MMV Capital Partners Inc. v. The Queen

MMV Capital Partners Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-08-12
Neutral citation
2020 TCC 82
File numbers
2016-5137(IT)G
Judges and Taxing Officers
Randall S. Bocock
Subjects
Income Tax Act
Decision Content
Docket: 2016-5137(IT)G
BETWEEN:
MMV CAPITAL PARTNERS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 17-18, 2018, at Toronto, Ontario and final submission completed on May 31, 2019
Before: The Honourable Mr. Justice Randall S. Bocock
Appearances:
Counsel for the Appellant:
David Muha
Michael J.Collinge
Kevin Chan
Counsel for the Respondent:
Michael Taylor
Matthew Turnell
JUDGMENT
WHEREAS the Court has issued its Reasons for Judgment on this date;
NOW THEREFORE the appeal relating to the 2011, 2012, 2013, 2014 and 2015 taxation years concerning the notice of reassessment dated June 8, 2016, issued under section 245 of the Income Tax Act, RSC 1985, c.1, as amended (the “Act”), is hereby allowed on the basis that the MMV is entitled to non-capital losses incurred under Part I of the Act arising from the 2001 to 2009 taxation years, inclusive.
Costs are awarded provisionally to the Appellant subject to the right of either party to make written submissions thereon within 30 days of the date of this judgment, whereupon the Court may consider such submissions and vary its provisional cost award, failing which this provisional cost award shall become final.
Signed at Toronto, Ontario, this 12th day of August 2020.
“R.S. Bocock”
Bocock J.
Citation: 2020TCC82
Date: 20200820
Docket: 2016-5137(IT)G
BETWEEN:
MMV CAPITAL PARTNERS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bocock J.
I. INTRODUCTION
[1] The Appellant, MMV Capital Partners Inc. (“MMV”), was reassessed under section 245, the general anti-avoidance rule (the “GAAR”), of the Income Tax Act, RSC 1985, c.1, as amended (the “Act”). The Minister of National Revenue (the “Minister”) disallowed non-capital losses totalling $23,444,775 (the “losses”) deducted over five taxation years: those ending December 31, 2011 through to and including 2015.
[2] The GAAR has three critical elements necessary for its engagement: the taxpayer must (1) have realized a “tax benefit” (subsection 245(1)); (2) have undertaken a transaction or series of transactions (subsection 248(10)) which contain at least one avoidance transaction (subsection 245(3)); and, (3) within the transactions yielding the tax benefit misused a section or abused the Act as a whole. The parties in this appeal agree that MMV realized a tax benefit and that a transaction or series of same constituted an avoidance transaction. As seen within these reasons, they disagree sharply as to whether the loss use restriction rules under section 111 of the Act or any other section were misused or abused.
II. FACTS
[3] The parties submitted an agreed statement of facts at the outset of the hearing. Two volumes comprising an agreed common book of documents with a customary document reliance agreement and additional read-ins and clarifications from examinations for discovery supplemented the agreed facts. As well, MMV’s counsel sought to introduce highly redacted communications between the Canada Revenue Agency (“CRA”) and the Tax Policy Branch of the Department of Finance (“DOF”). After a voir dire, the Court ruled that the communications between the CRA and DOF were admissible. The Court indicated at the time of such ruling and as noted herein, that the usefulness of and the ultimate weight given to those communications would be limited.
[4] From these sources of information, the Court finds that the facts comprising the evidence are as follows.
a) The Original Business
[5] MMV, then National Convergence Inc. (“NCI”), was incorporated in April 2001. From that time until its receivership in July 2009, its business related to voice over internet protocol applications to service providers (the “original business”).
b) The “Owners”
[6] MMV Finance Inc. (“MMV Finance”) was incorporated in October 2002. Its directors included Minhas Mohamed, Ron Patterson, Tony Gioia and Graham Turner.
[7] MMV Financial Inc. (“MMV Financial”) was incorporated in August 2004. MMV Financial held, through its wholly-owned subsidiary 4387902 Canada Inc., 45% of the common shares and 100% of the non-voting common shares of MMV Finance. The directors of MMV Financial also included Minhas Mohamed and Ron Patterson.
