Oxford Properties Group Inc. v. The Queen

Oxford Properties Group Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-09-19
Neutral citation
2016 TCC 204
File numbers
2011-3616(IT)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Income Tax Act
Decision Content
Docket: 2011-3616(IT)G
BETWEEN:
OXFORD PROPERTIES GROUP INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 2 and 3, 2015 at Toronto, Ontario
Before: The Honourable Justice Steven K. D’Arcy
Appearances:
Counsel for the Appellant:
Al Meghji
Jack Silverson
Pooja Mihailovich
Counsel for the Respondent:
Robert Carvalho
Perry Derksen
JUDGMENT
In accordance with the attached reasons for judgment:
The appeal with respect to a reassessment made under the Income Tax Act for the Appellant’s taxation year ending August 31, 2006 is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant’s transactions, as more particularly set out in the attached Reasons for Judgment, did not result in abusive tax avoidance for the purposes of section 245 of the Income Tax Act;
The parties will have 30 days from the date of this judgment to arrive at an agreement on costs, failing which they are directed to file their written submissions on costs within 60 days of the date of this judgment. Such submissions shall not exceed 15 pages.
Signed at Antigonish, Nova Scotia, this 19th day of September 2016.
“S. D’Arcy”
D’Arcy J.
Citation: 2016 TCC 204
Date: 20160919
Docket: 2011-3616(IT)G
BETWEEN:
OXFORD PROPERTIES GROUP INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
I. Introduction [1] The Appellant engaged in a series of transactions to package certain of its real estate holdings, including the three real estate properties at issue in this appeal, into a number of limited partnerships. With respect to the three properties, it used subsection 97(2) of the Income Tax Act (Canada) (the “Act”) to eventually roll the properties into three separate limited partnerships. As a result, it paid no tax on the transfers and each of the properties retained its tax attributes, including its adjusted cost base and undepreciated capital cost. In the course of packaging the real estate, the Appellant elected to use paragraphs 88(1)(c) and (d) and subsection 98(3) to bump the adjusted cost base of its interests in certain limited partnerships, including the three limited partnerships holding the three properties. It then sold its interests in the three limited partnerships to tax-exempt entities.
[2] The Appellant calculated its taxable capital gains on the disposition of its interests in the three limited partnerships by using the increase of $163,981,767 in the adjusted cost base of the limited partnership interests that resulted from the bumps under paragraphs 88(1)(c) and (d) and subsection 98(3).
[3] The Minister of National Revenue (the “Minister”) concluded that the Appellant, by using the rollover in subsection 97(2) and the bumps in paragraphs 88(1)(c) and (d) and subsection 98(3) and then selling its interests in the three limited partnerships to a tax-exempt entity, avoided the payment of tax that would otherwise have been payable on capital gains and recapture: specifically, the tax on such capital gains and recapture that would have arisen if the three real estate properties themselves had been sold to the tax-exempt entities.
[4] The Minister concluded that the Appellant carried out a series of transactions that avoided tax on taxable capital gains and recapture and, as a result, the transactions abused certain provisions of the Act, including subsections 97(2), 88(1), 98(3) and 100(1). Applying the general anti-avoidance rule (the “GAAR”), the Minister denied the subsection 88(1) and 98(3) bumps, which resulted in a $148,221,522 increase in the taxable capital gain realized by the Appellant on the sale of the three limited partnership interests and the reduction of a capital loss/suspended capital loss with respect to one of the limited partnerships from $5,155,531 to nil.
[5] The Appellant has appealed the Minister’s reassessment.
II. Summary of Facts [6] There were no witnesses at the hearing. The parties filed a statement of agreed facts (the “ASF”). Each party also filed a book of documents (which were entered on consent) and discovery read-ins (filed under section 100 of the Tax Court of Canada Rules (General Procedure)). The Respondent objected to the Appellant’s discovery read-ins. As I will discuss shortly, I have allowed the read-ins to be entered as evidence in this appeal. The Appellant also filed an Answer to the Respondent’s Reply. In the Answer, the Appellant admitted numerous facts set out in the Reply.
[7] The ASF (without attachments) is attached hereto as Appendix A. I will begin by summarizing the agreed facts.
[8] The Appellant is a global real estate owner, investor, developer and property manager with offices across Canada, in New York and in London, U.K.
