Gladwin Realty – Federal Court of Appeal finds that generating and utilizing a CDA increase whose subsequent reversal would never matter was abusive

The taxpayer, a private real estate corporation, effectively generated the technical ability to pay a capital dividend of $24 million in relation to a taxable capital gain of $12 million on a property sale by, prior to the property’s sale, rolling the property into a subsidiary LP and then structuring a result under which it both realized a negative ACB capital gain of $24 million under s. 40(3.1) (as a result of an immediate distribution to it of the sale proceeds) and also was allocated the $24 million capital gain on the property sale. After it subsequently paid the capital dividend of $24 million, it took a $24 million capital loss under s. 40(3.12), in effective recognition of it having recognized the same gain twice.

Noël CJ found that there was no abuse in merely paying out the CDA balance after realizing a capital gain in one year, and before subsequently realizing a capital loss. However, here there was a s. 245(4) abuse because it was intended for the taxpayer to become immediately dormant, so that it “will never have to contend with the negative CDA balance resulting from the corresponding deemed loss” under s. 40(3.12). It did not change his GAAR analysis that, subsequently to the transactions at issue, an amendment eliminated a CDA increase for a negative s. 40(3.1) gain.

Before getting to the abuse analysis, Noël CJ indicated (citing Wild) that there had been no tax benefit so as to engage s. 245(2) because the capital dividends had not been paid outside the corporate group. However, the taxpayer made an undertaking (since fulfilled) that “a dividend be paid to non-corporate shareholders so as to allow the matter to be resolved at this juncture” with the court agreeing “to conduct the abuse analysis on the basis that a tax benefit arose by reason of such a dividend having been paid.”

Neal Armstrong. Summaries of Gladwin Realty Corporation v. Canada, 2020 FCA 142 under s. 245(4) and s. 245(1) – tax benefit.