Gervais – Federal Court of Appeal confirms that a basis averaging scheme to transfer half of a capital gain to the taxpayer’s wife was an abusive circumvention of the attribution rules

The taxpayer’s wife (Mrs. Gendron) purchased 1.04M preferred shares from the taxpayer (Mr. Gervais) at a cost of $1.04M (with Mr. Gervais electing out of s. 73 rollover treatment) and was gifted a further 1.04M shares (having a $1M accrued capital gain) on a s. 73 rollover basis, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to Mr. Gervais on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.

In agreeing with the CRA approach of adding “her” $0.5M capital gain to Mr. Gervais’ return, Noël CJ stated that the above result was:

contrary to the object, spirit and purpose of subsections 73(1) and 74.2(1), the purpose of which is to ensure that a gain (or loss) deferred by reason of a rollover between spouses or common-law partners be attributed back to the transferor. … Because the rollover provided for in subsection 73(1) deferred this accrued gain [of $1M] in its entirety, the whole of the gain realized on the sale to [the third party] had to be attributed back to Mr. Gervais when regard is had to the object, spirit and purpose of subsection 74.2(1).

Neal Armstrong Summary of Gervais v. The Queen, 2018 FCA 3 under s. 245(4).