Date: 20040618
Docket: A-438-03
A-439-03
Citation: 2004 FCA 234
CORAM: ROTHSTEIN J.A.
A-438-03
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
CANADIAN UTILITIES LIMITED
Respondent
A-439-03
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
CANUTILITIES HOLDINGS LIMITED
Respondent
Heard at Calgary, Alberta, on May 19, 2004.
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: NOËL J.A.
EVANS J.A.
Date: 20040618
Docket: A-438-03
A-439-03
Citation: 2004 FCA 234
CORAM: ROTHSTEIN J.A.
A-438-03
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
CANADIAN UTILITIES LIMITED
Respondent
A-439-03
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
CANUTILITIES HOLDINGS LIMITED
Respondent
REASONS FOR JUDGMENT
INTRODUCTION
[1] These appeals from a decision of the Tax Court (2003 TCC 193) presents an opportunity for this court to consider the term "series of transactions or events" in subsection 55(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) ("the Act").
[2] A succinct summary of the operation of subsection 55(2) is set forth in a case comment on the Tax Court decision in this case by Mark W. Lobsinger entitled "Capital Gains Strips and Normal Course Dividends" (2003) 51:6 Can. Tax. J. 2291. I paraphrase that summary as follows.
[3] Subsection 55(2) of the Act is a capital gain stripping anti avoidance rule. Under the rule, an otherwise tax free inter-corporate dividend that is deemed to arise on a redemption of shares is deemed to be proceeds of disposition of the shares where the deemed dividend is part of a "series of transactions or events" that results in a significant reduction of capital gains realized on the disposition of the shares. Under an exception to this rule ("the Part IV tax exception"), a deemed dividend will not be re-characterized as proceeds of disposition of shares to the extent that the redeeming shareholder is subject to Part IV tax on the deemed dividend. However, the Part IV tax exception does not apply if the Part IV tax is refunded on the payment of further dividends by
the recipient corporation to other corporations where the further dividend payments are part of the same "series of transactions or events" that includes the initial deemed dividend.
[4] At the relevant time in 1996, subsection 55(2) provided (emphasis added):
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(2) Where a corporation resident in Canada has after April 21, 1980 received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or 138(6) as part of a transaction or event or a series of transactions or events (other than as part of a series of transactions or events that commenced before April 22, 1980), one of the purposes of which (or, in the case of a dividend under subsection 84(3), one of the results of which) was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the transaction or event or the commencement of the series of transactions or events referred to in paragraph (3)(a), notwithstanding any other section of this Act, the amount of the dividend (other than the portion of it, if any, subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend to a corporation where the payment is part of the series of transactions or events) (a) shall be deemed not to be a dividend received by the corporation; (b) where a corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share except to the extent that it is otherwise included in computing such proceeds; and (c) where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property. |
(2) Lorsqu'une société résidant au Canada a reçu, après le 21 avril 1980, un dividende imposable à l'égard duquel elle a droit à une déduction en vertu du paragraphe 112(1) ou 138(6), comme partie d'une opération ou d'un événement ou d'une série d'opérations ou d'événements (sauf comme partie d'une série d'opérations ou d'événements qui ont commencé avant le 22 avril 1980) dont l'un des objets (ou, dans le cas d'un dividende visé au paragraphe 84(3), dont l'un des résultats) a été de diminuer sensiblement la partie du gain en capital qui, sans le dividende, aurait été réalisée lors d'une disposition d'une action du capital-actions à la juste valeur marchande immédiatement avant le dividende et qu'il serait raisonnable de considérer comme étant attribuable à autre chose qu'un revenu gagné ou réalisé par une société après 1971 et avant l'opération ou l'événement ou le début de la série d'opérations ou d'événements visés à l'alinéa (3)a), malgré tout autre article de la présente loi, le montant du dividende (à l'exclusion de la partie de celui-ci qui est assujettie à l'impôt en vertu de la partie IV qui n'est pas remboursé en raison du paiement d'un dividende à une société lorsqu'un tel paiement fait partie de la série d'opérations ou d'événements): a) est réputé ne pas être un dividende reçu par la société; b) lorsqu'une société a disposé de l'action, est réputé être le produit de disposition de l'action, sauf dans la mesure où il est inclus par ailleurs dans le calcul de ce produit; c) lorsqu'une société n'a pas disposé de l'action, est réputé être un gain de la société pour l'année au cours de laquelle le dividende a été reçu de la disposition d'une immobilisation. |
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[5] A number of other provisions of the Act and the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA") are relevant to the issues in this case and are referred to in these reasons. Except for section 129 and subsection 248(10) of the Act, which are dealt with subsequently, there is no controversy with respect to the interpretation and application of these other provisions.
