Harvard Properties 2024 TCC 139
per Boyle TCJ
General procedure
Under appeal A-382-24; A-388-24
“Another Section 160 Tax Avoidance Scam: Harvard Properties” Brian Arnold report 296 Jan 14/25
* Facts
The following is a paraphrase of the facts set out in the introduction
to the judgment.
1. The appellant Harvard Properties Inc. held a 50% interest in Calgary shopping mall, the remainder being held by some co-owners.
2. In 2005 the co-owners were approached, unsolicited, by a broker representing a potential purchaser of the shopping centre. The potential purchaser was Abacus, which was virtually unknown to the co-owners.
2.1 Appellant tended not to sell properties, and a related corporation provided management services to the mall.
3. The sale was to be structured as a share sale, but the share purchase price was to be a function of a calculated Purchase Value of the assets of the shopping centre had it been sold in an asset sale.
4. The transactions essentially closed as initially outlined and as set out in the negotiated Share Purchase Agreement (“SPA”). The series, in outline, was as follows:
a. Each co-owner of mall incorporated a newco and transferred their interest in the mall to the newco under 85. Consideration was voting and non-voting shares of newco.
b. Each co-owner transferred its voting shares of its Newco to NH Properties and received a Promissory Note from NH Properties as part of its consideration (the “Promissory Notes”). That is, NH Properties transferred a Promissory Note of approximately $7 million to Harvard Properties for its HP Newco voting shares. The other consideration received by each co-owner was its share of the Deposits. Harvard Properties received $700,000 of the Deposits.
c. The Newcos’ transferred their interests in the shopping centre to Bentall.
d. NH Properties “repaid” its voting share Promissory Notes in full by causing the Newcos to direct the release of cash from Bentall to MLT for the co-owners. That is, NH Properties transferred about $7 million to settle the voting share Promissory Note of Harvard Properties.
e. The stated capital increase of each Newco’s capital was done by resolution, and capital dividend treatment was elected for the resulting deemed dividend.
f. Each co-owner transferred its non-voting shares of its Newco to NH Properties for the balance of the total calculated price that Abacus agreed to pay for the co-owners’ interests in the shopping centre. That is, NH Properties caused HP Newco to transfer via MLT $8.7 million of the cash received from Bentall to Harvard Properties for its HP Newco non-voting shares. At this time the security for the tax indemnity was also required to be provided.
g. The newcos were left unable to pay the tax on the sale of the mall.
5. The co-owners did not know or inquire how Abacus would pay or avoid the tax liability on the taxable income triggered by the Newcos’ sale of the shopping centre, nor did they make inquiries. The co-owners had been advised by their tax accountant to make appropriate inquiries of this nature. There are documented concerns by the co-owners from the outset with Abacus’s credibility and whether it would honour its obligations under its proposed purchase arrangement. Appellant and other vendors received a tax indemnity for the 160 risk. Appellant was wilfully blind.
5.1 The Court found that the vendors received a “premium” for the newco shares – an amount in excess of their fair market value, with the excess being the underlying tax associated with a sale of the assets held by the newcos.
6. The CRA reassessed the Abacus side of the structured series of interdependent and related corporate reorganization and sale steps. Abacus is disputing its reassessments, but at this time that dispute is unresolved and the tax has not been paid on the Abacus side.
7. CRA assessed the appellant under s 160 and the GAAR for an amount that CRA maintains the co-owners directly or indirectly received upon the sale of the shares through which they held their interests in the shopping centre. The amount is approximately $6.5 million.
8. Notes re evidence
– Maurice Bundon, appellant Sr VP, testimony: I did not understand SPA vs APA, and he said the sale by the newcos did not involve a tax plan. He said he relied on in-house counsel for details of the deal. The in-house counsel did not testify. Hill was family rep. Harvard Properties part of a family-owned conglomerate. He did not testify. No negotiation re price offered. Bundon repeatedly said he couldn’t remember.
