On August 27, 2026, the Federal Court of Appeal (the “FCA”) allowed the taxpayer’s appeal in Harvard Properties Inc. v. His Majesty The King, 2026 FCA 142 (“Harvard Properties”), set aside the Tax Court’s judgment, and vacated the assessment under subsection 160(1) of the Income Tax Act. The FCA also rejected the Tax Court’s alternative conclusion that the general anti-avoidance rule (“GAAR”) supported the assessment.
The FCA returned the analysis to the statutory requirements of section 160: whether property was transferred, whether the parties dealt at arm’s length, and whether the fair market value (“FMV”) of the property transferred exceeded the FMV of the consideration given.
Background
Harvard Properties Inc. (“Harvard”) owned a 50% undivided interest in Calgary’s North Hill Shopping Centre; four other co-owners held the remaining 50%. In 2005, Abacus Capital Corporation proposed a share-sale transaction based on an $89.8 million mall value. A direct sale of Harvard’s interest would have left it with approximately $14.8 million after tax, and Abacus worked backwards from that amount in pricing the transaction.
Harvard transferred its mall interest to a newly incorporated subsidiary (“Newco”), which assumed approximately $25.6 million of debt and issued voting and preferred shares to Harvard. Harvard then sold its voting shares to NH Properties, an Abacus subsidiary, principally for a $6.92 million promissory note. Newco subsequently sold Harvard’s former 50% mall interest to Bentall for $44.9 million as part of Bentall’s $89.8 million acquisition of the mall. Part of the proceeds was used to satisfy the note, and Harvard then sold its preferred shares in Newco to NH Properties for approximately $8.7 million.
Harvard ultimately retained approximately $14.8 million after tax, essentially the same economic result as a direct sale. Years later, the Minister disallowed losses Newco had used against the mall-sale gain and assessed Harvard under section 160. The existence and amount of Newco’s underlying tax debt were bifurcated from the issues before the Tax Court.
The Tax Court Decision
The Tax Court resolved the bifurcated section 160 issues against Harvard. Central to its reasoning was its conclusion that Harvard and the co-owners had received a “premium” above the mall’s FMV, funded by Newco’s unpaid tax liability. The Court considered the circumstances analogous to Canada v. Microbjo Properties Inc., 2023 FCA 157.
It also held, in the alternative, that the GAAR supported the assessment.
The FCA Decision
Fair Market Value Was the Starting Point
The Minister’s pleadings proceeded on the basis that the mall was sold to Bentall for $89.8 million, and Crown counsel expressly confirmed at trial that FMV was not in dispute. The Tax Court itself indicated that Harvard did not need to address whether the mall was worth what Bentall had paid. Yet it later faulted Harvard for not producing additional valuation evidence.
The FCA held that deciding the case on that basis was an error of law and procedurally unfair. It further concluded that the contemporaneous arm’s-length sale of the property was highly probative and that $89.8 million was the inevitable FMV conclusion on the record.
With the mall’s FMV established at $89.8 million, the factual basis for the Tax Court’s supposed “premium” fell away.
Microbjo Distinguished: The Missing Economic Advantage
The FCA did not retreat from Microbjo. It distinguished it on the evidence.
In Microbjo, the purchaser paid more than the after-tax value of the subsidiary shares, and the parties shared an amount tied directly to an unpaid tax liability. In Harvard Properties, the FCA found no comparable premium and no evidence that Harvard and Abacus had agreed to share an amount that would otherwise have been used to satisfy Newco’s tax liability.
Those differences mattered in two respects. First, once the premium and tax-sharing premise disappeared, the FCA concluded that Harvard and the Abacus group were dealing at arm’s length. Second, subparagraph 160(1)(e)(i) limits derivative liability to the excess of the FMV transferred over the FMV of the consideration given. As Microbjo explained, this limits the transferee’s liability to the “monetary advantage” derived from the transfer. Harvard derived no such advantage from the share-sale structure: it ended up in essentially the same after-tax position as on a direct sale.
Eyeball Networks: Value at the Time of Transfer
The FCA’s consideration analysis relied on Eyeball Networks Inc. v. Canada, 2021 FCA 17.
Eyeball Networks requires adequacy of consideration to be assessed through a “snapshot” taken at the time of the transfer. The relevant question is the value of the consideration in the transferee’s hands at that time, not its value reconstructed after later steps.
That principle was important for the $6.92 million promissory note. NH Properties paid the debt represented by the note, and Harvard surrendered its corresponding claim. As Eyeball Networks had already established, payment of a bona fide debt does not itself trigger subsection 160(1). It was therefore difficult to characterize the note as having nil value when it was surrendered for its full amount.
The preferred shares raised a related valuation issue. The directions, escrow arrangements and trust accounts existed to ensure that Harvard would be paid. Those protections could not logically establish that the shares were worthless in Harvard’s hands.
Applying Eyeball Networks, the FCA held that the Tax Court erred in law by failing to value the note and the preferred shares as they stood in Harvard’s hands at the time of each transfer. Measured that way, Harvard gave consideration equal in value to what it received. That finding was independently fatal to the section 160 assessment.
GAAR
The FCA also rejected the Tax Court’s alternative GAAR analysis.
The FCA assumed, without finally deciding, the existence of the tax benefit identified by the Tax Court: avoidance of section 160 liability. The difficulty was causation. The Tax Court had identified the creation and sale of Newco’s voting shares as avoidance transactions intended to remove Harvard’s legal control of Newco. But those transactions did not themselves produce the alleged section 160 benefit.
Even assuming an avoidance transaction, the FCA found no misuse or abuse. Section 160 protects the fisc against vulnerability created by transfers between non-arm’s-length persons for inadequate consideration. On the FCA’s findings, Harvard and Abacus dealt at arm’s length and Harvard provided full consideration for the transfers.
Key Takeaways
The FCA did not determine whether Newco ultimately owed the underlying tax. The decision therefore should not be read as validating the loss planning undertaken on the purchaser side.
Nor should it be read as narrowing section 160 whenever sophisticated planning is involved. Microbjo remains an important counterpoint where the evidence establishes that parties shared an economic benefit arising from an unpaid tax liability.
What Harvard Properties does emphasize is analytical discipline. FMV must be determined from the evidence actually before the Court and at the relevant time. Derivative liability must remain tied to the monetary advantage contemplated by subparagraph 160(1)(e)(i). The GAAR requires careful identification of both the alleged tax benefit and the transaction that actually produced it.
The procedural lesson is equally important: however complex the transaction, the result must remain anchored in the case the parties were given an opportunity to meet.
About the Author
Elena Kozachek is a tax lawyer at Marciano Beckenstein LLP, where her practice focuses on tax dispute resolution and litigation, as well as tax planning. She is a Member-at-Large of the Ontario Bar Association’s Taxation Law Section Executive.
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.