[8] MMV Financial’s business provided venture capital loans and financing. In 2006, MMV Financial had an investment portfolio with a value of approximately US$74 million.
c) The Loan(s)
[9] On December 29, 2006, MMV Financial invested in MMV by lending MMV the sum of US$2 million pursuant to a credit agreement. The loan was an amortized loan to be repaid monthly over 38 months, with an interest rate of 13.68% per year.
[10] On the same day, MMV issued warrants to MMV Financial to acquire 2,129,547 Class C preferred shares at a total exercise price of US$240,000. MMV Financial did not exercise those warrants.
[11] On January 4, 2007, MMV Financial registered a general security interest over the assets of MMV as security for its loan.
[12] On August 31, 2007, MMV Financial entered into a subordination agreement with certain third-party secured creditors of MMV, who were also shareholders of MMV (the “secured creditor shareholders”). Under the subordination agreement, the debt and security of the secured creditor shareholders were fully postponed and subordinated in favour of MMV Financial.
[13] MMV was not profitable and posted losses in every year from 2001 to 2009.
d) The Receivership and the Sale of MMV’s Assets
[14] By 2009, MMV’s financial position had further deteriorated. On July 22, 2009, a lender to MMV, BDC Capital Inc. sent MMV a notice of intention to enforce security under the Bankruptcy and Insolvency Act, RSC, 1985, c. B-3 (the “BIA”).
[15] On July 31, 2009, the Ontario Superior Court of Justice appointed an interim receiver to oversee all of MMV’s assets, undertaking and properties under the BIA. On the same date, MMV sold its significant assets, including its intellectual property to an arm’s length third party, for US$1.1 million. Subsequent to its receivership, MMV ceased carrying on its original business and, as of that time, was not carrying on any business.
[16] After the sale of its assets, MMV’s only remaining assets were some nominal moveable assets and certain accrued losses: unused non-capital losses, net capital losses, scientific research and experimental development expenditures, plus certain investment tax credits. For the most part these amounts comprise the losses in dispute.
[17] Subsequent to the appointment of a receiver, MMV repaid MMV Financial the balance of the US$2 million loan that remained outstanding using a combination of the proceeds from the asset sale and tax refunds which MMV received in respect of its scientific research and experimental development expenditures.
[18] At the time of the receivership, MMV had outstanding 9,890,394 common shares and 317,042,039 preferred shares, held by 78 different shareholders. MMV Financial did not hold any shares in MMV at that time. In November 2010, at the request of the secured creditor shareholders, the preferred shares were converted into common shares on a one to one basis.
e) The Re-Structuring and Repurposing of MMV
[19] On December 16, 2010, at a special meeting of MMV’s shareholders, the shareholders voted to consolidate all of MMV’s common shares at a 13,000,000:1 ratio. Following the consolidation and winnowing of tiny shareholdings, only 18 common shares of MMV remained outstanding, all now held by the secured creditor shareholders.
[20] At the time of the share consolidation, two of the secured creditor shareholders, BDC Capital Inc. and Wesley Clover Corporation held convertible debentures issued by MMV having a combined face value of US$850,000; BDC Capital Inc. was owed US$550,000 and Wesley Clover Corporation owed US$300,000.
[21] During the special meeting of the shareholders of MMV on December 16, 2010, Paul Amirault, Tony Gioia, Graham Turner and Michael Jan were elected to the board of directors of MMV. These four individuals had previously not been directors of MMV; however, Paul Amirault had been an officer of MMV from 2004 to 2009 and a former shareholder of MMV.
f) Prepping the Board and Officers and Settling the Debts
[22] In December 2010, MMV Financial signed indemnity agreements with each member of MMV’s board of directors, indemnifying them against all liabilities and costs in connection with their duties as a member of the board.