– Tina Svedahl. para 44 We obtained tax advice from KPMG because of the share sale. We didn’t follow up re last paragraph that advised understanding how the tax liability on the sale of the property would be addressed. Appellant’s only response to this was to obtain a tax indemnity. Boyle: “I infer” that appellant knew Abacus was not the ultimate purchaser even if appellant didn’t learn actual identity of that purchaser until much later in the sale process. Svedahl had no difficulty with recollection in chief but frequent recall issues in cross.
– Court concludes
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[63] It appears that Mr. Bundon and Ms. Svedahl read the final
paragraph of the Auger tax memo and, at that time, made an informed
decision to be willfully blind to how Abacus was planning to deal with
its tax liability on the income arising from their series of
transactions with the co-owners, apart from worrying about their own
tax risks, including section 160, capital dividend treatment, and the
GAAR.
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– Dennis Auger, KPMG. Para 68: He calculated what the appellant’s after-tax proceeds would be on a $90 million sale. Para 70: His memo shows the appellant and co-owners understood that the SPA method allowed Abacus to pay a premium. Auger very professional and provided good advice. What appellant did with that advice is telling in this case. “I find” Auger and his client understood that the “premium” he described in his memo was funded by the avoidance of tax on the sale.
– Lorne Paperny, lawyer and principal with one of the co-owners of the mall. He read the tax memo, didn’t remember reading the last paragraph about Abacus black box for eliminating the tax debt, and he didn’t believe the mall owners made any inquiries about it. Based on the KPMG memo contents, “I infer” that at least one owner asked how Abacus could pay an asset price on a share deal. He said he didn’t know what the sale to a “third party” or affiliate meant, and he didn’t ask.
– Mark Zivot, a principal at another co-owner of the mall. He knew nothing about Abacus but didn’t make further inquiries. He understood they were selling shares for an asset sale price, which is why KPMG was engaged.
– Don Kowalenko, lawyer at FMC for Abacus. He could not explain why Hillcore Financial, one of the Abacus group entities, was subject to a “cone of silence” within FMC as noted on FMC’s trust ledger for Hillcore. He can’t remember important mechanics about how money moved but did acknowlege that Abacus received $2.25 million from the ultimate purchaser.
– Scott Exner, external lawyer for appellant. He had never heard of Abacus before. He always knew the mall would be sold to a third party that was not necessarily an Abacus affiliate. “I infer” the co-owners either always knew about the sale to a third party or they didn’t want to know more about it. He was worried about some entity intercepting funds, and so he insisted on a single escrow for all transactions, including the ultimate sale of the mall to the third party. “I infer” notes were used for the shares sales to defer any transfer of cash until after the mall was sold. Co-owners did not like steps proposed by Abacus to address 160 concerns, but they also did not inquire further about what gave rise to the 160 risk in the first place. They chose to rely on the indemnity for that risk given by Abacus.
– Mark Weston, valuation expert. His evidence is not helpful because, among other things, he didn’t provide a value of the mall as such.
9. Findings of fact include
– appellant “at best willfully blind” to how Abacus would address the tax liability.
– appellant willfully blind that the tax liabliity for the sale of the mall was in a corporation that had no assets to pay it
– appellant was warned about the 160 risk and obtained an indemnity to address it
– appellant knew that Abacus was proposing a tax plan to it that would leave the tax liability in a corporation they knew nothing about
– appellant knew it would get a premium only if Abacus didn’t pay tax on the income generated.
– it knew the premium derived from the unpaid tax.
– Abacus only brought the tax plan to the table
– Abacus entity that had sold the mall did not have assets to pay the related tax bill.
– Abacus and appellant attempted to bury the premium in the LOIs.
– Appellant could have presented evidence of actual fair market value but did not do so. The parties manipulated the cap rate instead.
– Voting shares transferred separately so that control changed before cash paid for non-voting shares and the promissory notes so not deemed to be not at arm’s length.
* Issues
1. Does 160 apply to appellant? (Transferor, which is Abacus sub,
is assumed to be a tax debtor for this appeal.)
2. Does the GAAR apply?
* Decision
1. Section 160 applies.
2. GAAR applies.
* Reasons
** Section 160
Para 138 Parties’ state of mind is critical to arm’s length analysis.
Here, the appellant was warned by its tax adviser about a potential
issue. It chose not to inquire and get an indemnity instead.
