Wild – Federal Court of Appeal finds that surplus-stripping transactions were not subject to GAAR before the surplus had in fact been stripped

Mr. Wild stepped up the adjusted cost base of his investment in a small business corporation (PWR) by transferring his PWR common shares to two new Holdcos for him and his wife in exchange for preferred shares of the Holdcos, and electing under s. 85 at the right deemed proceeds amount to use up his capital gains exemption. However, the paid-up capital of those preferred shares was ground down to essentially nil under s. 84.1.

The solution was for PWR to then transfer high basis assets to the Holdcos in consideration for preferred shares of the same class, so that the PUC of the preferred shares held by Mr. Wild personally could be bumped due to the class-averaging rule in s. 89(1).

Dawson JA reversed the finding of the Tax Court that there was an abuse under s. 245(4) that should be remedied by grinding the PUC of Mr. Wild’s preferred shares down to what his starting (nominal) PUC had been. She stated:

Because the tax-free distribution of retained earnings section 84.1 is intended to prevent has not occurred section 84.1 has not, to date, been mis-used or abused.

In other words, positioning for future abuse is not abuse.

This was a pyrrhic victory for Mr. Wild. The Tax Court was wrong, very wrong, to take away the PUC of his shares. However, now he is effectively being told that he can keep that PUC but never use it (lest he be subject to a deemed dividend under s. 245(2).) Will Mr. Wild wait 20 years until CRA has forgotten about this case and where his PUC came from?

Neal Armstrong. Summary of Wild v. Canada (Attorney General), 2018 FCA 114 under s. 245(4).