Principal Issues: In the given situation where (i) two unrelated individual shareholders (M.A and M.B) of a profitable corporation (Société Payante) transfer their shares of Société Payante to their respective newly formed holding corporation (GescoA and GescoB) on a rollover basis (ii) GescoA and GescoB transfer their shares of Société Payante to Société Payante on a rollover basis for redeemable preferred shares of Société Payante and M.A and M.B subscribe to new common shares of Société Payante (iii) Société Payante redeems annually a portion of its preferred shares owned by GescoA and GescoB resulting in deemed dividends ($ 150,000) pursuant to subsection 84(3) (iv) GescoA and GescoB self-assess subsection 55(2) in respect of the deemed dividend in order to report the entire amount of the deemed dividend ($ 150,000) as proceeds of disposition of the redeemed shares pursuant to paragraph 55(2)(b) (and a resulting taxable capital gain) in an attempt to distribute annually to their respective shareholder (M.A and M.B) half ($ 75,000) of what would have been an annual subsection 82(1) dividend in the amount of $ 150,000 as a capital dividend: whether (1) the general anti-avoidance provision (GAAR) under subsection 245(2) may apply? and (2) our answer to question 1 would be different if in (ii) above, instead of M.A and M.B subscribing to the new common shares of Société Payante, a discretionary trust for the benefit of M.A and his family and a discretionary trust for the benefit of M.B and his family subscribed to the new common shares of Société Payante?
Position: (1) Yes, the GAAR may apply. (2) No.
Reasons: (1) and (2) In the particular situation, the GAAR may apply since the result of the avoidance transactions is similar to the situation in a ruling request (2004-009920) that was withdrawn because CRA`s GAAR Committee agreed that the GAAR should apply. In our opinion, the GAAR may very well be applicable whether the capital gain is realized at the corporate level as in the present case or at the individual shareholder level as in the withdrawn ruling request (2004-009920). Notwithstanding the recent decision in Gwartz et al. v. The Queen, 2013 TCC 86, the CRA intends, at the next opportunity, to demonstrate to the Court that there is a specific scheme of the Act for taxing the distribution of surplus of a Canadian corporation as a taxable dividend in the hands of individual shareholders and that there is also an overall scheme of the Act against surplus stripping.