Para 140 Arm’s length test ensures parties transact as in ordinary
commercial dealings, but that requires transacting with their own
property.
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[144] Given the evidence and findings in this case, it is apparent
that the needed arm’s length tension was not present in this case as
the premium received by Harvard Properties and the co-owners is
anomalous, lopsided, off-the-mark, intentionally removed from, and
clearly out of whack with, a fair market value price.
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The “out of whack” is funded by unpaid tax (although I am not saying
the Abacus plan for not paying that tax was ineffective).
“In cases involving the avoidance of tax, willful blindness is equated
to intentionally participating in an unsuccessful tax avoidance
venture.”
150 Three property transfers by NH Properties (the debtor) to
appellant including via appellant’s newco for the voting and
non-voting shares of the appellant’s newco.
155 Given the premium funded by tax, the transactions did not reflect
ordinary commercial dealings. 161 Appellant, Abacus and NH Properties
(vendor of the mall) acted together to dictate HP Newco’s actions. The
parties did not deal at arm’s length.
165 Canada was not at the table when the parties split the premium.
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When otherwise arm’s length parties negotiate a tax efficient
transaction structure, that alone does not make them non-arm’s length.
Similarly otherwise arm’s length parties do not have a duty to verify
their counterparty’s tax planning or compliance to remain arm’s
length. In this case it is the co-owners’ willful blindness that
equates to intentional or knowledgeable participation and action that
drives a conclusion that the parties were not dealing at arm’s length
as defined in and for purposes of the Act.
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166 Appellant has failed to prove fmv of its newco’s shares.
169 Abacus billed newco $5 million for “management services” a few
days before closing. No explanation given and no evidence of services
provided. Again, shows NAL.
170 No evidence of value of note from NH Properties to appellant’s
newco for its voting shares, but it couldn’t have had a value equal to
its principal amount because of obligations of NH Properties. 171 The
very existence of the note, representing most of the purchase price of
the voting shares, is evidence of NAL. 172 Once the transactions
started, they could not be stopped, and all steps led to NH Properties
being stripped of all property and unable to pay its taxes.
183 Newco non-voting shares had no value, and so 160 applies to $8.7
million paid for them by NH Properties. 185 This exceeds underlying
assessment, but I also find that appellant has no established value
for the prom note or the voting shares.
186 I don’t know what the premium was because appellant didn’t lead
evidence, but it’s not my job to fill that hole.
** GAAR
Was there a tax benefit? 198 Yes, 2d class of newco shares, separate sales of voting and non-voting shares and use of a note to purchase voting shares. 200 the benefit is the avoided 160 liability
Object, spirit and purpose – 202 to 204
Was there misuse? 206 Yes! The inserted steps were inserted precisely to frustrate and avoid 160.
Tax consequences? 208 Appellant is liable for amount by which consideration received exceeds fmv of property transferred minus unpaid tax of NH Properties.
210ff The GAAR does not have a normal reassessment period. 220 The only requirement is that the GAAR be involved in an assessment that otherwise validly issue. (In this case, 160 does not have a limitation period.)
* Quotes
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[61] I do not find it credible that senior management responsible for real estate investments at Harvard Properties were unaware of the significant tax and cash flow difference between share purchases and asset purchases for real estate companies. It is simply not credible that Harvard Properties’ senior management, or the other co-owners (at
least those who had officers, shareholders or principals testify) were unaware of the great significance to Canadian real estate companies of the contribution of capital cost allowance/tax depreciation on their owned assets to their tax shield and ultimately their overall success. This was spelled out in even greater detail in Mr. Auger’s two-and-a-half page memo which describes this as the very reason that Abacus could pay a premium to the co-owners for a share deal that followed the Abacus proposal.
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[138] The Court stresses that “the parties’ state of mind is essential to the arm’s length component of the analysis.” (paragraph 75). In the case before this court, the state of mind of Harvard Properties and the other co-owners includes their choice to remain willfully blind to the tax liability created by following the Abacus proposal and to instead insist upon changes to the series of transactions that might better shield them from liability including the irrevocable secured tax indemnity.
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