Gervais – Federal Court of Appeal finds that a scheme to use basis averaging to permit spousal use of the capital gains exemption technically worked

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 of the gifted shares was $0.04M. The transactions were reported on the basis 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 was a $0.5M capital gain attributed back to her husband on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.

In reversing the finding by Jorré J below that the taxpayer’s resale of the 1.04M preferred shares occurred on income account given that ”not only was there a rapid resale, but the resale… was programmed in advance,” Boivin J found that as it was predetermined that she would resell at her acquisition cost, it would be “at the very least incongruous to impute to Mrs. Gendron a reasonable expectation of profit and to categorize this transaction as an adventure or concern in the nature of trade.” (See also see Continental Bank, Loewen and 2012-0438651E5). Acquiring shares in order to gift them also was not an adventure.

The transactions thus “worked” on a technical basis. Rather than dealing with the GAAR issue raised by the Crown (which Jorré J had ducked), Boivin JA remitted the file to the Tax Court for consideration of this issue.

Neal Armstrong. Summary of Gervais v. The Queen, 2016 CAF 1 under s. 9 – capital gain v. profit – shares.