Magren Holdings Ltd. v. Canada

Magren Holdings Ltd. v. Canada
Court (s) Database
Federal Court of Appeal Decisions
Date
2024-11-28
Neutral citation
2024 FCA 202
File numbers
A-199-21, A-200-21, A-201-21
Notes
A correction was made on November 29, 2024
Decision Content
Date: 20241128
Dockets: A-199-21
A-200-21
A-201-21
Citation: 2024 FCA 202
CORAM:
BOIVIN J.A.
LOCKE J.A.
MONAGHAN J.A.
BETWEEN:
Docket: A-199-21
MAGREN HOLDINGS LTD.
Appellant
and
HIS MAJESTY THE KING
Respondent
AND BETWEEN:
Docket: A-200-21
2176 INVESTMENTS LTD., (as successor to Grencorp Management Inc. which was the successor to 994047 Alberta Ltd.)
Appellant
and
HIS MAJESTY THE KING
Respondent
AND BETWEEN:
Docket: A-201-21
MAGREN HOLDINGS LTD. (successor by amalgamation to 1052785 Alberta Ltd.)
Appellant
and
HIS MAJESTY THE KING
Respondent
Heard at Toronto, Ontario on May 29 and May 30, 2023.
Judgment delivered at Ottawa, Ontario on November 28, 2024.
REASONS FOR JUDGMENT BY:
MONAGHAN J.A.
CONCURRED IN BY:
BOIVIN J.A. LOCKE J.A.
Date: 20241128
Dockets: A-199-21
A-200-21
A-201-21
Citation: 2024 FCA 202
CORAM:
BOIVIN J.A.
LOCKE J.A.
MONAGHAN J.A.
BETWEEN:
Docket: A-199-21
MAGREN HOLDINGS LTD.
Appellant
and
HIS MAJESTY THE KING
Respondent
AND BETWEEN:
Docket: A-200-21
2176 INVESTMENTS LTD., (as successor to Grencorp Management Inc. which was the successor to 994047 Alberta Ltd.)
Appellant
and
HIS MAJESTY THE KING
Respondent
AND BETWEEN:
Docket: A-201-21
MAGREN HOLDINGS LTD. (successor by amalgamation to 1052785 Alberta Ltd.)
Appellant
and
HIS MAJESTY THE KING
Respondent
REASONS FOR JUDGMENT
MONAGHAN J.A.
[1] In 2006, three corporations controlled by James Grenon paid dividends aggregating more than $110 million, and filed elections so that they would be capital dividends. Capital dividends are not taxable to the recipient. However, where a corporation pays a capital dividend in excess of the balance of its capital dividend account, the corporation is liable for tax.
[2] The Minister of National Revenue concluded that the three corporations did exactly that. Accordingly, the Minister issued assessments imposing tax on the basis that all of the capital dividends those corporations paid in 2006 were excess dividends.
[3] For several reasons, the Tax Court of Canada dismissed the appeals of those assessments (2021 TCC 42 per Smith J.). It agreed with the Minister that Mr. Grenon and the corporations did not achieve the results they thought they had. The question we face is whether the Tax Court erred in doing so.
[4] Although I do not agree with all of the Tax Court’s conclusions, and disagree with many of its obiter statements, I would dismiss the appeals.
I. Background A. Factual Overview [5] The series of transactions at the centre of this appeal is complex and must be reviewed in some detail. It includes a reorganization of Foremost Industries Income Fund (FMO), a publicly-traded mutual fund trust, in 2005. Before the series began, members of the public owned approximately 42 percent of FMO’s outstanding units. A self-directed registered retirement savings plan (RRSP Trust) owned the remaining 58 percent. James Grenon was the sole annuitant of RRSP Trust.
[6] In late 2005, Mr. Grenon proposed a reorganization to FMO. The stated objectives of the reorganization included increasing the tax cost of FMO’s underlying business assets. To accomplish this, FMO would transfer all of its business operations to a newly established mutual fund trust (FIF) on a taxable basis, and FMO unitholders would exchange their FMO units for FIF units on a one-for-one basis, also on a taxable basis.
[7] For the public FMO unitholders, that is exactly what happened. The business assets were sold to FIF and the public exchanged their FMO units for FIF units. In doing so, the public realized a gain (or loss) if the value of the FIF units they received exceeded (or was less than) their tax cost of the FMO units given in exchange. As far as the public unitholders were concerned, once this occurred the FMO reorganization was largely complete.
