Total Energy Services Inc. v. The King (2024)

*** This information is presented for educational purposes only and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual tax situation. *** 

Total Energy Services Inc. v. The King (2024)

 Key Lessons / Points

•  Be cautious when acquiring a company to utilize its tax assets. In this case, the judge ruled that because there was a total change in identity when the old company was purchased and their tax attributes did not carry over after the transformation as the shareholders and identity had been completely transformed.
• For more information on how SR&ED is impacted after a change in control of a company please see our article Carryover amounts for SR&ED after a Change in Company Control

Fiscal Years in Question 

2010, 2011

Court Heard In 

Tax Court of Canada (Calgary, Alberta)

Dates Heard 

June 20-24, 2022 & June 27-29, 2022; January 15, 2024 & January 16, 2024

Length of Process

14 years

Neutral Citation 

2024 TCC 12

Docket 

2016-367(IT)G

Amount Under Dispute 

$23,229,238

Decision 

The appeals are dismissed.

Costs are awarded to the Respondent. The parties shall have until March 4, 2024 to reach an agreement on costs, failing which the Respondent shall have a until April 4, 2024 to serve and file written submissions on costs and the Appellant shall have 30 days following the service of the Respondent’s submissions above to file and serve a written response. Any such submission shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing limits, costs shall be awarded to the Respondent as set out in the Tariff.

[128] The appeals are dismissed on the basis of the foregoing.

[129] Costs are awarded to the Respondent. The parties shall have until March 4, 2024 to reach an agreement on costs, failing which the Respondent shall have a until April 4, 2024 to serve and file written submissions on costs and the Appellant shall have 30 days following the service of the Respondent’s submissions above to file and serve a written response. Any such submission shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing limits, costs shall be awarded to the Respondent as set out in the Tariff.

Summary 

This was an appeal of a notice of reassessment dated August 27, 2015, denying the deduction of non-capital and other losses and deductions for the 2010 and 2011 taxation years on the basis of the application of the General Anti Avoidance Rules (GAAR). The Appellant, Total Energy Services Inc., bought a failing company, Xillix Biotechnologies Corp. to absorb their tax losses and benefits. The Appellant argued that they did not violate the GAAR and were entitled to the non-capital loses and SR&ED expenditures based on the acquisition of the company. The judge dismissed the appeals.

Key Excerpts 

[17] It should be noted that the total consideration to be paid to the shareholders of Biomerge through a combination of cash and shares of New Total was $3.9 million negotiated by the parties based on paying $0.052 per dollar on the total of non-capital losses and SR&ED expenditures in the Biomerge tax pool.

[23] In my view, the above CCAA transactions and Total Conversion transactions reflect a vendor of inactive but existing shell corporations, with tax losses and securities exchange registrations, marketing and selling such attributes on the open market to a willing and unrelated buyer, who ended up acquiring and using such losses against its income from a business totally different from that of the original corporation, almost entirely for the benefit of new shareholders. The role of this Court will be to determine whether any of such transactions which gave rise to the aforesaid result violates the GAAR.

[71] As set out in Copthorne, at paragraph 72, abusive tax avoidance exists “(1) where the transaction achieves an outcome the statutory provision was intended to prevent; (2) where the transaction defeats the underlying rationale of the provision; or (3) where the transaction circumvents the provisions in a manner that frustrates or defeats its object, spirit or purpose” and these are often intertwined.

[72] The Respondent takes the position that the transactions were an abuse of s.111(5) dealing with non-capital losses, s.111(4) which parallels s.111(5) for net capital losses, s.37(6.1) which effectively parallels s.111(5) with respect to SR&ED deductions as well as an abuse of the SIFT conversion rules in s.85.1(8) and s.88.1(2) which are the provisions particular to the facts of this case.

[75] While I will restrict my analysis to paragraph 111(5) of the Act, the same will apply to the parallel provisions dealing with net capital losses and SR&ED deductions.

[97] The Appellant, as the successor to Xillix, claimed its tax losses and SR&ED deductions in 2010 and 2011 for the benefit of the almost entirely new and unrelated shareholders of the Appellant.

[111] Here, like in Deans Knight and MP Properties, the only link between Xillix, prior to the series of transactions, and the Appellant after them, were the tax attributes in issue. The impugned transactions resulted in a total transformation of Xillix –a complete lack of the continuity of its identity- while imbuing a new entity with new shareholders to benefit from its tax attributes – a result completely contrary to spirit, object and purpose of each of s.111(5) in respect of non-capital losses, s.111(4) in respect of net-capital losses and s.37(6.1) in respect of SR&ED deductions. The Minister was therefore correct in denying the Appellant the losses and deductions in issue in this appeal using the GAAR.

Link to Full Ruling 

View the full report here. 

Related Ruling

Total Energy Services Inc. v. The King (2019)

Total Energy Services Inc. v. The King (2024) – Current