[9] In 2001, the Appellant’s business was carried on by a predecessor (“Old Oxford”). Old Oxford was a public company and one of the largest commercial real estate firms in North America. It managed and owned interests in prime office, industrial and retail premises in Canada’s major urban markets. It was at all material times a taxable Canadian corporation for the purposes of the Act.
The Takeover and Creation of First Level Limited Partnerships [10] On August 16, 2001, BPC Properties Ltd. (“BPC”) made a proposal to make a bid for all of the common shares of Old Oxford not held by the Ontario Municipal Employees Retirement System (“OMERS”). BPC was formed in May 2001 for the purpose of making the takeover bid. OMERS held 30% of the voting shares of BPC and had an option to acquire the remaining voting shares. The fair market value of the shares of BPC held by OMERS represented the vast majority of the fair market value of the issued shares of BPC.
[11] At all material times, OMERS was a registered pension plan under the Act and exempt from tax under Part I of the Act.
[12] On August 20, 2001, as part of the takeover negotiations, BPC and Old Oxford entered into an agreement (the “Support Agreement”). Pursuant to the provisions of the Support Agreement, Old Oxford agreed to effect a pre-closing reorganization of its business if requested, provided that the request was reasonable and BPC reimbursed Old Oxford for the costs of the reorganization.
[13] Between October 10, 2001 and October 15, 2001, pursuant to the Support Agreement, Old Oxford effected the requested reorganization by establishing newly formed limited partnerships (the “First Level LPs”) and then transferring its interest in certain real property to the First Level LPs. The transferred properties included the properties at issue in this appeal, the Atria Complex, the Richmond Adelaide Centre (“RAC”), and a 50% beneficial interest in the Calgary Eaton Centre (“CEC”). I will refer to the properties jointly as the “Three Real Estate Properties”.
[14] The various transactions are set out at paragraph 11 of the ASF. They may be summarized as follows:
- Old Oxford created two subsidiaries, GP Co 1 Inc. (“GP1”) and GP Co 2 Inc. (“GP2”) to act as general partners for the First Level LPs.
- Old Oxford amalgamated with certain other affiliates to form Oxford Properties Group Inc. (“OPGI Amalco”).
- OPGI Amalco and GP1 formed OPGI Office Limited Partnership (“OPGI Office LP”), with OPGI Amalco being the limited partner and GP1 the general partner.
- OPGI Amalco then transferred its beneficial interest in certain real property, including RAC and CEC, to OPGI Office LP in exchange for the assumption of debt and additional limited partnership interests in OPGI Office LP. An election was made pursuant to subsection 97(2) with respect to the transfer.
- Certain other affiliates of Old Oxford amalgamated to form Oxford MRC Inc. (“MRC Amalco”). It appears that after the amalgamation MRC Amalco held the beneficial interest in the Atria Complex.
- MRC Amalco and GP2 formed MRC Office Limited Partnership (“MRC Office LP”), with MRC Amalco being the limited partner and GP2 the general partner.
- MRC Amalco then transferred its beneficial interest in certain real property, including the Atria Complex, to MRC Office LP in exchange for the assumption of debt and additional limited partnership interests in MRC Office LP. An election was made pursuant to subsection 97(2) with respect to the transfer.
[15] The subsection 97(2) elections made on the transfer of property to the OPGI Office LP and the MRC Office LP will be referred to as the “First 97(2) Rollovers”.
[16] On October 16, 2001, BPC completed its takeover of Old Oxford (now OPGI Amalco). The steps taken to complete the takeover are set out in paragraphs 12 to 14 of the ASF. The end result was that BPC owned 100% of the shares of a newly formed subsidiary, 2006186 Ontario Inc. (“Acquireco”) and Acquireco owned 100% of the shares of OPGI Amalco.
Formation of the Appellant and the First Bump [17] On March 12, 2002, Acquireco incorporated a numbered company, 1519052 Ontario Inc. (“1519052”).
[18] On May 30, 2002 and May 31, 2002, a reorganization was effected which resulted in the formation of the Appellant and a bump in the adjusted cost base of the interests in the First Level LPs (OPGI Office LP and MRC Office LP). The reorganization is described at paragraphs 16 to 19 of the ASF and may be summarized as follows:
- OPGI Amalco, MRC Amalco and certain other affiliated companies amalgamated to continue as one corporation, Oxford Properties Group Inc. (“First OPGI Amalco”), which was wholly owned by Acquireco. As a result of the amalgamation, First OPGI Amalco held the limited partnership interests in the First Level LPs.
