CRA finds that an avoidance of Part VI.1 tax likely was not abusive where the preferred shares in question did not replace debt financing

An estate avoided triggering Part VI.1 tax, on a retraction of non-voting preferred shares held by it, by getting the corporation to first redeem special voting shares held by the other shareholder – which was a family inter vivos trust with the same trustees as the executors of the estate and also holding non-voting common shares.  This caused the estate's preferred shares to become voting pursuant to s. 48 of the Quebec Business Corporations Act - a provision (somewhat similar to s. 24(4)(b) of the CBCA) which effectively deems all shares to become voting whenever none otherwise has voting rights.

CRA concluded:

• this transaction was not caught by the specific anti-avoidance rule in s. 191(3); and GAAR likely did not apply as Part VI.I "contemplates a situation where a taxpayer replaces a debt financing with a taxable preferred share financing," whereas here, the estate's preferred shares instead had previously been created under an estate freeze;
• there was no acquisition of control of the corporation, as the trustees of the previously-controlling trust were the same as the executors (see Consolidated Holding); and
• the addition of voting rights by mere operation of law did not give rise to a disposition.

Neal Armstrong.  Summaries of 18 December 2013 T.I. 2013-0511101E5 F under ss. 191(3), 249(4), s. 248(1) - disposition.