Poulin – Tax Court of Canada finds that a sale to the special-purpose Holdco of an independent employee was essentially a surplus-stripping transaction rather than an arm’s length sale

CRA successfully applied s. 84.1 to a transaction in which one of the two major shareholders of a Quebec CCPC (Mr. Turgeon) agreed to sell some preferred shares of the CCPC to a newly formed Holdco of its comptroller (“Hélie Holdco”) in consideration for a promissory note bearing interest at 4% and which was to be repaid over a number of years out of dividends or redemption proceeds received by Hélie Holdco from the CCPC. D’Auray J noted that this employee had no risk, and Hélie Holdco had no upside as its only assets and liabilities were the prefs and the note, both with frozen values – so that Hélie Holdco essentially was just an accommodation party. She stated:

Hélie Holdco served only to participate in the transaction for the benefit of Mr. Turgeon, thereby permitting him to strip the surplus of [the CCPC] free of tax by virtue of utilizing the capital gains deduction.

At the same time as Mr. Turgeon was arranging this “sale” to Hélie Holdco, he formed a new Holdco to purchase preferred shares of the other major shareholder. D’Auray J found this to be an arm’s length transaction (so that s. 84.1 did not apply) even though it occurred on quite similar terms (under advice from a common tax advisor) as the sale to Hélie Holdco, as they each were advancing their own interests (arranging an exit on advantageous terms, and acquiring control of the CCPC, respectively.)

Neal Armstrong. Summary of Poulin v. The Queen, 2016 CCI 154 under s. 251(1)(c).