- Acquireco transferred all of the shares of First OPGI Amalco to the numbered company created in March 2002 (1519052) for shares of the numbered company.
- 1519052 and First OPGI Amalco then amalgamated to form the Appellant, which was wholly owned by Acquireco.
- On the amalgamation of 1519052 and First OPGI Amalco, designations were filed pursuant to paragraph 88(1)(d) of the Act to increase the adjusted cost base of the non-depreciable capital properties formerly held by First OPGI Amalco, including the interests in the First Level LPs, i.e., OPGI Office LP and MRC Office LP (the “First Bump”). The Appellant now held the limited partnership interests in the First Level LPs.
Formation of Second Level Limited Partnerships [19] Between November 12, 2002 and September 12, 2003, a second tier of partnerships were formed “First Bump” the First Level LPs. The formation of the partnerships is described at paragraphs 20 to 22 of the ASF and may be summarized as follows:
- The Appellant incorporated three subsidiaries to serve as the general partners of the new limited partnerships:
o GP Co. 11 Inc. (“GP11”), created on November 12, 2002
o GP Co. 16 Inc. (“GP16”) and GP Co. 18 Inc. (“GP18”), both of which were created on September 12, 2003.
- The First Level LPs created three new limited partnerships (the “Second Level LPs”):
o On December 2, 2002, MRC Office LP and GP11 formed Atria Limited Partnership (“Atria LP”), with MRC Office LP being the limited partner and GP11 the general partner.
o On September 12, 2003, OPGI Office LP and GP16 formed the RAC Limited Partnership (“RAC LP”), with OPGI Office LP being the limited partner and GP16 the general partner.
o On September 12, 2003, OPGI Office LP and GP18 formed the Calgary Eaton Centre Limited Partnership (“CEC LP”), with OPGI Office LP being the limited partner and GP18 the general partner.
[20] Once the Second Level LPs were formed, the Appellant was the limited partner in the OPGI Office LP, which was the limited partner in each of the RAC LP and the CEC LP. The Appellant was also the limited partner in the MRC Office LP, which was the limited partner in the Atria LP.
Transfer of Certain Real Properties by the First Level LPs to the Second Level LPs [21] On February 1, 2004 the First Level LPs transferred certain real properties to the Second Level LPs. The transactions are described at paragraph 23 of the ASF essentially as follows:
- OPGI Office LP transferred certain real properties to CEC LP, including its 50% interest in CEC, in exchange for the assumption of debt and an additional limited partnership interest in CEC LP. An election was made pursuant to subsection 97(2) with respect to the transfer.
- OPGI Office LP transferred RAC to RAC LP in exchange for the assumption of debt and an additional limited partnership interest in RAC LP. An election was made pursuant to subsection 97(2) with respect to the transfer.
- MRC Office LP transferred certain real properties to Atria LP, including the Atria Complex, in exchange for the assumption of debt and an additional limited partnership interest in Atria LP. An election was made pursuant to subsection 97(2) with respect to the transfer.
[22] The subsection 97(2) elections made on the transfer of properties to the three Second Level LPs will be referred to as the “Second 97(2) Elections”.
The Second Bump [23] On August 27, 2004, the First Level LPs were dissolved, with the parties bumping the adjusted cost base of the interests in the three Second Level LPs (the “Second Bump”). The dissolution and Second Bump are described in paragraphs 24 to 27 of the ASF, and the description includes the following:
- MRC Office LP distributed its assets, including its limited partnership interest in Atria LP, to its partners. An election was made by the partners under subsection 98(3) of the Act, resulting in an increase in the adjusted cost base of the non-depreciable capital properties held by MRC Office LP immediately prior to the dissolution, including the limited partnership interest in Atria LP.
- OPGI Office LP distributed its assets, including its limited partnership interests in RAC LP and CEC LP, to its partners. An election was made under subsection 98(3) of the Act, resulting in an increase in the adjusted cost base of the non-depreciable capital properties held by OPGI Office LP immediately prior to the dissolution, including the limited partnership interests in RAC LP and CEC LP.
[24] Once the First Level LPs were dissolved, the Appellant held the limited partnership interests in each of the Second Level LPs. Its adjusted base in the limited partnerships included an increase of $163,981,767 resulting from the First Bump and the Second Bump.[1]
[25] On August 31, 2004, another reorganization was effected, which resulted in OMERS holding 75% of the Appellant.
