Principal Issues: Taking into consideration the recent Tax Court of Canada decisions with respect to surplus stripping, is the CRA of the opinion that the GAAR would apply to a particular series of transactions the purpose of which is to rely on subsection 55(2) to convert a dividend into a capital gain.
Position: A similar series of transactions (“Transactions”) was recently considered by the GAAR Committee. Although the GAAR Committee recognized that the Transactions circumvented the integration principle, it recommended that the GAAR not be applied. The GAAR Committee was of the view that it would be unlikely that the GAAR could be successfully applied to the Transactions given the current state of the jurisprudence. It was also recognized that results similar to those obtained from the Transactions could be achieved in a variety of ways. The CRA is nevertheless concerned about this type of surplus stripping arrangement and has expressed its concerns to the Department of Finance. However, the CRA will continue applying the GAAR and/or subsection 84(2) to cases like The Queen v. Macdonald where a taxpayer uses losses or other tax shelter to reduce a capital gain realized as part of a surplus stripping scheme. Also, the CRA will rely on the reasoning in Descarries where a taxpayer seeks to extract corporate surplus in a manner contrary to the object, spirit or purpose of specific anti-avoidance provisions, such as sections 84.1 and 212.1.
Reasons: According to the jurisprudence.