In its recent decision in Harvard Properties Inc v. The King, 2024 TCC 139, the Tax Court of Canada held that the vendors of Calgary's North Hill Shopping Centre ("North Hill") were liable under section 160 of the Income Tax Act1 ("Act") for taxes owing by subsidiary corporations that were sold as part of the North Hill transaction.2 The vendors knowingly received a premium for the sale that was only viable if the purchasers did not pay the tax owed by the subsidiaries resulting from the sale of North Hill.3 Consequently, the Court held that the vendor and purchaser were not dealing at arm's length and section 160 applied. Since the vendors did not lead evidence of North Hill's fair market value, the taxpayer's liability was not reduced by the actual value of North Hill.4
Section 160 and Non-Arm's Length Transfers
The purpose of section 160 is to facilitate tax collection by protecting the tax debtor patrimony.5 The CRA commonly relies on section 160 to prevent tax debtors from rendering themselves unable to pay their tax debts by transferring away their assets to friends, family and other non-arm's length parties for less than fair market value consideration. In addition to these typical situations, recent cases have applied the provision in a transactional context, where a share purchaser funds the acquisition price with the asset of the target and a tax liability of the target ultimately goes unpaid.6 Recent amendments and proposed amendments extended or will extend the application of section 160 to better target tax planning similar to the transactions in Eyeball Networks.7 In addition, special penalties have been enacted to dissuade tax advisors from creating transactions which achieve the intended effect of the transactions in Harvard Properties.8 While an intent to assist with the avoidance of tax payments is not required for subsection 160(1) to apply, an improper motive can inform the court's analysis.9
Evidence is therefore critical in defending assessments under section 160, both to prove the fair market value of the property transferred (or of the consideration paid), and that the transferee was dealing at arm's length with the transferor. Without such evidence, a transferee of property may be liable for the transferor's tax up to the value of the property received.
The Plan
The taxpayer in the appeal ("Harvard Properties") was a co-owner of North Hill.10 The co-owners received an unsolicited letter of intent from a potential purchaser, known as Abacus, who proposed a tax plan which involved the sale of North Hill to third parties.11 The tax plan was intended to allow the co-owners to receive a premium on the sale versus the after-tax amount that the co-owners would have received had they sold North Hill to the third parties and paid the resulting corporate income tax liability. The Court found as a fact that the premium was to be funded by Abacus avoiding or eliminating the tax liability created.12
The overall sale was for approximately $90 million, of which a portion went to Harvard Properties. Simplified, and looking only at Harvard Properties, the essential steps to the plan were:13
- Harvard Properties incorporated a new corporation ("NewCo"), and transferred its interest in North Hill to the NewCo on a tax-deferred basis.14 In exchange, Harvard Properties received voting and non-voting shares.
- A subsidiary of Abacus purchased the voting shares in NewCo from Harvard Properties in exchange for a $7 million promissory note and $700,000 cash. This resulted in an acquisition of control of NewCo at the beginning of the day and a taxation year-end.15 Harvard Properties paid tax on the capital gain realized on the disposition of these shares.
- NewCo sold its interest in North Hill to the third party buyer.
- The Abacus subsidiary repaid the $7 million promissory note (owing under step #2 above) by directing NewCo to pay Harvard Properties with the cash from the sale in step #3.
- NewCo increased the stated capital of Harvard Properties' non-voting shares in NewCo by the amount of the increase to the capital dividend account that resulted from the North Hill sale. The resulting deemed dividend was designated as a capital dividend.16
- Harvard Properties sold its non-voting NewCo shares to the Abacus subsidiary in exchange for $8.7 million cash (which was transferred to the Abacus subsidiary from the funds NewCo received as part of the sale in step #3).17
The intended result of these transactions was for the tax liability from the sale to remain in NewCo, which no longer had enough cash or assets to satisfy the liability. Abacus then caused NewCo to engage in tax planning that purportedly eliminated NewCo's corporate income tax liability from the sale of North Hill. The details of that tax planning were not dealt with in the Harvard Properties decision and CRA is challenging its efficacy in a related proceeding, following a bifurcation order.18
The Decision
Non-Arm's Length
The Court found that Harvard Properties and the purchaser were not dealing at arm's length in arranging and executing these transactions. When considering if two parties are dealing at arm's length, all the facts that bear on the relationship must be taken into account,19 and the premium paid by Abacus was "clearly out of whack" with a fair market value price.20
The Court placed significant weight on the taxpayer's state of mind, including its willful blindness to NewCo's inability to pay the tax liability created by the Abacus transactions.21 The Court found that the tax-related risks were communicated to Harvard Properties and the co-owners in a memo from their tax accountant early on, and they were advised to consider "to what extent [they] want to know how Abacus is sheltering/eliminating the recapture and federal capital gain income."22
The Court found that the vendors responded to these concerns by seeking a tax indemnity allocating any section 160 risks to Abacus rather than rejecting the Abacus proposal. This was further proof that they were indifferent with respect to the efficacy of Abacus' tax plan and NewCo's ability to discharge its tax liability.23
Magnitude of Tax Liability