FACTS
[6] The facts are complex but are not in dispute.
The Participants in the Sale of ATCOR
[7] In 1995, ATCO Ltd. ("ATCO"), an Alberta company owned by Ronald Southern, controlled Canadian Utilities Limited ("CU") and Canadian Utilities Holdings Limited ("CUH"). Both CU and CUH were publicly traded corporations. ATCO owned 100% of the voting shares of CUH and, together with CUH, owned 67% of the voting shares of CU.
[8] In 1995, ATCOR Resources Ltd. ("ATCOR") was a publicly traded corporation engaged in oil and gas exploration, production, processing and marketing. Collectively, ATCO, CU and CUH controlled ATCOR, owning approximately 87% of the voting shares of ATCOR.
[9] In May 1995, Ronald Southern decided to explore the possibility of selling ATCOR.
[10] At the relevant time, Forest Oil Corporation ("Forest"), a potential purchaser, was a New York oil and natural gas company whose shares were publicly traded.
[11] At all material times ATCO, CU and CUH dealt with Forest at arm's length. By an agreement entered into on December 12, 1995, Forest agreed to purchase ATCOR.
[12] 3140334 Canada Ltd. ("Newco") was incorporated as a wholly owned subsidiary of ATCO. ATCO held Newco's one outstanding issued share.
[13] By an amalgamation agreement dated December 15, 1995, ATCOR and Newco were to be amalgamated to form a new corporation which would continue to be known as ATCOR Resources Ltd ("Amalco").
[14] Forest incorporated 3189490 Canada Ltd. ("Forest Subco"), a wholly owned subsidiary, under the CBCA for the purpose of acquiring Amalco.
The Amalgamation of ATCOR and Newco
[15] On January 31, 1996, ATCOR and Newco were amalgamated to form Amalco. Under the amalgamation agreement, the one outstanding share of Newco held by ATCO was converted into one common share of Amalco. By virtue of ownership of this share, being the only issued voting share of Amalco, ATCO controlled Amalco.
[16] Pursuant to the amalgamation agreement, all other issued and outstanding shares of ATCOR were converted into three classes of redeemable/retractable special shares of Amalco. Holders of ATCOR shares could choose to convert their ATCOR shares into Class A, Class B, or Class C Amalco shares on a one-for-one basis.
[17] Under subsection 87(4) of the Act, the aggregate adjusted cost base (ACB) of the Amalco shares acquired by CU and CUH was deemed to be equal to the aggregate ACB of their respective ATCOR shares.
[18] As required under paragraphs 26(3)(b) and 182(1)(c) of the CBCA and subsections 87(3) and 89(1) of the Act, the amalgamation agreement provided for the aggregate paid-up capital ("PUC") of Newco and ATCOR to be allocated among the four classes of Amalco shares. The PUC of the one Newco share was allocated directly to the one common share of Amalco held by ATCO. The PUC of the Class A shares was set at $2.65/share while the PUC of the Class B shares was set at $1.40/share. The PUC of the Class C shares was to be computed after all shareholders had elected how to convert their shares in a manner that ensured that the aggregate PUC of Amalco was equal to that of Newco and ATCOR combined.
[19] On January 31, 1996, after the amalgamation took place, CU converted all of its ATCOR shares into Class A Amalco shares. CUH and ATCO converted all of their ATCOR shares into Class B Amalco shares. All other shareholders converted their ATCOR shares into Class A, Class B, or Class C Amalco shares as they saw fit.
The Sale of ATCOR to Forest Subco
[20] On January 31, 1996, Forest Subco acquired from ATCO its one common share of Amalco, thereby acquiring control of Amalco from ATCO.
[21] Immediately thereafter, Forest Subco subscribed for 1,000,000 Amalco common shares for an aggregate subscription price of $129,161, 278.
[22] Amalco redeemed all of its Class A and B shares for redemption proceeds of $4.88 per share for a total of $129,161,278.
[23] Forest Subco then acquired all outstanding Amalco Class C shares at $4.88 per share for a total of $56,805,527.76.
