3295036 Canada – Court of Quebec finds that the use, years later, of stepped up ACB through sales of the property was “in contemplation” of the basis step-up series

In October 1996, a Quebec-taxpayer company (“329”) acquired public company shares from its parent. The parent realized no gain because federal and Ontario s. 85(1) elections were made. However, 329 acquired the shares at full cost for Quebec purposes because no Quebec rollover election was filed. Most of the shares were sold by 329 in 2000 at a capital loss for Quebec purposes, and it claimed some of those capital losses in its 2007 and 2008 Quebec returns.

A specific Taxation Act provision (s. 529.1) effectively denied 329’s use of its stepped-up cost if its two 1996 acquisitions occurred as part of a series of transaction that ended after 18 December 1996. Fournier JCQ found that the two 1996 share drop-downs were a “series of transactions” and that the subsequent sales of the shares by 329 were transactions occurring “in contemplation” of that series and, thus, were assimilated to the series by the Quebec equivalent of s. 248(10).

He also rejected 329’s submissions that the backward-looking interpretation of “in contemplation” adopted in inter alia Copthorne should be rejected because the French version had used the narrower phrase “en vue de” rather than “au vue de” and because a narrower scope should be given to a specific anti-avoidance provision than to GAAR. Accordingly, the ARQ was successful in its application of s. 529.1 to deny the use of the stepped-up basis.

S. 248(10) only assimilates a transaction to an existing series. A different result might have obtained if the 1996 drop-down had occurred in a single transaction rather than on two separate days.

Neal Armstrong. Summary of 3295036 Canada Inc. v. Agence du revenu du Québec, 2018 QCCQ 8100 under s. 248(10).