Madison Pacific Properties Inc. v. The King

Madison Pacific Properties Inc. v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2023-12-27
Neutral citation
2023 TCC 180
File numbers
2014-3959(IT)G
Judges and Taxing Officers
David E. Graham
Subjects
Income Tax Act
Decision Content
Docket: 2014-3959(IT)G
BETWEEN:
MADISON PACIFIC PROPERTIES INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on November 10, 12, 13, 16, 17, 18, 19 and 20, 2020, February 28, 2022 and March 1, 2, 3, 9, 10 and 11, 2022
and November 17, 2023 at Vancouver, British Columbia
Before: The Honourable Justice David E. Graham
Appearances:
Counsel for the Appellant:
David R. Davies S. Natasha Kisilevsky Tyler Berg
Counsel for the Respondent:
Perry Derksen Dominic Bédard-Lapointe (for all but November 17, 2023)
Yanick Houle Eric Brown
Erin Krawchuk (on November 17, 2023 only)
JUDGMENT
The appeals of the reassessments of the Appellant’s taxation years ending December 31, 2009, December 31, 2011 and August 31, 2013 are dismissed.
Costs are awarded to the Respondent. The parties shall have until February 2, 2024 to reach an agreement on costs, failing which the Respondent shall have until March 1, 2024 to serve and file written submissions on costs and the Appellant shall have until March 28, 2024 to serve and file a written response. Any such submissions shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing time limits, costs shall be awarded to the Respondent as set out in the Tariff.
Signed at Ottawa, Canada, this 27th day of December 2023.
“David E. Graham”
Graham J.
Citation: 2023 TCC 180
Date: 20231227
Docket: 2014-3959(IT)G
BETWEEN:
MADISON PACIFIC PROPERTIES INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Graham J.
[1] This is a loss-trading case. The appeal involves the application of the general anti-avoidance rule (the “GAAR”) to the Appellant’s deduction of net capital losses.
I. Overview [2] The Appellant was an insolvent, publicly traded, mining company with accumulated non-capital and net capital losses.
[3] Madison Venture Corporation (“Madison”) and its affiliates held a portfolio of rental properties. Vanac Development Corp. (“Vanac”) and its affiliates also held a portfolio of rental properties.
[4] Madison and Vanac arranged a series of transactions that allowed them to access the Appellant’s losses from its mining business. In simple terms, the Appellant’s mining business was spun out and the Appellant was reorganized. Madison and Vanac then transferred various real estate assets into the Appellant and the Appellant began carrying on a new real estate business. The profits of that business were offset by the Appellant’s existing losses.
[5] If Madison and Vanac had acquired control of the Appellant, subsections 111(4) and (5) of the Income Tax Act would have prevented the Appellant from using its mining losses to reduce its profits from its new real estate activities. As a result, Madison and Vanac were careful to ensure that they did not acquire control of the Appellant. They achieved this through the use of non-voting shares. At no point during the series of transactions did Madison and Vanac together acquire de jure control of the Appellant. While they together held substantially all of the Appellant’s non-voting shares, they held just under half of its voting shares.
[6] In the years in question, the Appellant used its net capital loss carryforwards from its mining business to reduce capital gains from the disposition of its real estate investments. The Minister reassessed the Appellant to deny those losses under the GAAR.
[7] Three conditions must be met for the GAAR to apply:[1]
a)there must have been a tax benefit arising from a transaction or series of transactions;
b)the transaction must have been an avoidance transaction; and
c)the avoidance transaction must be abusive.
[8] The parties agree that there was a series of transactions. That series of transactions included steps where Madison and Vanac received non-voting shares in the Appellant instead of voting shares.
[9] The Respondent submits that the use of the losses was a tax benefit and that the creation and use of the non-voting shares which allowed the Appellant to preserve the losses was an avoidance transaction. The Respondent argues that Madison and Vanac avoided the application of subsection 111(4) in a manner that abused the object, spirit and purpose of the provision and, therefore, that the losses should be denied.
[10] The Appellant submits that there was no tax benefit because the losses would have been preserved even if non-voting shares had not been used. If I find that the Appellant is wrong, then the Appellant concedes that the creation and use of the non-voting shares were an avoidance transaction. However, the Appellant argues that subsection 111(4) was not abused.
