CRA finds that a sale of corporate properties at a deliberate undervalue to corporations wholly-owned by the two respective equal shareholders could engage s. 56(2)

X and Y (unrelated individuals), who each wholly-owned operating corporations ("ACo" and "BCo"), also equally owned XYZCo, which built and sold two condominiums to ACo and BCo at a mutually agreed price that they knew to be below fair market value.

After the usual caveats about questions of fact, CRA indicated that if indeed this was the mutual back-scratching arrangement that it appeared to be, the sales likely were non-arm’s length transactions to which s. 69(1)(b) would apply. Furthermore, assuming that this should be characterized as a situation where X and Y were directing the conferral of a benefit on their respective corporations that would have been taxable to them under s. 15(1) if received directly, then s. 56(2) could apply to include the known FMV deficiencies in their respective incomes.

Neal Armstrong. Summaries of 1 June 2021 External T.I. 2020-0865201E5 F under s. 251(1)(c) and s. 56(2).