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Top 10 Business Decisions
CO-WRITTEN BY AIDAN MACNAB, BERNISE CAROLINO
IN THIS tax case, the Supreme Court of
Canada found that a company used a com-
plex series of transactions to evade Income
Tax Act restrictions, which were aimed at
preventing companies from making acquisi-
tions solely to use the target's business losses
to reduce its tax burden.
Forbes Medi-Tech had $90 million in
non-capital losses, scientific R&D tax expendi-
tures, and investment tax credits. e venture
capital firm Matco agreed with Forbes to shi
its assets and liabilities into a new parent com-
pany called Newco. Matco bought debentures
that would convert into voting shares and all
of Newco's non-voting shares in Forbes, and
Newco promised to sell Matco a certain num-
ber of shares. Matco founded Deans Knight
Capital Management, which used Forbes to
raise money in an IPO, and Forbes changed
the Tax Court agreed they were tax-avoidance
transactions, it found they were not abusive.
e Federal Court of Appeal set aside the
Tax Court's judgment and ruled that the
transactions were abusive and the general
anti-avoidance rule, under s. 245 of the Act,
applied to deny the tax benefits. e SCC dis-
missed the appeal and clarified the application
of the general anti-avoidance rule.
"In making this determination, the court
provided guidance on how to determine what
the object, spirit, and purpose of an Income
Tax Act provision are, which may be of assis-
tance to tax professionals in structuring their
business affairs," says Meehan.
its name to Deans Knight, which used Forbes'
non-capital losses to reduce its tax liability in
the 2009 and 2012 tax years.
e case dealt with the general anti-
avoidance rule and s. 111(1)(a) of the Income
Tax Act. e provision allows taxpayers to
offset income with non-capital losses to low-
er their tax rate in another tax year. Under s.
111(1)(a), to capitalize on an acquired compa-
ny's non-capital losses, the acquiror must carry
on the same or similar business as the compa-
ny that incurred the losses.
Aer the minister of national revenue reas-
sessed Deans Knight and denied deductions
from non-capital losses, the company appealed
to the Tax Court. e minister had found
that the transactions by which Deans Knight
acquired $90 million in non-capital losses
amounted to abusive tax avoidance. While
DEANS KNIGHT INCOME CORP. V. CANADA,
2023 SCC 16
• Deans Knight Income Corporation >
Burnet, Duckworth & Palmer LLP >
Barry R. Crump, Heather DiGregorio,
Robert Martz
• His Majesty the King > Attorney General
of Canada Department of Justice >
Michael Taylor, Perry Derksen
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