Digests

Canada v. Donahue Forest Products Inc.

A-502-01

2002 FCA 422, Noël J.A.

1/11/02

12 p.

Appeal from Tax Court of Canada (T.C.C.) decision (2001), 2001 DTC 586) allowing taxpayer's appeal against tax assessment, ruling entitled, in computing taxable income, to allowable business investment loss (ABIL) of $46,657,499 --Appellant citing general anti-avoidance rule (GAAR) and claiming tax benefit obtained by respondent resulted in misuse or abuse of Act read as whole--Respondent part of group of corporations (Donohue Group) controlled by Donohue Inc. (Donohue)--Starting in 1988, Donohue Group invested considerable amounts of money in Donohue Matane Inc. (DMI) for construction of pulp and paper mill, improvements to four sawmills and operations of those mills --For this project, Donohue formed partnership with Société de récupération, d'exploitation et de développement forestier du Québec (Rexfor), each partner holding 50% of DMI's common shares (62,150,000 shares reflecting investment of $62,150,000)--Following collapse in price of wood pulp in 1991, Donohue's investment in DMI no longer worth anything while adjusted cost base of shares $62,210,000--To realize economic loss resulting from that investment, Donohue, with Rexfor's co-operation, restructured its investment in DMI-- Appeal dismissed--In its relevant tax aspects, transaction structured to maintain adjusted cost base of DMI shares at $62,210,000 and to produce in respondent ABIL of $46,675,499 (75% of recorded loss), which respondent applied in full against 1990 income--Taxpayer conceded before T.C.C. that operation in question avoidance transaction within meaning of s. 245(3), producing for respondent tax benefit within meaning of s. 245(1)--However, taxpayer managed to persuade T.C.C. judge that transaction did not result in any abuse of provisions of Act--Judge rightly refused to recognize existence of principle cited by appellant (that Act read as whole contemplating form of matching between value of corporation's property and value of corporation's shares, so that no "actual disposition" or "actually realized" loss)-- Application of OSFC Holdings Ltd. v. Canada, [2002] 2 F.C. 288 (C.A.) and Water's Edge Village Estates (Phase II) Ltd. v. Canada, [2003] 2 F.C. 25 (C.A.): Court must be confident that although words used by Parliament allow avoidance transaction, general policy underlying relevant provisions or Act as whole sufficiently clear that Court may safely conclude that use made of provision or provisions by taxpayer constituted misuse or abuse--After exhaustive analysis, must be observed that not only no clear and unambiguous policy, but that principle on which Minister relied simply does not exist--Under corporate law, business corporation's property belongs to corporation and not shareholders--So gain or loss may be realized at same time by shareholder in respect of his shares and by corporation in respect of its own property--No principle that would allow effect of these transactions to be consolidated by matching them--Principle underlying Act, if any, contrary to one cited by Minister--In final analysis, once it is recognized that sale of shares by DSF to Cédrico Inc. made at arm's length and that it registered real decrease in value, becomes impossible to argue any misuse or abuse within meaning of s. 245(4) in transaction contemplated by Minister--Record disclosing that in acquiring DMI shares, executives of Cédrico Inc. obtained exactly what they wanted--No non-arm's length relationship between Cédrico Inc. and the Donohue Group--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 245(1), (3), (4).