CRA indicates that extracting exempt surplus through cash dividends rather than a s. 93 election in a sale scenario may be GAARable

An arm’s length shareholder (NR1) of a 2nd-tier foreign affiliate of Canco (Cco) purchased an asset from Cco, with Cco then paying a dividend on one of its classes of shares (namely, Class D shares) held by the 1st-tier foreign affiliate of Canco (Bco) and with NR1 waiving its right to the dividend on its Class D shares.  Cco then redeemed the Class D shares of Bco at a loss to Bco.  There was a further indirect sale transaction that looked even more peculiar.

The Rulings Directorate noted that if (1) Bco was able to access more exempt surplus through the payment of dividends by Cco rather than by selling the shares and using the s. 93(1) election, and (2) its shares of Cco were not excluded property, so that accessing more exempt surplus meant reducing the recognition of foreign accural property income to Canco by reducing a taxable gain which would have been recognized by Bco on the direct sale scenario, then the auditor should consider the application of the general anti-avoidance rule.

Neal Armstrong.  Summary of 10 September 2013 Memorandum 2010-0387631I7 under Reg. 5902(1).