Sale by Appellant of Its Interests in Each of the Second Level LPs [26] During its taxation year ending on August 31, 2006 (the “2006 Taxation Year”), the Appellant sold its limited partnership interests in the Second Level LPs. Each sale was made to an entity that was exempt from tax under Part I of the Act.
[27] The sales are described at paragraphs 30 to 36 of the ASF. I have set out below a summary of each sale described in the ASF.
[28] On September 29, 2005, the Appellant sold its limited partnership interest in Atria LP to 1564501 Ontario Inc., a subsidiary of the Alberta Investment Management Corp (“AIMCo”). 1564501 Ontario Inc. is exempt from tax under Part I of the Act.
[29] At the time of the sale, Atria Complex was the only real property held by Atria LP, as the partnership had prior to that time transferred its interest in another real property to a tax-exempt entity, OMERS Realty Corporation, a wholly owned subsidiary of OMERS.
[30] The Appellant realized a capital gain on the sale of its partnership interest in Atria LP, which was calculated taking into account the $45,583,064 increase in the Appellant’s adjusted cost base of its limited partnership interest in Atria LP resulting from the First Bump and the Second Bump.
[31] On October 1, 2005, the Appellant sold its limited partnership interest in CEC LP to 1183044 Alberta Ltd., a subsidiary of AIMCo; 1183044 Alberta Ltd. is exempt from tax under Part I of the Act.
[32] At the time of the sale, the Calgary Eaton Centre was the only real property held by CEC LP, as the partnership had prior to that time transferred its interest in another real property.
[33] The Appellant realized a capital gain on the sale of the partnership interest in CEC LP, which was calculated taking into account the $50,525,179 increase in the Appellant’s adjusted cost base of its limited partnership interest in CEC LP resulting from the First Bump and the Second Bump.
[34] On July 1, 2006, the Appellant sold its limited partnership interest in RAC LP to OMERS Realty Corporation. At the time of the sale, RAC was the only real property held by RAC LP.
[35] The Appellant realized a capital loss on the sale of the partnership interest in RAC LP, which loss was suspended. The capital loss was calculated taking into account the $67,873,524 increase in the Appellant’s adjusted cost base of its limited partnership interest in RAC LP resulting from the First Bump and the Second Bump.
The Minister’s Reassessment [36] Paragraph 37 of the ASF states that the Minister reassessed the Appellant for the 2006 Taxation Year on the basis that section 245 of the Act applied to the transactions set out in paragraphs 15(xx)(a) to (q) of the Amended Reply.
[37] Generally speaking, those are the transactions I have just discussed, including the creation of the First Level LPs, the transfer of properties to the First Level LPs, the transactions relating to BPC’s acquisition of Old Oxford, the formation of the Appellant, the First Bump, the formation of the Second Level LPs, the transfer of properties to the Second Level LPs, the Second Bump and the sale by the Appellant of its limited partnership interests in the Second Level LPs to the exempt entities.
[38] Pursuant to the reassessment, the Minister increased the taxable capital gain realized by Oxford for its 2006 Taxation Year by $148,221,522 and reduced its capital loss/suspended capital loss with respect to the disposition of the RAC LP from $5,155,531 to nil.[2]
[39] Specifically, the Minister reduced the adjusted cost base of the interests in the Second Level LPs by the amount of the Second Bump and then applied subsection 100(1) to determine the taxable capital gain realized on the sale of the Appellant’s interests in the Second Level LPs.[3]
Transactions in Respect of Which the Minister Did Not Apply GAAR [40] The Appellant brought to the Court’s attention two sets of transactions which led to the sale by the Appellant of interests it held in other limited partnerships.
[41] The first four paragraphs of the Appellant’s Request to Admit summarize the first set of transactions.[4] The transactions relate to partnership interests Oxford MRC Inc. held in two partnerships: Twelve-Fifty Company Limited and 1250 René Lévesque Land Partnership (together the “René Lévesque Partnerships”). Oxford MRC Inc. owned the partnership interests prior to July 2001, i.e., prior to BPC’s proposal to acquire Old Oxford. Further, Oxford MRC Inc. did not transfer the land or properties to, or “prepackage” them into the René Lévesque Partnerships as part of the series of transactions.
[42] As part of the First Bump, the tax cost of the René Lévesque Partnerships was increased to the fair market value of the land and buildings held in these partnerships. Later, the interests in these partnerships were sold to OMERS Realty Corporation, an exempt entity and the same corporation as that which had purchased the limited partnership interests in the RAC LP.
