CRA indicates that using s. 55(3)(a) to create a high-basis redemption note is abusive even if that high basis is not used right away

In 2015-0604521E5, a promissory note issued to Holdco on a share redemption was subsequently transferred to Newco as a capital contribution. Since the amount of the promissory note was higher than the ACB of the redeemed shares and increased Holdco’s ACB of the shares of Newco, CRA indicated that it would seek to apply GAAR to Holdco’s reliance on s. 55(3)(a).

CRA has now confirmed that this finding did not turn on the high-basis note being immediately “used” to create high basis in the Newco shares, and indicated that where a purpose is to increase the cost amount of property of the dividend recipient, GAAR would be triggered, and it is irrelevant whether the cost amount has been used in a series of transactions that includes the dividend. (Also, this oral comment that GAAR “would” be triggered is not the fuzzier language in the Technical.)

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.6 under s. 55(2.1)(b).