Canada v. Nova Corp. of Alberta
A-454-95
Marceau, McDonald JJ.A.; Desjardins J.A. dissenting
1/5/97
36 pp.
Appeal from Tax Court of Canada decision re: application of Income Tax Act, s. 55(1) to taxpayer's acquisition of capital losses-In 1985, two transactions undertaken by respondent (Nova) and number of corporations to which Nova not related within meaning of Act, s. 251-Nova acquiring shares with adjusted cost base of approximately $42,000,000 but only nominal value-Nova's purchase price for shares $2,237,500-Once shares disposed of through series of transactions, Nova claimed capital loss of approximately $42,000,000, thus allowable capital loss of nearly $21,000,000 carried back to 1985 taxation year and offset against capital gain realized in that year, reducing tax payable by approximately $10,000,000-In December 1993, Minister issued reassessment reducing net capital losses carried back from 1986 as follows: (a) Allarco allowable capital loss: 618,750; (b) Petralgas allowable capital loss: $500,000-Tax Court Judge holding Act, s. 55(1) did not apply to reduce losses claimed by Nova-As taxpayer had not done anything to increase adjusted cost base of assets acquired or decrease proceeds of disposition, Tax Court Judge concluded Nova entitled to losses claimed-Appeal dismissed, Desjardins J.A. dissenting-Per McDonald J.A.: entire transaction undertaken by Nova to avoid tax, to reduce tax burden-Precondition to application of s. 55(1): taxpayer must have done something to influence adjusted cost base or proceeds of disposition in order to have artificially or unduly increased losses from disposition-Nova has not increased amount of "loss from disposition" of Allarco preferred shares or Petralgas shares-Tax loss claimed by Nova far in excess of actual loss sustained in transaction-S. 55(1) should not be pushed beyond limits of plain meaning-No ambiguity in provision herein-Act amended in 1987 to prevent type of loss purchase undertaken in present case-Taxpayer cannot be punished for taking full advantage of operation of Act while existing-Economic losses incurred by Nova on purchase of shares much less than losses claimed-Once taxpayer inherits adjusted cost base of shares through operation of Act, loss deemed to be taxpayer's loss-Different use of "a loss" in s. 55(1)(b) and "his loss" in s. 55(1)(c) not advancing Minister's case-Since s. 55(1) requires some action on taxpayer's part, which was not present in case at bar, issue of whether losses claimed artificially, unduly increased need not be decided-S. 55(1) not operating to deprive taxpayer of losses claimed-Not broad anti-avoidance provision-Per Marceau J.A.: Nova Corporation of Alberta did nothing to create or increase loss in manner formally contemplated by Income Tax Act, s. 55(1)-No transfer of losses between unrelated companies-Transactions structured so as to provide for transfer of losses to companies related to each other at each step in process-Each step in process involving transfer of losses from one company to related company-Taxpayer entitled to arrange affairs so as to maximize tax shelter available to it under law-Act not only allowed scheme but caused inflated deduction to exist-Per Desjardins J.A. (dissenting): only purpose of series of transactions to enable respondent to avail itself of capital loss inherent in Allarco, Petralgas preferred shares-Loss for tax purposes exceeding respondent's economic loss-Interpretation of tax statutes no longer dependent on predetermined assumptions favouring taxpayer or government-Rules of interpretation of taxing statutes adopt purposive approach, emphasizing context of statute, objective, legislative intent-Court must take purposive approach to interpretation of s. 55(1)(c)-Capital losses acquired by Nova through Allarco, Petralgas transactions made possible through operation of several provisions in Act-S. 55(1)(c) providing results-driven test-Intention of taxpayer irrelevant-All circumstances must be looked at to appreciate if taxpayer may reasonably be considered to have artificially or unduly increased loss-Standard to be applied one of reasonable consideration-Transactions must be viewed as a whole rather than in isolation-Nova's actions not to be examined in isolation from series of transactions leading to disputed result-"Product" to be brought arranged so as to fit business purposes pursued by corporations such as Nova-Series of transactions would have had no value had Nova not taken steps it did-Adjusted cost base may have been obtained by operation of Act, but contrary to scheme, intent of Act-What Nova obtained "by operation of the Act" obtained through distortion of Act-Words "unduly or artificially" cover situations such as present one where action taken in clear defiance of scheme of rollover provisions, contrary to normal business practice-Through deviation of rollover provisions, respondent may reasonably be considered to have unduly, artificially increased one of two figures in calculation of fiscal loss, namely adjusted cost base-Nova's action well captured by terms of Act, s. 55(1)(c)-Income Tax Act, S.C. 1970-71-72, c. 63, ss. 55(1) (as repealed by S.C. 1988, c. 55, s. 33(1)), 251.