[43] The Minister did not apply the GAAR to these transactions (the “René Lévesque Transactions”). Paragraph 4 of the Request to Admit explains the Minister’s reasons for not applying the GAAR as follows:
The Minister chose not to reassess the Appellant as a result of the transactions in paragraphs 1 and 2, above, because the Minister decided that Oxford (or its predecessors) had not contributed the property to the partnerships as part of the series of transactions, and therefore the transactions in paragraphs 1 to 3 did not comprise a series of transactions to which subsection 245(2) of the Act could apply . . .
[44] The second set of transactions relate to the MRC Shopping Centres Limited Partnership (“MRC Shopping Centres LP”) that was formed on October 15, 2001 as one of the First Level LPs. The second set of transactions is set out in paragraphs 5 to 12 of the Appellant’s Request to Admit.[5]
[45] The second set of transactions are nearly identical to the transactions relating to Atria LP, CEC LP and RAC LP, except that the second-tier limited partnership was sold to a taxable entity not an exempt entity. Specifically:
- On October 15, 2001, MRC Amalco was the limited partner of MRC Shopping Centres LP and a subsidiary of MRC Amalco was the general partner.
- On October 15, 2001 MRC Amalco transferred its beneficial interest in the Dufferin Mall to MRC Shopping Centres LP, using subsection 97(2).
- As part of the First Bump, the tax cost of MRC Shopping Centres LP was increased to the fair market value of the Dufferin Mall.
- On July 10, 2003, a new limited partnership, Dufferin Mall LP, was formed, with MRC Shopping Centres LP as the limited partner and a corporation owned by MRC Shopping Centres LP as the general partner.
- On July 15, 2003, MRC Shopping Centres LP transferred its beneficial interest in the Dufferin Mall to Dufferin Mall LP, using subsection 97(2).
- On July 15, 2003, MRC Shopping Centres LP was dissolved and, pursuant to subsection 98(3), the tax cost of Dufferin Mall LP was “bumped”.
- On July 17, 2003, the Dufferin Mall LP was sold to a person taxable under the Act.
[46] I will refer to this series of transactions as the “Dufferin Mall Transactions”.
[47] Paragraph 12 of the Request to Admit states the following:
Although Oxford had “prepackaged” the Dufferin Mall into MRC Shopping Centres LP, “bumped” the value of the MRC Shopping Centres LP under section 88(1)(c) and (d), “prepackaged” the Dufferin Mall into Dufferin Mall LP, and “bumped” the tax cost of the Dufferin Mall LP on dissolution of MRC [Shopping Centres] LP under 98(3)(d), the Minister did not reassess the Appellant in respect of the Dufferin Mall LP.[6]
Admissibility of Appellant’s Read-Ins [48] The Respondent objected to a number of the Appellant’s read-ins. The Respondent’s primary concern is that the read-ins state the Canada Revenue Agency’s views on questions of law and, accordingly, are not facts admissible as evidence. Rather, the read-ins represent expressions of an opinion on domestic law.
[49] The Appellant provided the following accurate summary of the issues addressed in the read-ins:
• The assumptions or conclusions made by the Minister with respect to the object, spirit and purpose of or policy behind the provisions allegedly misused and abused and the basis on which the Minister formed these conclusions;
• The particular facts on which the Minister relied in concluding that the policy behind these provisions was misused or abused in some fact situations but not others;
• The basis of the reassessment and, in particular, the reasons for reassessing Oxford to deny the bump in respect of certain properties and not others; and
• The Minister’s conclusions as to the reasonable tax consequences.
[50] The Appellant, relying on the decision my colleague Justice Campbell Miller in Birchcliff Energy Ltd.,[7] argued that, since the Minister bears the burden of showing that the avoidance transaction is abusive under subsection 245(5), the Appellant is entitled to know the Minister’s view of the object, spirit and purpose of the provisions that she relied on in making her assessment.
[51] Counsel for the Appellant argued that, since the pleadings do not disclose the sections that the Minister feels were abused, the Court requires the read-ins to understand the Appellant’s case. In other words, in order for me to understand the Appellant’s argument with respect to abuse, I need to understand what position the Appellant believes the Minister took when assessing the Appellant.
