Robert Martz

The appellant corporation, which held approximately $90 million in non-capital losses and other tax attributes it could not itself utilize, entered into a complex arrangement with a venture capital company to monetize those tax attributes.

Through a series of transactions, the appellant's assets and liabilities were stripped into a parent company, and the venture capital company obtained contractual control over the appellant's board composition and activities via an investment agreement, while never formally acquiring de jure control of its shares.

The appellant then carried on a new investment business using the tax attributes to shelter income.

The Supreme Court held, 7-1, that the transactions constituted abusive tax avoidance under the general anti-avoidance rule (GAAR) in s. 245 of the Income Tax Act.

The object, spirit and purpose of s. 111(5) is to prevent corporations from being acquired by unrelated parties in order to deduct unused losses against income from another business for the benefit of new shareholders; the transactions achieved the functional equivalent of an acquisition of control and frustrated that rationale.

The appellants sought a stay of proceedings in favour of arbitration under s. 15 of the Arbitration Act, R.S.B.C. 1996, c. 55, after the court-appointed receiver commenced a civil claim to collect amounts allegedly owed under contracts containing mandatory arbitration clauses.

The Supreme Court of Canada dismissed the appeal, holding that a court-appointed receiver may be a party to a debtor's pre-receivership arbitration agreement, but that an arbitration agreement may be found inoperative under s. 15(2) where enforcing it would compromise the orderly and efficient resolution of a court-ordered receivership under the Bankruptcy and Insolvency Act.

The majority applied a two-part framework: the technical prerequisites for a mandatory stay were met, but the arbitration agreements were inoperative because the multiple overlapping arbitral proceedings contemplated would compromise the objectives of the BIA.

The concurring judges agreed on the result but reasoned that the Receivership Order itself authorized the receiver to sue in court and thereby disclaim the arbitration agreements.