[11] For the reasons that follow, I find that the use of the non-voting shares resulted in a tax benefit, that those shares were used primarily to obtain that benefit and that the use of those shares abused subsection 111(4). As a result, I conclude that the GAAR applies.
II. Series of Transactions [12] The parties filed a Partial Agreed Statement of Facts (attached as Schedule “A”), a Second Partial Agreed Statement of Facts (attached as Schedule “B”) and an agreed set of transaction diagrams (attached as Schedule “C”).
[13] The parties agree that there was a series of transactions. The following is a description of the steps in that series and the key players.
The Players [14] The following describes the state of the key players in 1997, immediately before the transactions in issue:
a)The Appellant: The Appellant was a publicly traded company known as Princeton Mining Corporation. The Appellant and its subsidiaries were engaged in the business of mining. As of December 31, 1997, the Appellant had $9,688,703 in non-capital losses and $72,718,480 in capital losses. The Appellant was experiencing serious financial difficulties. It needed new funds to continue its operations. Madison held 1.44% of the Appellant’s common shares.
b)Madison Venture Corp: Madison was a privately held holding company with a portfolio of rental properties and investments in private companies. It had been involved in the ownership, construction and management of real estate for approximately 20 years.
c)Sam Grippo: Sam Grippo was the largest shareholder of Madison and the chair of its board of directors.
d)Vanac Development Corp: Vanac was a privately held company owned by two related shareholders. It too had a portfolio of rental properties and had been involved in the ownership, construction and management of real estate for at least 20 years. Vanac did not carry on any significant activities outside of its real estate business. Vanac owned 3.95% of Madison through a wholly owned subsidiary. Madison and Vanac co-owned at least six properties on a 50/50 basis. They had been involved with each other since sometime in the 1980s.
e)Raymond Heung: Raymond Heung was the principal and controlling shareholder of Vanac.
f)R.E.W. Holdings Ltd: REW was a wholly owned subsidiary of Madison.
g)Imperial Metals Corporation: Imperial was a publicly traded mining company that was interested in acquiring the Appellant’s mining assets.
h)James O’Rourke: James O’Rourke was the chair of the board of directors of the Appellant.
i)Shanoro Development Ltd: Shanoro was controlled directly or indirectly by Mr. O’Rourke. It owned 6.02% of the shares of the Appellant.[2]
Step 1: Loan to the Appellant [15] In October 1997, the Appellant was in a difficult financial position. The Appellant owned 60% of Huckleberry Mines Ltd. An investor group from Japan owned the remaining 40%. Huckleberry was trying to bring a mine into production but was having difficulty doing so. It desperately needed $4,500,000. The Japanese investors could be counted on to provide their share of those funds, but the Appellant had few options to raise its $2,700,000 share.
[16] REW, Vanac and Shanoro formed a syndicate to lend the necessary $2,700,000 to the Appellant. REW and Vanac both contributed $1,250,000 to the syndicate. Shanoro contributed the remaining $200,000. The $2,700,000 advanced to the Appellant was, in turn, advanced by the Appellant to Huckleberry. The partial agreed statement of facts refers to this loan as the “REW Loan”. I find this term misleading as it suggests that the Madison subsidiary, REW, was the sole lender. I will instead refer to the loan as the “Syndicate Loan” and to REW, Vanac and Shanoro as the “Syndicate”.
[17] The Syndicate Loan was repayable in six months. The repayment date was the same day that the key steps in the series of transactions were to occur. The Syndicate Loan bore interest at prime plus 2%. There was a 3.5% set-up fee.
[18] The Appellant called Mr. Grippo as a witness. Mr. Grippo testified that REW took part in this loan because it offered an excellent rate of return. He testified that he presented the loan opportunity to Vanac and that Vanac got involved for that same reason.
