Brent Kern Trust – Sommerer robs humankind of an interesting surplus-stripping Tax Court case under GAAR

Some surplus-stripping transactions involved a company (Opco) paying a dividend to Trust 1, which distributed the dividend to a related corporation (Holdco) qua beneficiary which, in turn, paid the same dividend amount to Trust 2 (the taxpayer).  The "trick" was that Holdco had previously undergone an estate-freeze style of reorg so that Trust 2 had been able to purchase all of Holdco’s common shares from Opco for their nominal fair market value.  Therefore (the taxpayer argued), s. 75(2) applied to deem the dividend received by it from Holdco to instead be dividend income of Opco, which was eligible for the s. 112 intercorporate dividend deduction.

However, Sommerer was decided before judgment – so that Bocock J found that s. 75(2) did not apply to the dividend income on the Holdco common shares, as they had been sold, rather than contributed, to the taxpayer.  Hence, GAAR was moot.

He did not comment on new (draft) s. 75(2).

Neal Armstrong.  Summary of Brent Kern Family Trust v. The Queen, 2013 TCC 327, under s. 75(2).