In Atlantic Packaging Products Ltd. v R, 2018 TCC 183, the taxpayer sold one of its divisions (the “Tissue Division”) to an arm’s length purchaser. In connection with the sale, it sold 68% of the assets of the division to a subsidiary for Common Shares. The taxpayer sold the remaining assets of the division and the Common Shares of the subsidiary to the purchaser. The CRA reassessed on the basis that s 54.2 of the Income Tax Act did not apply to the sale of the Common Shares and that the sale was on income account. The Tax Court upheld the reassessment.
The Court (Graham J) posed four questions as follows:
(a) Was the Tissue Division a business? The Court held that it did not need to decide this question because, even if the Tissue Division was a business, the Court was of the view that the taxpayer had not transferred all or substantially all of the assets of the business to the subsidiary.
(b) If the Tissue Division was a business, what assets were used in that business? The Court summarized the various assets used by the taxpayer in producing “tissue”, which assets were located at three different locations used by the taxpayer in carrying on its business.
(c) Which of those business assets were transferred to “722” (ie the subsidiary)? The Court found as follows:
 The only assets that were transferred to 722 were the Converting Mill and the Remaining Converting Assets [ie all of the assets at one of the locations used by the taxpayer]. All of the other assets of the Tissue Division were either sold directly to Cascades [the purchaser], leased to Cascades or retained by the Appellant. The Appellant’s leasehold interest in the Converting Property was subleased to Cascades.
(d) Do the transferred assets represent all or substantially all of the assets used in that business? The Court noted that the meaning of “all or substantially all” as found in s 54.2 was not entirely clear:
 It is unclear on the face of section 54.2 how I am to determine whether the assets that the Appellant transferred to 722 represent all or substantially all of the assets of the Tissue Division. Clearly the test does not involve simply counting the number of assets transferred. My initial inclination is to consider the value of the assets but the test makes no specific reference to value. The test in section 54.2 can be contrasted to the definition of ““small business corporation”” found in subsection 248(1). That definition requires an examination of whether ““all or substantially all of the fair market value of the assets”” of the corporation meets certain tests. It is clear from this definition that, when Parliament wants to require the use of fair market value in an ““all or substantially all”” test, it does so explicitly. However, the fact that the test in section 54.2 does not refer to value does not mean that I cannot consider value. It simply indicates that I am not limited to considering value.
The Court held that transferring all of the assets necessary to carry on a business is likely a sufficient, albeit not necessary, condition for the application of s 54.2. Put another way, if a taxpayer transfers all of the assets necessary to carry on a business, then the taxpayer likely meets the requirements of s 54.2. It does not follow, however, that the section is satisfied only if all such assets are transferred.
After finding that the assets transferred to the subsidiary constituted at most only 68% of all of the assets of the division (by value), the Court wrote:
 Taking all of the above into account, the assets transferred to 722 would make up only 68% of the total assets of the Tissue Division. While I acknowledge that all or substantially all does not mean 90% and that the specific percentage that meets the test in any given context may vary, I cannot accept that it means something just over two-thirds. Furthermore, the foregoing calculation does not take into account all of the assets of the Tissue Division.
The Court rejected the idea that it should consider net book value in applying the “all or substantially all” test. It also rejected the use of the square footage used by the transferred assets or the number of employees used in connection with the assets. The Court rejected a calculation of the contribution of the transferred assets to the gross profits of the taxpayer because the calculation ignored “sales” within the division.
Finally, the Court also rejected the idea that the “heart of the business” had been sold to the subsidiary. While acknowledging that such an analysis might be a valid approach, the Court found that the portion of the business transferred to the subsidiary, while important, was not essential. The assets transferred could have been used to carry on a business, but by the same token the assets not transferred to the subsidiary could also have been used in carrying on a business.
Neal Armstrong questions why, in light of technical interpretation 2012-0438651E5 (given the principles in Continental Bank and Loewen), the CRA thought that s 54.2 was essential to the analysis.