series is the amount of tax that would otherwise be payable under this Act, but for that Series. The proper comparable is the amount of tax which would have been payable had the Appellant sold the 703,000 shares of DFR on June 28, 1995 for cash. In that circumstance, the Appellant, then being a resident of Cayman Islands would not have been protected by the Treaty and would have been subject to Canadian tax on the capital gain of that sale. The tax benefit therefore ends with the Series, and cannot be extended to the final Saleunless that Sale is found to be a part of the series.
[61] Respondent's counsel did not initially advance the argument that the Sale was a part of the "series" of transactions. It was only in response to Appellant's counsel's reference to the series being limited to three transactions that he strayed slightly from that primary position. Appellant's written submission reads as follows:
Even if the three transactions were a series (they were not), and even if one of the three transactions was an avoidance transaction (none were), the sale by the Appellant of the DFR shares in August 1996 was not part of the series, and it is that sale from which the tax benefit arose.
In response thereto, Respondent's counsel's written argument said:
67. The Appellant also asserts that the August 1996 sale was neither preordained nor contemplated when the Transactions were undertaken. However, common sense and evidence point to DFR being a willing takeover target:
(emphasis added)
[62] The reference to the terms "preordained" and "contemplated" are references to the tests for determining a "series of transactions" as described by the Supreme Court at paragraph 25 of Canada Trustco:
The meaning of the expression 'series of transactions' under s.245(2) and (3) is not clear on its face. We agree with the majority of the Federal Court of Appeal in OSFC and endorse the test for a series of transactions as adopted by the House of Lords that a series of transactions involves a number of transactions that are 'pre-ordained in order to produce a given result' with 'no practical likelihood that the pre-planned events would not take place in the order ordained': Craven v. White, [1989] A.C. 398, at p. 514, per Lord Oliver; see also W.T. Ramsay Ltd. v. Inland Revenue Commissioners, [1981] 1 All E.R. 865.
[63] The fuller quote from Craven v. White reads:
As the law currently stands, the essentials emerging from Furniss v. Dawson, [1984 A.C. 474], appear to me to be four in number:
1) that the series of transactions was, at the time when the intermediate transaction was entered into, pre-ordained in order to produce a given result;
2) that that transaction had no other purpose than tax mitigation;
3) that there was at that time no practical likelihood that the pre-planned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life, and
4) that the pre-ordained events did in fact take place.
Subsection 248(10) reads as follows:
For the purposes of this Act, where there is a reference to a series of transactions or events, the series shall be deemed to include any related transactions or events completed in contemplation of the series.
[64] In paragraph 26 of Canada Trustco the Supreme Court of Canada said:
Section 248(10) extends the meaning of 'series of transactions' to include 'related transactions or events completed in contemplation of the series'. The Federal Court of Appeal held, at para. 36 of OSFC, that this occurs where the parties to the transaction 'knew of the ... series, such that it could be said that they took it into account when deciding to complete the transaction'. We would elaborate that 'in contemplation' is read not in the sense of actual knowledge but in the broader sense of 'because of' or 'in relation to' the series. The phrase can be applied to events either before or after the basic avoidance transaction found under s.245(3).
[65] There must be a strong nexus between transactions in order for them to be included in a series of transactions. In broadening the word "contemplation" to be read in the sense of "because of" or "in relation to the series", the Supreme Court cannot have meant mere possibility, which would include an extreme degree of remoteness. Otherwise, legitimate tax planning would be jeopardized, thereby running afoul of that Court's clearly expressed goals of achieving "consistency, predictability and fairness".
[66] The Respondent's principal argument for the connection between the Sale and the Series seems to be that DFR was a willing takeover target and that, therefore, a sale of the company was contemplated by the Appellant at the time of the Series. Paragraph 67 of the counsel's submission reads:
a) shortly after November 1994, when drilling confirmed the existence of a major nickel-copper-cobalt deposit at Voisey's Bay, market interest in DFR shares intensified and public trading prices increased significantly. Further, DFR was approached by numerous Canadian and international mining companies with respect to the property;
b) the Board of DFR adopted a shareholders rights plan ("poison pill") in December 1994 in order to give the Board of DFR time to maximize shareholder value and to ensure that all shareholders would be treated equally and fairly with respect to any takeover offers;
DFR's "poison pill" was its reaction to the unsolicited interest of eighteen courting companies. This is simply normal commercial practice to prevent an undesired take-over.