[52] I have placed no weight on the Appellant’s read-ins. All of the relevant facts are included in the ASF, the admissions, the evidence filed on consent, the answers to the Requests to Admit and the Respondent’s read-ins. However, the documents will stay on the record to address the concern raised by counsel for the Appellant.
I The GAAR [53] Section 245 is set out in Appendix B hereto.
[54] The Supreme Court of Canada, in Canada Trustco Mortgage Co. v. Canada,[8] noted that the GAAR is different from the other provisions of the Act. While the Act is dominated by “explicit provisions dictating specific consequences” that invite a largely textual interpretation, the GAAR is “quite a different sort of provision.” It “is a broadly drafted provision, intended to negate arrangements that would be permissible under a literal interpretation of other provisions of the Income Tax Act, on the basis that they amount to abusive tax avoidance.”[9]
[55] The Supreme Court stated that the GAAR draws a line between legitimate tax minimization and abusive tax avoidance, a line that is “far from bright”.[10]
[56] The Supreme Court of Canada has set out three steps to be followed in determining the applicability of the GAAR. Those steps consist in ascertaining:
1. Whether there is a “tax benefit” arising from a “transaction” under subsections 245(1) and (2).
2. Whether the transaction is an avoidance transaction under subsection 245(3), in the sense of not being “arranged primarily for bona fide purposes other than to obtain the tax benefit”.
3. Whether the avoidance transaction is abusive under subsection 245(4).[11]
[57] All three requirements must be fulfilled. The burden is on the taxpayer to refute (1) and (2) and on the Minister to establish (3). If the existence of abusive tax avoidance is unclear, the benefit of the doubt goes to the taxpayer.[12]
(a) Was there a tax benefit? [58] The Appellant concedes in paragraph 14 of its Answer that it obtained the following tax benefits:
1. The deferral of taxation on capital gains and recapture by virtue of subsection 97(2) of the Act.
2. The increase in the adjusted cost base of the interests in the First Level LPs and the Second Level LPs by virtue of subsections 88(1) and 98(3) of the Act.
3. The reduction of the income tax payable by the Appellant on the sale of its partnership interests.
(b) What was the series of transactions that contained one or more avoidance transactions? [59] Paragraphs 15 (xx) and (yy) of the Amended Reply state that the Minister, when reassessing the Appellant, assumed that the transactions set out in subparagraphs 15(xx)(a) to (q) were avoidance transactions within the meaning of subsection 245(3) of the Act.
[60] Paragraphs 40 and 41 of the ASF state the following:
40. The transactions set out in paragraphs 15(xx)(a) to (p) of the Amended Reply constituted a “series of transactions” as defined for purposes of subsection 245(3) of the Act.
41. Such series contained one or more “avoidance transactions” within the meaning of subsection 245(3) of the Act.
[61] The difference between the Minister’s assumption and paragraphs 40 and 41 of the ASF is subparagraph 15(xx)(q) of the Amended Reply, which refers to the sale of the Appellant’s interests in the Second Level LPs to the tax-exempt entities. In short, the Appellant concedes that, for the purposes of paragraph 245(3)(b), there was a series of transactions that contained one or more avoidance transactions, but does not concede that the sale of its interests in the Second Level LPs to the tax-exempt entities is part of this series.
[62] The SCC in Copthorne provided detailed guidance on what constitutes a series of transactions for the purposes of paragraph 245(3)(b). The Court noted that the starting point is the common law series taken from English law, where each transaction in the series is preordained to produce a final result.[13]
[63] The phrase series of transactions is qualified in subsection 248(10) of the Act 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] The SCC noted that this definition expands the common law series by deeming any related transaction which is completed in contemplation of a series to be part of the series.[14]
[65] It then explained what nexus is required between the series of transactions and the related transaction,
. . . The court is only required to consider whether the series was taken into account when the decision was made to undertake the related transaction in the sense that it was done “in relation to” or “because of” the series (Trustco, at para. 26).
[47] Although the “because of” or “in relation to” test does not require a “strong nexus”, it does require more than a “mere possibility” or a connection with “an extreme degree of remoteness” (see MIL (Investments) S.A. v. R., 2006 TCC 460, [2006] 5 C.T.C. 2552, at para. 62, aff’d 2007 FCA 236, 2007 D.T.C. 5437). Each case will be decided on its own facts. . . . In the end, it will be the “because of” or “in relation to” test that will determine, on a balance of probabilities, whether a related transaction was completed in contemplation of a series of transactions.[15]
[66] It also concluded that subsection 248(10) allows either prospective or retrospective connection of a related transaction to a common law series.[16] Further, if I find that there was a series of transactions which resulted in a tax benefit, the finding that one transaction in the series was an avoidance transaction will satisfy the requirements of subsection 245(3).[17]
[67] Counsel for the Appellant did not dispute during the hearing that the sale of RAC LP to OMERS Realty Corporation was part of the series of transactions that the parties agreed contained one or more “avoidance transactions”. However, the Appellant argued that the sale of Atria LP and CEC LP to the subsidiaries of AIMCo was different.
