Deans Knight Income Corporation v. Canada (2023)

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Deans Knight Income Corporation v. Canada (2023)

 Key Lessons / Points

  • Corporate restructuring  may trigger a lawsuit from the CRA and should not be done lightly; oftentimes there are less risky options to explore which are less likely to draw the attention of the CRA. Speak with a lawyer before making a big changes.
    • Many companies may have carry-over SR&ED ITCs; however, they should be careful entering into investment agreements for the purpose of leveraging these ITCs or other carry-over deductions.
  • Be familiar with the General Anti-Avoidance Rule (GAAR) set out in Section 245 of the Income Tax Act.
    • Section 111(1)(a) of the Income Tax Act allows a taxpayer’s non‑capital losses to be carried back or forward to different taxation years to offset income in those years. However, Section 111(5) restricts non‑capital loss carryovers for a corporation if control of the corporation has been acquired by a person or group of persons, unless it continues the same or similar business that incurred the losses.
    • In this case, the Appellant performed a variety of transactions which caused a fundamental transformation to the corporation. Without triggering an “acquisition of control”, the shareholders voting power was changed which resulted in the Appellant’s company being fundamentally changed. The result obtained by the transactions frustrated the rationale of section 111(5) and therefore constituted as abuse with the intent to avoid the payment of taxes.

Fiscal Years in Question 

2009, 2010, 2011, 2012

Court Heard In 

Supreme Court of Canada (N/A)

Dates Heard 

November 2, 2022

Length of Process

14 years

Neutral Citation 

2023 SCC 16



Amount Under Dispute 

Not Specified


[197] For these reasons, I am of the view that the avoidance transactions did not frustrate the rationale of s. 111(5). There was therefore no abuse, and consequently, I would allow the appeal and restore the judgment of the Tax Court of Canada.


Prior to this case the Appellant, Deans Knight Income Corporation (“Deans Knight”), then operating under the name Forbes Medi‑Tech Inc. (“Forbes”), had approximately $90 million of unused non‑capital losses, scientific research and experimental development (SR&ED) expenditures, and investment tax credits. The Appellant entered into an investment agreement with a venture capital company, Matco, and a complex arrangement was devised to take advantage of the loss carryover deduction in Section 111(1)(a) without triggering the restriction in Section 111(5).

Many companies may have carry-over SR&ED ITCs; however, they should be careful entering into investment agreements for the purpose of leveraging these ITCs or other carry-over deductions.

First, Forbe’s assets and liabilities were moved into a new parent company, Newco. Second, pursuant to the investment agreement, Matco purchased a debenture convertible into some of the voting shares and all of the non‑voting shares that Newco held in Forbes. While Newco was not obliged to sell its shares to Matco, it was promised that it would receive at least a guaranteed amount if it sold the shares or if such an opportunity did not present itself. Third, Matco would find a new business venture for Forbes, which would be used to raise money through an initial public offering (“IPO”). The profits from this venture could be sheltered by the tax attributes Forbes originally could not utilize. Other than when acting pursuant to the investment agreement, Newco and Forbes could not engage in a variety of activities without the consent of Matco. Matco was able to find a mutual fund management company, Deans Knight Capital Management, that agreed to use Forbes for an IPO through which it would raise money to invest in high‑yield debt instruments. Forbes’ name was changed to Deans Knight. The IPO and subsequent investment business succeeded. Consequently, the Appellant deducted its non‑capital losses to reduce its tax liability for its 2009 to 2012 tax years.

Beginning in 2015 the Appellants 2009-2012 claims were reassessed and denied by the Minster under the rationale that the non‑capital loss deduction transactions were abusive and therefore the General Anti-Avoidance Rule (GAAR) applied. In 2019 the Appellant appealed the Minister’s 2015 decision to the tax court and was successful. The Judge reasoned that “The use of the Appellant’s Tax Attributes against income from the investment business could have been achieved even if the Investment Agreement had not been entered into.”