[24] The foregoing transactions, commencing with the incorporation of Newco, were termed the ATCOR/Forest series of transactions by the trial judge.
The Normal Course Dividends
[25] CU had paid dividends on its common shares since 1950 (with the exception of 1955 and 1956) and fixed rate dividends on its preferred shares. It increased its annual common share dividends for thirty consecutive years. CUH had paid dividends on its preferred shares in 1994, 1995, 1996, 1997 and 1998. These CU and CUH dividends were referred to by the parties and the trial judge as "normal course dividends".
CU and CUH's Calculation of Tax
[26] In its T2 return for its 1996 taxation year, CU included the amount of $26,497,509 as a deemed dividend pursuant to subsection 84(3) of the Act in respect of the redemption of its Amalco shares. It calculated the deemed dividend as follows:
|
amount paid on redemption of Class A Amalco shares |
11,882,291 x $4.88 = |
$57,985,580 |
|
less PUC of Amalco Class A shares redeemed |
11,882,291 x $2.65 = |
$31,488,071 |
|
deemed dividend received |
|
$26,497,509 |
[27] In its T2 return for its 1996 taxation years, CUH included the amount of $18,928,680 as a deemed dividend pursuant to subsection 84(3) of the Act in respect of the redemption of its Amalco shares. It calculated the deemed dividend as follows:
|
amount paid on redemption of Class B Amalco shares |
5,439,276 x $4.88 = |
$26,543,666 |
|
less PUC of Amalco Class B shares redeemed |
5,439,276 x $1.40 = |
$7,614,986 |
|
deemed dividend received |
|
$18,928,680 |
[28] In computing taxable income, CU and CUH deducted the amount of the deemed dividends pursuant to subsection 112(1) of the Act.
[29] In computing their liability for tax under Part IV of the Act for their taxation years ending December 31, 1996, both CU and CUH treated the entire amount of the deemed dividends as assessable dividends subject to Part IV tax under paragraph 186(1)(a). CUH also computed Part IV tax pursuant to paragraph 186(1)(b) on the portion of the dividends it received from CU for which CU claimed a dividend refund under subsection 129(1).
[30] CU offset its liability for Part IV tax by claiming a dividend refund under subsection 129(1) of $8,832,503, arising from its payment of normal course dividends during its taxation year ending December 31, 1996.
[31] CUH partially offset its liability for Part IV tax by claiming a dividend refund under subsection 129(1) of $5,269,117, arising from its payment of normal course dividends during its taxation year ending December 31, 1996. The remainder of CUH's Part IV tax was refunded by way of a dividend refund arising from its payment of normal course dividends during its taxation year ending December 31, 1997.
The Minister's Reassessment
[32] By reassessment dated May 22, 2001, the Minister of National Revenue increased by $5,646, 814 the tax payable under Part I of the Act by CU for its taxation year ending December 31, 1996. The Minister did this by adding an amount of $19,605,780 to CU's income, on the basis that subsection 55(2) applied to the deemed dividend and that, as a result, the amount of the deemed dividend was to be treated as the proceeds of disposition of its Class A Amalco shares with resulting capital gains treatment. The Minister computed the income inclusion as follows:
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proceeds of disposition |
11,882,291 x $4.88 = |
$57,985,580 |
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less adjusted cost base |
11,882,291 x $2.68 = |
$31,844,539 |
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capital gain |
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$26,141,041 |
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capital gains inclusion rate |
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x 75% |
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taxable capital gain to be included in income |
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$19,605,780 |
[33] The Minister then reduced CU's tax liability under Part IV of the Act by $8,832,503. The original basis of this reduction was abandoned at trial, but if the Minister is correct in arguing that subsection 55(2) applies to all of the deemed dividends arising from the redemption of the Amalco shares, paragraph 55(2)(a) will deem the dividends not to have been received and thus no Part IV tax will be payable.
[34] As he found that no Part IV tax was payable, the Minister also decreased CU's dividend refund under subsection 129(1) of the Act by $8,832,503.
