Gervais – Tax Court of Canada finds that a rollover followed by immediate resale at no commercial gain is an income account transaction

The taxpayer purchased 1.04M preferred shares from her husband at a cost of $1.04M and was gifted a further 1.04M shares on a rollover basis by him under s. 73, so that her cost was $0.04M.  The idea was that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there would be a $0.5M capital gain attributed back to her husband on the gifted shares, and that the other $0.5M capital gain would be "hers," so that she could claim the capital gains exemption.

Jorré J accepted that the gifted shares were acquired on capital account (as a gifting transaction is not a trading transaction), and he also accepted that the transactions did not generate a commercial profit to the taxpayer, as the shares did not change in value between their acquisition by her and their sale.  However, he found that as the purchased shares were acquired with a view to their immediate resale, they were acquired on income account.  (This appears to be inconsistent with the proposition that a transaction which is not intended to give rise to a commercial profit is not a trading transaction - see Continental Bank, Loewen and 2012-0438651E5).

Accordingly, s. 47 did not apply - so that her full $1M gain on resale was a capital gain on the gifted shares, all of that capital gain was attributed to her husband, and it was not necessary to address GAAR.

Summaries of Gervais v. The Queen, 2014 CCI 119 under s. 9 - capital gain v. profit – shares, and s. 47(1).