c) DFR hired Nesbit Burns and Credit Suisse First Boston in August 1995 as advisors to advise on any takeover bids;58
This footnote referred to the August 26, 1995 Minutes of the meeting of the Board of DFR. Those Minutes, which made no reference to potential takeover bids, read as follows:
Financial Advisors:
Financial Advisory roles were reviewed by Mr. Mercaldo with respect to First Marathon, Nesbitt Burns and CS First Boston. Upon motion duly made and seconded IT WAS UNANIMOUSLY RESOLVED THAT MANAGEMENT BE AUTHORIZED TO ENTER INTO AGREEMENTS WITH EACH OF THESE ADVISORS FOR ONGOING FINANCIAL SERVICES.
d) the subject of a further acquisition came up between DFR and Inco as early as a meeting in September 1995, barely two months after the June 28, 1995 deal, and was informally discussed throughout October and November 1995;59
The referenced words of Feiner read as follows:
We had a dinner meeting in early September, 1995, in Toronto, where the issue of Inco's interest in acquiring that portion of the Voisey's Bay deposit that it did not then own was broached with some of the Diamond Fields people.
Teck, Falconbridge, and Inco had each pursued the potential acquisition of the full Voisey's Bay interest prior to this date and all such overtures had been rejected by DFR. This cannot be construed as evidence of a desired sale.
e) the minutes of the meetings of the directors of DFR held on August 26, 1995, February 9, 1996 and April 1996, and the directors resolution dated October 17, 1995 all focus on the company as a takeover target rather than on developing a mine. Nor is there evidence that the directors of DFR discussed issues resulting from serious concerns raised by the Government of Newfoundland and various local aboriginal groups, which issues were apparent by June of 1995. Those issues ultimately took Inco more than five years to resolve; and
Mercaldo's evidence clearly explained those "single-purpose meetings".[10] In cross-examination he said:
... the points that you're bringing up were things that we did everyday.
This exchange then followed:
Q. The same question. I'm just going to ask you the same question, that there wasn't any kind of discussion with respect to this resolution regarding any kind of drilling, exploration results or the hiring of experts and mining people.
A. Right. The fact is that we didn't run this company by board or committee meetings. We ran the company. We did -- we brought those items that we needed to bring to the Board, at the appropriate time. ... The Board delegated to me the responsibility to develop the drilling program, to hire the people and so forth. I hired Mr. Paterson, I negotiated his contract with him. I hired Mr. Carson, I negotiated his contract with him, et cetera. ... you know, we didn't run the company by committee. ... we documented what we were supposed to have documented, we got authority when we needed to get it but we were given broad authority that covered long periods of time.
f) there is no evidence that, by June 1995 when Inco provided $25 million for a feasibility study, DFR had completed even a pre-feasibility study, and by April 1996, when Inco agreed to acquire the remaining shares of DFR, a feasibility study had not been done and most work had still been exploration.
Mercaldo had said that a feasibility study is done after the determination of reserves. He then explained, in detail, what is involved in that process respecting "amazingly complex stuff because you are trying to eliminate the guess work and be able to predict ... what your cash flow stream will be, what your cash costs of operating will be, what your depreciation and amortization will be." Respondent's witness, Feiner, agreed that a feasibility study is a key document to support the development of a mining project, particularly:
...you would not move forward with making any significant capital expenditures relating to the development of a deposit until such time as the feasibility study had been completed and had confirmed the economics, operational and other key parameters for the project. ... It would not be a preliminary step. The preliminary step would be what people commonly refer to as a pre-feasibility site which would again look at some of the same key areas that one would have a feasibility study cover but not in the same depth. Once that pre-feasibility study were completed and there was, you know, satisfactory results, then one would normally move to a feasibility study.
[67] The evidence clearly showed that DFR took active steps to prevent any purchase. For example, the arrangements with both Teck and Inco included "standstill agreements" which bound them to vote in accordance with DFR management and prohibited them from purchasing further shares of DFR without DFR management's consent. Furthermore, the Inco arrangement involved an acquisition of 25% of Voisey's Bay, a subsidiary of DFR rather than shares of DFR itself. The reason for this, as Mercaldo's evidence indicates, was to control "our own destiny" and to protect themselves when dealing with Inco. I find that at the end of the series of transactions DFR management, including co-chairman Boulle, and therefore, the Appellant, had no intention of selling.
[68] Mercaldo, when asked, on cross-examination, whether in August 1995 there was a "very good possibility" that there would be a future sale of all the remaining shares of DFR to one of the suitors, he responded:
No, I would think that abs