Case information

Taxation — Income tax — Assessment — Hybrid sale of corporation — Distribution or appropriation of funds or property of corporation to shareholders on winding-up, discontinuance or reorganization of business — Excess cash — Deemed dividend — Meaning of words “distribution” and “reorganization” in context of hybrid sale of shares and assets of corporation pursuant to s. 84(2) of Income Tax Act — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 84(2).

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Watch4Net Solutions inc. (W4N) was incorporated by the applicants Michel Foix and Nicolas Souty in 2000. Unlike her spouse Mr. Souty, who held his shares of W4N directly, the applicant Sonia Lebel held her shares of W4N indirectly, as a beneficiary of the family trust, Fiducie Familiale Nicolas Souty 2007. Mr. Foix held his shares of W4N through Virtuose Informatique inc. (Virtuose). In 2006, EMC — a large American public corporation (EMC (US)) and its Canadian subsidiary (EMC Canada) — told the applicants that it wanted to purchase W4N. Mr. Foix and Mr. Souty rejected the purchase offer because they were of the view that the price was too low. In 2011, EMC (US) made a new offer to purchase W4N. In January 2012, the parties agreed on the sale of all W4N shares for $50,000,000. The sale of the shares took place through a letter of interest dated January 20, 2012, which documented the agreement and was accepted by Mr. Foix, on behalf of W4N, on January 23, 2012. In April 2012, the parties agreed instead to a hybrid sale of W4N’s shares and assets for an amount over $70,000,000. The hybrid sale agreement stipulated that W4N was to sell EMC (US) its significant assets, namely, its intellectual property pertaining to the APG software, its ongoing contracts (unless the customers were located in Canada), the shares of its subsidiaries, and all of the goodwill associated with its business. Because the other assets would remain the property of W4N, EMC Canada would then purchase all of W4N’s capital stock directly from the shareholders. The reorganization of the capital stock of W4N and Virtuose unfolded through transactions that were completed between April 24 and May 30, 2012 in accordance with the sale agreement. The hybrid sale occurred between 11:30 p.m. on May 30 and 12:30 a.m. on May 31, 2012 in four steps, which were set out in the sale agreement. On June 1, 2012, W4N, Virtuose and EMC Canada amalgamated. With the exception of Virtuose, which ceased to act as a holding company, W4N and EMC Canada continued to operate under the name EMC Canada. In their 2012 tax return, the applicants each declared a capital gain resulting from the sale of their shares and claimed the capital gains deduction provided for in the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). In 2017, the Minister of National Revenue issued reassessments with respect to the three applicants’ 2012 taxation year, treating the capital gains originally declared as deemed dividends pursuant to s. 84(2) of the Income Tax Act. The Tax Court of Canada dismissed the three appeals from the three reassessments. The Federal Court of Appeal dismissed the three appeals from the decisions of the Tax Court of Canada.