Continental Bank Leasing Corp. v. Minister of National Revenue, (1998) 229 N.R. 58 (SCC)

• Judge: McLachlin, Iacobucci, Major and Bastarache, JJ.
• Court: Supreme Court (Canada)
• Case Date: September 03, 1998
• Jurisdiction: Canada (Federal)
• Citations: (1998), 229 N.R. 58 (SCC);1998 CanLII 794 (SCC);[1998] 4 CTC 119;[1998] SCJ No 63 (QL);[1998] 2 SCR 298;82 ACWS (3d) 196;229 NR 58;[1998] ACS no 63;163 DLR (4th) 385;52 DTC 6505

Continental Bk. Leasing Corp. v. MNR (1998), 229 N.R. 58 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

....................

Temp. Cite: [1998] N.R. TBEd. SE.001

Continental Bank Leasing Corporation (appellant) v. Her Majesty The Queen (respondent) and The Canadian Bankers' Association (intervenor)

(25532)

Indexed As: Continental Bank Leasing Corp. v. Minister of National Revenue

Supreme Court of Canada

L'Heureux-Dubé, Gonthier, Cory,

McLachlin, Iacobucci, Major

and Bastarache, JJ.

September 3, 1998.

Summary:

Continental Bank needed to sell Continen­tal Leasing, a subsidiary. A straight sale of assets was unattractive, because Leasing had used most of its permitted capital cost al­lowance. The sale of assets above their tax value (below fair market value) would trig­ger a tax liability for recapture of capital cost allowance. Section 97(2) of the Income Tax Act permitted disposition of assets without recapture if the disposition was to a "partnership" of which Leasing was a mem­ber, in which case the tax liability was deferred. Central purchased Leasing's busi­ness and assets by way of a disposition to a purported partnership involving Leasing and two Central subsidiaries. After the desired tax objective was believed to have been achieved, the partnership was disassembled. The Minister of National Revenue reassessed Leasing on the basis that no partnership was created and the s. 97(2) rollover provision did not apply. The taxpayer appealed.

The Tax Court of Canada determined that a valid, subsisting partnership was created and recapture liability was validly deferred. The court rejected the Minister's contention that the scheme was a sham, illegal or ultra vires. The Minister appealed.

The Federal Court of Appeal, in a judg­ment reported 199 N.R. 9, allowed the ap­peal and restored the Minister's reassess­ment. There was no valid partnership cre­ated. Alternatively, if there was a part­ner­ship, it was void ab initio because of illegal­ity (Bank Act, s. 174(2)(i)) and ultra vires the bank. The taxpayer appealed.

The Supreme Court of Canada, Bastarache and L'Heureux-Dubé, JJ., dissenting, allowed the appeal and remitted the matter to the Minister for reconsideration and reassessment on the basis that the s. 97(2) election was valid.

Banks and Banking - Topic 10

General and definitions - Invalid acts - Saving provision - Section 20(1) of the Bank Act provided that "no act of a bank, including any transfer of property to or by a bank, is invalid by reason only that the act or transfer is contrary to this Act" - A taxpayer bank claimed s. 20(1) kept all invalid acts of a bank from being rendered invalid - The Supreme Court of Canada stated that s. 20(1) "supports the view that Parliament never intended breaches of the Bank Act to render bank transactions, including investments in other corpor­a­tions, ..., null and void. This supports the argument that Parliament intended to cre­ate an offence punishable by fines, not to invalidate otherwise lawful transactions and that the doctrine of illegality should have no application in the case at bar." - See paragraph 17.

Banks and Banking - Topic 1203

Powers of banks - Prohibited dealings - Partnerships - Continental Bank sold a wholly owned subsidiary (Leasing) by way of trans­ferring assets to a purported part­nership composed of the subsidiary and the pur­chaser's two subsidiaries - The Federal Court of Appeal held that assuming a valid partnership was created, it violated s. 174(2)(i) of the Bank Act, which pro­hibited banks from participating in a part­nership in any way - Accordingly, Conti­nental's and the subsidiary's participation was legally invalid and void ab initio - The Supreme Court of Canada held that s. 174(2)(i) did not apply to Leasing (non-bank) - Continental was an investor only - The fact that s. 174(2)(i) prohibited Conti­nental from investing in the partner­ship did not render the partnership, and Leasing's involvement in it, unlawful for the pur­poses of dissolving the partnership under s. 34 of the Ontario Partnerships Act - The court stated that "the validity of the part­nership depends on its members, not on who may hold shares in them" - See para­graphs 3 to 16.