[23] On December 21, 2010, 7733704 Canada Inc. (“773”) was incorporated under the Canadian Business Corporations Act, RSC 1985, c. c-144 (the “CBCA”) and subscribed for 17 common shares (one less than the 18 shares previously outstanding) in MMV. 773 is a wholly owned subsidiary of MMV Financial. At all material times, the directors of 773 were Minhas Mohamed and Ron Patterson.
[24] Subsequently, the board of MMV adopted a series of resolutions implementing the following:
a. appointing the following officers:
1. President and CEO: Minhas Mohamed;
2. Executive Vice-President: Ron Patterson;
3. Chief Operating Officer: Michel Beland;
4. Chief Financial Officer: Michel Beland; and
5. Treasurer and Secretary: Michel Beland;
b. setting the bank of MMV to be the Bank of Nova Scotia, which was MMV Financial’s bank;
c. changing the location of MMV’s registered office to the same location as MMV Financial’s registered office; and
d. resolving to make a proposal to MMV’s creditors pursuant to the BIA.
[25] During the material period, Ron Patterson was also the Executive Vice President of MMV Financial, and Michel Beland was the Chief Financial Officer and the Chief Operating Officer of MMV Financial.
[26] On February 21, 2011, Minhas Mohamed became a director of MMV.
[27] In January and February 2011, MMV made a proposal to its creditors under the BIA, pursuant to which outstanding unsecured debts of $1,108,639 were settled for a total of $50,000, which amount was loaned to MMV by MMV Financial. In addition, MMV’s outstanding secured debts of US$850,000 were acquired by MMV Financial for a total of $100,000.
g) Amending the Articles and Share Capital, and Streamlining of Shareholders
[28] On February 25, 2011, by Articles of Incorporation (the “Articles”) MMV changed its name to MMV Capital Partners Inc. and authorized the issuance of an unlimited number of non-voting common shares and preferred shares.
[29] Under MMV’s amended Articles, neither the holders of the non-voting common shares nor the holders of the preferred shares were entitled to vote at any meetings of the shareholders of MMV, except as permitted by statutory right under the CBCA, its incorporating statute. The common shares carried the right to one vote per share at shareholders’ meetings, and were the only class of shares in the capital stock of MMV conferring a right to elect the board of directors of MMV.
[30] Following the amendment of the Articles, 773 subscribed for 100,000 non-voting common shares in MMV at an aggregate subscription price of $1,000, and MMV entered into a revolving credit facility with MMV Financial for a total principal amount of US$75 million. All non-voting common shares are exclusively held by 773.
[31] At all relevant times, 773 held 100% of the issued and outstanding non-voting common shares of MMV. In contrast, 773 held approximately 48.6% being 17 of the issued and outstanding 35 common shares in MMV, while the remaining shareholders held 51.4% or 18 of the issued and outstanding common shares in MMV. 773 did not own that number of shares carrying an arithmetic majority of the votes to elect by itself MMV’s board of directors. Similarly, MMV Financial and its affiliates alone never acquired that degree of shareholder voting control of MMV. The remaining shareholders held the following voting common shares in MMV: BDC Capital Inc. (6), Wesley Clover Corporation (6), Desjardins Venture Capital LP (3), VIMAC ESF Annex Fund LP (2) and VIMAC Early Stage Fund LP (1).
h) The New Business Begins
[32] By an agreement dated March 1, 2011 and amended March 14, 2011, MMV purchased a portfolio of loans and related assets from MMV Financial for US$44,338,526. The purchase price of US$23 million was satisfied by the issuance of 23,000 preferred shares in the capital stock of MMV and the balance of US$21,338,526 was paid in cash. The 23,000 preferred shares were originally issued to MMV Financial, but were subsequently transferred to 773.
[33] Also by an agreement dated March 1, 2011 and amended March 14, 2011, MMV purchased a portfolio of loans and related assets from MMV Finance for approximately US$22,823,000.
[34] Following the acquisition of the portfolio, MMV carried on a venture lending business, servicing the existing portfolio of loans and entering into new financing arrangements (the “new business”). Since that time, MMV has earned income from the new business.
