9101-2310 Québec - Court of Appeal finds an accommodation party to not be at arm's length, and that Quebec is different

Several cases (e.g., RMM, see also Livingston) suggest that if a normally independent (and unrelated) person agrees to act as an accommodation party for the taxpayer, then it and the taxpayer are not dealing at arm's length in the resulting transaction.  The most recent example is a friend of the taxpayer who let the taxpayer deposit funds with his corporation to be held by the corporation on behalf of the taxpayer, in order to defeat a bank claim (the friend didn't know about the taxpayer's tax debt).

Noël JA also found that because this arrangement was a "simulation" under the Civil Code (i.e., a contract availed of by third parties notwithstanding that it was contrary to the parties' "secret contract" - i.e., the funds in fact were held on behalf of the taxpayer rather than having been truly divested by him), CRA could treat the funds as if they had been transferred to the corporation for s. 160 purposes.  Although there is no doctrine that CRA can rely on the terms of a purported common law contract which is a sham, a taxpayer in a common law province unsuccessfully argued (in 1524994 - see also Gurd's Products) that a contract should be disregarded for tax purposes because it was "merely" entered into in order to deceive a third party for non-tax reasons.

Neal Armstrong.  Summaries of The Queen v. 9101-2310 Québec Inc., 2013 FCA 241 under ss. 160(1) and 251(1)(c).