The appellant corporate taxpayer sold its assets to a sister subsidiary that had accumulated substantial tax losses.
The appellant then operated the business as an agent for the subsidiary, transferring the net income to it at the end of each fiscal year to utilize the loss carry-forward.
The Minister of National Revenue reassessed the appellant, arguing the transaction was incomplete, a sham, and lacked a bona fide business purpose.
The Supreme Court of Canada allowed the appeal, holding that the transaction was legally complete and not a sham, as it created the exact legal relationships intended by the parties.
The Court rejected the strict 'business purpose' test, affirming that taxpayers may arrange their affairs to minimize tax liability provided the transaction is legally effective and does not violate specific anti-avoidance provisions.
