Madison Pacific Properties Inc. v. His Majesty the King
Madison Pacific Properties Inc.
His Majesty the King

Executive Summary: Key Legal and Evidentiary Issues

  • The core dispute centered on the application of the General Anti-Avoidance Rule (GAAR) to deny a tax loss carryforward.

  • Madison Pacific engaged in a “corporate restart” involving unused tax losses and new shareholders through a dual share structure.

  • The Tax Court found the sole purpose of the transaction was to access tax losses, invoking GAAR.

  • Appellant argued procedural unfairness and factual/legal errors in the Tax Court’s assessment, but the Federal Court of Appeal found no reviewable errors.

  • The Court clarified the scope of a “series of transactions” under subsection 248(10) of the Income Tax Act.

  • Both the substantive GAAR appeal and a separate costs appeal were dismissed with costs awarded to the Crown.

 


 

Facts and outcome of the case

The case involved Madison Pacific Properties Inc., a public corporation formerly engaged in mining, which underwent a “corporate restart” after becoming a shell company holding only tax losses. Businessmen Sam Grippo and Raymond Heung, who operated private real estate companies, executed a transaction plan where their entities transferred real estate assets to Madison Pacific in exchange for shares. This maneuver gave their companies a controlling interest (46.56% voting rights and 92.82% equity) in Madison Pacific, with further voting influence through business associates.

Following the transaction, Madison Pacific used accumulated tax losses—non-capital losses of approximately $9.7 million and net capital losses of roughly $72.7 million—over a 15-year period. The appeals focused on the final years in which the last of the net capital losses were used. The Canada Revenue Agency reassessed Madison Pacific’s tax returns, disallowing the carryforward under the General Anti-Avoidance Rule (GAAR). The Tax Court upheld this decision, finding the transformation's sole purpose was to access the tax losses.

The Federal Court of Appeal reviewed two consolidated appeals: one on the GAAR ruling and another on the Tax Court’s costs award. The appellant raised several arguments, including alleged factual errors, improper legal framing regarding group control, and claims of procedural unfairness due to being denied post-hearing submissions on a related case (MMV Capital). The Court found these arguments unpersuasive.

The Court also independently raised the issue of whether the “series of transactions” should include the claiming of losses, not just the transformation phase. Referring to subsection 248(10) of the Income Tax Act and Supreme Court jurisprudence, the Court concluded that the series necessarily included the tax benefit events, as they were contemplated and related to the initial transformation.

Ultimately, the Federal Court of Appeal dismissed both appeals. It affirmed that the GAAR was properly applied and upheld the Tax Court’s discretionary award of costs to the Crown. Madison Pacific was ordered to pay $5,000 in costs for the GAAR appeal and additional costs for the costs appeal.

Federal Court of Appeal
A-30-24
Taxation
$ 5,000
Respondent
26 January 2024