Deans Knight suggests that CRA may attack Bill C-208 surplus-stripping transactions on the basis that the stripper retains “actual” control of the small business corporation

The requirement in s. 84.1(2)(e) that the children or grandchildren merely have legal control of the purchasing corporation suggests a surplus-stripping transaction in which Mr. A, who owns all the shares (having nominal tax basis and paid-up capital) of a private company carrying on an active business, forms Newco, in which his children invest $100 in preferred shares giving them voting control, with Mr. A then selling his shares to Newco for $1 million in cash and common shares issued by Newco, and claiming the capital gains exemption.

Deans Knight decided that the object, spirit and purpose of s. 111(5) is to restrict the tax losses of a corporation if a person acquires “actual control over the corporation’s actions, whether by way of de jure control or otherwise.”

[I]n light of Deans Knight, the CRA could take the position that, under GAAR, the relevant question is: whose business is it? Do the children have “actual control” over the actions of the family business, or do the parents?

Neal Armstrong. Summary of Allan Lanthier, "The general anti-avoidance rule and family surplus strips", Canadian Accountant, 12 August 2021 under s. 84.1(2)(e).