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Contracts - Non-Arm's Length. Scott v. Golden Oaks Enterprises Inc.
In Scott v. Golden Oaks Enterprises Inc. (SCC, 2024) the Supreme Court of Canada dismissed a civil litigation appeal, here where the main question was "how the common law doctrine of corporate attribution should be applied to a “one-person” corporation controlled by its sole officer, shareholder, and directing mind".
The court considers 'arm's-length' dealings, here in a BIA insolvency context:(1) General Principles of Non-Arm’s Length Dealing Under Section 95(1)(b) of the BIA
[125] Preferences occur when a debtor with insufficient assets to satisfy all its creditors pays one creditor preferentially over other creditors. Such payments are unfair because they undermine the scheme of distribution that would otherwise prevail in bankruptcy (Wood, at pp. 205-6; Honsberger and DaRe, at p. 375). Section 95(1)(b) of the BIA provides that transactions that have the effect of giving one creditor a preference over other creditors are void as against the trustee when they involve a non-arm’s length creditor within a specified period of time surrounding the bankruptcy. Section 95(1)(b) provides:95 (1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person
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(b) in favour of a creditor who is not dealing at arm’s length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.
(See also Wood, at p. 215; Honsberger and DaRe, at p. 387.) [126] The BIA does not define an arm’s length transaction. It does, however, stipulate that “[i]t is a question of fact whether persons not related to one another were at a particular time dealing with each other at arm’s length” (s. 4(4)). A finding of non-arm’s length dealing attracts a high level of appellate deference and is reviewable only for palpable and overriding error (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 36).
[127] Courts generally examine the following criteria in determining whether unrelated persons are dealing at arm’s length: (i) whether there was a common mind that directed the bargaining for both parties to a transaction; (ii) whether the parties to a transaction were acting in concert without separate interests; and (iii) whether there was de facto control (Canada v. McLarty, 2008 SCC 26, [2008] 2 S.C.R. 79, at paras. 43 and 62; Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169, at para. 68, citing Piikani Nation v. Piikani Energy Corp., 2013 ABCA 293, 86 Alta. L.R. (5th) 203, at para. 29; Wood, at pp. 204-5).
(2) The Trial Judge Did Not Err in Finding Non-Arm’s Length Dealing
[128] The trial judge correctly addressed the question of non-arm’s length dealing under s. 95(1)(b) of the BIA. I agree with the Court of Appeal that although the trial judge was required to focus on the transactions at issue between Golden Oaks and Mr. Scott, it was appropriate for her to consider these transactions in the overall context of the parties’ relationship, including the Ponzi scheme that these transactions facilitated and Mr. Scott’s role in that scheme. In McLarty, this Court rejected a “restrictive approach” under which a trial judge could examine only an impugned transaction, but not the parties’ relationship at any other time or the facts relating to any other transaction (para. 65). Likewise, here, the trial judge was entitled to consider the totality of the evidence in determining whether parties were dealing at arm’s length (see National Telecommunications Inc., Re, 2017 ONSC 1475, 45 C.B.R. (6th) 181, at para. 48; National Telecommunications v. Stalt, 2018 ONSC 1101, 59 C.B.R. (6th) 263, at para. 41). . Canada v. Microbjo Properties Inc.
In Canada v. Microbjo Properties Inc. (Fed CA, 2023) the Federal Court of Appeal considers indicia of an arm's length contractual dealings:[61] I first observe that although the Tax Court correctly states that the issue to be determined is whether WTC and the respondents were dealing at arm’s length “at a particular time” being the time of the transfer (Reasons, para. 182, citing paragraph 251(1)(c)), it remains that all the facts that bear on the relationship at that time, including those that relate to pre-sale transactions, must be taken into account. As was explained by the Supreme Court in Canada v. McLarty, 2008 SCC 26, [2008] 2 S.C.R. 79 [McLarty] (para. 61; see also Swiss Bank (Ex. Ct.), p. 438): “while the initial focus is on the transaction between the [parties], all the relevant circumstances must be considered to determine if the acquiring taxpayer was dealing with the vendor at arm’s length”. There is therefore no basis for the suggestion that preserving the certainty and predictability of the “relationship rules” requires courts to turn a blind eye on facts that bear on the relationship as it exists at the time of the transfer only because they took place in the past, at a time when the subsidiaries were legally controlled by the respondents (Reasons, para. 182).
