In DEML Investments Limited v. Canada (2025 FCA 204, rev’g in part 2024 TCC 27) (“DEML Investments”), the FCA applied the GAAR to a bump transaction involving Canadian resource properties and found that it abused paragraph 88(1)(d). While the TCC applied the GAAR to deny the entire capital loss of $45,850,237 arising on a sale of partnership interest in 2010, the FCA applied the GAAR only to the portion of the capital loss attributable to the 88(1)(d) bump, which portion was in an amount of $39,402,330.
Paragraph 88(1)(c) implements the bump. It provides that on the winding up of a subsidiary, where the property was a capital property (other than an ineligible property) of the subsidiary, the parent’s cost of the property distributed from the subsidiary is the amount determined under paragraph 88(1)(d). Paragraph 88(1)(d) provides how much a taxpayer can bump, which, in general, is essentially the difference between the parent’s ACB of the subsidiary shares and the subsidiary’s tax cost of certain capital property. Subparagraphs 88(1)(c)(iii) to (vi) set out ineligible property, which includes depreciable property. In 2012, subparagraph 88(1)(d)(ii.1) was added to restrict the bump that is available for an interest in a partnership when the partnership holds depreciable property or a Canadian resource property. It was not in effect when the bump transaction in DEML Investments was implemented.
As described by the FCA in DEML Investments, citing Canada v. Oxford Properties Group Inc. (2018 FCA 30) (“Oxford Properties”), the purpose of the bump provisions is to “allow a parent company to preserve some or all of the ACB of the shares of a subsidiary company that would be lost when those shares disappear on the winding-up … by allowing the parent company to add some or all of that lost ACB to the ACB of non-depreciable capital property acquired by the parent company on the winding-up …”.
In DEML Investments, there was no dispute that there was a tax benefit arising from the capital loss upon DEML’s sale of the partnership interest. There was also no dispute that the transactions resulting in the 88(1)(d) bump were avoidance transactions - the subsidiary of DEML dropped down the Canadian resource properties to a partnership; then upon the winding up of the subsidiary under subsection 88(1), the partnership interest was distributed to the parent, DEML, and DEML’s cost in the partnership interest (which partnership held the Canadian resource properties) was bumped up. The Canadian resource properties were not capital property, therefore did not qualify for the bump themselves. But the partnership interest was a capital property and was not an “ineligible property”, therefore qualified for the bump. There would be no bump if the transactions were done now, since subparagraph 88(1)(d)(ii.1) was added in 2012.
The only issue before the courts was abuse. The FCA’s abuse analysis focused on the alleged abuse relating to the 88(1)(d) bump. It quoted the Oxford Properties for the object, spirit and purpose of paragraphs 88(1)(c) and (d). According to the Court, the bump provisions seek to address the disappearance of the subsidiary shares and the tax cost embedded therein, by preserving and transferring such ACB to an asset “that is taxed with the same rate of inclusion”, i.e., 50% (shares are capital property). This explains why depreciable property or other types of property that gives rise to a 100% inclusion rate cannot be bumped. With respect to the new subparagraph 88(1)(d)(ii.1), which was added in 2012, the Court commented that it “conveys in express terms a rationale which was already present” in the bump provisions.
Essentially, the FCA in DEML Investments expanded the Oxford Properties decision to Canadian resource properties, and found that the bump transaction in question, by using a partnership to bump up the ACB of the partnership interest when the partnership holds a Canadian resource property, frustrates the distinction between a non-depreciable capital property and a Canadian resource property, i.e., the capital vs income distinction. Furthermore, the FCA in DEML Investments also found abuse in doubling up of tax attributes: increased ACB in the partnership interest attributable to the FMV of the Canadian resource properties, as well as a significant balance of $34.9M in DEML’s cumulative Canadian oil and gas property expense (“CCOPGE”) account in relation to the same Canadian resource properties. According to the FCA, the rationale of paragraphs 88(1)(c) and (d) is “not to allow a corporate parent to have access to both an increased ACB of a partnership interest held by that subsidiary and also access to the CCOPGE of the subsidiary maintained for the Canadian resource properties that are owned by that partnership”.
Notably, the FCA only applied the GAAR to the abusive portion of the capital loss, i.e., the portion attributable to the bump. It found that there was a gap in the TCC’s calculation of the ACB for the partnership interest and that the portion attributable to the allocation of partnership income to DEML is not abusive. It therefore revised the TCC decision in part.
Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.