CRA will seek judicial confirmation that indirect distributions of corporate surplus otherwise than as dividends are contrary to the scheme of the Act

Although it did not appeal Descarries (as it won on grounds that the surplus stripping in that case was abusive having regard to the policy of s. 84.1), CRA thinks it also should have won on s. 84(2) grounds. It considers that the reference in s. 84(2) to an appropriation to the shareholders "on" the winding-up of the corporate business includes a distribution "as a result of" the winding-up, and that it should not especially matter that the distribution occurs indirectly by means of an interim loan through an intermediate company.

It also considers that Hogan J’s GAAR analysis was too narrow, stating that there is a range of provisions "whose purpose is to prevent individual shareholders from indirectly accessing the surplus of a corporation otherwise than as a dividend" and that the Descarries transactions were "an abuse of the integration system." CRA reiterated (see also 2012-0433261E5) that it "will seek a decision of the Federal Court of Appeal or the Supreme Court of Canada…confirming the broad scope of subsection 84(2)… and on whether...there is a specific scheme under the Act for taxing any direct distribution of surplus of a Canadian corporation as a taxable dividend in the hands of individual shareholders; as well as a specific scheme under the Act against indirect surplus stripping."

Neal Armstrong. Summaries of 10 October 2014 APFF Roundtable, Q.21, 2014-0538091C6 F under s. 84(2) and s. 245(4).