[35] By reassessment dated May 25, 2001, the Minister increased by $4,095,982 the tax payable by CUH under Part I of the Act for its taxation year ending December 31, 1996. The Minister increased the tax payable by adding $14,066,082 to CUH's income on the basis that subsection 55(2) applied to the deemed dividend. As a result, the amount of the deemed dividend was to be treated as the proceeds of disposition of its Class B Amalco shares with resulting capital gains treatment. The Minister computed the income inclusion as follows:
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proceeds of disposition |
5,439,276 x $4.88 = |
$26,543,666 |
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less adjusted cost base |
5,439,276 x $1.432 = |
$7,788,890 |
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capital gain |
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$18,754,776 |
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capital gains inclusion rate |
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x 75% |
|
taxable capital gain to be included in income |
|
$14,066,082 |
[36] The Minister then reduced CUH's tax liability under Part IV of the Act by $9,266,097. Again, the basis of this reduction was abandoned at trial but the result will be correct if the Minister succeeds in establishing that subsection 55(2) applies to all of the dividends.
[37] As he found that no Part IV tax was payable, the Minister also decreased CUH's dividend refund under subsection 129(1) of the Act by $5,269,117.
ISSUES
[38] There are two issues in these appeals. The first issue is whether the payment of the normal course dividends was part of a series of transactions contemplated by subsection 55(2),
one of the results of which was to effect a significant reduction in the capital gain that would have been realized on the disposition of the Class A and B Amalco shares owned by CU and CUH.
[39] If the first issue is decided in favour of the Minister, the second issue is to what extent the Part IV tax exception in subsection 55(2) did not apply because the refund of Part IV tax caused by the payment of the normal course dividends was due to the payment of those dividends to corporations.
THE TRIAL JUDGE'S FINDINGS
[40] As to the first issue, the trial judge was of the opinion that payment of the normal course dividends was not part of the ATCOR/Forest series of transactions that gave rise to the dividends deemed to have been received by CU and CUH on the redemption of their Amalco shares. As a result, he concluded that subsection 55(2) did not apply because CU and CUH were subject to Part IV tax and because the refunds of Part IV tax were occasioned, not as part of the ATCOR/Forest series of transactions giving rise to the deemed dividends and the significant reduction in capital gains, but by independent transactions.
[41] In arriving at this conclusion, the trial judge considered three approaches to the question of whether the normal course dividends and the ATCOR/Forest series of transactions were all part of the same series:
1. whether the transactions constituted a series under his understanding of the test for a common law series set out in Furniss v. Dawson, [1984] 1 A.C. 474 (H.L.), as adopted in Craven v. White, [1989] 1 A.C. 398 (H.L.);
2. if not, whether the reliance of the ATCOR/Forest series of transactions on the normal course dividends meant that they were all part of the same series; and
3. if neither of the above approaches was sufficient to render the ATCOR/Forest transactions and the normal course dividend transactions part of the same series, whether subsection 248(10) of the Act operated so as to make them part of the same series.
[42] As I understand the learned judge's reasons, he concluded that the Furniss v. Dawson test did not apply because the normal course dividends which he characterized as the "intermediate transaction" had a purpose other than tax mitigation.
[43] As to his second approach, he concluded that mere reliance is not sufficient at common law to make the other events part of the series if they have a genuine independent purpose and existence, even if some events are adapted in reliance on other events to achieve a tax advantage. Since, in the judge's opinion, the normal course dividends had such a genuine independent purpose and existence, no common law definition of series would include them as part of the ATCOR/Forest series of transactions.
[44] At paragraph 148 of his reasons, the trial judge states:
The normal course dividends have nothing in common with any element of the ATCOR/Forest transactions. They are not driven or guided by the same conscious volition. The normal course dividends are not a continuation of any aspect of the ATCOR/Forest series of transactions. They do not exist to facilitate any aspect of the ATCOR/Forest series of transactions. They do, in fact, facilitate a tax planned element of the ATCOR/Forest series and reliance is placed on them. That is not sufficient however to constitute them, the normal course dividends, as part of the ATCOR/Forest series of transactions.
while in paragraph 150 he says:
That an event in a series is related to another event, even adapted in reliance on such other event, to achieve a tax advantage, is not sufficient at common law to make the other event part of the series if it has a genuine independent purpose and existence. In my view, no common law definition of "series" would include the normal course dividends as part of the ATCOR/Forest series of transactions.
[45] As to the third approach which involved subsection 248(10), the judge found that the normal course dividends would have to have been paid in contemplation of the ATCOR/Forest series of transactions for the provision to apply. In his view, while the ATCOR/Forest series may have been completed in contemplation of the normal course dividends, the converse was not true. The normal course dividends were not transactions or events completed in contemplation of the ATCOR/Forest series of transactions.