[8] While RRSP Trust also owned FIF units at the end of the series, the steps by which it acquired them bore no resemblance to the steps by which the public acquired their FIF units. Along the way, the appellants acquired FMO units and participated in the FMO reorganization in a manner that resulted in no taxable income for them, but an aggregate $113 million addition to their capital dividend accounts. The appellants then paid capital dividends of more than $110 million to their parent corporations, which added those dividends to their capital dividend accounts. This permitted the parent corporations to distribute to Mr. Grenon, as non-taxable capital dividends, approximately $110 million, amounts that they otherwise could only have distributed as taxable dividends.
[9] Before I describe the details of the transactions, a brief summary of certain key income tax principles concerning the taxation of trusts and the operation of the capital dividend account (CDA) is useful.
B. Key Relevant Taxation Principles [10] Except as expressly noted, in these reasons all references to statutory provisions are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as they read at the time the relevant transactions occurred. The relevant provisions are duplicated in Appendix B to these reasons. Many were amended subsequently and these reasons must be read in that light.
[11] Only 50 percent of a capital gain realized by a taxpayer—the taxable capital gain—must be included in income for tax purposes. Where the taxpayer has a capital loss, 50 percent of that loss—the allowable capital loss—is deductible against taxable capital gains, but is not otherwise deductible in computing income.
(1) Taxation of trusts and their beneficiaries [12] A trust is a taxpayer and therefore must compute its income and taxable income. However, a trust may avoid a tax liability on its income by paying an equal amount to its beneficiaries, who then must include the payment in their income: ss. 104(6)(b), 104(13). The same is not true of losses. Where a trust realizes a loss, it cannot pass that loss out to its beneficiaries; only the trust may use its losses.
[13] Where a trust pays its income to its beneficiaries, any liability for tax on the trust’s income is determined based on the beneficiary’s circumstances. If the beneficiary is a registered retirement savings plan, or other tax-exempt plan, no tax is payable until the income is withdrawn from the plan, typically many years later. If the beneficiary is itself a trust, it in turn may pay the income to its beneficiaries so it becomes their income rather than income of the trust.
[14] With few exceptions, the character of the trust’s income is not maintained when paid to a beneficiary; rather, the beneficiary has income from a property that is an interest in a trust: s. 108(5)(a). Capital gains are one exception to that general principle relevant to this appeal.
[15] Where a trust realizes a capital gain, and distributes an equal amount to a beneficiary, the trust may make a designation so that one-half of the distribution is deemed to be a taxable capital gain realized by the beneficiary: s. 104(21). The other portion of the distribution—reflecting the non-taxable portion of the trust’s capital gain—is not included in the beneficiary’s income. Moreover, the distribution does not affect the beneficiary’s tax cost—the adjusted cost base (ACB)—of their interest as beneficiary in the trust: s. 53(2)(h)(i.1)(A) and (B). That ACB remains unchanged regardless of the distribution’s effect on the value of that interest.
[16] In this way, provided the appropriate designation is made, the trust’s capital gain is taxed as if the beneficiary had realized it directly.
[17] When a trust purchases for cancellation (redeems) a beneficiary’s interest in the trust, the trust may choose to treat part of the amount it pays for that interest as a distribution of its income, rather than an amount paid to acquire the interest. In that circumstance, only the amount in excess of the income distribution will be proceeds of disposition for the beneficiary’s interest. Consequently, whether the beneficiary has a capital gain (or capital loss) depends on whether those reduced proceeds exceed (or are less than) the beneficiary’s ACB of the repurchased (redeemed) interest.
[18] If the trust’s income includes taxable capital gains, the trust may choose to treat part of the amount it pays on the redemption as a distribution of a capital gain, designating 50 percent as a taxable capital gain. While the distributed capital gain reduces the beneficiary’s proceeds of disposition for the interest in the trust as described in the preceding paragraph, the beneficiary’s overall capital gain (or capital loss) should be the same, albeit comprised of two amounts.
[19] In particular, the capital gain distributed by the trust would reduce the proceeds of disposition for the redeemed trust interest, and would require the beneficiary to include 50 percent as a taxable capital gain in income. The beneficiary would also have a capital gain (or capital loss) on the trust interest redeemed, depending on whether the reduced proceeds of disposition (reflecting the distributed capital gain) exceed (or are less than) the beneficiary’s ACB of the redeemed trust interest. Any resulting allowable capital loss would be deductible against the distributed taxable capital gain.
