http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110128/index.do
Deans Knight Income Corporation v. The Queen (June 11, 2015 – 2015 TCC 143, Graham J.).
Précis: In it taxation years ending December 31, 2009 to 2012 the appellant claimed non-capital losses, a terminal loss and SRED expenditure (the “Claimed Amounts”). These arose of out transactions the appellant had entered into in 2008 and 2009 and related to periods prior to those transactions. CRA denied the Claimed Amounts on the basis that there had been a change of control, or, in the alternative, on the basis of GAAR.
The appellant move to strike the Reply in its entirely as it disclosed no reasonable grounds to oppose the appeal, or, alternatively, those portions of the Reply that failed to disclose such grounds or, in the further alternative, certain portions of the Reply which the appellant alleged were irrelevant or prejudicial. The Court found no merit in the appellant’s arguments and dismissed the motion with costs.
Decision: The Court stated the basis for the motion succinctly:
[1] The Appellant and others engaged in various transactions in 2008 and 2009. When it filed its tax returns for its taxation years ending December 31, 2009 to 2012, the Appellant claimed certain non-capital losses, a terminal loss and certain scientific research & experimental development expenditures (collectively, the “Claimed Amounts”). The Claimed Amounts arose in a period prior to the transactions in question. The Minister of National Revenue reassessed the Appellant to deny the Claimed Amounts on the basis that they had been lost as a result of an acquisition of control of the Appellant or, alternatively, that the general anti-avoidance rule acted to prevent the Appellant from claiming them. The Appellant appealed those reassessments and the Respondent filed a Reply.
[2] The Appellant has brought a motion to strike the Reply on the grounds that it discloses no reasonable grounds for opposing the appeal. In the alternative, if I do not find that the Reply as a whole discloses no reasonable grounds for appeal, then the Appellant is seeking to strike those portions of the Reply that I find disclose no reasonable grounds for opposing the appeal and to strike certain other paragraphs of the Reply that it finds are irrelevant or prejudicial.
The Minister’s pleading on change of control was as follows:
[10] Paragraph 251(5)(b) states that, where a person has a right to acquire shares of a corporation in certain circumstances, the person shall be deemed to own those shares for the purpose of determining control of the corporation. The Respondent takes the position that Matco held a right to acquire shares within the meaning of paragraph 251(5)(b).
[11] The Reply states that the Minister made the following assumptions of fact:
(a) Under the Investment Agreement, Matco “would pay the guaranteed amount of $800,000 less applicable adjustments for any” shares of the Appellant remaining outstanding one year after the date of closing of the agreement.
(b) On April 16, 2009, Matco made an offer to purchase the remaining common shares of the Appellant from Newco for the adjusted guaranteed amount as per the Investment Agreement.
(c) On April 20, 2009, Matco’s offer to purchase the remaining common shares of the Appellant held by Newco was accepted.
(d) By virtue of the contractual rights associated with the Investment Agreement described in (a) above and some convertible debentures that it also held, Matco acquired a right to acquire all of the voting shares of the Appellant.
[Footnotes omitted]
The appellant argued that the right of Matco did not amount to an acquisition of control. The Court rejected this on the basis of the “clear and obvious” test:
[15] I agree with the Respondent. While the Appellant’s position that a right to acquire shares must be a unilateral right appears to be strong, I am not prepared to conclude that it is plain and obvious that the Respondent could not convince a trial judge who had reviewed all of the evidence that whatever rights Matco may have received under the Investment Agreement were rights to acquire shares of the Appellant within the meaning of paragraph 251(5)(b). Accordingly I dismiss the Appellant’s motion to strike the Respondent’s paragraph 251(5)(b) argument.