In this case, the court performed an in-depth analysis of the Appellant’s series of transactions to determine whether they constituted as abusive tax avoidance under the ITA. The court determined that they were abusive and restored the judgment of the Tax Court of Canada from 2015:

 “[6][…] Through a complex series of transactions, the appellant underwent a fundamental transformation that achieved the outcome that Parliament sought to prevent, while narrowly circumventing the text of s. 111(5). The result of the transactions thereby frustrated the provision’s rationale. Since the GAAR applies to deny the tax benefits, the Minister’s reassessments must be restored.”

Key Excerpts 

I. Overview

[1] This tax appeal raises the issue of the application of the general anti-avoidance rule (the “GAAR”) to transactions undertaken by the appellant, Deans Knight Income Corporation, to monetize non-capital losses and other deductions.

[4] Before this Court, the parties accept that the appellant complied with the text of the Act. In other words, the parties agree that there was no “acquisition of control” and that, therefore, the loss carryover restriction in s. 111(5) did not apply. The central issue in this appeal is whether s. 245 of the Act, known as the general anti-avoidance rule or the GAAR, applies to deny the deductions. The GAAR operates to deny tax benefits flowing from transactions that comply with the literal text of the Act but nevertheless constitute abusive tax avoidance. For the GAAR to apply to a transaction, three elements found in s. 245 must be met: (1) there must be a “tax benefit”; (2) the transaction must be an “avoidance transaction”, meaning one that is not undertaken primarily for a bona fide non-tax purpose; and (3) the avoidance transaction giving rise to the tax benefit must be an “abuse” of the provisions of the Act (or associated enactments).

[5] The Tax Court found that the transactions were tax avoidance transactions that resulted in a tax benefit, but concluded that they were not abusive. On appeal, the Federal Court of Appeal held that the transactions were abusive, such that the GAAR applied to deny the tax benefits. I note that the parties and the lower courts focused on the non-capital loss deductions since the SR&ED and ITC provisions function similarly. As was the case in the Federal Court of Appeal, the only issue on appeal is whether the appellant’s series of transactions resulted in abusive tax avoidance.

[6] For the reasons that follow, I would dismiss the appeal. The transactions were abusive. The object, spirit and purpose of s. 111(5) of the Act is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. Through a complex series of transactions, the appellant underwent a fundamental transformation that achieved the outcome that Parliament sought to prevent, while narrowly circumventing the text of s. 111(5). The result of the transactions thereby frustrated the provision’s rationale. Since the GAAR applies to deny the tax benefits, the Minister’s reassessments must be restored.

II. Facts

[7] Before the transactions at issue in this appeal, the appellant carried on a drug research and nutritional food additive business under the name Forbes Medi-Tech Inc. Its shares were publicly listed on the NASDAQ and TSX. In 2007, the appellant’s business was struggling and it faced a potential delisting of its shares from the NASDAQ because the bid price for its common stock had fallen below the minimum price required by the exchange. At a meeting of the appellant’s board of directors in May 2007, then-CFO David Goold reported on a method of realizing the value of its accumulated Tax Attributes in the form of non-capital losses, SR&ED tax expenditures and ITCs. These unused Tax Attributes had accumulated to nearly $90 million by the end of 2007. Goold told the board that a reorganization of the company, followed by a takeover by another company, would allow the Tax Attributes to be monetized for between 4 and 4.5 cents on the dollar for a total of between $3.5 million and $4 million. It was unlikely that the appellant would be able to use the Tax Attributes on its own at any point; indeed, by November 2007, it had only six months of cash flow left.

[9] In early 2008, the appellant reorganized and restructured by way of a court-approved Plan of Arrangement. The board of directors had determined that this was the best way of maintaining compliance with the NASDAQ’s minimum bid price listing standard while facilitating a future monetization of its Tax Attributes. A new company, 0813361 B.C. Ltd. (“Newco”), was incorporated, and all outstanding common shares, options and warrants of the appellant were exchanged for common shares and warrants of Newco on an 8:1 basis. The appellant thus became a wholly owned subsidiary of Newco. Newco’s shares began to be traded on the NASDAQ in substitution for the shares of the appellant.

[10] On March 4, 2008, the appellant and Matco entered into a second letter of intent. On March 19, 2008, the appellant entered into an investment agreement with Newco and Matco (the “Investment Agreement”).