[35] On March 7, 2011, Michael Jan resigned as a director of MMV.
i) Services Provided by MMV Financial and MMV Finance to MMV
[36] In March 2011, MMV engaged MMV Financial to provide management services, and MMV Finance USA Inc. (a wholly owned subsidiary of MMV Financial) to provide marketing services in the United States.
[37] By an agreement dated May 31, 2011 and amended June 20, 2011, MMV Finance sold an additional portfolio of loans and related assets to MMV for US$41,943,730.
[38] On August 25, 2011, a notice of an application to discharge MMV’s trustee under the BIA was made, and a discharge was subsequently granted.
[39] On July 17, 2012, the following individuals were re-elected to the board of directors of MMV: Minhas Mohamed, Paul Amirault, Tony Gioia and Graham Turner.
j) The Transactions Subject to the GAAR Reassessment
[40] MMV’s net income, as reported in its financial statements filed with its tax returns, was $1,684,631 for 2010, $10,573,865 for 2011, $2,991,772 for 2012 and $1,469,062 for 2013.
[41] On November 8, 2012, MMV declared a dividend in the amount of the US dollar equivalent of $11,348,517 on its non-voting common shares. 773 subsequently paid a dividend of $11,348,517 to MMV Financial.
[42] On May 14, 2013, MMV declared a dividend of the US dollar equivalent of $16,066,314 on its non-voting common shares. 773 subsequently paid a dividend of $16,101,144 to MMV Financial.
[43] For its 2011 to 2015 taxation years, MMV applied non-capital losses totaling $23,444,775 from prior years to reduce its taxable income under Part I of the Act in various amounts during each year from 2011 to 2015, until the losses were extinguished:
(i) $10,772,633 in respect of its taxation year ending December 31, 2011;
(ii) $2,832,496 in respect of its taxation year ending December 31, 2012;
(iii) $1,379,947 in respect of its taxation year ending December 31, 2013;
(iv) $7,385,569 in respect of its taxation year ending December 31, 2014; and
(v) $1,074,130 in respect of its taxation year ending December 31, 2015.
[44] By notices of reassessment dated June 8, 2016, the Minister reassessed MMV’s 2011 to 2015 taxation years to disallow the deductions that MMV claimed in respect of the applied non-capital losses (the “Reassessments”). The Reassessments commensurately increased MMV’s tax payable under Part I of the Act.
III. THE DISPUTE AND LAW
a) The Dispute in Brief
[45] The loss streaming rules under the Act are in section 111. These are the “ground zero” of the disagreement in this appeal. Succinctly, MMV argues that absent de jure control, itself embedded as a clear, bright-line test in subsection 111(5), the applicable loss trading prohibition (the “loss streaming rule”) is not engaged and the losses should be deductible. On the contrary, and as simply, the Respondent says that the de jure, “bright-line” acquisition of control test is a “proxy” for control. It is not automatically determinative; a purposive analysis of its existence in this appeal demonstrates that the deduction of losses from an entirely different business, with dramatically different beneficiaries earning revenue from a disparate business undertaking, abuses, frustrates and runs contrary to the rationale of subsection 111(5), the loss streaming rule.
b) Statutory Provisions
(i) The GAAR - - excerpted provisions of section 245 of the Act
PART XVI
Tax Avoidance
Definitions
245 (1) In this section,
tax benefit means a reduction, avoidance or deferral of tax or other amount payable under this Act […]
tax consequences to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount; (attribut fiscal)
transaction includes an arrangement or event. (opération)
General anti-avoidance provision
(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit […]
Avoidance transaction
(3) An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit […]
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit […]
Application of subsection (2)
(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction
(a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of […]
Determination of tax consequences
(5) Without restricting the generality of subsection (2), and notwithstanding any other enactment,
(a) any deduction, exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,
[…]
In determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.