[68] The Appellant’s argument is summarized at page 5 of its second set of written submissions entitled Submissions Application of GAAR [sic] & Reasonable Tax Consequences (“Appellant’s 2nd Written Submissions”), as follows:
At the time that BPC acquired control of Old Oxford, it had not determined whether [the] Atria [Complex] and CEC were long term-term hold properties or not (Atria LP and CEC LP each held one property). As such, Old Oxford did not know if the Alberta Revenue [AIMCo] would even be a potential buyer, let alone an actual buyer. Accordingly, if GAAR[sic] is determined to apply to the Transactions, it should not apply to the transfer of the Alberta Partnerships [Atria LP and CEC LP].
[69] Paragraphs 30 and 33 of the ASF state that AIMCo, through two subsidiaries, had a right of first offer and a right of first refusal under co-ownership agreements relating to the Atria Complex and the CEC. Both co-ownership agreements were entered into prior to BPC’s acquisition of the shares of Old Oxford. Once Oxford determined that it would dispose of its interests in Atria LP and CEC LP, it was contractually required to give the subsidiaries of AIMCo the right to purchase Oxford’s interest in those limited partnerships.
[70] AIMCo exercised its right of first offer/first refusal by having two subsidiaries (1564501 Ontario Inc. and 1183044 Alberta Ltd.) purchase Oxford’s interests in the two limited partnerships.
[71] In my view, these facts are inconsistent with the Appellant’s argument. It may not have been determined at the time BPC acquired control whether the Atria Complex or CEC would be sold, but it was known that, if they were sold, AIMCo would be a potential buyer. Regardless, I do not believe what Oxford knew at the time of the takeover is determinative of the issue. It is clear that the test can be applied on either a prospective or retrospective basis.
[72] I have no difficulty concluding, solely on the basis of the ASF and the Appellant’s admission with respect to the tax benefits, that the sale of the limited partnership interests to the subsidiaries of AIMCo was done in relation to the series of transactions set out in subparagraphs 15(xx)(a) to (p) of the Amended Reply. I come to this conclusion for the same reason that my colleague Justice Campbell reached a similar conclusion in her decision in the Copthorne appeal; the sale of the limited partnership interests to the subsidiaries of AIMCo was exactly the type of transaction necessary to make the tax benefit resulting from the series of transactions set out in paragraphs 15(a) to (p) of the Amended Reply (which included the packaging of the real property into a limited partnership and the bump of the adjusted cost base of the interests in the limited partnership) a reality. [18]
[73] Even if I did not reach that conclusion on the basis of the ASF, I would have reached the same conclusion on the evidence provided by the Respondent, particularly the following:
- Prior to October 15, 2001, the date the properties were transferred to the First Level LPs, Oxford understood that OMERS intended to transfer assets to limited partnerships, bump the limited partnership interests on an amalgamation and then sell some of the properties to a tax-exempt entity. It was not aware of which properties would be sold and to whom.[19]
- On December 16, 2002, the accounting firm KPMG[20] wrote a memorandum to officials of OMERS and Oxford. The purpose of the memorandum was “to summarize the proposed steps that should be undertaken in order to minimize the net inherent gain on the future disposition of any non-core real estate property held indirectly by OMERS through its taxable subsidiaries.”[21] One of the steps discussed is the transfer of properties “that may be sold to a REIT or a tax-exempt entity (i.e., Alberta Revenue [AIMCo])” to the Second Level LPs. The memo states that “Additional steps will be taken to ensure the high tax basis of the partnerships triggered on the May 31, 2002 amalgamation is preserved and pushed down to the second tier partnerships created.”[22] May 31, 2002 is the date of the First Bump.