[11] Under the Investment Agreement, Newco would receive roughly $3.8 million in the following manner. First, Matco purchased a convertible debenture for $3 million, subject to adjustments (ss. 2.2 and 2.3 of the Investment Agreement, reproduced in A.R., vol. II, at p. 86). The debenture would be convertible into 35 percent of the voting shares and 100 percent of the non-voting shares that Newco held in the appellant (i.e., 79 percent of the equity shares in the appellant). Second, Matco guaranteed that Newco would be able to sell its remaining shares in the appellant for a minimum of $800,000 (the “Guaranteed Amount”), subject to adjustments (s. 5.5). The remaining shares represented a majority (65 percent) of the voting shares of the appellant. Newco was not obliged to sell its shares to Matco. If an opportunity for Newco to sell its remaining shares did not present itself during the relevant period, then Matco would still be required to pay the Guaranteed Amount.

[16] The Investment Agreement was executed on May 9, 2008. Pursuant to the agreement, the appellant’s assets and liabilities were transferred to Newco in exchange for a promissory note, which the appellant transferred to another subsidiary of Newco; Matco subscribed for the convertible debenture in the amount of nearly $3 million, which the appellant transferred to the other subsidiary. As planned, all of the appellant’s directors resigned except Butt, and Goold and Ross were elected directors.

[17] Matco sought to find a business that could use the appellant’s Tax Attributes. In December 2008, Matco presented the appellant with a corporate opportunity pursuant to the Investment Agreement. Deans Knight Capital Management (“DKCM”), a mutual fund management company, was interested in investing in high-yield debt instruments, which were selling at low prices because of the 2008 financial crisis. DKCM planned to raise money for the investments through an IPO. Matco proposed that DKCM would use the appellant as the corporate vehicle for the intended IPO, rather than incorporating a new company, because the appellant’s Tax Attributes would shelter the majority of the portfolio income and capital gains.

[18] The appellant’s board of directors discussed the proposal, did some investigation into DKCM, and approved the proposal. In December 2008, DKCM and the appellant entered into a letter of intent. The letter specified that the appellant must have at least $95 million in deductible amounts available to be used against income earned by the corporation in Canada. To allow the appellant to be used for DKCM’s business venture, DKCM would be appointed to manage the appellant; 4 of the 5 directors of the appellant would be appointed by DKCM; and the appellant would be used in a $100 million minimum IPO, whose proceeds would be used to purchase corporate debt securities that would generate income and gains that could be sheltered by the Tax Attributes. The IPO would be priced such that the appellant’s existing common shares (which would ultimately be held by Matco following its exercise of the convertible debenture) would be attributed a net asset value of $5 million.

[19] In February 2009, the appellant’s name was changed to its current name, “Deans Knight Income Corporation”. DKCM’s President became a director of the appellant. In March 2009, Matco’s managing director and four nominees of DKCM were appointed as directors of the appellant, and three officers of DKCM were appointed as officers of the appellant.

[24] When filing its tax returns for 2009 to 2012 and in computing its income, the appellant claimed Tax Attributes from 2007 and earlier. The appellant deducted nearly $65 million of its Tax Attributes to reduce its tax liability from the debt-securities business.

[25] The Minister reassessed these taxation years to disallow the claimed losses and expenditures. The appellant objected to the reassessments and appealed to the Tax Court.

IV. Issues

[39] Only the third step of the GAAR analysis is challenged before this Court. The issues can therefore be stated as follows:

(1) Did the Federal Court of Appeal err in its articulation of the object, spirit and purpose of s. 111(5) of the Act?

(2) Did the Federal Court of Appeal err in concluding that the avoidance transactions were abusive?