(ii) Treatment of non-capital losses
The loss streaming rule - section 111 – at Reassessment time
Losses deductible
111 (1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as the taxpayer may claim of the taxpayer’s
Non-capital losses
(a) non-capital losses for the 20 taxation years immediately preceding and the 3 taxation years immediately following the year;
[…]
Idem
(5) Where, at any time, control of a corporation has been acquired by a person or group of persons, no amount in respect of its non-capital loss or farm loss for a taxation year ending before that time is deductible by the corporation for a taxation year ending after that time and no amount in respect of its non-capital loss or farm loss for a taxation year ending after that time is deductible by the corporation for a taxation year ending before that time except that,
(a) such portion of the corporation’s non-capital loss or farm loss, as the case may be, for a taxation year ending before that time as may reasonably be regarded as its loss from carrying on a business and, where a business was carried on by the corporation in that year, such portion of the non-capital loss as may reasonably be regarded as being in respect of an amount deductible under paragraph 110(1)(k) in computing its taxable income for the year is deductible by the corporation for a particular taxation year ending after that time
(i) only if that business was carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular year, and
(ii) only to the extent of the total of the corporation’s income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services; and
(b) such portion of the corporation’s non-capital loss or farm loss, as the case may be, for a taxation year ending after that time as may reasonably be regarded as its loss from carrying on a business and, where a business was carried on by the corporation in that year, such portion of the non-capital loss as may reasonably be regarded as being in respect of an amount deductible under paragraph 110(1)(k) in computing its taxable income for the year is deductible by the corporation for a particular year ending before that time
(i) only if throughout the taxation year and in the particular year that business was carried on by the corporation for profit or with a reasonable expectation of profit, and
(ii) only to the extent of the corporation’s income for the particular year from that business and, where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services.
Recent legislative activity - “2013 Amendments” – after Reassessment time
Losses deductible
111 (1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as the taxpayer may claim of the taxpayer’s
Non-capital losses
(a) non-capital losses for the 20 taxation years immediately preceding and the 3 taxation years immediately following the year;
[…]
Loss restriction event - non-capital losses and farm losses
(5) If at any time a taxpayer is subject to a loss restriction event,
(a) no amount in respect of the taxpayer’s non-capital loss or farm loss for a taxation year that ended before that time is deductible by the taxpayer for a taxation year that ends after that time, except that the portion of the taxpayer’s non-capital loss or farm loss, as the case may be, for a taxation year that ended before that time as may reasonably be regarded as the taxpayer’s loss from carrying on a business and, if a business was carried on by the taxpayer in that year, the portion of the non-capital loss as may reasonably be regarded as being in respect of an amount deductible under paragraph 110(1)(k) in computing the taxpayer’s taxable income for that year is deductible by the taxpayer for a particular taxation year that ends after that time
(i) only if that business was carried on by the taxpayer for profit or with a reasonable expectation of profit throughout the particular year, and
(ii) only to the extent of the total of the taxpayer’s income for the particular year from
(A) that business, and
(B) if properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services; and
(b) no amount in respect of the taxpayer’s non-capital loss or farm loss for a taxation year that ends after that time is deductible by the taxpayer for a taxation year that ended before that time, except that the portion of the taxpayer’s non-capital loss or farm loss, as the case may be, for a taxation year that ended after that time as may reasonably be regarded as the taxpayer’s loss from carrying on a business and, if a business was carried on by the taxpayer in that year, the portion of the non-capital loss as may reasonably be regarded as being in respect of an amount deductible under paragraph 110(1)(k) in computing the taxpayer’s taxable income for that year is deductible by the taxpayer for a particular taxation year that ends before that time
(i) only if throughout the taxation year and in the particular year that business was carried on by the taxpayer for profit or with a reasonable expectation of profit, and
(ii) only to the extent of the taxpayer’s income for the particular year from
(A) that business, and
(B) if properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services.
c) Jurisprudence Concerning the GAAR - General Principles regarding Misuse or Abuse:
[46] As stated, MMV has conceded that the series of transactions created a tax benefit and constituted an avoidance transaction. Considering these GAAR elements is unnecessary.