- On January 24, 2005, the director of taxation of Oxford sent to other Oxford officials an email explaining the income tax that would be saved if Oxford sold its interest in the Atria LP as opposed to making a direct sale of the Atria Complex. He concluded that from an income tax perspective, Oxford should sell its interest in the Atria LP.[23]
- On January 31, 2005 the Executive Vice President and Chief Financial Officer of Oxford sent to other Oxford officials an email noting that any potential purchaser of Oxford’s interest in the Atria Complex would be asked to acquire that interest by acquiring Oxford’s interest in the Atria LP. She also noted that the acquirer must commit to retaining the acquired interest and not selling it prior to February 2007.[24] In a February 3, 2005 email, a KPMG advisor confirmed that waiting until February 2007 was required in order to avoid the application of subsection 69(11) of the Act.[25]
- In a July 21, 2005 presentation by Oxford to the OMERS Investment Committee, it was noted that the Atria Complex had been designated in Oxford’s strategic plan as a non-strategic asset. The author then stated: “However due to Oxford’s tax plan restrictions, a sale to any party other than the co-owner (Alberta Revenue [AIMCo]) before February 2007 would incur significant tax penalties”.[26]
- On July 24, 2005 a recommendation was made to the OMERS investment committee to sell its limited partnership interest in Atria LP to the AIMCo subsidiary for a purchase price of $65,500,000. One of the facts supporting the recommendation was that “Alberta Revenue is motivated to diversify its joint venture partners and have agreed to accommodate Oxford’s tax restrictions by structuring the transactions to facilitate the sale. Without a structured transaction, the asset could not be sold without prohibitive tax costs.”[27]
- A July 19, 2005 memorandum from Oxford to the OMERS investment committee summarizes the sale of Oxford’s interest in CEC LP to the subsidiary of AIMCo. The memorandum notes that, as a result of first and second mortgage debt, Oxford has zero equity value in the CEC and that the proposed sale of Oxford’s interest in the CEC LP is in accordance with Oxford’s strategic plan. It states the following with respect to Canadian income tax: “Oxford’s ownership interest, within the limited partnership structure, was put in place to facilitate portfolio tax structuring objectives. [redacted] The sale is in accordance with the KPMG tax plan related to the OMERS purchase of Oxford in October 2001 and to all relevant further developments since that time. A sale of Oxford’s interest to any entity other than its co-owners is cost prohibitive. A property level sale would trigger noticeable gains and therefore the tax benefits of the limited partnership structure would be negated by the taxes due upon a sale.”
[74] The Appellant has admitted that the series of transactions included in subparagraphs 15(xx)(a) to (p) of the Amended Reply contains one or more avoidance transactions.
[75] I agree with counsel for the Respondent that the preceding clearly evidences that the Appellant, when selling its limited partnership interests in Atria LP and CEC LP to the subsidiaries of AIMCo, clearly took into account the transactions included in subparagraphs 15(xx)(a) to (p) of the Amended Reply that resulted in the packaging of the real property into limited partnerships and the bumping of the adjusted cost base with respect to such limited partnerships.
[76] As a result, the sale of the three limited partnership interests to exempt entities was part of a series of transactions that contained one or more avoidance transactions.
[77] In summary, the transactions set out in subparagraphs 15(xx)(a) to (q) of the Amended Reply (the “Oxford Transactions”) constitute, for the purposes of subsection 245(3) of the Act, a series of transactions that contains one or more avoidance transactions.
[78] The Oxford Transactions are set out in Appendix C hereto. The key transactions, which I have discussed, are the formation of BPC and Acquireco, the creation of the First Level LPs, the transfer of properties to the First Level LPs, the formation of the Appellant, the First Bump, the formation of the Second Level LPs, the transfer of properties to the Second Level LPs, the Second Bump and the sale of the Appellant’s interests in the Second Level LPs to the tax-exempt entities.
(c) Was there an abuse of the Act? [79] Although subsection 245(4) refers to determinations of “misuse” and “abuse”, the SCC has made it clear that there is no distinction between an “abuse” and a “misuse”. “Section 245(4) requires a single, unified approach to the textual, contextual and purposive interpretation of the specific provisions of the Income Tax Act that are relied upon by the taxpayer in order to determine whether there was abusive tax avoidance.” [28] As a result I will only use the term “abuse”.
[80] The determination of whether a transaction is an abuse of the Act involves the following two steps:
1. I must first determine the “object, spirit or purpose of the provisions of the Income Tax Act that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids”.
2. Once this step is completed, I will “examine the factual context of [the] case in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purpose of the provisions in issue”.[29]
Position of the Respondent [81]