V. Analysis

C. Applying the GAAR

[51] As Rothstein J. wrote in Copthorne, “[i]t is relatively straightforward to set out the GAAR scheme. It is much more difficult to apply it” (para. 32). This is because the GAAR confers upon courts the “unusual duty of going behind the words of the legislation” (para. 66). While the duty imposed by the GAAR is unusual, the analysis involves a structured, three-step test that has been the subject of thorough guidance by this Court. In order for the GAAR to apply, the following questions must be asked (para. 33, citing Trustco, at paras. 18, 21 and 36):

1. Was there a tax benefit? . . .

2. Was the transaction giving rise to the tax benefit an avoidance transaction? . . .

3. Was the avoidance transaction giving rise to the tax benefit abusive?

(3) Abusive Tax Avoidance

[56] The third step of the GAAR analysis is frequently the most contentious. Indeed, it is the only step at issue in the present appeal. Analyzing whether the transactions are abusive involves, first, determining the object, spirit and purpose of the relevant provisions and, second, determining whether the result of the transactions frustrated that object, spirit and purpose (Trustco, at para. 44; Copthorne, at paras. 69‑71).

[73] In summary, at the third stage of the GAAR analysis:

– The object, spirit and purpose is a description of the provision’s underlying rationale. The means (the how) do not always provide a full answer as to the rationale underlying the provision (the why).

– The text, context and purpose of a provision provide indicia of its rationale. The text can shed light on what the provision was designed to encourage or prevent based on what it expressly permits or restricts, how it is worded and structured, and the nature of the provision. Similarly, the context can serve to identify the function of the provision within a coherent scheme. Finally, the provision’s purpose can help to discern the outcomes that Parliament sought to achieve or prevent.

– Once the object, spirit and purpose has been ascertained, the abuse analysis goes beyond the legal form and technical compliance of the transactions to consider whether the result frustrates the provision’s rationale.

VI. Application

(4) Conclusion on Object, Spirit and Purpose

[115] Respectfully, both the lower courts and the appellant formulated the object, spirit and purpose as a legal test, rather than summarizing the rationale of the provision. This ultimately distorted their GAAR analysis. De jure control, “effective” control and “actual” control do not indicate why Parliament was concerned about an acquisition of control and the mischief it sought to address (Oxford Properties Group, at para. 101). To define the object, spirit and purpose of s. 111(5) based on Parliament’s choice of test or substitute it for another test would, in this case, result in prioritizing the means (the how) over the rationale (the why).

[122] An analysis of the transactions at issue demonstrates that their result served to frustrate the object, spirit and purpose of s. 111(5): considering the circumstances as a whole, they achieved the outcome that Parliament sought to prevent and provided Matco with the benefits of an acquisition of control, all while narrowly circumventing the application of s. 111(5). I note that finding that a transaction falling short of de jure control has abused s. 111(5) in this case does not mean that every transaction falling short of de jure control will be found abusive of this provision. Indeed, the question is not whether Matco holds de jure control or satisfies some other test such as de facto control. As I explained, the abuse analysis is comparative: it asks courts to assess the transactions at issue in light of the provision’s rationale to determine whether the result achieved by the transactions frustrates this rationale. It clearly did so here.

[124] Section 111(5)’s rationale is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. As previously explained, s. 111(5) reflects the proposition that when the identity of the taxpayer has effectively changed, the continuity at the heart of the loss carryover rule in s. 111(1)(a) no longer exists. From this perspective, the same result was achieved through the impugned transactions. Indeed, the reorganization transactions resulted in the appellant’s near-total transformation: its assets and liabilities were shifted to Newco, such that all that remained were its Tax Attributes. Put differently, the appellant was gutted of any vestiges from its prior corporate “life” and became an empty vessel with Tax Attributes.

[125] Importantly, the tax attributes of a loss corporation were preserved to benefit another party. Indeed, the payments agreed upon by Matco under the Investment Agreement were in contemplation of being able to financially benefit from the Tax Attributes by filling the vessel with its chosen corporate opportunity and remaining a significant equity shareholder. Such a conclusion is reinforced by the adjustment clause in the Investment Agreement. The amounts owed by Matco under the Investment Agreement were to be adjusted based on the actual value of the Tax Attributes; in this way, the consideration which Matco was to provide was tied to its ability to benefit from monetizing the Tax Attributes (arts. 2.3, 5.5(a) and 5.5(b)).