[19] I did not find Mr. Grippo to be credible. He offered very detailed evidence regarding irrelevant matters but his answers were often vague when it came to important questions. He frequently claimed not to know information that I would have expected him to know. His testimony on key points was contradicted by that of Mr. Heung. Most importantly, many of the explanations that Mr. Grippo offered throughout his testimony simply defied belief. I am referring, in particular, to his insistence that Madison did not enter into the series of transactions to obtain a tax benefit, that he did not know about the losses when the series of transactions began, that he did not know how the relevant share prices were determined and that Madison’s primary reasons for entering into the series was to increase liquidity for its shareholders and to obtain ready access to capital markets. These explanations, taken collectively, seriously harmed Mr. Grippo’s credibility. Overall, I was left with the impression that Mr. Grippo was prepared to say whatever he believed was necessary to win the appeal. Other than as explicitly set out in these reasons, I give no weight to his evidence.
[20] Neither Madison nor REW was in the money-lending business. Despite Mr. Grippo’s assertion that he initially thought the loan would be repaid, I find that lending money to the Appellant would have involved significant risk. The Appellant was on the verge of insolvency. The rate of return offered to the syndicate does not appear commensurate with that risk. The initial term sheet for the Syndicate Loan had the Appellant paying 26.8% interest. Mr. Grippo testified that he had talked Mr. Heung into having Vanac invest on the basis that the return would be about 20%. Mr. Grippo could not provide a plausible explanation as to why the Syndicate reduced the rate in the initial term sheet to prime plus 2% before making the loan. He could not recall any change in the risk that would have explained it. Mr. Grippo’s attempts to explain the difference in the rate by referring to the 3.5% set-up fee only harmed his credibility as that fee existed under both the initial term sheet and the final loan. Ultimately, the reduced rate strongly suggests that the Syndicate made the loan for ulterior reasons.
[21] The Appellant also called Mr. Heung as a witness. Mr. Heung was the only witness called by the Appellant that I found to be generally credible.[3] Mr. Heung testified that Vanac had participated in the Syndicate Loan, not because it wanted to earn interest on a risky loan, but simply because he understood that it was the first step in the overall plan. He knew that the Appellant was in dire financial straits. He was not interested in lending it money. He was interested in getting the deal done. Overall, I found Mr. Heung’s testimony on this point to be straight forward and logical. I accept his explanation for the Syndicate Loan.
[22] The Appellant also called Mr. O’Rourke as a witness. Mr. O’Rourke had a good recollection of events and details when discussing the Huckleberry mine, the history of the Appellant and the internal political struggles within the Appellant during this period. On the other hand, he had a poor recollection of anything having to do with the series of transactions and his involvement as a director of the Appellant after the series of transactions. He could remember little about how the Syndicate was formed. He had no idea how the Syndicate determined what Shanoro’s share of the loan would be. He knew next to nothing of the terms of the Syndicate Loan and testified that he relied entirely on Mr. Grippo to ensure that they were appropriate. He claims not to have known the details of the reorganization that Madison and Vanac were planning. He was evasive when asked any questions relating to tax losses. He defaulted to what appeared to be a rehearsed non-answer. My overall impression was that Mr. O’Rourke was not a credible witness, that he acted throughout the series of transactions in the interests of Madison and that, after the series of transactions was completed, he acted in the interests of Madison and Vanac on the Appellant’s board of directors.
[23] Mr. O’Rourke could not specifically recall why Shanoro was asked to be part of the Syndicate Loan. He believes that it was so that Madison and Vanac would be satisfied that he had “some skin in the game”.[4] Mr. Grippo used that same phrase in his testimony. When asked why he asked Shanoro to be involved in the Syndicate Loan, he stated it was because he wanted someone from the Appellant (i.e. Mr. O’Rourke) to “have some skin in the game”.[5] Mr. Grippo and Mr. O’Rourke both testified that they had not discussed their evidence in advance. However, the use of this same expression by both of them left me with some concerns. While it is not an uncommon expression, it seems odd that two witnesses would use it to describe the same transaction 22 years after it occurred.
