Mony – Tax Court of Canada follows Gervais to find that avoiding capital gains attribution through ACB averaging abused ss. 73(1) and 74.2(1)

The taxpayer, agreed to sell his shares of a Canadian-controlled private corporation, having a nominal ACB, to third parties. On the day of the closing of the sale, about two months later, the following transactions occurred:

• He donated ½ of his shares, having an FMV of approximately $1M, to his wife, with s. 73(1) applying for this to occur on rollover basis.
• He assigned the other ½ of his shares to her in consideration for a promissory note of approximately $1M, and elected out of the application of s. 73(1), so that he realized a capital gain of approximately $1M and her ACB increased by this amount.
• She completed the sale of all the shares to the purchaser and used ½ the proceeds to repay the note.

As a result of the ACB-averaging under s. 47(1), she realized a taxable capital gain (of around $250,000) on the sale of the ½ of the shares which she had purchased at full cost, so that the exception in s. 74.5(1) for FMV purchases allowed her to retain that half of the taxable capital gain and claim the capital gains deduction under s. 110.6(2.1), rather than such gain being attributed to him. The other half of the taxable capital gain realized by her (from her sale of the donated shares) was attributed to him pursuant to s. 74.2(1).

Favreau J found that the sale of ½ of the taxpayer’s shares to his wife for a note clearly was a tax avoidance transaction:

[T]he proceeds from the sale of the shares she purchased were used in full to repay the note ... . The appellant received the same amount by selling these shares to Ms. Vitté as if he had sold them directly to the third parties.

Favreau J went on to find that there was an abuse under s. 245(4), noting in this regard (at para. 56) that the facts were “very similar” to those in Gervais, where Noël CJ had stated that the result of the spouse retaining half of the capital gain realized by her due to ACB averaging was “contrary to the object, spirit and purpose of subsections 73(1) and 74.2(1), the purpose of which is to ensure that a gain (or loss) deferred by reason of a rollover between spouses or common-law partners be attributed back to the transferor.”

Accordingly, the s. 245(2) assessment of the taxpayer to include all (rather than ½) of the taxable capital gains in his hands was confirmed.

Neal Armstrong. Summary of Mony v. The King, 2022 CCI 120 under s. 245(3) and s. 245(4).