Robillard Estate – Tax Court of Canada finds that MacDonald established that s. 84(2) applied to a speedo pipeline – but doubts MacDonald’s correctness

An estate engaged in accelerated pipeline transactions in which it transferred shares (stepped up under s. 70(5)) of a portfolio company (“Holdco”) to a Newco in consideration for a note, with Holdco being wound up into Newco a day later – and with the note being repaid by Newco to the estate about three weeks later. Hogan J concluded that he was bound to follow MacDonald, so as to confirm the assessment of the estate for a deemed dividend under s. 84(2).

However, he went on to indicate that he disagreed with MacDonald. First, that decision had the unfortunate effect of giving CRA a non-statutory discretion to determine when pipeline transactions occurred too rapidly to be acceptable to it. The findings in MacDonald also appeared to ignore the more precise wording of s. 84(2), as contrasted to the earlier versions considered in Merritt and Smythe. In light of the references in s. 84(2) to the “time of the distribution”:

The time at which the dividend is deemed paid is the time at which the distribution is completed. In addition, the dividend is deemed to have been received by the persons who were shareholders at that time.

Since at the time of the distribution, the estate was not a shareholder of Newco, s. 84(2) could not be applied to it.

The estate had distributed an amount equal to approximately half of the s. 84(2) deemed dividend to its three family beneficiaries. Hogan J found that this amount was deductible by the estate under s. 104(6), notwithstanding that the executors had thought of this payment as being a capital distribution rather than of income. This of course confirms the view that capital distributions effectively cushion the trust itself from subsequent assessments which increase its income for the year.

Neal Armstrong. Summaries of Robillard (Estate) v. The Queen, 2022 CCI 13 under s. 84(2) and s. 104(6).