MacDonald - Tax Court suggests that "pipeline" transactions work

MacDonald dealt with a surplus-stripping transaction.  A New Brunswick doctor, who was about to emigrate to the US, sold a cash-rich corporation to his brother-in-law for a promissory note, with his resulting capital gain being sheltered by unrelated capital losses - and with his brother-in-law extracting the corporate funds following a transfer of the corporation to a Newco of the brother-in-law, and then paying off the promissory note.  The doctor was not subject to deemed dividend treatment under s. 84(2) (because he was a creditor rather than a shareholder at the time of the corporate asset extraction) or under the general anti-avoidance rule (given, among other considerations, that it was not contrary to the scheme of the Act to accelerate the recognition of capital gains.)  Also relevant was that, in the absence of this planning, the doctor would have realized the same capital gain on emigration under s. 128.1(4)(b) (although he avoided Part XIII taxes that would have been payable on subsequent extractions of corporate surplus.)

Hershfield J. indicated that the CRA requirement that there be a one-year delay before extracting funds in a (broadly similar) post-mortem pipeline transaction (see, e.g., 2011 STEPs Roundtable, Q. 5 2011-0401861C6), was arbitrary and not justified.

Neal Armstrong.  Summary of MacDonald v. The Queen, 2012 TCC 123 under ss. 84(2), 245(1) and 245(4).