(2) The capital dividend account [20] The capital dividend account (CDA) is an important part of what is typically referred to as the integration system in the Income Tax Act. Broadly speaking, the system’s goal is to tax income at the same rate whether earned directly by an individual or by a private corporation of which the individual is a shareholder. To do this, the system integrates—or combines—the taxes paid by the corporation and by the individual shareholder on a dividend of the corporation’s after-tax income to so that they roughly equal the tax the individual would pay had they earned the income directly. The system does this through different mechanisms, of which the CDA is one.
[21] The CDA is a notional account in which a private corporation tracks certain tax-free surpluses that it accumulates over time. A corporation’s CDA balance at a particular time is determined by adding and subtracting specified amounts that have arisen before that time. Two additions related to the non-taxable portion of a capital gain, albeit from different sources, are relevant here. They are:
The positive difference between the non-taxable portion of all capital gains and the non-deductible portion of all capital losses that the corporation has had from dispositions of property before the calculation time: see paragraph (a) of the definition of CDA in s. 89(1); and
The non-taxable portion of any capital gain that a trust distributes to the corporation, as a beneficiary of the trust, before the calculation time: paragraph (f) of the definition of CDA in s. 89(1).
[22] Notably, capital losses the corporation realizes are relevant only to the first CDA addition—that in paragraph (a). If, at the CDA calculation time, a corporation’s cumulative capital losses exceed its cumulative capital gains from dispositions of property, there is no positive amount described in paragraph (a). The resulting deficit precludes any addition to the CDA under paragraph (a) until the corporation realizes sufficient capital gains to eliminate it (i.e., until the corporation has an excess of cumulative capital gains over cumulative capital losses). However, that deficit has no other effect on the corporation’s CDA, including on the addition under paragraph (f) of the definition. This is of particular significance to this appeal.
[23] Where a trust pays an amount equal to its capital gain to the corporation (beneficiary), designating 50 percent of the payment as a taxable capital gain, the corporation adds the other (non-taxable) 50 percent to its CDA under paragraph (f) without regard to any capital losses previously realized by the corporation.
[24] When a corporation has a positive CDA balance, it may pay a capital dividend to its shareholders by making an appropriate election: s. 83(2). Capital dividends paid reduce the corporation’s CDA but are not taxable to the recipient: closing words of the CDA definition and paragraph (a) of the definition of taxable dividend in s. 89(1), 82(1). If the recipient is a private corporation, the capital dividends are added to its CDA: paragraph (b) of the CDA definition in s. 89(1).
[25] With that background, I turn now to the transactions giving rise to the assessments at issue in this appeal.
II. The FMO Reorganization [26] Some introductory comments are necessary.
[27] First, the three corporations that paid the capital dividends no longer exist as separate entities; the appellants are their successors by amalgamation. As nothing turns on this, I refer to the appellants as if they existed at all relevant times.
[28] Second, the appellants participated in the series of transactions in the same way, albeit for different amounts. For simplicity, rather than describe amounts relevant to each appellant, I describe the amounts on an aggregate basis for the appellants as a group.
[29] Third, certain unit trusts also participated in the series of transactions. In addition to FMO and FIF, Foremost Ventures Trust (FVT) and TOM 2003-4 Income Fund (TOM) played significant roles. References to unitholders and units refer to the beneficiaries and their interests in the trust as beneficiaries, respectively.
[30] Fourth, many transactions are not relevant to the issues in this appeal and I need not describe them in detail. My focus is the most relevant transactions. For this reason, where the details of the transactions undertaken to achieve certain results are not germane to the issues, I may only describe the result. The relevant transactions are described in detail in Annex C attached to the Tax Court’s reasons. In these reasons, references to Steps refer to the Steps as they appear in that Annex.
[31] Finally, I simplify wherever possible. Therefore, I have largely ignored FILP and FULP, two partnerships collectively owned by FMO and FVT. Although they owned the operating businesses transferred to FIF, those partnerships were wound up and FVT acquired their assets: see Steps 6 and 12. To simplify, I typically describe FVT as if it were the party to certain transactions. Similarly, I ignore the trusts and partnerships that comprised the FIF structure, and instead refer simply to FIF. Because I use approximate (i.e., rounded) numbers of units, percentages and values, they do not always add to the “correct” totals. However, Annex C to the Tax Court’s reasons provides precise amounts. I also largely ignore income and capital gains from other sources. For example, while FMO reported relatively modest capital gains other than as related to the reorganization, for simplicity I treat all the capital gains as realized in the FMO reorganization.
