Crystal Beach Park Limited v. The Queen, 2006 TCC 183 is an interesting case with some local roots (the audit was conducted by the St. Catharines TSO and the hearing was held in that city too). The case considers when persons can be considered to act together to acquire de jure control of a corporation for the purposes of the loss carryforward rules. The Court also examined when a business represents the same business for the purpose of those same rules.
When do two individuals act together as a group? In Crystal Beach, the Court first reviewed the relationship between two of the shareholders of the corporate taxpayer. The two shareholders were not related; in fact, they did not even socialize. Second, the Court examined their business relationships. Before becoming shareholders of the taxpayer, the two conducted separate businesses in different fields in which they had some limited dealings. One of the shareholders invited the other to become a shareholder, but the latter was only one of several potential candidates considered by the former. Third, the Court rejected the notion that, merely because they worked together to achieve a common commercial goal, the two “acted in concert”. The Court quoted from Chief Justice Bowman’s judgement in Lenester Sales Ltd. v. The Queen, 2003 TCC 531 (at ¶35):
To say that every time two independent business persons in pursuit of their own business interests work together to achieve a mutually beneficial commercial objective means that they are “acting in concert” and are, therefore, not at arm’s length would mean that no business relationships would ever be at arm’s length.
Finally, the Court accepted the evidence of the taxpayers that there was no voting agreement between them and that, in fact, a trust arrangement involving shares of a third party under which they were trustees would have undermined any such agreement.
Based on these factors, the Court concluded that the two taxpayers did not constitute a group.
The Crown also argued that the corporate taxpayer carried on a different business after the “acquisition of control”. Before the taxpayer carried on an amusement park business; after it carried on a real estate development business (at ¶33). The Court rejected the distinction: “Looking at the evidence in the present case, I find that the essence of the business (pre- and post-amalgamation [acquisition]) was the exploitation of a recreational site.”
The Court’s conclusion illustrates well the difficulty in comparing the “essence” of two things. The answer to whether they are the same will depend to a large degree on the level of abstraction at which the comparison is made. The Court might have arrived at a different conclusion if its category had been less abstract so that it could have focused, for example, on the fact that after the “acquisition”, the business of the taxpayer included selling homes whereas beforehand it operated ferris wheels and the like!