[126] Moreover, the shareholder base of the taxpayer underwent a fundamental shift throughout the transactions: the appellant began as a wholly owned subsidiary of Newco and ultimately became a publicly traded company advertised for a new business, with Matco as part of the new shareholder base.

[127] As for its business activity, the appellant was used as the vessel for an unrelated venture planned by DKCM and selected by Matco. Thus, the only link between the appellant after the transactions and its prior corporate “life” was the Tax Attributes; in other respects, it was, in practice, a company with new assets and liabilities, new shareholders and a new business. Accordingly, the transactions resulted in a fundamental change in the identity of the taxpayer. The appellant’s continued ability to benefit from the loss carryover deductions frustrates the rationale behind Parliament’s decision to sever the continuity of tax treatment in s. 111(5), particularly considering the rights and benefits obtained by Matco.

[128] As I explained, the de jure control test was used as a means to implement Parliament’s aims in s. 111(5) because it appropriately recognizes that obtaining majority voting shares carries with it the ability to elect the board of directors and therefore to control the management of the affairs of the corporation (Buckerfield’s, at pp. 302-3; Duha Printers, at paras. 35-36). Matco achieved the functional equivalent of such an acquisition of control through the Investment Agreement, while circumventing s. 111(5), because it used separate transactions to dismember the rights and benefits that would normally flow from being a controlling shareholder. Several aspects of the transactions at issue demonstrate this functional equivalence, by which I mean that Matco achieved an outcome that Parliament sought to prevent without directly acquiring the rights that would have triggered s. 111(5) (Trustco, at para. 57; Copthorne, at para. 69).

[129] First, Matco contracted for the ability to select the corporation’s directors. Section 3.4 of the Investment Agreement reads as follows:

3.4 Resignation of Officers and Directors

The Parent shall exercise its best efforts to ensure that a nominee of Matco is added to the board of directors of the Subsidiary and that such nominee, as well as Charles Butt and David Goold, shall be the sole officers and directors of the Subsidiary, effective as of the Effective Time. The Parent shall exercise its best efforts to cause such directors to continue as directors of the Subsidiary until the closing of a Corporate Opportunity, at which time it shall exercise its best efforts to cause each of Charles Butt and David Goold to resign as an officer and director and provide an unconditional mutual release of all claims he or she may have against the Subsidiary and vice versa, other than claims in respect of indemnification.

(A.R., vol. II, at p. 87)

[130] Accordingly, even without holding majority voting shares, Matco contractually required Newco, who would have control over most remaining shares at the relevant time, to ensure that the three directors of the appellant would be Butt, Goold and a director selected by Matco. This is what occurred during the election following the execution of the Investment Agreement. It thereby contractually oversaw the makeup of the board of directors. As contemplated by s. 3.4, once the corporate opportunity was found and accepted, Butt and Goold were to resign and were to be replaced with directors selected by DKCM to implement its own business activity while monetizing the appellant’s Tax Attributes. Again, this is precisely what occurred.

[131] Second, the Investment Agreement in effect placed severe restrictions on the powers of the board of directors. The appellant was prohibited from taking a variety of actions including, but not limited to: issuing any shares, options, warrants, calls, conversion privileges or rights to acquire any shares; changing or amending its constating documents or by-laws; reorganizing, amalgamating, merging or continuing the appellant with any other legal person; taking any action relating to the liquidation, dissolution or winding-up of the appellant; declaring any dividends; entering into any contract in respect of the appellant; and engaging in any activity other than examining and pursuing a corporate opportunity (s. 6.1). Several of these decisions are so central to directors’ duties that under its governing corporate law statute, directors are not ordinarily permitted to delegate such authority to a managing director or a committee (s. 115(3) of the CBCA). The aforementioned corporate activities could only occur with the “prior written consent of Matco” (s. 6.1 of the Investment Agreement).

[132] The restrictions in favour of Matco resemble the fettering of discretion that would normally occur through a unanimous shareholder agreement and which would lead to an acquisition of de jure control (Duha Printers, at para. 71). The only reason that s. 111(5) was not violated was due to a circuit-breaker transaction: the managing director of Matco purchased 100 shares through a holding company, 1250280 Alberta Ltd., which was not a party to the agreement in order to prevent the Investment Agreement from being signed by all shareholders. Despite this manoeuvre, the result was similar: the powers of the directors were effectively neutralized for the duration of the agreement.