[47] Regarding this final element, the Supreme Court of Canada (the “SCC”) has distilled the “misuse and abuse” standard of the third component of the GAAR into a refined question: is the challenged avoidance transaction(s) (the “avoidance transaction”) abusive of a provision within the Act or the Act as whole [1] ?
[48] It is a mixed question of law and fact whether the avoidance transaction is abusive. It involves first the proper construction of the Act’s provisions supported by the evidence before the Court.
[49] If the Court is satisfied the avoidance transaction viewed within the context of the circumstances surrounding it frustrates the object, spirit or purpose of the provisions or the Act, then the avoidance transaction shall be considered abusive. The deductibility of the losses comprising the tax benefit shall then be denied; that result is enumerated in paragraph 245(5)(a) of the GAAR.
[50] The Minister bears the onus of identifying the object, spirit and purpose, frequently described as the “legislative rationale” of the provisions. The Minister must also establish the abuse of the provisions [2] .
[51] In evaluating the Minister’s position, the Court is directed to undertake a textual, contextual and purposive interpretation of the statutory provisions to discern the object, spirit and purpose. Again, this is to learn the legislative rationale. This quest is nuanced by two refinements [3] . This sub-textual rationale may not be caught by the immediate meaning of the words per se. While the text is analyzed in pursuance of determining abuse under the GAAR, the analysis embeds itself within a broader contextual and purposive interpretation [4] . Once establishing this more profound legislative purpose, the Court assesses whether the avoidance transaction frustrates or confounds the discerned object, spirit and purpose, again, the legislative rationale [5] .
IV. POSITIONS OF THE PARTIES
[52] The timing for release of this judgment was delayed for several reasons. During this Court’s deliberations, two possibly relevant decisions were decided: 594710 British Columbia Ltd. v. HMQ [6] at trial and on appeal and Deans Knight Income Corporation v. HMQ [7] at trial. As a result, the Court held this decision and reasons in abeyance to afford the parties an opportunity to await the appeal decisions and make additional submissions to the Court. Ultimately, additional submissions reached the Court in early June 2019. However, as the Court resumed its deliberations Deans Knight was appealed to the Federal Court of Appeal (the “FCA”). The Court sought consensus for the release of its reasons and decision. The parties could not agree and the Court again held its judgment in this appeal in abeyance. When the COVID-19 pandemic raged around the world in March of this year, Canada and its courts understandably ceased hearings for all but essential hearings affecting liberty of the subject. The FCA was no exception. Given the unknown delay, in July the Court received word that the parties agreed that the Court should issue its judgment and reasons. It now does so despite the pending appeal of Deans Knight before the FCA.
a) Undertaking the Analysis of Subsection 111(5) and Other Informing Sections
[53] The Court commences its step by step analysis of the legislative rationale by referencing a summary of the parties’ positions, bearing in mind the Minister bears the onus to establish same for the Court. Thus, the Respondent’s position appears first.
(i) Respondent’s Position Generally
[54] The transactions at issue in this case were clearly structured to permit MMV to claim non-capital losses of prior years under subsection 111(1) of the Act in relation to income exclusively from a new business. This was not the old business from which the losses were incurred. The structure employed did not engage the restrictions on loss utilization in subsection 111(5) that would otherwise prevent losses from one business being claimed against income from a different business when an acquisition of control occurs.
[55] Subsection 111(5) is the key provision in this case. The Minister says that MMV’s loss transactions circumvented the application of that provision in a manner that frustrates or defeats its object, spirit, and purpose. The use of the old business losses to shelter income from the new business is not consistent with the object, spirit and purpose of subsection 111(5) and the “loss streaming rules” in the Act.
[56] Accordingly, the provisions that are relevant to the GAAR analysis in this case are subsection 111(5) and the parallel loss streaming rules in subsections 37(6.1) and 127(9.1). As well as the provisions of the Act that determine when an acquisition of control has occurred and the loss streaming rules will be applicable. Such provisions include subsections 251(5), 256(7) and (8), and section 256.1.