A. Pre-reorganization Structure [32] In 2005, FMO was a publicly-traded mutual fund trust. FMO directly owned all of the units in another trust, FVT. FMO and FVT collectively owned 99 percent of two limited partnerships (FULP and FILP), each of which carried on an operating business. At the end of 2005, the fair market value of the operating business assets, most notably the goodwill, exceeded their tax cost by more than $210 million.
[33] RRSP Trust owned 11 million FMO units, representing 58 percent of FMO. The remaining 8 million units, representing 42 percent, were owned by members of the public. Because it is important to distinguish the two groups of FMO units, I will refer to the former as the RRSP FMO units and the latter as the public FMO units. CIBC Trust Corporation was the trustee of RRSP Trust (Trustee).
[34] The simplified structure before the series of transactions commenced may be illustrated as follows:
B. Pre-reorganization Transactions: The Appellants Acquire the RRSP FMO units [35] In November 2005, James Grenon, annuitant of RRSP Trust and one of FMO’s three trustees, proposed a reorganization to FMO. Its trustees agreed to put the proposal before the unitholders for a vote and, on November 10, 2005, FMO issued a press release announcing the proposed reorganization and unitholders’ meeting: Appeal Book at 10932.
[36] The circular calling the unitholders’ meeting described the proposed reorganization’s objectives as threefold: (i) to increase the cost for tax purposes of the business assets; (ii) to simplify FMO’s organizational and governance structure; and (iii) to attract a wider retail investor base for the FMO units: reasons at paras. 34-35.
[37] To accomplish this, the circular explained, the reorganization would see FMO’s structure largely replicated under a newly established mutual fund trust, FIF. FMO unitholders would exchange their FMO units on a one-for-one basis for FIF units: reasons at para. 33. As the Tax Court explained it, “[a]s far as the public unitholders were concerned, the FMO units would be exchanged on a one-for-one basis for new units of FIF, there would be no change to existing management or the underlying business operations and the new units would continue to trade on the Toronto Stock Exchange under the same ticker symbol.”: reasons at para. 212.
[38] On November 14, 2005, RRSP Trust subscribed for units in TOM for $153 million and satisfied the subscription price by transferring the RRSP FMO units to TOM: Step 1. Prior to the subscription, TOM had relatively nominal assets, with the result that RRSP Trust became the holder of approximately 99.5 percent of TOM’s outstanding units: reasons at para. 21.
[39] On Friday December 23, 2005, the last business day before the FMO unitholders’ meeting, the appellants acquired the RRSP FMO units from TOM for $161 million: Step 2. As a result, TOM realized a taxable capital gain of $3.9 million: TOM 2005 T3 Trust Income Tax and Information Return, Appeal Book 10716-10730 at 10724. The appellants issued promissory notes, guaranteed by Mr. Grenon, to satisfy the purchase price: reasons at para. 44.
[40] On December 28, 2005, the FMO unitholders approved the FMO reorganization and the steps to effect it commenced and were completed later that same day.
[41] However, as we will see, the manner in which the holders of the public FMO units participated differed significantly from the manner in which the appellants, as holders of the RRSP FMO units, participated.
C. FMO Reorganization: Relevant Transactions [42] Broadly speaking, the FMO reorganization may be divided into two successive phases.
(1) First phase of the FMO reorganization [43] The first phase, comprising Steps 3-10, achieved three principal objectives. FIF acquired the operating business assets from the FMO partnerships; FVT acquired one FIF unit for each outstanding FMO unit; and the public exchanged the public FMO units for FIF units on a one-for-one basis. While the transactions comprising the first phase are not relevant, certain results are important.
[44] These transactions were effected on a taxable basis. Therefore when the operating business assets were sold, FVT realized $105 million of income as a result of the $210 million gain realized on disposition of the goodwill. (Although not a capital gain, similarly only 50 percent of this gain was included in income: s. 14(1); see also FVT’s amended T3 Income Tax and Information Return for 2005, Appeal Book 6536-51 at 6541 and FVT-Amended 2005 T3 Income Allocations Schedule at 6532.) FIF acquired the operating assets with a fair market value tax cost, achieving one of the stated objectives of the FMO reorganization. Finally, FVT acquired the 19 million FIF units necessary to effect the one-for-one exchange for FMO units with a tax cost equal to their $277 million fair market value.
