6 October 1995 APFF Roundtable Q. 45, 9522720 - GAAR

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

APFF - 1995

Question 45

General Anti-avoidance Rule and section 84.1

Would the Department apply subsection 245(2) of the Act in the following situation?

An individual, Mr. A, has net capital losses of $10 million. He owns 50% of all issued and outstanding common shares in a Canadian controlled private corporation (Holdco). The paid-up capital and the adjusted cost base of the common shares is $1,000, and the fair market value of the shares (FMV) is $10 million. The individual transfers his shares in Holdco at their FMV to a previously created trust for his children, thereby realizing a taxable capital gain that allows him to use his net capital loss. In return, the trust issues him a promissory note. The trust then transfers, under subsection 85(1) of the Act, the common shares that it owns in Holdco to Newco, a newly created corporation controlled by Mr. A. In return, Newco issues a promissory note for an amount equal to the FMV of the shares in Holdco and the common shares of Newco with a nominal FMV and paid-up capital. All dividends received by Newco from Holdco will be used to reduce the promissory note held by the trust, and the trust can repay the note that it issued to Mr. A.

Answer by the Department of Revenue

Following the series of transactions, all the Holdco shares are with Newco. Section 84.1 of the Act describes the circumstances whereby a sale of shares in one corporation by an individual to another corporation may give rise to a deemed dividend.

The apparent purpose of the sale of shares in Holdco to the trust is to circumvent paragraph 84.1(1)(b) of the Act, because if Mr. A sold his shares in Holdco directly to Newco under the same conditions, such a dividend would be deemed to have been paid under paragraph 84.1(1)(b) of the Act. Therefore, the sale of the Holdco shares to the trust constitutes an avoidance transaction. The series of transactions constitutes an abuse of the Act read in its entirety, within the meaning of subsection 245(4), because it makes it possible to circumvent subsection 84.1(1) of the Act. The Department would therefore apply subsection 245(2) of the Act in such a situation.