[133] Third, the transactions allowed Matco to reap significant financial benefits. Through the transactions at issue, Matco became a significant equity owner and maintained a stake in the corporation worth $4.5 million following the IPO. However, rather than merely purchasing a majority of the voting shares, it used a separate contractual agreement to gain the functional equivalent of majority voting power prior to the fulfilment of the corporate opportunity. During this intervening period, Matco deprived Newco, the majority voting shareholder on paper, of each of the core rights that it could ordinarily have exercised. One need only examine the three traditional shareholder rights outlined in s. 24(3) of the CBCA: the right to vote at any meeting of shareholders, the right to receive any dividend declared by the corporation, and the right to receive a portion of the remaining property of the corporation on dissolution. While Newco maintained its voting rights in theory, most decisions that would normally be subject to a shareholders vote — such as a change in the corporation’s by-laws — could only occur with the consent of Matco (s. 6.1(b)(iii) of the Investment Agreement). Similarly, it may have had a right to dividends on paper, but any such dividends could only be declared with the consent of Matco (s. 6.1(c)(iv)). Finally, Newco may have been entitled to the appellant’s remaining property upon dissolution, but again, the directors were prohibited from taking such a step without Matco’s approval (s. 6.1(c)(iii)). In any case, all of the appellant’s assets had been removed through the reorganization transactions. In this way, the appellant corporation had changed hands, but Matco obtained such a result through a series of transactions rather than through the acquisition of a majority of the voting shares in the appellant.

[134] In response, the appellant argues that it remained at all times a free actor. In my view, any residual freedom under the Investment Agreement is illusory and merely reinforces how the transactions frustrated the rationale of s. 111(5).

[135] While the appellant could, in theory, refuse the corporate opportunity presented by Matco (s. 4.1 of the Investment Agreement), a careful reading of the Investment Agreement indicates that its acceptance of such an opportunity was a fait accompli.

[136] First, the appellant was prohibited from engaging in any other activity other than studying and accepting the corporate opportunity (s. 6.1(d)). Put simply, the sole purpose for the appellant’s continued existence was to serve as a vessel for the corporate opportunity selected by Matco. It was therefore not in doubt that such an opportunity would be accepted.

[137] Second, the consequences of refusing the corporate opportunity were severe. In particular, Matco would no longer be obligated to provide the Guaranteed Amount (s. 5.5(d)). It is worth placing these consequences in context: when the appellant sought an external opportunity, it was in dire financial stress. The money owed by Matco under the Investment Agreement, in consideration for permitting it to indirectly monetize the Tax Attributes, provided the appellant with its only lifeline. The discretion provided in s. 4.1 must be understood in light of these circumstances, which were known to the parties at the time of contracting. Indeed, they are the reason that the negotiations occurred in the first place, because the appellant was unable to benefit from the Tax Attributes on its own due to its financial situation.

[138] As for the fact that Newco could sell its shares to another party if it received a higher price than Matco (ss. 5.1 and 5.2), the prospect of finding another buyer was illusory. Given that the appellant was unable to carry out any activities without Matco’s consent due to the Investment Agreement, it could not reasonably be expected that a third party would value the shares higher than the price stipulated within the agreement until Matco had first found a corporate opportunity.

[139] Of course, Newco had the right not to sell its remaining shares at all (ss. 5.3 and 5.8), as the Tax Court recognized (paras. 159 and 164). But understood in light of the correct object, spirit and purpose, the fact that Newco could choose to keep its voting shares is consistent with the circuitous path by which the transactions circumvented s. 111(5). Regardless of whether Newco sold its shares to Matco, the actions of the appellant were already locked down by the Investment Agreement, and the core benefits of share ownership (such as the right to dividends) were negated by being subjected to Matco’s approval. Furthermore, the ability to receive the Guaranteed Amount directly rather than by selling the shares to Matco (ss. 5.3 and 5.8) merely reinforces that the transactions were designed to circumvent s. 111(5). This option was important because in certain circumstances, Matco’s purchase of the shares might lead to an acquisition of de jure control. The complex series of transactions and the flexibility built into the Investment Agreement were necessary only because the contracting parties sought to achieve the very mischief that s. 111(5) was intended to prevent.