[45] The public FMO unitholders realized capital gains (or capital losses) when FVT acquired their FMO public units in exchange for FIF units, depending on whether the value of the FIF units received exceeded (or was less than) their ACB of the FMO units given in exchange: see FMO Notice of Special Meeting of Unitholders and Information Circular and Proxy Statement, Appeal Book 6111-6230 at 6137-8. However, FVT did not realize a gain or loss on the exchange because it both acquired and disposed of the FIF units for the same amount on the same day. FVT acquired the public FMO units with a cost equal to their $115 million fair market value.
[46] At the end of the first phase, FIF owned the operating businesses and the public no longer had any interest in FMO. FVT’s only significant assets were 11 million FIF units, one for each of the RRSP FMO units, and the 8 million public FMO units acquired in exchange for FIF units. FMO’s assets consisted primarily of its FVT units and a $44.5 million promissory note owing by FVT. As a result, FMO and FVT each owned assets with an aggregate $277 million value. The resulting simplified structure at the end of the first phase may be illustrated as follows:
[47] I turn now to describe the key transactions in the second phase.
(2) Second phase of the FMO reorganization [48] First the appellants acquired the public FMO units from FVT issuing $115 million promissory notes in exchange: Step 11. The appellants thus became holders of all 19 million outstanding FMO units with a total cost of $277 million comprising $161 million paid to TOM for the RRSP FMO units and $115 million paid to FVT for the public FMO units. As we shall see, this $277 million cost is a significant factor in this appeal.
[49] FVT repaid the $44.5 million notes owing to FMO by delivering 3 million FIF units: Step 13. This transaction resulted in no gain or loss and FMO acquired the 3 million FIF units with a cost equal to their $44.5 million value. This left FVT with total assets of $232 million comprising 8 million FIF units and the $115 million promissory notes issued by the appellants.
[50] The resulting simplified structure after this transaction may be illustrated as follows:
[51] FMO then sold its FVT units to TOM for $232 million: Step 14. TOM satisfied the purchase price by transferring the appellants’ $161 million promissory notes (acquired when TOM sold the RRSP FMO units to the appellants), and issuing its own $72 million promissory note, to FMO. Because the $232 million TOM paid far exceeded FMO’s ACB of the FVT units, FMO realized a significant capital gain: FMO T3 Trust Income Tax and Information Return, Appeal Book 12677-12689 at 12681. As we shall see, FMO distributed a $226 million capital gain to the appellants, leading to the $113 million CDA addition that is in dispute in this appeal.
[52] The resulting simplified structure after these transactions may be illustrated as follows:
[53] As is evident, FMO’s only significant assets, with an aggregate value of $277 million, were the $232 million of promissory notes acquired from TOM and the 3 million FIF units acquired from FVT.
[54] Moreover, although the FMO reorganization contemplated that each FMO unit would be exchanged for a FIF unit, the RRSP FMO units had not been exchanged. The 11 million FIF units necessary to make the exchange were owned as to 3 million by FMO and as to 8 million by FVT, in turn wholly-owned by TOM.
[55] FMO then distributed $277 million of its assets to the appellants, the only remaining FMO unitholders: Step 15. As a result, the appellants acquired 3 million FIF units and the $72 million TOM promissory note, and their $161 million promissory notes were cancelled. Thus, they held assets acquired from FMO with an aggregate fair market value equal to their outstanding indebtedness to FVT under the notes they issued to acquire the public FMO units from FVT.
[56] FMO treated $226 million of the $277 million distributed to the appellants as a distribution of its capital gain. To do so, FMO designated $113 million as a taxable capital gain. The balance of FMO’s $277 million distribution reduced the appellants’ ACB of their FMO units: s. 53(2)(h).
[57] The appellants included the taxable capital gain in their income and added the non-taxable portion, also $113 million, to their CDA relying on paragraph (f) of the definition—the non-taxable portion of the capital gain distributed by a trust, FMO.
[58] The distribution left FMO with no remaining income and nominal assets with nominal value. Thus, the value of the appellants’ FMO units was also nominal. The resulting simplified structure after these transactions may be illustrated as follows:
[59] FMO then redeemed substantially all of its outstanding units from the appellants for their nominal value: Step 16. Because the appellants’ ACB of the FMO units was significantly greater, the appellants claimed a $232 million capital loss, and deducted $113 million of the resulting allowable capital loss against their $113 million taxable capital gain resulting from FMO’s distribution. This left the appellants with no taxable income.
