Under The Income Tax Act (“ITA”), if a taxpayer disposes of property that is all or substantially all of the assets used in an active business for consideration that includes shares of a corporation, the shares are deemed to be capital property. The disposal is considered to be a capital gain and may be eligible for the lifetime capital gains exemption for qualifying companies. This is a very important piece of many estate and divestiture plans.

What constitutes all of substantially all was put to the test in Atlantic Packaging Products Ltd. v. The Queen, 2018 DTC 1133. The taxpayer was in the business of manufacturing paper products, including toilet paper and paper towels (the “Tissue Division”). The bulk of the assets of the Tissue Division were two tissue mills, which manufactured very large rolls of tissue, and a third converting mill that converted the very large rolls into individual rolls. In 2009, as part of a series of transactions to sell the Tissue Division, the taxpayer rolled over the converting mill into a newly formed company under the applicable sections of the ITA, sold the shares, and then reported a capital gain.

The CRA reassessed the sale as income on two grounds. The taxpayer had not transferred all or substantially all of the Tissue Division to the new company and the Tissue Division was not a business. The taxpayer appealed.

The appeals were dismissed. The Court held that the taxpayer had not transferred enough of the fair market value of the Tissue Division’s assets. Whether the Tissue Division was a business was thus moot. To determine meaning “all or substantially all”, the Court looked at other instances in which the term “all or substantially all” was used in the ITA. Unlike other provisions, the section of the ITA pertinent to this case did not contain an explicit reference to value, nor did it focus on the recipient receiving all the assets necessary to carry on the business. The test was less restrictive than the other provisions. Based on fair market value, the percentage of the assets of the Tissue Division transferred to the new company was around 68%.

The Court also seriously considered two alternative tests: whether the taxpayer transferred the “heart of the business”, and the contribution of the transferred property to the Tissues Division’s profit. In this case, the fair market value was the most reliable method for determining the issue; and in the Court’s determination, “all or substantially all” meant more than just over two-thirds.

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