Company Law - Topic 688

Powers - Doctrine of ultra vires - Acts contrary to statute - The Supreme Court of Canada held that the doctrine of ultra vires was abolished with respect to banks - Accordingly, the prohibition in s. 174(2)(i) of the Bank Act against a bank having any participation in a partnership did not make such involvement ultra vires the bank - See paragraphs 73 to 81.

Contracts - Topic 6531

Illegal contracts - Violations of statute law - Statutes - General - [See Income Tax - Topic 1750.1 ].

Income Tax - Topic 1750.1

Capital gains and losses - Capital gains - Assets transferred to partnership - Conti­nental Bank needed to sell Continental Leasing, a subsidiary - A straight sale of assets was unattractive, because Leasing had used most of its capital cost allowance - The sale of assets above tax value (below fair market value) would trigger tax liabil­ity for recapture of capital cost al­lowance - Section 97(2) of the Income Tax Act per­mitted disposition of assets without recap­ture if the disposition was to a "part­ner­ship" of which Leasing was a member (tax liability deferred) - Central purchased Leasing's assets by way of disposition to a purported partnership involving Leasing and two Central sub­sidiaries - The Supreme Court of Canada held that the s. 97(2) election was valid - Leasing's par­ticipation in the partnership did not violate s. 174(2)(i) of the Bank Act (banks pre­cluded from participating in partnerships) - Section 34 of the Ontario Partnerships Act "dissolved" partnerships only where they were "unlawful" - Cont­inental's involve­ment as investor in the partnership did not affect the legality of the partnership - The court rejected the submission that since Leasing's involve­ment was illegal for public policy reasons, the partnership business was unlawful - The court stated that "the fact that the court determines that a contract is void or unenforceable for public policy reasons under the doctrine of illegality does not render either the con­tract itself or the subject of the contract unlawful" - Further, "public policy requires that breaches of the Bank Act should not lead to the invalida­tion of contracts and other transactions" - See paragraphs 3 to 16.

Income Tax - Topic 5021

Partnerships - Creation - General - [See Banks and Banking - Topic 1203 and Income Tax - Topic 1750.1 ].

Income Tax - Topic 9545

Tax evasion and tax avoidance - Artificial transactions - Sham defined - A bank sold a subsidiary to Central by way of a trans­fer of business and assets to a purported partnership, seeking to defer liability for recapture of capital cost allowance (Bank Act, s. 97(2)) - The Minister claimed that the scheme was a "sham" - The Federal Court of Appeal affirmed that there was no sham - A sham required an element of deceit to fool the Minister as to the true nature of the transaction - There was no deceit - The fact that the scheme was not successful in avoiding tax liability did not mean it was a sham - The Supreme Court of Canada stated that although the "sham" transaction issue was not raised before it on appeal "both the trial judge and the Court of Appeal correctly held that the transactions entered into by the parties did not amount to a sham" - See paragraph 38.

Partnership - Topic 10

Partnership - What constitutes - [See Banks and Banking - Topic 1203 and Income Tax - Topic 1750.1 ].

Partnership - Topic 10

Partnership - What constitutes - Conti­nen­tal Bank needed to sell Continental Leas­ing, a subsidiary - A straight sale of assets was unattractive, because Leasing had used most of its capital cost allowance - The sale of assets above tax value (below fair market value) would trigger tax liability for recapture of capital cost al­lowance - Section 97(2) of the Income Tax Act permitted disposition of assets without recapture if the disposition was to a "part­nership" of which Leasing was a member (tax liability deferred) - Central purchased Leasing's assets by way of disposition to a purported partnership involving Leasing and two Central sub­sidiaries - The Supreme Court of Canada held that the definition of "partnership" in s. 2 of the Ontario Partnerships Act (carrying on a business in common with a view to profit) was met - See paragraphs 38 to 71.

Cases Noticed:

Salomon v. Salomon (A.) and Co., [1897] A.C. 22 (H.L.), refd to. [para. 10].

Stubart Investments Ltd. v. Minister of National Revenue, [1984] 1 S.C.R. 536; 53 N.R. 241; 84 D.T.C. 6305; [1984] C.T.C. 294, refd to. [para. 38].

Orion Finance Ltd. v. Crown Financial Management Ltd., [1996] 2 B.C.L.C. 78 (C.A.), refd to. [para. 39].

Mahon v. Minister of National Revenue (1991), 91 D.T.C. 878 (T.C.C.), refd to. [para. 43].

Hickman Motors Ltd. v. Minister of National Revenue, [1997] 2 S.C.R. 336; 213 N.R. 81, refd to. [para. 48].

