A non-resident corporation ("EC") approached a business associate who, along with two other individuals, formed a Canadian corporation ("RMM") to buy the shares of a Canadian subsidiary ("EL") of EC for a cash purchase price approximating the cash and near cash on hand of EL and a Canadian subsidiary of EL ("ECL"). Immediately following the purchase, EL was wound-up into RMM and ECL was amalgamated with RMM; and three or four days later, RMM used the cash received by it from EL and ECL to pay off a loan that had financed the acquisition.
In finding that if this transaction had not already been caught by s. 84(2), s. 245 would deem the appropriate portion of the sale proceeds to be a dividend, Bowman TCJ. stated:
"The Income Tax Act, read as a whole, envisages that a distribution of corporate surplus to shareholders is to be taxed as a payment of dividends. A form of transaction that is otherwise devoid of any commercial objective, and that has as its real purpose the extraction of corporate surplus and the avoidance of the ordinary consequences of such a distribution is an abuse of the Act as a whole."
He also found that the Canada-U.S. Income Tax Convention could not prevent Canada from applying GAAR to recharacterize the transaction as one to which section 84 applied.