[140] Considering the foregoing circumstances as a whole, the result obtained by the transactions clearly frustrated the rationale of s. 111(5) and therefore constituted abuse. The object, spirit and purpose of s. 111(5) is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. The transactions achieved the very result s. 111(5) seeks to prevent. Without triggering an “acquisition of control”, Matco gained the power of a majority voting shareholder and fundamentally changed the appellant’s assets, liabilities, shareholders and business. This severed the continuity that is at the heart of the object, spirit and purpose of s. 111(5).

I. Overview

[143] It is essential to keep in mind that the GAAR requires a careful balance “between two competing interests: the interest of the taxpayer in minimizing his or her taxes through technically legitimate means and the legislative interest in ensuring the integrity of the income tax system” (V. Krishna, Fundamentals of Canadian Income Tax (2nd ed. 2019), vol. 1, at p. 96). As Binnie J., dissenting, aptly warned in Lipson v. Canada, 2009 SCC 1, [2009] 1 S.C.R. 3, at para. 55, “[t]he GAAR is a weapon that, unless contained by the jurisprudence, could have a widespread, serious and unpredictable effect on legitimate tax planning”. With respect, I am of the view that both my colleague Rowe J. and the Federal Court of Appeal have failed to apply the GAAR with due restraint. Accordingly, I would allow the appeal.

[144] I disagree with several aspects of my colleague Rowe J.’s analysis. Despite Parliament’s unambiguous adoption of the de jure control test in s. 111(5) of the Act, my colleague has opted for an ad hoc approach that expands the concept of control based on a wide array of operational factors. In my view, this approach invites the exercise of unbounded judicial discretion and will result in the loss‑trading restrictions in s. 111(5) being applied to transactions on a circumstantial basis. Moreover, unlike my colleague, I adopt the findings of fact made by the Tax Court of Canada. For these reasons, I would allow the appeal and restore the Tax Court’s judgment.

[152] With respect, my colleague applies the GAAR in a way that not only ignores but also disregards this core principle. He states that the rationale behind a provision must be distinguished from the means used to give effect to that rationale (para. 59). According to him, it is essential to look to the drafting process as it “reflects the task of translating government aims into legislative form in order to create intelligible, legally effective rules” (para. 59). The necessary implication that flows from my colleague’s reasoning is that Parliament is unable to translate its objectives into effective means; the best it can do is choose text that is “most faithful to its objectives” (para. 59 (emphasis added)). In my view, Parliament often intends to do precisely what it actually does. If Parliament crafts a provision carefully, courts should pay close attention to the means chosen and not simply assume that Parliament drafted the provision incompetently.

[157] I agree with much of my colleague’s analysis of the text, context and purpose of s. 111(5). However, I disagree with his conclusion that the provision’s rationale is “to deny unused losses to unrelated third parties who take the reins of a corporation and change its business” (para. 118). The analysis below addresses this issue, focusing on the concept of control as this is the main source of disagreement between my colleague and me.

[158] I begin my analysis with the observation that s. 111(1)(a) of the Act allows taxpayers to deduct non‑capital losses for the purpose of computing taxable income for a taxation year. This general rule is restricted by s. 111(5). Upon an acquisition of control, s. 111(5) prevents a corporation from carrying over losses unless the business, carried on by the corporation subject to the change of control, is continued for profit or with a reasonable expectation of profit. Thus, the general loss deductibility provision — s. 111(1)(a) — sets out the default rule subject to the restrictions found in s. 111(5), with exceptions in specific circumstances. Section 111(5) is a specific anti‑avoidance rule that limits what would otherwise be permissible deductions under s. 111(1)(a) (D. G. Duff et al., Canadian Income Tax Law (7th ed. 2023), at pp. 205‑6; T. E. McDonnell, “Legislative Anti‑Avoidance: The Interaction of the New General Rule and Representative Specific Rules”, in Report of Proceedings of the Fortieth Tax Conference (1989), 6:1, at p. 6:18). It bars corporate acquisitions for the singular purpose of accessing tax attributes by restricting the use of those attributes if accessed through the exercise of control. The acquisition of control test and the business continuity requirement are, properly construed, narrow exceptions to the anti‑avoidance provision.

