Atlantic Packaging Products Ltd./Atlantic Produits d’Emballage Ltée v. The Queen (September 7, 2018 – 2018 TCC 183, Graham J.).
Précis: The Appellant sold its tissue business (the Tissue Division) to a competitor, Cascades Canada Inc. in its taxation year ended May 31, 2010. It treated the resulting gain as being a capital gain in reliance upon section 54.2 of the Income Tax Act on the basis that it had disposed of property that consisted of all or substantially all of the assets used in an active business. CRA denied the application of section 54.2 and the Appellant appealed to the Tax Court. The Tax Court denied the appeal holding that the sale did not represent all or substantially all of the assets used by the Appellant’s Tissue Division. Costs were awarded to the Respondent.
Decision: The basic facts are not complex:
 The Appellant is a paper products manufacturer. In 2009, the Appellant had five divisions. One of those divisions was its tissue division (the “Tissue Division”). The Tissue Division focused on the manufacturing and sale of toilet paper and paper towels. The Appellant was approached by a competitor named Cascades Canada Inc. regarding the sale of the Tissue Division. In August 2009, the Appellant entered into a number of different transactions that were designed to effect the transfer of the Tissue Division to Cascades.
 One of the transactions that the Appellant completed was a rollover of certain assets of the Tissue Division to a newly formed corporation named 7228392 Canada Inc. (“722”) pursuant to subsection 85(1) of the Income Tax Act (the “Act”) in exchange for common shares of 722. The Appellant ultimately sold those common shares to Cascades.
 When the Appellant filed its tax return for its taxation year ending May 31, 2010, it reported its $29.2 million gain on the sale of the shares of 722 as a capital gain. The Appellant did so in reliance on section 54.2 of the Act. Section 54.2 states that when a taxpayer disposes of property that consists of all or substantially all of the assets used in an active business carried on by that taxpayer to a corporation for consideration that includes shares of the corporation, the shares are deemed to be capital property.
 The Minister of National Revenue audited the Appellant and concluded that the Appellant could not rely on section 54.2 to deem the shares of 722 to have been capital property. The Minister came to this conclusion for two reasons. First, the Minister believed that the Tissue Division was not a business in itself but rather was a part of the Appellant’s overall paper products business. Second, even if the Tissue Division was a business, the Minister believed that the Appellant did not transfer all or substantially all of the assets used in that business to 722.
The Tax Court did not need to answer the Crown’s argument that the Tissue Business was not a separate business; instead it concentrated on the “all or substantially all” test and found the Appellant’s arguments wanting:
 The Appellant valued the assets transferred to 722 at $52,000,000.
 The assets that were sold directly to Cascades were sold for $14,329,744. A breakdown of those values is set out in the chart at Appendix “A”.
 The Whitby Mill was leased to Cascades for one dollar per year. Cascades was given an option to purchase the Whitby Mill. The option was exercisable at any time. The option purchase price would have been at least $10,000,000. The Appellant submits that I should not place any value on the Whitby Mill because the option purchase price represents nothing more than an offer. I agree that the option purchase price represents the price at which the Appellant is prepared to sell the Whitby Mill. It does not necessarily represent the price at which Cascades would be prepared to buy the Whitby Mill. I acknowledge that, assuming Cascades had the available funds, if it felt the option purchase price was a fair price, it could have simply purchased the Whitby Mill for that price up front. At the same time, the fact that it did not do so may simply have been because, at a lease price of $1 per year, there was little incentive to buy the Whitby Mill before the lease ended. In any event, the fact that Cascades did not simply buy the Whitby Mill or exercise the option is not a reason to place no value at all on the Whitby Mill or to value it based on the $10 in revenue that it was to generate over the term of the lease. In the circumstances, the best evidence that I have of the value of the Whitby Mill is the value that the Appellant was prepared to sell it for, namely a minimum of $10,000,000. Accordingly, that is the value that I will place on it. If the Appellant wanted me to place a different value on the Whitby Mill, it should have provided me with evidence upon which I could do so.
 Taking all of the above into account, the assets transferred to 722 would make up only 68% of the total assets of the Tissue Division. While I acknowledge that all or substantially all does not mean 90% and that the specific percentage that meets the test in any given context may vary, I cannot accept that it means something just over two-thirds. Furthermore, the foregoing calculation does not take into account all of the assets of the Tissue Division.
The Court found that the fair market value analysis was the most reliable method of determining the application of section 54.2 to the facts and on that basis dismissed the appeal:
 Based on the evidence before me, the most reliable method of determining whether all or substantially all of the assets of the Tissue Division were transferred is by examining the fair market value of the assets. That analysis indicates that the assets the Appellant transferred to 722 do not represent all or substantially all of the assets used by the Tissue Division.
Costs were awarded to the Respondent.