2763478 Canada – Tax Court of Canada finds that not all the transactions in a value-shift scheme were infused with an estate-freezing purpose

An individual did not sell his shares of an operating company (Groupe AST) directly to a third-party purchaser. Instead he rolled his shares into a holding company (276), following which some internal transactions occurred in which the adjusted cost base of the Groupe AST shares was stepped up to fair market value - including a non-rollover drop-down of those shares to a subsidiary (9144) in exchange for high-basis common shares - with 276 realized corresponding capital gains. The Groupe AST shares were then sold to the purchaser at no additional gain.

276 then engaged in “value shift” transactions of the same general type as were struck down under GAAR in Triad Gestco and 1207192, i.e., a stock dividend of high-low preferred shares was paid on the high-ACB common shares that 276 held in 9144, thereby rendering those common shares almost worthless, and then the capital loss was realized by selling those common shares for $1 to a corporation owned by the son of 276’s shareholder.

Although, unlike Triad Gestco and 1207192, the capital gains – to be offset by the value-shift loss – were realized in internal transactions, this was not a relevant difference. In rejecting the taxpayer’s submission that there was no avoidance transaction as each transaction had an estate freezing objective, Paris J stated that although he accepted “that the global objective of the series was to effect an estate freeze,” one of the transactions was unnecessary from an estate freezing perspective.

Neal Armstrong. Summary of 2763478 Canada Inc. v. The Queen, 2017 CCI 98 under s. 245(3) and s. 245(4).