Québecor – Tax Court of Canada finds that a yo-yo transaction to utilize the accrued capital loss of an indirect subsidiary to step-up nil-basis shares to FMV was not a GAAR abuse

Québecor held 54.72% of the shares of another holding company (Québecor Media) which, in turn, held all the common shares of a third holding company (“366”) directly, and preferred shares of 366 through a fourth holding company (“9101”). In order to utilize an accrued loss of 366 on its shares of an operating company, Québecor transferred its shares of Abitibi, having an FMV of $191.8 million and a nominal ACB, to 366 on a s. 85(1) rollover basis in exchange for preferred shares of 366, then immediately redeemed those preferred shares for a note, which was repaid through the transfer back to Québecor of the Abitibi shares. 366 realized a capital loss to offset its capital gain on the Abitibi shares by being wound up into its two shareholders (Québecor Media and 9101) pursuant to s. 69(5). (The common shares of 366 held by Québecor Media were treated as having no value, so that Québecor Media received no winding-up distribution and realized a large capital loss on the wind-up; all the property of 366 instead was distributed as a s. 84(2) dividend to 9101.)

In finding that it was no abuse of ss. 88 and 69(5) for 366 to have been wound-up on a non-rollover basis so as to realize a capital loss, Ouimet J noted that the scheme of s. 88 was to provide for both wind-ups on a rollover basis under s. 88(1) and for wind-ups on a taxable basis under ss. 88(2) and 69(5), with the application of stop-loss rules being expressly excluded in ss. 69(5)(c) and (d).

In finding that the transfer of the Abitibi shares on a rollover basis to 366 did not constitute an abuse of s. 85(1), Ouimet J stated that “this provision allows two related corporations ... to transfer a capital gain to be realized on a property from one corporation that does not have a capital loss to another that does have a capital loss, so that the latter can deduct it from the capital gain to be realized on the transferred property.” Although he accepted that the object of s. 85(1) was to provide for the deferral rather than the elimination of tax, here the step-up of the ACB of the Abitibi shares in the hands of Québecor entailed the receipt by it of a deemed dividend that was included in its income (albeit, eligible for the s. 112(1) deduction), and the capital gain realized by 366 on disposing of the Abitibi shares was included in computing its income.

Québecor’s GAAR appeal was allowed.

Neal Armstrong. Summary of Québecor Inc. v. The King, 2023 CCI 142 under s. 245(4).