Carter – Tax Court of Canada finds that s. 84.1 did not apply to a sale of the taxpayer’s Opco shares to her cousin’s holdco for cash funded by an Opco dividend

The appellant, her cousin (“McAllister”) and her father held 40%, 40% and 20% of the common shares of Brown’s Paving Ltd. (“BPL”), respectively, and her father also had voting control through special voting shares (representing over 90% of the voting rights). Both she and McAllister worked in the business. After McAllister had approached the appellant about purchasing her shares, the following occurred:

1. BPL took out a $600,000 bank loan, secured by a charge on its assets and a secured guarantee of McAllister and his personal holding company (Corco).
2. Corco purchased all of the appellant’s shares in consideration for issuing a $600,000 demand promissory note.
3. BPL redeemed the shares held by Corco for $600,000 in cash, which was used by Corco to pay off the demand promissory note. Corco claimed the s. 112(1) deduction.

In finding that the sale in 2 above was a transaction between persons dealing with each other at arm’s length, so that s. 84.1 did not deem the appellant to receive a dividend, Graham J indicated that:

• “The Appellant and Corco engaged in hard bargaining regarding the terms of the sale.”
• “[T]he transactions were structured in the way they were to benefit Corco … [which] needed a way to finance the purchase.”
• “The parties only ended up in the position that they did because the Appellant, when asked, was willing to sell her shares to Corco”, and a transaction in which her shares instead were redeemed by BPL was not a realistic alternative.

Graham J stated:

Ultimately, for the Appellant and Corco to have been acting in concert without separate interests, there must be something more than sharing the same tax advisors and having a common interest in getting the deal done.

Graham J also found that BPL was not connected to Corco immediately after the sale, as required by s. 84.1(1). In particular, Corco (which held under 10% of the votes) also did not control BPL pursuant to s. 186(2) given that there was no evidence that Corco did not deal at arm’s length with the person (the appellant’s father) who held over 90% of the voting rights over the BPL shares.

Neal Armstrong. Summary of Carter v. The King, 2024 TCC 71 under s. 84.1(1).