[46] Because, in his view, the normal course dividends were not paid as part of the ATCOR/Forest series giving rise to the reduction in capital gains, the trial judge held that subsection 55(2) did not apply.
[47] With regard to the second issue, the trial judge held that the appeal would also have succeeded on the basis that nothing in the Act requires a pro rata allocation of Part IV tax refunds as between dividends paid to corporations and dividends paid to individuals when dividends are paid to both. He therefore concluded that CU and CUH could allocate the normal course dividends in the manner most beneficial to them. To the degree dividends were allocated to individuals, the Part IV tax exception in subsection 55(2) would apply.
ANALYSIS
Did the ATCOR/Forest Series of Transactions and the Normal Course Dividends Together Constitute a Series?
The Common Law Definition of Series
[48] The term "series" is not defined in the Act. Therefore, recourse must be had to the common law definition of "series." If the ATCOR/Forest series of transactions and the normal course dividends together constitute a series at common law, that is the end of the analysis and subsection 55(2) applies. If they do not, it is necessary to go on to determine whether the normal course dividends are included in the ATCOR/Forest series of transactions by reason of subsection 248(10).
[49] Determining whether a series exists at common law involves a consideration of how closely tied individual steps or transactions must be to constitute a series. See OSFC Holdings Ltd. v. The Queen, [2002] 2 F.C. 288 (C.A.) at paragraph 19.
[50] In OSFC, the Court adopted what it called the "preordination test" to determine whether a series exists at common law. Under that test, each transaction in the series must be preordained to produce a final result. Preordination means that, when the first transaction of the series is completed, all essential features of the subsequent transaction or transactions are determined by persons who have the firm intention and ability to implement them (paragraph 24).
[51] In endorsing the preordination test, the court in OSFC used the term "adopt[ing] the House of Lords approach." This was a reference to a statement by Lord Oliver of Aylmerton in Craven v. White at 514:
As the law currently stands, the essentials emerging from Furniss v. Dawson, [1984] A.C. 474 appear to me to be four in number: (1) that the series of transactions was, at the time when the intermediate transaction was entered into, pre-ordained in order to produce a given result; (2) that the transaction had no other purpose than tax mitigation; (3) that there was at that time no practical likelihood that the pre-planned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life, and (4) that the pre-ordained events did in fact take place.
[52] The trial judge may have thought that OSFC adopted all four factors described in Craven v. White as the common law test for series of transactions or events. However, I agree with appellant's counsel that this cannot be so. The four factors listed in Craven v. White do more than define a series.
[53] In England, the courts have created judicial anti-avoidance measures whereby they ignore the legal effects of otherwise valid transactions in certain circumstances. The Craven v. White
factors are a common law code for determining not only whether a series exists, but also when the legal effect of an intermediate transaction in the series, which has no other purpose than tax avoidance and which is not intended to have any independent life, may be ignored.
[54] In articulating his four-part test in Craven v. White, Lord Oliver explained at 513-14 that the court in Furniss v. Dawson sought not only to treat a series of transactions as one composite transaction, but also to ignore an intermediate transaction that would otherwise have to be given legal effect:
...the court was able to look at the overall transaction and to assess its legal result as a composite whole. But it was able to do this because it was in fact not only conceived but carried out as one indivisible transaction. However, that in itself was not enough, because if you merely did that you still ended up with the statutory fiscal results of an actual disposition by the Dawsons via Greenjacket to Wood Bastow and the price firmly locked in Greenjacket. You have to go one stage further and nullify the immediate transfer to Greenjacket which has its own permanent fiscal consequences unless it can be totally disregarded, for Ramsay merely "enables the courts to arrive at a conclusion which corresponds with the parties' intentions." In Furniss v. Dawson the parties' intention was to produce a sale by Greenjacket instead of a sale by the Dawsons. So a further ingredient has to be supplied, and this is found in Burmah. This establishes the further proposition that if you find in what, ex hypothesi, is an integrated and interdependent series of transactions a step inserted which has no other purpose than that of avoiding or minimising a liability to tax which, without that step, would be attracted by the transactions, you are entitled for fiscal purposes to ignore that step in assessing what is the true legal result of the series taken as a whole [emphasis in original].
[55] Thus, the second and third parts of the test articulated by Lord Oliver are not concerned with when individual transactions are sufficiently connected that the court may consider them as having the composite effect they were intended to have. Rather, they are concerned with whether one transaction in that series was inserted solely for tax purposes, and, as a matter of judicial anti-avoidance, should not be given what would otherwise be its legal effect.
