CRA thinks using a trust to funnel a deemed dividend from creating PUC to a Holdco beneficiary and funnelling that PUC to the individual beneficiary/Holdco shareholder, is surplus stripping

A discretionary trust of which X and his holding company (Holdco) are the beneficiaries receives a s. 84(1) deemed dividend of $100K from Opco (not in excess of applicable safe income) resulting from a PUC increase, and issues a $100K note to Holdco as the distribution of this deemed dividend. Opco uses its newly-created PUC to make a capital distribution to the trust, which makes a $100K capital distribution to X. These transactions are similar in economic effect to the trust using the $100K capital distribution that was made to it, to pay off its note to Holdco, with Holdco paying a corresponding dividend to X, but that of course would not be as “tax efficient.”

CRA stated that the transactions appeared “to strip Opco's surplus by converting a taxable dividend to a payment of a capital nature that is not taxable to Mr. X,” and that were such transactions submitted in a ruling request, the Directorate “would recommend to the General Anti-Avoidance Committee to confirm the application of subsection 245(2).”

Neal Armstrong. Summaries of 27 April 2016 External T.I. 2016-0625001E5 Tr under s. 84(2) and s. 104(24).