The taxpayers sold their shares of a corporation ("Bec"), whose assets (following a sale of real estate) consisted largely of cash, to a corporate purchaser for a cash purchase price that reflected, in part, the savings that would accrue to the taxpayers from effectively receiving that cash as an exempt capital gain rather than as a liquidation dividend from Bec. Following the acquisition, the purchaser amalgamated with Bec and used the cash received on the amalgamation to pay off a bank loan that had funded the acquisition.
Bonner TCJ. found that s. 84(2) did not operate so as to recharacterize the cash received as dividends, on the basis that the taxpayers were not in fact shareholders at the time. He stated:
The respondent's argument involves the conversion of the transaction which in fact took place into something else which is regarded as its equivalent and the application of the subsection to the latter. I know of no authority for such a process. Subsection 84(2) is not ambiguous.
However, he proceeded to find the taxpayers liable under the general anti-avoidance rule (s. 245).