Supreme Court Of Canada Won't Reconsider The GAAR In Birchcliff Energy Ltd.

On November 14, 2019, the Supreme Court of Canada denied the taxpayer's application for leave to appeal from judgment of the Federal Court of Appeal in Birchcliff Energy Ltd. v The Queen, 2019 FCA 151.1 In dismissing the taxpayer's appeal, the Supreme Court of Canada declined to re-consider the General Anti-Avoidance Rule (GAAR).

Background

The case dealt with an appeal from the 2017 judgment of the Tax Court of Canada (TCC),2 in which the TCC dismissed the appeal of Birchcliff Energy Ltd. (Birchcliff) from a reassessment of its 2006 taxation year denying approximately $16 million in non-capital losses that were incurred by Veracel Inc. (Veracel) and subsequently claimed by Birchcliff.

Birchcliff was formed by the amalgamation of Veracel and Birchcliff Energy Ltd. (Predecessor Birchcliff) in May 2005. Veracel and Predecessor Birchcliff entered into a number of agreements, which ultimately would apply the losses of Veracel, an unsuccessful medical instrument manufacturing business, to shelter the profits from certain oil and gas properties that Predecessor Birchcliff intended to acquire. In order to raise the necessary funds, Veracel sold subscription receipts to public investors. The subscription receipts included certain conditions to ensure that the funds would be used to acquire the oil and gas properties, including the condition that the funds would be released only if Veracel amalgamated with Predecessor Birchcliff. Furthermore, if the amalgamation did not take place, holders of subscription receipts would be entitled to a refund of their investment.

On May 31, 2005, the transactions (the Arrangement) were completed, including the following key steps:

Class B Common shares of Veracel were issued to holders of subscription receipts; Veracel and Predecessor Birchcliff amalgamated; Birchcliff received a credit facility of up to $70 million; and Birchcliff purchased the oil and gas properties. Following the completion of the Arrangement, the holders of the Class B Common shares of Veracel held approximately 34 million common shares of new Birchcliff, and the shareholders of Predecessor Birchcliff held approximately 20 million common shares of new Birchcliff.

As the holders of subscription receipts received a majority voting interest in Birchcliff, the loss streaming rules found at subsections 256(7) and 111(5) of the Income Tax Act (Canada)3 (the Tax Act)that would otherwise restrict the carry-forward of the Veracel losses on an...