[57] A textual, contextual, and purposive examination of section 111 and the broader loss streaming rules reveals a statutory scheme that embodies a policy against loss trading between unrelated corporations. The policy is a long-standing policy that bars one corporate entity from accessing the tax attributes, such as losses, of another corporate entity subject to narrow, limited exceptions that serve specific purposes. This policy has been repeatedly recognized by the courts and there can be no doubt that it underlies the loss streaming rules in the Act.
[58] Two narrow exceptions to the policy against loss trading are apparent from the scheme of the Act:
a) Loss utilization is permitted where tax attributes are accessed by related entities under common control. The rationale for this exception to the general policy is to acknowledge that although one taxpayer’s tax attributes may not be transferred to another, corporations are intermediary legal entities. The owners of a corporation ultimately benefit from, or incur, the corporation’s income and losses. It is not offensive, therefore, for losses from one business to be used to offset income from another business when there is sufficient continuity (or commonality) of ownership between a loss business and a profit business.
b) Loss utilization is permitted by an enterprise that is unrelated to the enterprise that incurred the losses where the new enterprise is carrying on the same or a similar business. The rationale for this exception to the general policy is to encourage the rehabilitation of failing businesses. Thus, where there is sufficient continuity of the business, a change of ownership is not a reason to apply the policy against loss trading. Further, the limited nature of this exception prevents losses from one business from serving as a form of tax subsidy to other businesses that would not be economically viable without the losses.
[59] A textual, contextual, and purposive interpretation of the Act establishes that the object, spirit, and purpose of the “acquisition of control” threshold in subsection 111(5) is to serve as a “marker” or “proxy” for when sufficient continuity of ownership of an enterprise is lacking and losses should not be available to new owners.
[60] In light of this purpose, a transaction that does not involve a technical acquisition of control may nonetheless be abusive if it circumvents the underlying rationale of subsection 111(5) and leads to a result that the provision is intended to prevent. The GAAR will deny loss utilization where there is not sufficient continuity of ownership of the enterprise or continuity of the business to fit within the rationale of the exceptions to the general policy against loss trading expressed in the Act.
(ii) MMV’s Rebuttal
[61] The determination of the legislative rationale of subsection 111(5) is a distinct undertaking for GAAR in contrast to the analysis concerning other provisions. The GAAR analysis engages in a value judgment of what tax law ought to be or do. The text may fully reveal the relevant object, spirit and purpose. It does in this case. The text of subsection 111(5) itself is consistent with and fully explains its underlying legislative rationale: the deduction of losses by corporations from other business is permitted unless the acquisition of de jure control has been attained by another person or group of persons. The well understood meaning of control, de jure control, is a bright-line test. It deserves respect.
[62] Subsection 111(5) was not transgressed or engaged and the losses are deductible, primarily owing to the certainty and predictability manifested in the simple and straightforward wording of the subsection and the jurisprudence which employs the bright-line test.
b) Text, Context and Purpose Specifically
(i) Textual Disparity
[63] The Respondent states that textually, subsection 111(5) clearly restricts the availability of losses from prior years where there is an acquisition of control; the legislative rationale for the subsection necessitates an analysis of broader abuse beyond the literal scope in the present case.
[64] In contrast, MMV says the text is clear, applies per se and staunches the need for further analysis. Should further analysis be undertaken, the purposes are multi-faceted and not limited to curtailing loss utilization through the acquisition of corporations with accrued losses.
(ii) Contextual and Purposive Analysis of Subsection 111(5)
1. The Respondent
[65] The Respondent states that the legislative history of subsection 111(5):
1. reveals an incrementally tightening of loss utilization over time;
2. imposes a continuity of business concept almost from its inception; and
3. provides that the “acquisition of control” test was a culmination of continued refinement and restriction of loss utilization.
[66] In delineating these assertions, the Respondent provided a historiography of legislative iterations intended to curtail broad loss use through loss trading. The MMV provided a parallel overview of the near century of legislation.