[24] I accept that Mr. Grippo wanted Mr. O’Rourke to have an interest in the Syndicate Loan, but not for the reasons put forward by Mr. Grippo. Mr. Grippo appears to have wanted me to believe that he wanted Mr. O’Rourke to be involved in the loan because he wanted someone on the inside at the Appellant to make sure that the loan was repaid. I find that Mr. Grippo wanted Mr. O’Rourke to be involved in the loan because the loan was the first step in the series of transactions and Mr. Grippo wanted someone on the inside at the Appellant to make sure that those transactions took place as planned. Because of Shanoro’s shareholdings in the Appellant, Mr. O’Rourke would have been both financially motivated to ensure that the series of transactions occurred and in a position to cause Shanoro to vote its shares to ensure that it did.
[25] The Appellant also called Bruce Aunger as a witness. Mr. Aunger was a director and CFO of Madison during the series of transactions and became a director of the Appellant as part of the series. While I found Mr. Aunger to be more credible and forthcoming than Mr. Grippo or Mr. O’Rourke, I still struggled with much of his testimony. He conceded a number of key points that other witnesses resisted conceding but, at the same time, stuck firmly to a number of the same illogical and implausible assertions made by Mr. Grippo. This significantly undermined his credibility.
[26] Mr. Aunger testified that Madison and Vanac had made the Syndicate Loan both to ensure that the series of transactions took place and for the purpose of earning interest income. I accept the former but not the latter. Mr. Aunger’s insistence that the term of the Syndicate Loan had been based on how long the Appellant anticipated it would need to repay the loan rather than how long Madison and Vanac expected to need to complete the series of transactions did not enchance his credibility.
[27] The loan agreement itself makes it clear that the Syndicate Loan was inextricably linked to the transactions that followed it. The initial term sheet specifically refers to an arrangement to reorganize the Appellant.[6] The letter agreement which followed the term sheet refers to a reorganization through which the Appellant will move all of its mining assets to a new public company and will then buy assets which it will use to operate a different business.[7] The loan agreement requires the Appellant to use all best efforts to effect a plan under which its share capital will be reorganized, its assets will be spun out to a subsidiary and it will acquire new assets. Schedule “A” to the loan agreement specifically outlines the steps that will be taken.[8] Those steps are the same as Steps 2 to 7 of the series of transactions. Mr. Grippo admitted that the Syndicate never tried to negotiate a loan agreement that did not involve a subsequent reorganization.
[28] The agreement also imposes a 5% “redemption fee” on the Appellant if it fails to receive approval for the reorganization from its shareholders or the relevant authorities. Most importantly, it requires the Appellant to complete the series of transactions even if the Appellant prepays the loan.
[29] The security for the Syndicate Loan was a pledge of 45% of the shares of Huckleberry. That security would be reduced to 25% if Huckleberry achieved certain operational targets. Had the Appellant defaulted on the loan, the Syndicate would have ended up holding shares of a company operating a struggling copper mine. Mr. Heung testified that he had no experience with mining companies and had no desire to be in that business. While Mr. Grippo indicated that he had thought that the mine had potential, I do not believe him. His actions show the opposite to be true. The loan agreement itself contemplated a series of transactions whereby all of the Appellant’s mining assets (including Huckleberry) were to be spun out. If Madison was truly interested in investing in the mine, it would presumably not have spun these assets out.
[30] The loan agreement contains a number of negative covenants. One of those covenants prevented the Appellant from selling any of its property without the consent of the Syndicate. While this may not have been an unusual term to include in a loan, in the circumstances, it gave the Syndicate significant power to prevent the Appellant from completing transactions with any rival bidders.
[31] Taking all of the evidence into account, I find that, while the Appellant clearly needed the funds that were advanced under the Syndicate Loan, that was not the purpose of the loan. The purpose of the Syndicate Loan was to set the stage for the series of transactions through which Madison and Vanac would gain access to the Appellant’s losses and to give Madison and Vanac power and leverage to ensure that those transactions occurred.
Step 2: Spin-Out [32] Steps 2 to 8 happened on April 30, 1998. The first transaction was the spinning-out of all of the Appellant’s mining assets to a subsidiary called 3396061 Canada Inc. (“New Mining Co.”) in exchange for shares, a promissory note and New Mining Co. assuming the Appellant’s liabilities (including the Syndicate Loan).
