Keybrand Foods Inc. v. Canada (November 19, 2020 – 2020 FCA 201, Webb (Author), Woods, Rivoalen JJ.A.).
Précis: The taxpayer, Keybrand Foods Inc. (Keybrand) had an investment in Vidabode Group Inc. (Vidabode). Vidabode borrowed roughly $15 million from GE Capital and that loan went into default in the Fall of 2010. Keybrand and another related company had guaranteed Vidabode’s debt to GE Capital. As a result Keybrand borrowed roughly $14 million in December of 2010 from another lender and used the funds to acquire shares of Vidabode. Vidabode in turn used the share proceeds to repay the GE Capital loan. Keybrand subsequently claimed an ABIL on the shares it acquired in 2010. CRA denied the ABIL on the basis that, since Keybrand and Vidabode dealt at less than arm’s length when the shares were acquired they had an adjusted cost base of NIL, i.e., the value of the shares at the date of acquisition, not their cost. The taxpayer was unsuccessful in the Tax Court and appealed to the Federal Court of Appeal. The Court of Appeal resolved the appeal on the simple basis that any taxpayer who paid $14 million for worthless shares was clearly not dealing at arm’s length with the issuer of the shares as a matter of fact. Accordingly the appeal was dismissed with costs in an agreed amount of $2,312. [There are smaller, peripheral issues in the appeal which I will not deal with since the lion’s share is accounted for by the ABIL issue which I regard as the more significant to practitioners.]
Decision: This case is interesting in that technically the investment of Keybrand in Vidabode would not run afoul of the arm’s length rules of the ITA except for the time-honoured rule of arm’s length “as a matter of fact”. Webb J.A., speaking for the Court, adopted a down to earth approach to this question that should be a guide for practitioners in cases that appear close to the line:
 This Court, in Remai Estate, simply noted that failing to consider “whether the terms of a transaction reflect ‘ordinary commercial dealings between parties acting in their own interests’” was not an error of law. However, since “‘ordinary commercial dealings between parties acting in their own interests’ […] is a helpful definition of an arm's length transaction”, the lack of ordinary commercial terms that would be agreed upon by parties acting in their own interests may support a finding that the transaction is not an arm’s length transaction and, therefore, that the parties were not dealing with each other at arm’s length.
 In my view, in an extraordinary situation such as here, where a person pays in excess of $14 million for shares that do not have any value, the magnitude of the discrepancy raises doubts that the parties were dealing with each other at arm’s length.
 As a result, it is more likely than not that Keybrand was the directing mind of both parties to the transaction related to its acquisition of the common shares of Vidabode in December 2010. Consequently, the Tax Court Judge did not err in concluding that Keybrand and Vidabode were not dealing at arm’s length when Keybrand acquired shares of Vidabode in December 2010.
I think it safe to paraphrase the Court of Appeals decision by saying that the first rule in determining arm’s length relationship in this type of situation is to apply common sense. The application of common sense as perceived by the Court of Appeal resulted in a dismissal of the appeal with a modest agreed costs award to the Crown ($2,312).