Turgeon - Federal Court of Appeal affirms that an accommodation party was not dealing at arm's length

In the Turgeon case (usually referred to by the name of the other taxpayer, Poulin), CRA successfully applied s. 84.1 to a transaction in which one of the two major shareholders of a Quebec CCPC (Mr. Turgeon) agreed to sell some preferred shares of the CCPC to a newly formed Holdco of its comptroller (“Hélie Holdco”) in consideration for a promissory note bearing interest at 4% and which was to be repaid over a number of years out of dividends or redemption proceeds received by Hélie Holdco from the CCPC. D’Auray J noted that this employee had no risk, and Hélie Holdco had no upside as its only assets and liabilities were the prefs and the note, both with frozen values – so that Hélie Holdco essentially was just an accommodation party. She stated:

Hélie Holdco served only to participate in the transaction for the benefit of Mr. Turgeon, thereby permitting him to strip the surplus of [the CCPC] free of tax by virtue of utilizing the capital gains deduction.

Mr. Turgeon appealed this decision on the sole ground that he was dealing at arm’s length with Hélie Holdco. Boivin JA dismissed his appeal, stating that D’Auray J had followed the principles stated by the Supreme Court in McLarty.

Neal Armstrong. Summary of Poulin v. The Queen, 2016 TCC 154, briefly aff’d sub nomine Turgeon v. The Queen, 2017 CAF 103 under s. 251(1)(c).