Gillen – Federal Court of Appeal affirms finding that property was not used in a business for s. 110.6(14)(f)(ii) purposes when it was beneficially acquired and dropped-down on the same day

Webb JA affirmed a finding of D’Arcy J that the beneficial ownership of some applications to the Saskatchewan government for potash exploitation rights that had been acquired by a limited partnership had been immediately on-transferred by it to a wholly-owned corporation for share consideration (presumably on an s. 85(2) rollover basis), so that their fleeting beneficial ownership by the LP did not qualify them as being used in a Canadian active business, as required under the s. 110.6(14)(f)(ii) test. Accordingly a gain that was realized approximately four months later when the shares were sold at a gain did not qualify for the capital gains deduction when the gain was distributed by family-trust limited partners of the LP to their family beneficiaries including, in the case of one of the family trusts, the taxpayer.

Webb JA noted that the shares in fact were not issued until shortly before their sale, but stated that “there is no prohibition on a corporation receiving payment for shares well in advance of the shares being issued.”

Neal Armstrong. Summary of Gillen v. Canada, 2019 FCA 62 under s. 110.6(14)(f)(ii).