[56] The Canadian approach is one of statutory rather than judicial anti-avoidance measures. Thus, it would be inappropriate to import in its entirety a common law test which involves when the legal effect of a transaction may be ignored into the definition of series for Canadian tax purposes.
[57] Adoption of the House of Lords' approach as described in OSFC means adoption of the pre-ordination test for determining whether a series of transactions exists at common law. It is only necessary to determine whether each of the transactions in the alleged series was preordained (as defined in OSFC). to produce a final result and whether those preordained transactions did in fact take place.
[58] For these reasons, the trial judge should not have considered the second and third parts of the test set out in Craven v. White in determining whether the ATCOR/Forest series of transactions and the normal course dividends together constituted a common law series.
Why a Transaction's Genuine Independent Purpose and Existence Does Not Exclude It From a Common Law Series
[59] As to the second analytical approach taken by the trial judge, I am of the opinion that the he has added to the test for determining the existence of a series a requirement that does not exist at common law. In his view, the fact that transactions are preordained to occur and do in fact occur is not sufficient to make them part of the same series. He states that if a preordained
transaction has "a genuine independent purpose and existence," such as he finds the normal course dividends to have, it will not form part of the same series as the other preordained transactions.
[60] I am unable to agree with the trial judge that a transaction cannot be a part of a common law series if it has a genuine independent purpose and existence. To explain why, it is necessary to consider the reasons that led to the development of the common law doctrine of a series of transactions. The concept of a common law series was originally based on an analogy to a contractual arrangement. If transactions were bound to occur by reason of contracts binding all of the parties, the equitable interests would pass instantly on the conclusion of the contracts, and the courts would look to the final result of the contracts without paying any attention to the motives for any intermediate steps (see Craven v. White at 513).
[61] In the English cases in which the series concept was developed, there was no overarching contractual arrangement. Nonetheless, the courts held that, so long as all of the transactions were intended to occur and to produce a given composite effect, the court could look to that composite effect.
[62] In English jurisprudence, the only relevance of whether a transaction had a "genuine independent purpose and existence" was for determining whether its tax effects could be ignored. If a transaction had no other purpose than tax mitigation and was not intended to have an
independent life, the courts could ignore the tax effect that the transaction otherwise would have had. This is the context in which the second and third parts of the Craven v. White test refer to independence. However, as discussed above, those parts of the test are not concerned with what transactions should be included in a common law series.
[63] In Canada, a common law series only requires that, when the initial transaction is completed, the subsequent transaction or transactions needed to avoid tax have been determined by those persons who have the firm intention and ability to implement them and that all of those transactions do in fact occur.
[64] In proposing a series, the Minister may choose whatever transactions he considers relevant. If it is determined that they were preordained to occur and did in fact occur, they will constitute a series of transactions for the purposes of subsection 55(2). Once the series is determined, whether subsection 55(2) applies will turn on whether one of the purposes (or results) of the series was to effect a reduction in capital gains that otherwise would have been realized.
[65] Where the parties intend and have the ability to ensure that a number of transactions produce a given composite result that engages a provision of the Act, the concept of a common law series means that the court must give effect to the composite result, even though it was produced by a number of transactions, rather than just one. If the parties intend that a transaction
with an independent purpose and existence will assist in achieving this composite result and have the ability to ensure that the independent transaction is carried out and the transaction is in fact carried out, the independent transaction will be considered a part of the series.
[66] The trial judge found as a fact that both the ATCOR/Forest series of transactions and the normal course dividends were preordained. Indeed, there was evidence to support that finding and the respondent does not say that this preordination finding was in error. The transactions, including the payment of the normal course dividends, were carried out. At paragraph 139(a) of his reasons he finds:
that the series of transactions was, at the time when the intermediate transaction (i.e. the normal course dividends) was entered into, pre-ordained in order to produce a given result. The ATCOR/Forest series of transactions was pre-ordained as was the series of normal course dividends.
[67] The facts that CU and CUH intended to use both the ATCOR/Forest transactions and the normal course dividends to achieve their tax avoidance objective, that they had the ability to ensure that all the transactions would occur, and that all the transactions did indeed occur as intended are sufficient to constitute them all part of a common law series for the purposes of subsection 55(2). It is of no consequence that one or more of the transactions had an independent purpose and existence.
