DEML Investments – Federal Court of Appeal finds that it abused the rationale of s. 88(1)(d) to bump the ACB of a resource partnership interest

In early 2008, the sale of resource properties by an arm’s length vendor (Transglobe) to the parent (Direct Energy) of the taxpayer (DEML) was structured on the basis that Transglobe transferred 99% and 1% of the resource properties to two wholly-owned Newcos (137 and 138, respectively), at a s. 85(1) elected amount of around $34.9 million in the case of the transfer to 137, which then transferred the resource properties on an s. 97(2) rollover basis to a newly-formed partnership (DERP 2) for nominal elected amounts, with no effect on the addition to the CCOGPE balance of 137 from the first transaction of $34.9 million (consistent with the ITA scheme for the CCOGPE being maintained at the partner, not the partnership, level). Direct Energy then acquired the shares of 137 and 138 from Transglobe for $51 million and $0.5 million, respectively.

A year later, Direct Energy transferred the shares of 137 to DEML on an s. 85(1) rollover basis, with 137 then distributing its partnership interest in DERP 2 to DEML on its winding up, with the ACB of that partnership interest being bumped under s. 88(1)(d).

DERP 2 then distributed its resource properties to DEML as a return of capital, thereby increasing the CCOGPE balance of DEML and reducing the ACB of DEML’s partnership interest by the FMV of the resource properties – but with these items effectively being approximately reversed at the partnership year end as a result of DERP 2’s proceeds of the distribution of the resource properties being allocated to its partners.

After then reseeding DERP 2 with a small resource property that was of interest to a third-party purchaser, DEML sold its partnership interest to that purchaser, thereby realizing a capital loss.

Before finding that the GAAR applied to deny that portion of the above capital loss that was attributable to the s. 88(1)(d) bump, Webb JA first found that the rationale of the bump provisions was to allow the parent to add some or all of ACB lost on winding-up a sub to the ACB of non-depreciable capital property acquired by it on the sub’s winding-up, but that, “as noted in Oxford Properties, the property to which the ACB is effectively transferred must be a non-depreciable capital property that would be taxed at the same rate of inclusion as the shares of the subsidiary that will disappear on the winding-up of the subsidiary.”

Furthermore:

The use of a partnership to bump up the ACB of the partnership interest when the partnership holds a Canadian resource property frustrates the distinction between a non-depreciable capital property and a Canadian resource property as it results in a bump in the ACB of a partnership interest when the underlying value of that partnership interest is attributable to a Canadian resource property.

After further observing that the transactions here entailed a “doubling up of tax attributes” in that there was a bump to the ACB in the partnership interest attributable to the value of DERP 2’s resource properties, yet at the same time DEML maintained a significant balance in its CCOPGE account ($34.9 million) in relation to the same Canadian resource properties, Webb JA stated (at para. 74):

The rationale of these provisions is not to allow a corporate parent to have access to both an increased ACB of a partnership interest held by that subsidiary and also access to the CCOGPE of the subsidiary maintained for the Canadian resource properties that are owned by that partnership.

Neal Armstrong. Summary of DEML Investments Limited v. Canada, 2025 FCA 204 under s. 245(4).