[67] Further, the Respondent asserted that courts have generally restricted loss trading. Primarily, while corporations may utilize “related” losses, different individuals could not [8] . The default is not that losses are transferrable except where curtailed, but rather, are not transferrable unless permitted [9] .
[68] The exceptions provide guidance on the restrictive nature of loss utilization. The then Minister of Finance took pains in 1988 to explain that the use of “in-house” losses would not normally result in a misuse of the Act. But these exceptions imply, if not require, common or substantially the same ownership of corporations. Further, the rehabilitation of a diminished business is required, but it must be a related business within which the change of control occurs [10] .
[69] The Respondent asserts that the utilization of de jure control is a “convenient proxy” for regulating situations where loss utilization will be permitted. Particularly, other provisions within the Act deem control to have occurred or not: subsection 256(8) relating to rights of acquisition providing control; paragraphs 256(7)(a) and (b) applying or avoiding change of control in certain circumstances; section 256.1 deeming economic interests above 75% to be a change of control; and, subsection 69(11) curtailing the non-utilization of certain tax benefits of an affiliated party.
[70] Finally, de jure control covers most situations. As a proxy for effective control, it is generally sufficient. However, literal constraints should not allow loss trading where circumstances engage broader policy considerations; an example is when effective or de facto control has passed and the two businesses are not related.
[71] As a result, abuse arose from the avoidance transaction because:
1. MMV Financial, a previously arm’s length and unrelated entity to MMV, engaged in distinct businesses and gained access to losses which were unrelated to its businesses and unsustained in its own undertaking. In short, there was no continuity of business through the series of transactions or continuity of ownership.
2. In abusing the “bright-line test”, MMV Financial obtained all the benefits of effective control (operational management, loss utilization and future rights to profits) without the need of meeting the precise threshold of de jure control. As such, subsection 111(5) has been frustrated and circumvented.
2. The MMV
[72] MMV’s arguments in rebuttal, bearing in mind the Respondent’s onus, are straight forward.
[73] There simply was no de jure control acquired by a new shareholding group. There was no masquerade used to disguise [11] a change in de jure control; acquisition of control simply did not occur. Further, the CRA itself has previously indicated that a substantial economic interest, otherwise not contravening the text of a section, will not attract the GAAR [12] .
[74] A general policy, not otherwise discernible from a section of the Act is insufficient to engage an abuse under the GAAR. This is borne out in the reasons of the SCC, which upheld but varied the decision by the FCA in Mathew. The SCC ruled that Parliament could not have intended the combined effect of the partnership trading rules and subsection 18(13) to allow an arm’s length transferee to preserve and transfer a loss [13] .
[75] Moreover, where the technical application of the section is used to prove the existence of a policy, such as the de jure control policy in subsection 111(5), it cannot then be relied upon to demonstrate some deeper, more nuanced legislative rationale.
[76] Finally, avoiding the application and engagement of subsection 111(5) places the series of transactions outside the section rather than within it; technically avoiding and not engaging a section cannot abuse it [14] .
V. LEGAL HISTORY OF LOSS DEDUCTIBILITY UNDER THE ACT
[77] The legislative and jurisprudential history of loss deductibility under the Act is a lengthy story of ebb and flow.
a) Legislation and Jurisprudence Constraining, Limiting or Restricting Non-Capital Losses
i) Prior and Up to the Appeal Years
[78] Canadian income tax legislation was initially very restrictive regarding the use of losses. In 1919, the Income War Tax Act was amended to prohibit the deduction of losses that were not incurred in connection with the taxpayer’s “chief business, trade, profession or occupation” against income therefrom, and losses were not permitted to be carried forward or back [15] . In the 1940s, taxpayers were authorized to carry over losses for a limited number of years, provided that the taxpayer carried on the “same business” during the years. A one-year carry-forward period was introduced in 1942 [16] . In 1944, the carry-forward period was extended to three years with a one-year carry-back period [17] . In 1949, the carry-forward period was further extended to five years [18] .
[79] In 1958, paragraph 27(l)(e) began