[159] It follows that the restrictions on loss carryovers in s. 111(5) are triggered when “control of a corporation has been acquired by a person or group of persons”. “Control” is therefore central to how s. 111(5) functions. The parties in this case disagree as to whether a change of control for the purpose of s. 111(5) is signalled through an acquisition of de jure control or de facto control.

(1) The Notion of De Jure Control

[160] “Control” is not defined in the Act. However, courts have considered this concept on a number of occasions and have determined that “control” for the purposes of the Act means de jure control. In Buckerfield’s Ltd. v. Minister of National Revenue, 1964 CanLII 1187 (CA EXC), [1965] 1 Ex. C.R. 299, the Exchequer Court of Canada held that de jure control refers to the ownership of a sufficient number of shares to have a majority of votes in the election of the corporation’s board of directors.

[164] In contrast to a corporation’s constating documents, external agreements “give rise to obligations that are contractual and not legal or constitutional in nature” (Duha Printers, at para. 59). Consequently, any limitations imposed by such agreements “are limitations freely agreed to by the shareholders, and not at all inconsistent with their de jure power to control the company” (para. 49). Although such agreements do not have an impact on de jure control, they remain relevant in assessing de facto control. This is because control in fact is based on the ability to exercise direct or indirect influence over the corporation’s voting shareholders (Silicon Graphics Ltd. v. Canada, 2002 FCA 260, [2003] 1 F.C. 447, at para. 67). As such, there are a broader range of factors — beyond voting power determined in light of constating documents and the share register — that have the potential to establish de facto control. De facto control thus captures everything that de jure control does not.

(2) The Binary Nature of Control: De Jure and De Facto Control

[165] The legal distinction between constating documents of a corporation and external agreements exposes the binary nature of control, which can be either de jure or de facto. While the former give rise to legal powers over a corporation, the latter do not, such that the distinction between de jure and de facto control goes to the dichotomy between power and influence. The breach of a corporation’s constating documents entitles a complainant to seek a compliance order requiring adherence to the corporate constitution (e.g., Corporations Act, quoted in Duha Printers, at para. 13). In contrast, external agreements do not bind the corporation in the same way: shareholders remain free to exercise de jure control “even if an outside agreement exists to limit actual or de facto control” (Duha Printers, at para. 49). Consequently, the distinction between de jure and de facto control lies in the breadth of factors that can be considered in determining who has control over the corporation.

[166] In light of the case law, Parliament has clarified the concept of “control” in order to reach specific legislative goals. Since September 13, 1988, when s. 256(5.1) was introduced, the Act has been clear as to which provisions refer to the concept of de jure control as opposed to those that involve, rather, the application of de facto control. The use of the phrase “controlled, directly or indirectly in any manner whatever” specifically refers to de facto control, which exists when a party has direct or indirect influence over the corporation which can result in control in fact. This change illustrates the intentionality with which Parliament prescribes control tests, bearing in mind the distinction between de jure and de facto control.

[170] In short, Iacobucci J. in Duha Printers took a purposive approach to interpreting the word “control”. Interpreted literally, “control” could mean any type of influence over a corporation (para. 35). Nevertheless, Iacobucci J. concluded that the “general purpose” of s. 111(5) — preventing the transfer of non‑capital losses from one corporation to another — does not expand the meaning of de jure control (para. 88). Therefore, even prior to the adoption of the GAAR, one thing was clear: Parliament intended the acquisition of de jure control — and only the acquisition of de jure control — to trigger the application of s. 111(5). To this day, Parliament continues to rely upon the distinction between de jure and de facto control. And despite my colleague’s suggestion to the contrary, the GAAR cannot eliminate this distinction.


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