[33] Following the spin-out, the Appellant had no assets or liabilities remaining other than its shares in New Mining Co. and a promissory note receivable from New Mining Co. It was an empty shell with tax losses.
Step 3: Share Restructuring [34] Following the spin-out, the share capital of the Appellant was amended to create three new classes of shares: Class B voting shares; Class C non-voting shares; and Class A Preferred shares. The Class B voting shares and the Class C non-voting shares were both fully participating. They ranked equally as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding-up. The Class C non-voting share rights included what is commonly referred to as a coattail provision.
[35] As set out in more detail below, I find that the sole reason for the creation of the Class C non-voting shares was to avoid the application of subsections 111(4) and (5) and thus preserve the Appellant’s net capital and non-capital losses.
Step 4: Share Exchange, Redemption and Set-Off [36] The existing shareholders of the Appellant then exchanged their old common shares for Class B voting shares and Class A Preferred shares of the Appellant. They then exchanged their Class A Preferred shares for common shares of New Mining Co. The Appellant redeemed the Class A Preferred shares now held by New Mining Co. and offset the redemption proceeds against the promissory note from Step 2 held by New Mining Co.
[37] It was at this point that the Appellant changed its name from Princeton Mining Corporation to Madison Pacific Properties Inc. The directors of the Appellant were replaced with preordained nominees of Madison and Vanac including Mr. Grippo and Mr. Heung.
Step 5: Amalgamation and Share Exchange [38] New Mining Co. then amalgamated with a subsidiary of Imperial to form HML Mining Inc. (“Amalco”). The shareholders of the Appellant then exchanged their shares in Amalco for shares of Imperial.
[39] There was some debate about how early in the series of transactions Imperial was identified as the recipient of the mining assets. While I do not think that much turns on this, based on all of the evidence, I find that Imperial was involved from the beginning. I do not accept Mr. Aunger’s evidence that, as far as he was concerned, Imperial simply appeared out of the blue several months after the Syndicate Loan. His insistence on that point hurt his credibility.
[40] To summarize, at this point in the series of transactions, Imperial now owned all of the Appellant’s mining assets through Amalco. All of the Appellant’s original shareholders had a continuing interest in the mining business through their ownership of shares in Imperial. The Appellant was an empty shell containing nothing but unused tax losses. Its original shareholders held all of its issued shares.
Step 6: Syndicate Loan Repayment [41] At this point in the series of transactions, Amalco repaid the Syndicate Loan.
Step 7: Vend-In of Real Estate [42] Now that the Appellant was an empty shell, Madison and Vanac began to take steps to utilize its tax losses. Madison and its affiliates (the “Madison Group”) and Vanac and its affiliates (the “Vanac Group”) sold the Appellant various real estate assets including all of their jointly owned properties. The Appellant paid for these assets by assuming various liabilities and issuing Class B voting and Class C non-voting shares to the Madison Group and the Vanac Group.
[43] The choice of what class of share and how many of each class to receive was entirely Madison’s and Vanac’s. Despite the fact that only the Class C shares were non-voting shares, both classes of shares were priced the same. Rather than taking back Class B voting shares, the Madison Group and the Vanac Group both chose to take a mix of Class B voting shares and Class C non-voting shares.
[44] I find that the Madison Group and the Vanac Group specifically chose to receive a mix of Class B voting shares and Class C non-voting shares to ensure that they had insufficient voting shares to together acquire control of the Appellant.[9]
[45] As set out in more detail below, I find that the sole reason that the Madison Group and the Vanac Group chose to receive Class C non-voting shares rather than Class B voting shares was to avoid the application of subsections 111(4) and (5) and thus preserve the Appellant’s losses. There is simply no non-tax reason that would justify their actions.
Step 8: Exercise of Options [46] There were certain properties that Vanac could not sell to the Appellant when the rest of the real estate was sold. Mr. Heung could not specifically recall why this was the case but he believes that Vanac or its affiliates may not yet have completed the acquisition of those properties. As a result, Vanac granted the Appellant options to acquire the properties in the future in exchange for Class C non-voting shares. The granting of these options was the last transaction that happened on April 30, 1998.