[60] The other half of the appellants’ capital loss created a deficit in their CDA under paragraph (a) of the definition. However, that deficit was of no consequence to the paragraph (f) addition from the taxable capital gain FMO distributed in Step 15.
[61] In its 2005 taxation year, FVT’s income was $137 million, comprising $105 million from the sale of the operating businesses (described at paragraph 44 above) and $32 million from the operating businesses’ 2005 operations. FVT distributed substantially all of its assets, consisting of 8 million FIF units and the appellants’ $115 million promissory notes, to TOM: Step 17. FVT treated $137 million of this distribution as a payment of income. TOM therefore included the $137 million in its 2005 income: FVT Statement of Trust Income Allocations and Designations, Appeal Book at 6551. The balance of the distribution would have reduced TOM’s ACB of its FVT units, but because FVT had distributed substantially all its assets to TOM, those units had nominal value.
[62] I pause here to note that the FMO reorganization agreement included in the circular sent to FMO unitholders was amended on the date of the unitholders’ meeting: reasons at para. 34. As amended, it contemplated that FMO would “sell its remaining interest in [FVT] to certain participating remaining [FMO] unitholders”: section 2.1(n), Reorganization Agreement Amendment, Appeal Book 4936-40, at 4938 (emphasis added). As the diagram at paragraph 50 above illustrates, immediately before FMO sold FVT, the appellants were the only remaining FMO unitholders. But TOM, not the appellants, acquired FVT. Before the Tax Court, the appellants submitted that they assigned their right to acquire FVT to TOM. While conceding that the assignment was not documented, they asserted that the parties agreed to it, there was no contrary evidence, and TOM did in fact acquire FVT: reasons at para. 189.
[63] Had FMO transferred FVT to the appellants—the only participating remaining FMO unitholders—instead of TOM, the tax consequences would have been entirely different. This is so because FVT needed to distribute its $137 million of income if it did not want to be liable for tax. Had the appellants acquired FVT, and FVT distributed that income, the appellants would have had to include the distribution in their income. FVT’s income did not include taxable capital gains and, if distributed to the appellants, would not have led to a CDA addition. Moreover, the appellants would not have been able to deduct any allowable capital losses they realized (when FMO redeemed its units) against any income FVT distributed to them.
[64] Whatever the original plan, it is clear that TOM acquired FVT from FMO so that FMO would have a substantial capital gain, $137 million of which was attributable to FVT’s underlying income, and so that substantially all of FVT’s income could be distributed to RRSP Trust thereby avoiding any current liability for taxes on that income, as described below in paragraph 70.
[65] I return now to the remaining steps in the FMO reorganization.
[66] TOM set off its obligation under its $72 million promissory note against an equal amount owing under the appellants’ $115 million promissory notes: Step 17. This left the appellants owing TOM an amount equal to the value of their 3 million FIF units.
[67] The resulting simplified structure after these transactions may be illustrated as follows:
[68] As is clear, despite the promised one-for-one exchange of FMO units for FIF units, the appellants, which owned 11 million RRSP FMO units when the FMO reorganization began, received only 3 million FIF units. The other FIF units that they “should have” received were held by TOM.
[69] In January 2006, FMO was dissolved, completing the FMO reorganization: Step 18(b).
D. Post FMO Reorganization Transactions: Capital Dividends and other 2006 Transactions [70] In March 2006, TOM purchased 1.4 million FIF units from the appellants and paid by issuing a promissory note: Step 19. TOM’s 2005 income was $143 million (which included the $137 million FVT distributed to TOM and the $3.9 million taxable capital gain TOM realized on selling the RRSP FMO units to the appellants). TOM paid its 2005 income to its unitholders by distributing its 9.4 million FIF units with a value of $140.5 million and paying cash for the balance: Step 20. However, only RRSP Trust received FIF units; the other TOM unitholders received their distribution in cash.