[68] Of course, merely finding that a series existed does not mean that subsection 55(2) necessarily applied. The other requirements of the provision, including the requirement that one
of the results of the series be a significant reduction in the amount of capital gains that would otherwise have been realized, still had to be met. In this case, however, there is no dispute that they were.
Subsection 248(10)
[69] As I have found that the ATCOR/Forest transactions and the normal course dividends constituted a common law series for the purposes of subsection 55(2), it is unnecessary to consider the application of subsection 248(10).
Pro Rata Allocation of Dividends Giving Rise to Part IV Tax Refunds
[70] CU and CUH paid normal course dividends to both corporations and individuals. As a result, they were entitled to a dividend refund under section 129. In relevant part, section 129 provides:
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129. (1) Where a return of a corporation's income under this Part for a taxation year is made within 3 years after the end of the year, the Minister (a) may, on mailing the notice of assessment for the year, refund without application therefor an amount (in this Act referred to as its "dividend refund" for the year) equal to the lesser of (i) 1/3 of all taxable dividends paid by the corporation on shares of its capital stock in the year and at a time when it was a private corporation, and (ii) its refundable dividend tax on hand at the end of the year; and (b)shall, with all due dispatch, make such a refund after mailing the notice of assessment if application therefor has been made in writing by the corporation within the period determined under paragraph 152(4)(b) or (c), as the case may be, within which the Minister may reassess tax payable by the corporation for the year. |
129. (1) Lorsque la déclaration de revenu d'une société en vertu de la présente partie pour une année d'imposition est faite dans les trois ans suivant la fin de l'année, le ministre: a) peut, lors de l'envoi par la poste de l'avis de cotisation pour l'année, rembourser, sans que demande en soit faite, une somme (appelée « remboursement au titre de dividendes » à la présente loi) égale au moins élevé des montants suivants: (i) le tiers de l'ensemble des dividendes imposables que la société a versés sur des actions de son capital-actions au cours de l'année et à un moment où elle était une société privée, (ii) son impôt en main remboursable au titre de dividendes, à la fin de l'année; b) doit effectuer un tel remboursement avec toute la diligence possible après avoir posté l'avis de cotisation, si la société en fait la demande par écrit au cours de la période déterminée selon l'alinea 152(4)b) ou c) au cours de laquelle le ministre peut établir une nouvelle cotisation de l'impôt payable par la société pour l'année. |
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(3) In this section, "refundable dividend tax on hand" of a corporation at the end of a taxation year means the amount, if any, by which the total of ... (b) the total of the taxes under Part IV payable by the corporation for the year; and (c) where the corporation was a private corporation at the end of its preceding taxation year, the corporation's refundable dividend tax on hand at the end of that preceding year exceeds (d) the corporation's dividend refund for its preceding taxation year. |
(3) Pour l'application du présent article, l'impôt en main remboursable au titre de dividendes d'une société à la fin d'une année d'imposition donnée correspond à l'excédent éventuel du total des montants suivants sur son remboursement au titre de dividendes pour son année d'imposition précédente : ... b) le total des impôts payables par la société pour l'année donnée en vertu de la partie IV; c) dans le cas où la société était une société privée à la fin de son année d'imposition précédente, son impôt en main remboursable au titre de dividendes à la fin de cette année. |
[71] It was agreed that CU and CUH were "subject corporations" as defined in subsection 186(3). Subsection 186(5) deems a subject corporation to be a "private corporation" for purposes of subsection 129.
[72] The Minister submits that, for the purpose of determining the extent to which the Part IV tax exception in subsection 55(2) applies, it must be determined what proportion of the total dividends were paid to corporations and to individuals. The Minister says that the subset of dividends needed to refund the Part IV tax must be apportioned in the same proportions between individuals and corporations.
[73] In the case of CU, 43.273% of its dividends were paid to individuals. The Minister therefore says that only 43.273% of CU's dividend refund can be treated as having arisen from the payment of dividends to individuals, making only 43.273% of CU's Part IV tax eligible for the Part IV tax exception in subsection 55(2). Similar calculations apply to CUH, resulting in approximately 19% of its refunded Part IV tax being eligible for the Part IV tax exception.
[74] This pro rata argument seems to be based on the theory that Part IV tax is only refunded when the recipient of the dividends paid is an individual who must pay tax on the dividends received and not when the recipient is a corporation entitled to an intercorporate deduction under subsection 112(1).