[47] One month later, the Appellant exercised the first of the options. For some reason that neither Mr. Grippo nor Mr. Heung was able to explain, despite the fact that Vanac alone had granted the first option, the Appellant paid for the first option by issuing Class C non-voting shares to both Madison and Vanac.[10]
[48] Six months after that, the Appellant exercised the second option. This time, shares were only issued to Vanac.[11]
Step 9: Evening-Up [49] Madison and Vanac always intended that the interests of Madison and its affiliates and of Vanac and its affiliates in the Appellant would be equal. Two transactions took place in the spring of 1999 to ensure that this “evening-up” occurred.[12]
[50] First, Madison sold additional real estate to the Appellant in exchange for a mix of Class B voting shares and Class C non-voting shares. That transaction left Madison and its affiliates and Vanac and its affiliates holding an equal number of Class B voting shares. However, the number of Class C non-voting shares was still unequal. Madison and Vanac solved this problem by having Madison subscribe for additional Class C non-voting shares.
[51] Following these evening-up transactions, the Madison Group and the Vanac Group together held 46.56% of the votes despite owning 92.82% of the equity and the other shareholders held 53.44% of the votes despite owing only 7.18% of the equity.
[52] I find that any transactions that took place after the evening-up transactions were not part of the series.
Conclusion [53] Based on all of the foregoing, I find there was a series of transactions that began in October 1997 with the Syndicate Loan and ended in April 1999 with the evening-up of shareholdings. I must now consider whether that series of transactions gave rise to a tax benefit.
III. Tax Benefit [54] Subsection 245(1) defines a “tax benefit” in part as a reduction, avoidance or deferral of tax. The preservation of tax losses does not, in itself, give rise to a tax benefit. The tax benefit arises when the losses are used.[13]
A. Use of Losses [55] The Appellant used non-capital loss carryforwards and net capital loss carryforwards from its mining activities to reduce its income and capital gains from its real estate business by the following amounts in the following years:
Tax Year Ending
Non-Capital Loss Carryforwards Claimed
Net Capital Loss Carryforwards Claimed
December 31, 1998
$418,016
December 31, 1999
$1,082,910
December 31, 2000
$2,256,375
$347,133
December 31, 2001
$2,976,801
$1,705,743
December 31, 2002
$1,199,429
$4,151,138
December 31, 2003
$254,594
December 31, 2004
$2,437,465
$1,341,068
December 31, 2005
$2,540,311[14]
$546,877
December 31, 2006
$9,478,309
December 31, 2007
$13,200,287
December 31, 2009
$7,539,680
December 31, 2011
$1,156,686
August 31, 2013
$3,773,141
[56] Only the last three taxation years are before me. I mention the losses that the Appellant used in other years because those losses play an important part in the avoidance transaction analysis.
B. Comparison to Alternative Arrangement [57] The Respondent submits that the Appellant’s use of the losses in the years in question establishes that there was a tax benefit. It is not that simple.
[58] In most situations, the existence of a tax benefit is obvious. However, in some instances, the Court can only determine the existence of a tax benefit by comparing the transactions that took place to an alternative series of transactions that would have been carried out but for the desire to obtain the tax benefit.[15] This is one of those instances.[16]
[59] As they read at the time of the series of transactions, subsections 111(4) and (5) denied the deduction of net capital losses and non-capital losses if there had been an acquisition of control by a person or group of persons. An acquisition of control means an acquisition of de jure control. De jure control is “the ability, through the ownership of shares, to elect the majority of the board of directors”.[17]
[60] The Respondent’s position is that the creation and use of the Class C non-voting shares preserved the losses by avoiding an acquisition of control. Following the series of transactions, neither the Madison Group nor the Vanac Group held de jure control of the Appellant. They each held only 23.28% of the Class B voting shares. Even if they were viewed as a group, they still did not hold enough shares to have de jure control. Therefore, subsections 111(4) and (5) did not apply and the losses continued to be available to the Appellant.
[61] The Appellant submits that the losses would have been preserved even if the Class C non-voting shares had never been created or issued and thus that the creation and use of the Class C non-voting shares did not result in a tax benefit. The Appellant asserts that, if only Class B voting shares had been issued, there would still not have been an acquisition of control. The Madison Group and the Vanac Group would each have owned 46.41% of the voting shares. Neither of them would have acquired de jure control. This is the alternative arrangement that the Appellant argues I should consider. I agree.