The appellant essentially argued that there was no clear policy under the
Income Tax Act that prohibited the transfer of losses between arm’s length parties and therefore the respondent’s pleading of GAAR should be struck. The Court did not agree:
[17] The Appellant asserts that none of the policies highlighted by the Respondent is applicable to its situation. The Appellant says that while there may be a general policy under the Act to prohibit the transfer of losses between arm’s length parties, no losses have been transferred in its case as the losses in question were, at all times, the losses of the Appellant. The Appellant says that while there may be a general policy under the Act to prohibit the continuation of losses where there has been an acquisition of control and the same or similar business is not continued, in its case there was no acquisition of control so it is irrelevant that the same or similar business was not carried on. Accordingly, the Appellant asserts that it is plain and obvious that the Respondent cannot succeed in its GAAR argument.
[18] I disagree with the Appellant’s position. The object, spirit or purpose of the provisions in question is something that the trial judge has to determine. It is not something that simply comes from the object, spirit or purpose that has been culled from the Act by judges in previous GAAR cases. It can hardly be said that the courts have completed an exhaustive analysis and description of the object, spirit and purpose of all provisions in the Act. As a result, I find it very difficult to conceive how it could ever be said that it was plain and obvious that the Respondent could not succeed on a GAAR argument in respect of a series of transactions of a type that had not previously been ruled upon. By its very nature, the misuse or abuse test in GAAR is something that can only be determined after the detailed analysis that a trial permits. Accordingly I dismiss the Appellant’s motion to strike the Respondent’s GAAR argument.
The Reply contained a Overview which involved a mixture of fact, argument and law. The appellant asked that this be struck. The Court refused. It held that Overviews were helpful to the Court and, by their very nature, involved a mixture of fact, argument and law.
The appellant was no more successful on its other attempts to strike specific portions of the Reply:
Paragraph 2
[21] Paragraph 2 of the Reply states that Matco “had a history of putting together monetization of tax attribute transactions”. The Appellant submits that this statement is both vexatious and irrelevant. I disagree. The statement would only be vexatious if it were irrelevant and I find that it is not plain and obvious that it is irrelevant. The second step of a GAAR analysis requires a determination of whether one or more transactions were undertaken or arranged primarily for a bona fide purpose other than to obtain a tax benefit. It is not plain and obvious to me that the trial judge would find that Matco’s history of putting together transactions for the purpose of getting at tax attributes was irrelevant when considering that test.
Paragraph 4
[22] Paragraph 4 of the Reply states that:
…[the Appellant] was “cleaned out” of all assets related to [its business] except for the Tax Attributes (with the business being transferred to a new company with the same management and ownership as [the Appellant]) and an investment agreement was entered into which provided for a payment to [the Appellant] for the Tax Attributes and which gave control of [the Appellant] to Matco in order to allow Matco to pursue opportunities to bring in a profitable business to utilize the Tax Attributes.
[23] The Appellant objects to the words “cleaned out”. The term is certainly colloquial but hardly prejudicial. The words “disposed of” would more likely have been a better choice but I would not say that the use of “cleaned out” crosses the line into being prejudicial, abusive or inflammatory. It is odd that quotation marks are used around the words but, in the context of the Reply as a whole, it is evident that they were used to indicate that the term was a colloquial term rather than to suggest that the assets were not actually transferred. Based on the foregoing I will not strike paragraph 4.
Paragraph 7
[24] Paragraph 7 of the Reply states:
Although cognizant of them, the attempt to avoid the loss streaming rules in the [Act] was unsuccessful as the agreement and arrangements entered into resulted in an acquisition of control of [the Appellant] under the Act.
[25] The Appellant submits that paragraph 7 should be struck because it is argument and because it fails to identify who was cognizant of the loss streaming rules. I am not going to strike paragraph 7. As set out above, it is perfectly acceptable for an Overview to contain argument. While I agree that paragraph 7 fails to indicate who was cognizant of the loss streaming rules I think it is evident from the rest of the sentence that it is the same person who was attempting to avoid them. That person can only be the Appellant. If the Appellant wants to be certain that my understanding is correct, it can make a demand for particulars.
As a consequence the motion was dismissed, with costs.