|
Federal Tax - Collection - Arm's Length (2). Harvard Properties Inc. Canada
In Harvard Properties Inc. Canada (Fed CA, 2026) the Federal Court of Appeal allowed a taxpayer's appeal, this regarding Income Tax Act s.160(1) ['Tax liability re property transferred not at arm’s length'] which - when it applies - "provides that when a tax debtor transfers property to a person with whom they are not dealing at arm’s length, both become jointly and severally liable for the tax debt":[1] Subsection 160(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), . However, the transferee’s liability is limited. It is restricted to the difference between the fair market value of the property received and the fair market value of what the transferee gave in exchange: Eyeball Networks Inc. v. Canada, 2021 FCA 17 at para. 2.
....
B. Section 160 does not apply to the present case
(1) Harvard and the Abacus group of companies dealt at arm’s length
[47] The Tax Court’s finding that Harvard and the Abacus group of companies were not dealing at arm’s length was based on its conclusion that Harvard received a premium that exceeded the mall’s fair market value, was funded by Newco’s unpaid tax debt, and was "“clearly out of whack […] with a fair market value price”": see paragraph [26] above. The Court likened the circumstances to those considered by this Court’s in Canada v. Microbjo Properties Inc., 2023 FCA 157: TCC Decision at paras. 8, 137–38, 141–44.
[48] In Microbjo, five corporations, including Microbjo, indirectly held an interest in a parcel of land that they had agreed to sell to an arm’s length purchaser. Before the sale, the corporations and Wilshire Technology Corporation agreed to a plan under which each corporation transferred its interest to a newly incorporated subsidiary, which then sold the interest in the land to the arm’s length purchaser. Wilshire purchased the shares of each subsidiary for $3.3 million. This exceeded the shares’ after-tax value of $2.7 million, calculated as $4 million less $1.3 million in tax. The plan depended on the subsidiaries not paying their $1.3 million tax liabilities. Instead, the corporations and Wilshire shared the funds that would otherwise have been used to pay those liabilities, with 46% of the $1.3 million going to the corporations ($600,000) and 54% ($700,000) going to Wilshire: Microbjo at paras. 13, 64. In this way, the corporations and Wilshire enriched themselves by "“splitting amounts earmarked to pay [the subsidiary’s] tax liability”": Ibid. at para. 81.
[49] This Court found that two factors pointed to a non-arm’s length relationship between the corporations and Wilshire: Wilshire paid more than the after-tax value of the subsidiary shares, and the excess came from unpaid taxes that the parties agreed to share: Microbjo at paras. 84–89. The Tax Court concluded that the same reasoning applied in the present case: TCC Decision at paras. 143–44.
[50] However, given the evidence that $89.8 million represented the mall’s fair market value, there was no basis to conclude that Harvard received a premium. Further, unlike in Microbjo, there is no evidence that Harvard and Abacus agreed to share any amount that would otherwise have been used to satisfy Newco’s tax liability. The Tax Court therefore erred in treating the alleged premium as indicative of a non-arm’s length relationship.
[51] The Tax Court’s finding that Harvard was "“willfully blind”" because it made no inquiries into how the Abacus group would deal with Newco’s tax liability was likewise based on the conclusion that Harvard received a premium above the mall’s fair market value and that the premium came from Newco’s unpaid tax liability: TCC Decision at paras. 123h), 123u), 165. Again, once it is accepted that there was no premium and no evidence that the parties would share the benefit of Newco’s unpaid tax liability, there is no basis for concluding that Harvard was willfully blind, and thereby knowingly participated in Abacus’ tax planning, such that the parties were not dealing at arm’s length: Ibid. at para. 165. Instead, this is the type of situation the Tax Court itself described as one in which "“otherwise arm’s length parties do not have a duty to verify their counterparty’s tax planning or compliance to remain at arm’s length”": Ibid. at para. 165.
[52] It is also worth noting that the Tax Court expressly stated that it was not saying that Newco’s plan to offset its tax liability with losses was "“questionable, ineffective [or] did not work”". Nor was it saying that Harvard should have known "“that the tax plan was ineffective or even questionable”": Ibid. at para. 144 and footnote 9.
[53] Finally, the Minister relies on the Tax Court’s conclusion that Harvard and the Abacus group of companies did not deal at arm’s length because both Harvard and NH Properties directed Newco’s role in the transactions: Respondent’s Amended Memorandum of Fact and Law in file A-382-24 at para. 47. However, the Tax Court said that this is common in commercial transactions and "“should not on its own make otherwise arm’s length persons non-arm’s length”". Yet again, the Tax Court found Harvard’s and NH Properties’ control of Newco problematic only because of the premium: TCC Decision at para. 165.
[54] Considering the foregoing, I find that the Tax Court committed a palpable and overriding error of fact and an error of law in finding that, as in Microbjo, Harvard received a premium above the mall’s fair market value and that the premium came from Newco’s unpaid tax liability. The error was palpable because it was made without regard to the evidence of the mall’s $89.8 million fair market value, the pleadings and the parties’ positions: Mahjoub v. Canada (Citizenship and Immigration), 2017 FCA 157 at para. 62. It was overriding because, without it, the Tax Court would have had to find that Harvard and the Abacus group of companies were dealing at arm’s length with the result that section 160 did not apply to Harvard: Ibid. at para. 64.
[55] Because section 160 does not apply to transfers between arm’s length parties, that palpable and overriding error is sufficient to dispose of this issue. Nevertheless, the following paragraphs explain how the Tax Court’s error regarding the mall’s fair market value, together with other errors of law, led it to incorrectly conclude that Harvard provided no consideration for the two transfers at issue. Those errors independently show that section 160 does not apply.
....
[56] Section 160, more precisely subparagraph 160(1)(e)(i), imposes joint and several liability on the person who receives a transfer from a tax debtor "“limited to the excess of the fair market value of the transferred property over the fair market value of the consideration given [by the transferee]”": Canada v. Csak, 2025 FCA 60 at para. 4. The use of the words "“consideration given [by the transferee]”" reflects Parliament’s intention to limit the derivative liability of a transferee to the monetary advantage that it derives from the transfer: Microbjo at para. 95. . Pillon v. Canada
In Pillon v. Canada (Fed CA, 2023) the Federal Court of Appeal considered the tax collection provision of ITA s.160 ['Tax liability re property transferred not at arm’s length'], here respecting non-arm's length transactions where the transferee may be liable for the transferror's tax liability (akin to fraudulent conveyance):[2] By way of background, s. 160(1) is a tax collection measure. It concerns a situation in which a person with an outstanding tax liability transfers property to another person without receiving adequate consideration. If they were not dealing at arm’s length, the person who received the property, the transferee, is liable for the transferor’s outstanding tax liability up to the net amount received.
....
[8] To determine the non-arm’s length issue, the trial judge applied the legal principles articulated by the Supreme Court of Canada in Canada v. McLarty, 2008 SCC 79. She found that Ms. Pillon and Mr. Wall were not dealing at arm’s length because they acted in concert without separate interests. In making this finding, the Court noted that Ms. Pillon or Mr. Wall had signed various documents which indicated that they were: “partners, common law, husband and wife, reflected a common address, and had also a financial relationship between them.” The trial judge concluded that they had a close personal relationship.
|