Antosko v. Minister of National Revenue, [1994] 2 S.C.R. 312; 168 N.R. 16, refd to. [para. 69].

Ashbury Railway Carriage and Iron Co. v. Riche (1875), L.R. 7 H.L. 653, refd to. [para. 73].

Communities Economic Development Fund v. Canadian Pickles Corp. et al. (SCC), [1991] 3 S.C.R. 388; 131 N.R. 81; 76 Man.R.(2d) 1; 10 W.A.C. 1, refd to. [para. 74].

Cope v. Rowlands (1836), 2 M. & W. 149; 150 E.R. 707, refd to. [para. 82].

Sidmay Ltd. v. Wehttam Investments Ltd. (1967), 61 D.L.R.(2d) 358 (Ont. C.A.), affd. [1968] S.C.R. 828, refd to. [para. 84].

Royal Bank of Canada v. Grobman (1977), 18 O.R.(2d) 636 (H.C.), refd to. [para. 84].

Still v. Minister of National Revenue (1997), 221 N.R. 127 (F.C.A.), refd to. [para. 85].

Neider v. Carda of Peace River District Ltd., [1972] S.C.R. 678, refd to. [para. 85].

Ménard v. Généreux (1982), 39 O.R.(2d) 55 (H.C.), refd to. [para. 103].

Holman v. Johnson (1775), 1 Cowp. 341; 87 E.R. 1120, refd to. [para. 104].

Hudgell Yeates & Co. v. Watson, [1978] 2 All E.R. 363 (C.A.), refd to. [para. 112].

Statutes Noticed:

Bank Act, R.S.C. 1985, c. B-1, sect. 18(1), sect. 20(1) [para. 28]; sect. 174(2)(i) [paras. 3, 28]; sect. 174(16) [para. 28].

Income Tax Act, R.S.C. 1952, c. 148, sect. 85(1)(a), sect. 88(1), sect. 97(1), sect. 97(2) [para. 28].

Partnerships Act, R.S.O. 1970, c. 339, sect. 2 [para. 28]; sect. 34 [paras. 3, 28].

Authors and Works Noticed:

Black's Law Dictionary (6th Ed. 1990) [para. 13].

Boyle, C., and Percy, D.R., Contracts: Cases and Commentaries (5th Ed. 1994), pp. 719 [para. 109]; 721 [para. 13].

Chesire, Fifoot and Furmston, The Law of Contract (13th Ed. 1996), pp. 375 [para. 105]; 385 to 406 [para. 111].

Crawford and Falconbridge, Banking and Bills of Exchange (8th Ed. 1986), pp. 94 [para. 77]; 97 [para. 86].

Fridman, Gerald Henry Louis, The Law of Contract in Canada (3rd Ed. 1994), p. 348 [para. 83].

Lindley and Banks on Partnership (17th Ed. 1995), pp. 9 [paras. 47, 52]; 10 [para. 47]; 11 [para. 61]; 73 [para. 41]; 135 [para. 95].

Manzer, A.R., A Practical Guide to Cana­dian Partnership Law (1994 Looseleaf), p. 2-4 [para. 42].

Manzer, A.R., The Bank Act Annotated (1993), p. 29 [para. 88].

Ogilvie, M.H., Canadian Banking Law (1991), p. 35 [para. 76].

Treitel, G.H., Law of Contract (9th Ed. 1995), pp. 399 [para. 14]; 438 to 466 [para. 111].

Wegenast, F.W., The Law of Canadian Companies (1979), pp. 136, 137 [para. 89].

Counsel:

H. Lorne Morphy, Q.C., and Kent E. Thomson, for the appellant;

Larry R. Olsson, Q.C., and S. Patricia Lee, for the respondent;

Harry Underwood and Ira Nishisato, for the intervenor, Canadian Bankers' Asso­ciation.

Solicitors of Record:

Tory Tory Des Lauriers & Binnington, Toronto, Ontario, for the appellant;

George Thomson, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the respondent;

McCarthy Tétrault, Toronto, Ontario, for the intervenor, Canadian Bankers' Asso­ciation.

This appeal was heard on January 26, 1998, before L'Heureux-Dubé, Gonthier, Cory, McLachlin, Iacobucci, Major and Bastarache, JJ., of the Supreme Court of Canada.

On September 3, 1998, the judgment of the Supreme Court of Canada was delivered in both offi­cial languages and the following opinions were filed:

McLachlin, J. (Gonthier, Cory, Iacobucci and Major, JJ., concurring) - see para­graphs 1 to 18;

Bastarache, J. (L'Heureux-Dubé, J., concurring), dissenting - see para­graphs 19 to 120.