Satoma Trust – Tax Court of Canada finds that is was abusive to use s. 75(2) as a surplus-stripping tool

In order to strip surplus of an Opco, Opco (indirectly) paid dividends to Holdco 1, which made a capital contribution of those funds to Holdco 2, which then paid those funds to a family trust (Satoma Trust) as a dividend on special shares that Satoma Trust held in Holdco 2. Due to some engineering, s. 75(2) applied to that dividend, so that all of that dividend was attributed under s. 75(2) to Holdco 1, which excluded the dividend from its taxable income under s. 112(1).

Lamarre ACJ thought that it was abusive to use s. 75(2) to avoid tax rather than prevent income splitting, and also indicated that the “intercorporate” dividend deduction was not intended to avoid tax to individuals such as Satoma Trust. Before confirming CRA’s approach of including the dividend in the income of Satoma Trust under s. 245(2), she stated:

The object and spirit of these two provisions is not to allow the transfer of funds from a corporation to a trust by taking advantage of a total tax reduction. The avoidance transactions at issue run counter to the purpose of these provisions.

Neal Armstrong. Summaries of Fiducie Financière Satoma v. The Queen, 2017 CCI 84 under s. 245(4), s. 245(1) - tax benefit and s. 75(2).