Descarries – Tax Court of Canada finds that using outside basis to step up outside PUC was contrary to s. 84.1's object

Some siblings would have realized a deemed dividend of $625,000 and a capital loss of $350,000 if they had wound-up a real estate company (Oka).  Instead, they:

• did a dirty s. 85 exchange of their Oka shares for Oka shares with a stepped-up adjusted cost base
• transferred those shares to a Newco for Newco shares with a stepped-up paid-up capital
• redeemed most of their Newco shares (with cash derived from a previous loan from Oka to Newco), thereby realizing a capital loss to offset capital gain realized on the 1st step
• following a sale of the real estate, wound-up Oka, then Newco

so that they realized a deemed dividend of only $275,000 (i.e., $625,000-$350,000) and no net capital gain (or loss).

Hogan J found that these transactions abused the object of s. 84.1 (a general anti-avoidance rule analysis which the Crown had not suggested).  The transactions were carefully designed to be well beyond the specific scope of ss. 84(2) and 84.1, but under the broader GAAR brush this didn’t matter.

Neal Armstrong.  Summaries of Descarries v. The Queen, 2014 DTC 1143 [at 3412], 2014 TCC 75 under ss. 84(2), 245(4) and 171(1).