[62] The Appellant’s argument hinges on its view that the Madison Group and the Vanac Group were not a group of persons that together acquired control of the Appellant. Acquisition of control need not be by a single person. Subsections 111(4) and (5) contemplate acquisition by a group of persons. If the Madison Group and the Vanac Group were a group of persons and they had only received Class B voting shares, they would collectively have acquired 92.82% of the voting shares of the Appellant. There would have been an acquisition of control and the losses would not have been preserved. In that case, it would be clear that the creation and use of the Class C shares resulted in a tax benefit.
[63] Therefore, in order to determine whether there was a tax benefit, I must first determine whether the Madison Group and the Vanac Group were a group of persons.
C. Group of Persons [64] A group of persons collectively has de jure control of a corporation if there is a “sufficient common connection” between them. Examples of a common connection might include “a voting agreement, an agreement to act in concert, or business or family relationships”.[18] A simple common identifying feature without a common connection is not enough.
[65] For the purposes of this analysis, it does not matter when the Madison Group and the Vanac Group had the common connection. It is sufficient if they had that connection at some time between the moment that they acquired shares in the Appellant (Step 7) and the end of 2008 (i.e. prior to the first tax year in issue). An acquisition of control at any point in that period would have resulted in the losses in question being denied.
[66] I find that the Madison Group and the Vanac Group had a sufficient common connection for me to conclude that they were a group of persons. Their actions before and during the above period support this conclusion.
D. Pre-Existing Business Relationship [67] Madison and Vanac had a pre-existing business relationship. Vanac had become involved in a newspaper business run by a subsidiary of Madison in the early 1980s. Vanac owned 3.95% of the shares of Madison. My understanding is that it acquired those shares approximately a decade before the series of transactions in exchange for its interest in the newspaper business.
[68] At the time of the series of transactions, Madison and Vanac operated numerous properties as joint ventures. Madison had provided the financing for some of those properties. Those properties were ultimately sold to the Appellant as part of the series of transactions. A big part of the appeal of the series of transactions to Madison and Vanac was that they would merge their real estate businesses. They saw opportunities from working together.
[69] The foregoing is not enough for me to conclude that Madison and Vanac had a common connection. It does, however, illustrate that, coming into the series of transactions, the companies had a history of working together on business ventures and a clear desire to do so in the future.
E. Acting in Concert [70] The Appellant submits that the Madison Group and the Vanac Group did not act in concert. It characterizes them as having acted in parallel but in their own interests. I disagree.
[71] The Appellant’s arguments focus largely on how the Madison Group and the Vanac Group interacted with each other. I accept that the Madison Group and the Vanac Group negotiated the value of the properties that they and their affiliates sold to the Appellant in an arm’s length manner. They ensured that each of them received appropriate value vis-à-vis the other in respect of the properties transferred in.[19] However, the question is not whether the Madison Group and the Vanac Group acted in an arm’s length manner when dealing with each other. The question is whether, in dealing with the Appellant and the other shareholders of the Appellant, they acted in concert. I find that they did so in every respect. The following facts support that conclusion.
F. Acting in Concert to Effect the Series of Transactions [72] The Madison Group and the Vanac Group were not simply two groups of shareholders who happened to own shares in the Appellant. They were two groups with a common business goal who came together to plan and execute a sophisticated series of transactions whereby they would together gain access to the Appellant’s losses and effectively control the company.
Negotiations [73] The series of transactions was negotiated between the Madison Group and the Vanac Group on one side and the Appellant on the other.
[74] Vanac did not hire its own counsel to review the transactions. It relied entirely on Madison’s counsel.
Syndicate Loan [75] As set out above, neither Madison nor Vanac had any desire to lend money to the Appellant. They together made the uneconomic choice to make the Syndicate Loan in order to further their goal of obtaining access to the Appellant’s losses.
Share pricing and allocation [76] One of the most telling examples of the two groups acting in concert is how the share price and allocation were determined.