[71] The resulting simplified structure may be illustrated as follows:
[72] As is clear, the public who owned 42 percent of FMO when the reorganization commenced, own 42 percent of FIF, consistent with the one-for-one exchange contemplated by the FMO reorganization. On the other hand, neither RRSP Trust, owner of the other 58% of FMO when the reorganization was proposed, nor the appellants, owner when the reorganization commenced, own the other 58 percent of FIF. Rather, RRSP Trust and the appellants collectively own that 58 percent. Moreover, the appellants’ net indebtedness to TOM is substantially equal to the value of their FIF units, and TOM is owned as to 99.5 percent by RRSP Trust. (The value of the FIF units in March 2006 when TOM purchased them from the appellants to distribute its income would have reflected the FIF trading value at that time, rather than on December 28, 2005.)
[73] In 2006, the appellants each paid more than one capital dividend, to their parent corporations. The appellants’ dividend payments resulted in deficits in an almost equal amount: Appellants’ Balance Sheets, Appeal Book at 12279, 12378, 12405. Two of them paid stock dividends, such that their assets remained unchanged: Resolutions declaring capital dividends, Appeal Book at 11816, 11819, 11822, 11844, 11847, 11850.
[74] The parent corporations in turn added the capital dividends received to their CDA and paid Mr. Grenon capital dividends. The parent corporations’ capital dividends were not paid as stock dividends. Consequently, to pay those dividends, the parent corporations would have distributed assets to Mr. Grenon, and the value of their assets would have been correspondingly reduced: Resolution declaring capital dividend, Appeal Book at 11884.
E. Summary of Key Tax Results Relevant to the Appeal [75] It is perhaps useful here to summarize the four key tax results relevant to this appeal that the appellants assert arise from the transactions I have just described.
[76] First, the appellants included the $113 million taxable capital gain designated by FMO in income, but deducted the same amount as an allowable capital loss from the disposition of their FMO units when FMO redeemed them: see paragraphs 55-57 and 59 above. As a result, the appellants reported no net taxable capital gain, no resulting income, and no resulting tax liability.
[77] Second, the appellants added $113 million to their CDA, relying on paragraph (f) of the CDA definition. While the capital losses from their disposition of the FMO units resulted in a deficit in their CDA under paragraph (a) of the CDA definition, that deficit had no effect on the addition under paragraph (f).
[78] Third, the capital dividends paid by the appellants to their parent corporations resulted in additions to the parent corporations’ CDA. As a result, the parent corporations could pay $110 million of non-taxable capital dividends to Mr. Grenon.
[79] Fourth, substantially all of FVT’s $137 million of income (from the sale of the operating businesses and their 2005 business operations) was paid to RRSP Trust, a tax-exempt taxpayer. As a result none of that income was subject to tax. (Whether RRSP Trust is taxable on that income is addressed in Grenon v. His Majesty the Queen, 2021 TCC 30 (RRSP TCC), described in paragraph 84 below, an appeal of which decision to this Court remains pending.)
[80] To summarize, no part of FVT’s 2005 income (including from 2005 business operations while the public owned 42 percent of FMO), nor any portion of the capital gains FMO realized when it sold FVT to TOM, were paid to the public FMO unitholders. And, despite the significant income realized in the course of the FMO reorganization ($105 million on sale of operating business assets and $113 million in taxable capital gains) and $110 million of dividends being paid to Mr. Grenon, no tax was payable by the appellants, FMO, FVT, TOM, RRSP Trust or Mr. Grenon. Only the public FMO unitholders and public TOM unitholders had a potential tax liability—the former on the taxable exchange of their public FMO units for FIF units, and the latter on TOM’s 2005 income distribution.
F. The Resulting Assessments [81] The Minister of National Revenue disagreed with these results. Accordingly, in 2013, the Minister reassessed the appellants under Part I of the Income Tax Act. Relying on the general anti-avoidance rule (GAAR), the Minister eliminated the appellants’ capital gains and capital losses, and issued notifications no tax was payable, also known as nil assessments (the Part I assessments). The Part I assessments could not be appealed: Okalta Oils Ltd. v. Minister of National Revenue, [1955] S.C.R. 824, [1955] 5 D.L.R. 614 at 826; Canada v. Interior Savings Credit Union, 2007 FCA 151, [2007] 4 C.T.C. 55 at para. 17; and Canada v. 984274 Alberta Inc., 2020 FCA 125, [2020] 4 F.C.R. 384 at para. 59, leave to appeal to SCC refused 39355 (29 April 2021).
