An individual did not sell his shares of an operating company (Groupe AST) directly to a third-party purchaser. Instead he rolled his shares into a holding company (276), following which some internal transactions occurred in which the adjusted cost base of the Groupe AST shares was stepped up to fair market value - including a non-rollover drop-down of those shares to a subsidiary (9144) in exchange for high-basis common shares - with 276 realizing corresponding capital gains. The Groupe AST shares were then sold to the purchaser at no additional gain.
276 then engaged in “value shift” transactions of the same general type as were struck down in Triad Gestco and 1207192, i.e., a stock dividend of high-low preferred shares was paid on the high-ACB common shares that 276 held in 9144, thereby rendering those common shares almost worthless, and then the capital loss was realized by selling those common shares for $1 to a corporation owned by the son of 276’s shareholder.
Although the realization of the capital gain – to be offset by the value-shift loss – was realized in internal transactions, unlike Triad Gestco and 1207192, this was not a relevant difference.
After quoting with approval from Triad Gestco, Paris J stated (at para. 56, TaxInterpretations translation):
For the same reasons, there is an abuse with respect to the transactions in this case having regard to the ITA.