[75] CU and CUH argue that the eligibility of their refunded Part IV tax for the Part IV tax exception should be based on the actual amount of dividends paid to individuals, not the proportion of total dividends paid to individuals.
[76] The Minister's argument is simply not supported by the language of the Act. Nothing in subsection 129(1) suggests that, when dividends are paid both to individuals and to corporations, dividend refunds are to be allocated on a pro rata basis between them. I agree with the trial judge
and the respondents that, in the absence of a statutory direction to apportion or allocate dividend refunds on a pro rata basis between dividends paid to corporations and dividends paid to individuals, a taxpayer may make that allocation or apportionment on a basis most beneficial to it.
[77] The parties agree that, if the Minister's pro rata argument is rejected, CU paid a sufficient amount of normal course dividends to individuals in its 1996 taxation year to entitle it to a refund of all its Part IV tax.
[78] In the case of CUH, it did not pay sufficient dividends to individuals in 1996 and 1997 to entitle it to a full refund of its Part IV tax. The normal course dividends paid to individuals in CUH's 1996 and 1997 taxation years should be deducted from the deemed dividend attributable to CUH to arrive at the amount of the deemed dividend to be treated as a capital gain for
purposes of subsection 55(2). Only CUH's 1996 and 1997 taxation years were under appeal and I
express no opinion on the taxation effect of normal course dividends paid to individuals in subsequent years.
CONCLUSION
[79] I would allow the appeal of the Minister in respect of the series issue. The normal course dividends are part of the same series of transactions as the ATCOR/Forest transactions for purposes of subsection 55(2).
[80] I would dismiss the appeal of the Minister in respect of allocating the dividends paid by each of CU and CUH on a pro rata basis.
[81] The application of subsection 55(2) should result in none of the deemed dividend received by CU on the redemption of its Amalco shares being treated as a capital gain. Only the deemed dividend received by CUH on the redemption of its Amalco shares less the amount of normal course dividends paid to individuals in its 1996 and 1997 taxation years should be treated as a capital gain.
[82] The entire matter should be remitted to the Minister for the purpose of reassessing CU for its 1996 taxation year and CUH for its 1996 and 1997 taxation years in accordance with these reasons.
[83] Within 7 days of the date of these reasons, the parties shall submit a draft judgment for each court file agreed upon between them. If they cannot agree, each shall submit draft judgments with a succinct explanation for the reason they cannot agree. If necessary, they may apply for directions. If the parties cannot agree on costs, within 7 days of the date of these reasons, the Minister shall serve and file a costs submission not exceeding three pages double-spaced. Within 5 days of receipt of that submission, the respondents shall serve and file a
responding costs submission not exceeding three pages double-spaced. A copy of these reasons will be placed in both court files.
"Marshall Rothstein"
J.A.
"I agree
Marc Noël J.A."
"I agree
John M. Evans J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-438-03
STYLE OF CAUSE: Her Majesty the Queen v. Canadian Utilities Limited
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: May 19, 2004
REASONS FOR
JUDGMENT: ROTHSTEIN J.A.
CONCURRED IN BY: NOËL J.A.
EVANS J.A.
DATED: JUNE 18, 2004
APPEARANCES:
Ms Bonnie Moon
Mr. Jon Gilbert FOR THE APPELLANT
Mr. Cliff O'Brien, Q.C.,
Mr. Curtis Stewart and
Mr. Michel Bourque FOR THE RESPONDENT
SOLICITORS OF RECORD:
Mr. Morris Rosenberg FOR THE APPELLANT
Deputy Attorney General for Canada
Bennett Jones LLP
Calgary, Alberta FOR THE RESPONDENT
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-439-03
STYLE OF CAUSE: Her Majesty the Queen v. Canutilities Holdings Ltd.
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: May 19, 2004
REASONS FOR
JUDGMENT: ROTHSTEIN J.A.
CONCURRED IN BY: NOËL J.A.
EVANS J.A.
DATED: JUNE 18, 2004
APPEARANCES:
Ms Bonnie Moon
Mr. Jon Gilbert FOR THE APPELLANT
Mr. Cliff O'Brien, Q.C.,
Mr. Curtis Stewart
Mr. Michel Bourque FOR THE RESPONDENT
SOLICITORS OF RECORD:
Mr. Morris Rosenberg FOR THE APPELLANT
Deputy Attorney General for Canada
Bennett Jones LLP
Calgary, Alberta FOR THE RESPONDENT