Satoma Trust – Federal Court of Appeal finds that using ss. 75(2) and 112(1) to pay tax-free dividends to a family trust thwarted s. 112(1)’s expectation of ultimate taxation of those earnings

A tax plan turned upon dividends that in fact were paid to a family trust (Satoma Trust) being attributed under s. 75(2) to a corporation (“9134”) that was connected to the dividend payer, so that the dividends deemed to be paid to 9134 were eligible for the intercorporate dividend deduction. Before turning to the application of s. 245(2), Noël CJ first found that such application of s. 75(2) to 9134 effectively precluded the dividends’ inclusion in the hands of Satoma Trust, stating:

[T]he subjecting to tax under the Act of a “taxpayer,” applies in the singular (section 3). Nothing permits the belief that the legislator intended that the same income would be taxable in the hands of more the one taxpayer… .

In confirming CRA’s application of GAAR to include the dividends in the hands of Satoma Trust, notwithstanding that those dividends had not yet been distributed by it, he stated:

Even where the application of [s. 75(2)] by itself has the desired effect, its utilization in combination with subsection 112(1) goes counter to the object and spirit of the latter provision [citing Lipson]. In this regard, the object and spirit of subsection 112(1) consists in permitting the transfer, free of tax, of dividends within certain groups of corporations, subject to their eventual taxation when the dividends are paid to their ultimate recipients. This object was thwarted, as the dividends can now be transferred to the beneficiaries without tax.

Neal Armstrong. Summaries of Fiducie Financière Satoma v. Canada, 2018 CAF 74 under s. 245(1) – tax benefit, s. 245(4) and s. 3.