[82] In 2014, the Minister assessed the appellants for tax under Part III of the Income Tax Act. The assessments were premised on the appellants not having any capital gains from the FMO reorganization, and thus no CDA, with the result that all of the 2006 capital dividends they paid were excess dividends. In 2016, the Income Tax Act was amended to reduce the rate of Part III tax, and the Minister issued new assessments reflecting that lower rate (the Part III assessments).
[83] The appellants appealed the Part III assessments to the Tax Court.
[84] The Minister also assessed RRSP Trust and Mr. Grenon in connection with RRSP Trust’s acquisition of the TOM units, and the units of several other unit trusts established at Mr. Grenon’s initiative. Those assessments also were appealed to the Tax Court. All of the appeals were heard on common evidence, but the Tax Court issued separate judgments and reasons for judgment. RRSP TCC is the decision allowing Mr. Grenon’s appeal, but dismissing RRSP Trust’s appeal, of those assessments. A third decision awarded costs of all appeals to the respondent: Grenon v. The Queen, 2021 TCC 89.
[85] RRSP Trust has appealed RRSP TCC and all but the respondent have appealed the costs decision. While this Court heard the three appeals together, we too will issue separate judgments and reasons.
[86] Although RRSP TCC shares some common facts with this appeal, and the two decisions are related, the focus of this appeal is the Tax Court’s decision dismissing the appellants’ appeal of the Part III assessments.
[87] I turn to that decision now.
III. Tax Court Decision A. Validity of the Part III Assessments [88] Before the Tax Court, the appellants advanced two arguments attacking the validity of the Part III assessments, asserting that they should be vacated on that basis. First, they argued that each capital dividend election made by an appellant required a separate assessment under subsection 185(1). Here, a single assessment assessed Part III tax in respect of more than one capital dividend election made by each appellant. Secondly, the appellants argued that the assessments were invalid because they had not been issued with all due dispatch as subsection 185(1) requires.
[89] The Tax Court rejected both of these submissions. It concluded that the first was without merit, particularly as the capital dividend elections made by each appellant concerned capital dividends it declared and paid in a single taxation year. As to the second, the Tax Court concluded that any failure to assess the appellants with all due dispatch did not permit it to vacate or invalidate the assessments, citing Carter v. The Queen, 2001 FCA 275, [2001] 4 C.T.C. 79 [Carter] and Ginsberg v. Canada, [1996] 3 F.C. 334, 50 D.T.C. 6372 (F.C.A.) [Ginsberg].
[90] Having dismissed the appellants’ challenges to the validity of the Part III assessments, the focus turned to the correctness of the Part I assessments. Although the appellants could not appeal the Part I assessments, the Part III assessments depended on the correctness of those Part I assessments because they eliminated the appellants’ capital gains that led to the CDA addition.
B. Correctness of the Part I Assessments [91] The respondent advanced three alternative arguments in support of the Part I assessments. First, the respondent asserted that the series of transactions that resulted in the capital gains and capital losses were not legally effective because, despite RRSP Trust’s transfer of the RRSP FMO units to TOM, followed by TOM’s transfer of those units to the appellants, beneficial ownership of those units never changed.
[92] Alternatively, the respondent said that the series of transactions that gave rise to the capital gains and capital losses were a sham and a misrepresentation.
[93] In the further alternative, the respondent said that the GAAR applied. The respondent asserted that the transactions were abusive of the capital gain and capital loss provisions and the capital dividend provisions of the Income Tax Act.
[94] The appellants challenged each of these grounds. They claimed the transactions were legally effective, beneficial ownership of the FMO units changed, none of the transactions was a sham, and that the conditions for the application of GAAR were not met.
[95] Again, the Tax Court disagreed with the appellants. It concluded that the appellants never acquired beneficial ownership of the RRSP FMO units because they acquired and held legal title as agents. Alternatively, it found that the transactions giving rise to the capital gains and capital losses were a sham. Finally, it said that, if it was wrong on the first two grounds, GAAR would apply and the elimination of the capital gains and capital losses by the Part I assessments, and the imposition of Part III tax by the Part III assessments, were reasonable tax consequences to deny the tax benefits.
[96] The appellants now appeal each of those findings.
IV. Standard of Review [97] It is indisputable that the appellate standard of review applies to this appeal. Any question of fact or mixed fact and law (excluding an extricable question of law) is reviewed for palpable and overriding error; questions of law are reviewed on the standard of correctness: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235.
V. The Appeal A. Validity of the Part III Assessments [98] Before us, the appellants challenge the Tax Court’s con