Barrasso – Tax Court of Canada is unsympathetic to the problem of a potential phantom capital gain arising from the failure under GAAR of a value-shift transaction

The taxpayer generated capital losses (totalling $65M) by engaging in essentially the same stock-dividend/value shift transactions which had failed in 1207192 and Triad Gestco (i.e., receiving a stock dividend of high-low pref from his Quebec company in order to shift all the value away from his common shares, and then selling those common shares for their now-nominal value to his sons).  The scheme was even more aggressive than in the other cases because the company’s only asset was a promissory note which he had issued to it in subscribing (one day earlier) for the common shares.

The taxpayer tried to distinguish the other cases on the basis that they had corporate taxpayers – whereas he as an individual would inevitably realize an offsetting capital gain on his prefs no later than death.  Paris J found that this difference did not detract from the contrived nature of the loss, and also noted that the taxpayer had not requested an upward adjustment to the ACB of his prefs (corresponding to the loss on his common shares denied under GAAR) under s. 245(6).  The implication may be that the taxpayer should have requested such an adjustment, and could not now use his failure to do so for an argument that it was unfair to deny the capital loss.

As a taxpayer apparently has no ability to make a s. 245(6) adjustment himself (see Copthorne) and in this case it now is too late to request one, the taxpayer or his estate now may face the ultimate realization of a phantom capital gain on his prefs.  (The promissory note might not be a "commercial debt obligation," but forgiving it might give rise to a taxable shareholder benefit.)

Neal Armstrong.  Summary of Barrasso v. The Queen, 2014 CCI 156 under s. 245(4).