Gervais – Tax Court of Canada finds that a basis averaging scheme to transfer half of a capital gain to the taxpayer’s wife was an abusive circumvention of the attribution rules

The taxpayer’s wife (Mrs. Gendron) purchased 1.04M preferred shares from the taxpayer (Mr. Gervais) at a cost of $1.04M (with Mr. Gervais electing out of s. 73 rollover treatment) and was gifted a further 1.04M shares on a s. 73 rollover basis, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to Mr. Gervais on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.

In affirming CRA’s GAAR assessment to add “her” $0.5M capital gain in Mr. Gervais’ return, Jorré J found that this scheme “thwarts the purpose of subsection 74.2(1) and the scheme of the Act by avoiding the attribution of part of the taxable capital gain to Mr. Gervais which would normally have occurred at the time Mrs. Gendron sold the shares,” and also stated:

In the context of the attribution rules, the purpose of the [s. 73] election is to permit a taxpayer to defer or not the realization of a gain, and not to permit a taxpayer to avoid attribution. Here, the election was made in order to circumvent attribution. This is an abuse.

Neal Armstrong Summaries of Gervais v. The Queen, 2016 CCI 180 under s. 245(4), s. 245(3) and s. 245(1) – tax benefit.