Eyeball Networks Inc. v. The Queen, 2019 TCC 150 (CanLII)

Tax practitioners should check out the recent case of Eyeball Networks Inc. v. The Queen. The case looked at the interaction between section 160 and a related party butterfly transaction. Simplified, the owner manager (“Owner”) of an opco (“Opco”) desired to spin out assets from Opco to a new corporation (“Newco”) because opco had been involved in a market segment with some moral taint. To do so Owner transferred some of his shares of Opco to Newco for shares of Newco employing section 85 to defer any gain. Then Newco purchased some of the assets of Opco in exchange for its own shares and the assumption of certain liabilities (again using section 85 to defer any gain). Then the two sets of shares were redeemed for equal amounts and the redemption prices paid by the issuance of promissory notes of equal face value. The two sets of notes were then set-off. This resulted in a completely tax deferred transfer of assets from Opco to Newco. Opco was then reassessed for taxes and the Minister attempted to chase Newco for them. It was accepted by the parties that although the assessment for Oldco was issued after the butterfly the tax was already exigible under the Act and so that part of 160 had been satisfied.

Newco contended that section 160 did not apply because consideration of equal amount was given for any assets purchased. The Minister wanted to apply 160 in a manner similar to MacDonald (essentially looking through the transactions steps to the end result where Newco gets Opcos assets without paying anything). The Court rejected this approach finding that section 160’s provision carving out its application to assets purchased for fair market value consideration should be applied on a point in time basis.

The Court held that while the purchases using the shares were for equal consideration the set-off of the notes had occurred for inadequate consideration as no third party purchaser would have paid full face value for the note from Oldco (which by then had no assets). This case is interesting because it makes clear that 160 applies at a point in time. However, with due respect to the Court the holding that the fair market value of note from Oldco was not equal to its face value at the time of the debt set-off seems wrong as Oldco had one asset the promissory note from Newco which could be enforced pursuant to the terms of the promissory notes. I’d be interested to know what others think of this case.