[77] The Madison Group and the Vanac Group agreed to sell assets to the Appellant in exchange for a combination of Class B voting shares and Class C non-voting shares. Those shares were issued at the same price per share despite the fact that the Class B voting shares were clearly more valuable since they were both publicly traded and voting.[20] Despite this difference in value, both the Madison Group and the Vanac Group chose to receive Class C non-voting shares in Steps 7, 8 and 9. If either of the groups had chosen to receive only Class B non-voting shares, the tax benefits would have been lost by both groups. In order for the deal to work, both groups had to agree that they would both receive the lesser class of shares. At the same time, they had to ensure that they received sufficient Class B voting shares that they could, from a practical point of view (as opposed to a de jure point of view), elect the board of directors.
[78] It is therefore unsurprising that, as Mr. Heung testified, the Madison Group and the Vanac Group collectively decided how the share consideration they received from the Appellant would be allocated between Class B voting shares and Class C non-voting shares. As he said, they did this because they “were on the same side of the equation”.[21] This is exactly the point. They were working in concert on one side of the deal and the Appellant was on the other side.
Evening-Up [79] Another example of the Madison Group and the Vanac Group acting in concert occurred in the evening-up transactions (Step 9).
[80] The Madison Group and the Vanac Group had agreed from the beginning that they would end up holding equal interests in the Appellant at the end of the series of transactions. The Appellant would not have cared whether this happened. It was Madison and Vanac that wanted the ownership of Class B voting and Class C non-voting shares to be equal. The only way to do that was for them to jointly cause the Appellant to allow Madison to subscribe for additional Class C non-voting shares.
[81] Buying shares on the open market would have equalized their shareholdings but would not have equalized their contributions to the Appellant since buying shares on the open market would result in money going to the seller not the Appellant.
[82] Madison did not just need to subscribe for additional shares. For the evening-up to work, Madison and Vanac had to cause the Appellant to issue shares to Madison at the same price per share that they had caused it to use one year earlier during the vend-in (Step 7). Subscribing for shares at a different price would not have made Madison’s and Vanac’s contributions equal. In particular, buying shares at the market price would not have equalized the amount of money that they had each invested in the Appellant as the market price for shares at the time was less than half the price at which the vend-in had occurred.[22] The fact that Madison and Vanac together caused the Appellant to issue shares at a price well above the market price is strong evidence that they were acting in concert.
[83] In addition, as part of the evening-up, Madison paid Vanac interest to account for the fact that Vanac had had more money invested in the Appellant than Madison between the vend-in and the evening-up. This payment shows that Madison and Vanac viewed investing in the Appellant as something that they were doing jointly. Madison owed Vanac for the fact that it had not initially put enough into their common venture.
Summary [84] In summary, I find that the Madison Group and the Vanac Group acted in concert to effect the series of transactions. These were not two isolated groups of shareholders. They acted together to plan, negotiate and execute the series of transactions. They negotiated with the Appellant as a single unit. They both made an uneconomic loan in order to allow them to control the series of transactions. They both agreed to receive lesser consideration for their real estate. Finally, to even things up, they transacted with the Appellant at prices far in excess of current market prices.
G. Acting in Concert After the Series of Transactions [85] I find that the Madison Group and the Vanac Group continued acting in concert after the series of transactions in order to ensure that they ran the Appellant without ever acquiring de jure control of it.
[86] It was clear to me from the overall testimony of all of the witnesses that the Madison Group and the Vanac Group essentially took over the Appellant and ran it for their own purposes. The other shareholders were, for all practical purposes, in the background.
Management [87] The Appellant moved its offices to Vanac’s offices. The Appellant hired Vanac to manage its real estate and provide corporate management services. In other words, the board selected by the Madison Group and the Vanac Group ensured that Vanac would handle all of the Appellant’s day-to-day activities. The Appellant paid Vanac a fee for these services. This arrangement continued for two or three years after the series of transactions. I do not doubt that Vanac was well qualified for this role. I am simply highlighting that it could not have taken on this role without the Madison Group’s agreement.
Board of directors [88] Following the series of transactions, the Appellant’s board of directors continued to consist of people loyal to Madison and Vanac. Every