In MMV Capital Partners Inc. v. The Queen (2020 TCC 82), the court ruled that GAAR was not triggered where a taxpayer had acquired essentially a 100% economic interest in a Lossco -- without acquiring de jure control -- and then transferred profitable assets to that corporation, and used the non-capital losses to shelter the taxable income from those assets. However, the court noted that its specific finding in the case “will likely be obsolete in the future” (paragraph 97) because 2013 amendments had altered subsection 111(5) considerably.
MMV Financial Inc. (MMVF), a corporation providing venture capital loans and financing, acquired, through a wholly-owned subsidiary, 48.6% of the voting common shares of National Convergence Inc. (NCI) during NCI’s 2009-2010 receivership proceedings. The other 51.4% was held by arm’s length taxpayers. NCI provided voice over internet protocol (VOIP) applications to service providers and was not profitable, posted losses in every year from 2001 to 2009 and ceased business at the time of receivership. NCI’s name was subsequently changed to MMV Capital Partners Inc. (MMV). In 2010-11, MMVF subscribed for a large number of non-voting common shares and transferred its loan portfolio to MMV in exchange for debt and preferred shares. Following the acquisition of the portfolio, MMV moved entirely into a new and profitable line of business – venture lending. From 2011 to 2015, MMV applied the non-capital losses generated from the VOIP business in 2001 to 2009 to reduce its taxable income from the new business. The Minister disallowed the deduction, and MMV appealed to the TCC.
The court, in summarizing the Crown’s position, noted that “The structure employed did not engage the restrictions on loss utilization in subsection 111(5) that would otherwise prevent losses from one business being claimed against income from a different business when an acquisition of control occurs” (paragraph 54). The reason would appear to be that subsection 111(5) is based on there being a change in de jure control, and this had not occurred with just a 48.6% voting interest – MMVF did not have the power to elect MMV’s board of directors. In any event, the Crown’s case was based on the application of GAAR.
GAAR has three critical elements, a taxpayer must: (1) have realized a tax benefit; (2) have undertaken a transaction or series of transactions which contain at least one avoidance transaction; and (3), within the transactions yielding the tax benefit, misused a section or abused the Act as a whole. The parties disagreed only on the final element: was the Act, and subsection 111(5) in particular, misused or abused? The Crown contended that MMVF circumvented subsection 111(5) because it acquired de facto or effective control of MMV without acquiring de jure control. Through general security interests and preferred-share status on distribution of dividends, MMVF had acquired a near-total economic interest in MMV.
The court noted that it is “arguable” (paragraph 156) that MMVF had acquired de facto control of MMV. However, the court noted that subsection 111(5) is not based on assessing control using the de facto control standard; the Crown’s argument is “stretched unreasonably” (paragraph 156). The amendments to this subsection in 2013 (after the years at issue) was taken as evidence of Parliament’s commitment to the de jure standard of control for this subsection. Hence, the Crown had not met its burden to establish that the avoidance transaction resulted in abusive tax avoidance, and in particular that the tax benefit is inconsistent with the objective, spirit or purpose of subsection 111(5).
Reprinted from Canadian Tax Focus (August 2020) by permission of the Canadian Tax Foundation.
About the Authors
Jamie Herman is a Principal at Fruitman Kates LLP and was formerly the CFO of a single family office. His practice focuses on holistic tax and estate planning, succession planning and providing an array of family office services for single family offices and high net worth individuals.
Stephen Rice is a Tax Manager at Fruitman Kates LLP. His practice is focused on identifying taxation issues and planning opportunities for owner-manager private businesses and high net worth individuals.