In addition, the Court found that the payments from the Abacus subsidiary to Harvard Properties were above fair market value. Specifically, the Court found that Harvard Properties had not established the value of the voting shares or non-voting shares of NewCo, nor the promissory note from the Abacus subsidiary.24 Once the series of transactions started, NewCo was irreversibly destined to be stripped, such that an arm's length party unrelated to these transactions would not have paid for the NewCo shares.25 Accordingly, the taxpayer could be liable for NewCo's tax debt to the extent of the $8.7 million received in step #6, and could have potentially been assessed for an additional amount equal to the $7 million received in step #4.26
The Court acknowledged that this outcome may be worse for the taxpayer than what theoretically should have occurred. The taxpayer could have limited its section 160 exposure to the value of the premium, being the amount paid in excess of North Hill's fair market value, had it led proper evidence. Since the taxpayer did not establish the amount of the premium, the taxpayer could not limit its liability to that amount.27
GAAR Limitation Period
The Court found that there is no specific statute-barred period for the GAAR such that the GAAR can be taken into account in any "timely and otherwise validly issued assessment under the Act."28 This functionally aligns the GAAR limitation period with that of the applicable regime under which the reassessment is issued.29
Guidance on Tendering Evidence in a Section 160 Case
The Court provided helpful comments on how to usefully marshal evidence in a section 160 case. In particular, the Court highlighted the importance of tendering evidence through a witness (particularly when incorporating that evidence into a visual aid), and providing an expert with instructions that allow for a complete and informative report. An expert that is instructed to assume key disputed points of fact may struggle to provide an opinion that is of assistance to the court if those assumptions deviate from the findings of fact at trial.30
Key Takeaways
Section 160 can be draconian.31 Taxpayers should be mindful of the evidentiary challenges and opportunities associated with appealing a section 160 assessment, including that:
- Expert evidence showing that a transaction was at fair market value – if accepted by the court – is enough on its own to defeat a section 160 assessment.
- However, proving that a transaction was at arm's length can be difficult where the relevant price is "far removed" from market. Taxpayers should consider what documentary and oral evidence is available to show that the parties to a transaction each had the required state of mind (i.e., were not willfully blind) and an "arm's length tension" between them.
Footnotes
1. Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), all statutory references are to the Act.
2. The Court also relied on the general anti-avoidance rule in the alternative. Due to a bifurcation order, the existence of an underlying tax liability, one of the conditions to the application of section 160, was not addressed in this decision.
3. Harvard Properties Inc v The King, 2024 TCC 139 (the "Decision") at para 123(f), (g), (h), (p) and (q).
4. Decision at paras 186-187.
5. Decision at para 128, citing Canada v 9101-2310 Quebec Inc., 2013 FCA 241 at paras 2 and 60.
6. See Canada v Microbjo Properties Inc., 2023 FCA 157 at para 3 ("Microbjo").
7. Eyeball Networks Inc. v Canada, 2021 FCA 17 ("Eyeball Networks").
8. Bill C-32, which received royal assent in December 2022, added anti-avoidance rules in subsection 160(5) targeting planning that circumvents the application of section 160. At the same time, a so-called "planning penalty" was introduced in subsection 160.01(2). The penalty applies to advisors who participate in "section 160 avoidance planning". Budget 2024 proposed additional anti-avoidance rules in subsections 160(6)-(8) that also address tax planning to avoid section 160. These proposed rules would apply where a third party facilitates the indirect transfer of property while trying to avoid joint and several or solidary liability of the transferee and transferor for a tax debt. Under the proposed rules, taxpayers participating in tax debt avoidance can also be jointly and severally, or solidarily be liable for the portion of the tax debt retained by the third party. In addition, Budget 2024 proposed to extend the penalty in subsection 160.01(2) to include circumstances in which the proposed anti-avoidance rules apply. The Budget 2024 amendments would apply in respect of a transaction or series of transactions occurring on or after April 16, 2024.
9. Decision at para 130, citing Eyeball Networks at para 39.
10. Decision at para 1.
11. Decision at para 2.
12. Decision at para 123 (g) and (h).
13. Decision at para 152.
14. Relying on subsection 85(1).
15. Pursuant to subsections 249(4) and 256(9).
16. Pursuant to subsection 83(2). A capital dividend is a tax-free dividend that is paid from a private corporation's capital dividend account, which is an account that tracks amounts that can be distributed tax-free.
17. The legal basis upon which the Abacus subsidiary had a legal entitlement to the amounts received by NewCo at step (3), such that it could make the directions at step (4) and (6), is unclear. However, the Court clarified at para 191 that in any event, such intermediate transfers would not impact the section 160 analysis.
18. Decision at para 7.
19. Decision at para 137.
20. Decision at paras 141-144, citing Microbjo.
21. Decision at para 123.
22. Decision at para 44.
23. Decision at paras 138-139.
24. Decision at paras 179 and 185.
25. Decision at paras 172 and 174.
26. Decision at paras 184-187.
27. Decision at para 186.
28. Decision at para 220. The Court found in the alternative that the GAAR would apply to this transaction if section 160 did not.
29. Decision at paras 212 and 218. For taxation years starting in 2024, subparagraph 152(4)(b)(viii) extends the limitation period by three years beyond the normal reassessment period. This would not have made a difference in this case, because the normal reassessment period does not apply to section 160 assessments (which can occur at any time).
30. Decision at paras 13 and 16.
31. Canada v 9101-2310 Québec Inc., 2013 FCA 241 at para 60.
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