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[78] The purpose of the arm’s length test is to verify whether the relationship between transacting parties is such that courts can have the assurance that the terms of the deal “will reflect ordinary commercial dealing[s] between parties acting in their separate interests” (Swiss Bank (SCC), p. 1152; McLarty, para. 43; Remai, para. 34). Such assurances cannot be found unless parties not only seek a profit, but also transact with their own property or money with the result that what is at stake is their own patrimony or property. Human behaviour being what it is, this combination allows for the presence of the tension that drives each party to “seek[] to get the best possible terms for himself” (Minister of National Revenue v. Kirby Maurice Company Limited., 1958 CanLII 715 (CA EXC), 58 D.T.C. 1033, [1958] C.T.C. 41 (Ex. Ct.), p. 1037). It is the existence of this tension that provides the assurance that the terms of the deal reflect ordinary commercial dealings.
[79] A cogent demonstration can be found in the Supreme Court’s decision in Swiss Bank (SCC), where the issue was whether non-resident lenders were dealing at arm’s length with a Canadian borrower, pursuant to then clause 106(1)(b)(iii)(A) of the Income Tax Act, R.S.C. 1952, c. 148 (now clause 212(1)(b)(i)(A) of the Act). The Supreme Court asked whether the lender-borrower relationship presented “the assurance that the interest rate will reflect ordinary commercial dealing between parties acting in their separate interests” (Swiss Bank (SCC), p. 1152) and found that it did not because the borrower was “captive to the interests” of the lenders and, therefore, no tension was in play (Swiss Bank (SCC), p. 1151). Subsequent rulings have reiterated the need for this tension to exist by insisting on the presence of “ordinary market forces” (Canada v. GlaxoSmithKline Inc., 2012 SCC 52, [2012] 3 S.C.R. 3, para. 1) or “commercial safeguard[s]” (Petro-Canada v. Canada, 2004 FCA 158, 58 D.T.C. 6329 [Petro-Canada], para. 59) before a factual arm’s length relationship can be found to exist.
[80] Whether and the extent to which this tension exists in any given case is an issue that must be addressed in light of the relevant facts (McLarty, para. 62) and the particular provision of the Act pursuant to which the issue arises (Keybrand Foods Inc. v. Canada, 2020 FCA 201 [Keybrand Foods], paras. 35; see also para. 46). Just as the applicable provision in Swiss Bank (SCC) was concerned with interest rate manipulations, subsection 160(1) is concerned with price manipulations in the context of non-arm’s length property transfers. As affirmed by this Court, subsection 160(1) was enacted to “protect the tax authorities against any vulnerability that may result from a transfer of property between non-arm’s length persons for a consideration that is less than the fair market value of the transferred property” (Eyeball Networks, para. 44, citing Canada v. 9101-2310 Québec Inc., 2013 FCA 241, [2013] D.T.C. 5170, para. 60; see also Canada v. 594710 British Columbia Ltd., 2018 FCA 166, [2019] 5 C.T.C. 1, para. 3).
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[84] A transaction that takes place at a price far removed from the price that one would expect based on the risks assumed and the rewards sought can provide a strong indication that the parties are not dealing at arm’s length (Keybrand Foods, para. 68; Remai, para. 34). ... . Golden Oaks Enterprises Inc. v. Scott
In Golden Oaks Enterprises Inc. v. Scott (Ont CA, 2022) the Court of Appeal set out the essence of a non-arm's length contract:[24] The trial judge identified the indicia of a non-arm’s-length transaction as the following: (1) a common mind directing the bargaining for both parties of a transaction; (2) parties to a transaction acting in concert without separate interests; and (3) de facto control: at paras 203-4, citing Canada v. McLarty, 2008 SCC 26, [2008] 2 S.C.R. 79, at para. 43, and Montor Business Corporation v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169, at para. 68.
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