Presentation Material - McCarthy Tétrault
Presentation Material - McCarthy Tétrault
Presentation Material - McCarthy Tétrault
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Chris Falk<br />
Stefanie Morand<br />
<strong>McCarthy</strong> Tétrault LLP<br />
discontinuance or reorganization of that business), subsection 84(2) should not apply in<br />
any case. 33<br />
In suggesting that subsection 84(2) may be engaged in a typical pipeline transaction, the<br />
authors respectfully suggest that the CRA may in effect be seeking to tax an estate based upon<br />
a transaction that the estate might have undertaken rather than the transaction actually<br />
undertaken. Clearly subsection 84(2) should not apply to deem the estate to have received a<br />
dividend in the example set out above and, it is suggested, GAAR should generally not be<br />
engaged in light of the provisions of section 84.1 and the circumstances in which the estate<br />
acquired its Hard ACB.<br />
Recent Jurisprudence<br />
In 2012, the Tax Court of Canada released two decisions which are not “pipeline” decisions per<br />
se, but should nonetheless be of interest to anyone who has been following the discussion<br />
about whether subsection 84(2) applies in the context of traditional pipeline planning. As<br />
discussed below, these decisions provide support for the proposition that subsection 84(2)<br />
should not be engaged in a typical post-mortem pipeline.<br />
McClarty Family Trust 34<br />
In McClarty Family Trust, the Tax Court of Canada considered a series of transactions whereby<br />
a taxpayer was able to split income with his minor children through the use of a family trust<br />
notwithstanding the “kiddie tax” provisions in section 120.4. Simplified, in each of 2003 and<br />
2004, a holding company paid a stock dividend to the trust, the trust sold the stock dividend<br />
shares to Mr. McClarty, Mr. McClarty sold the shares to another company and the holding<br />
company redeemed the shares owned by the other company. Since the stock dividend shares<br />
received by the trust had low cost (as well as low PUC), the trust realized a capital gain on the<br />
sale to Mr. McClarty. In reassessing, the Minister invoked the GAAR to treat as dividends the<br />
capital gains that were realized by the trust and were allocated by the trust to its minor<br />
beneficiaries. At trial, the Crown argued in the alternative that subsection 84(3) applied to deem<br />
the trust (rather than the company that owned the shares at the time of the redemption) to have<br />
received a dividend in each of the relevant years.<br />
Simplified, subsection 84(3) provides for a deemed dividend where “a corporation resident in<br />
Canada has redeemed, acquired or cancelled in any manner whatever […] any of the shares of<br />
any of its capital stock”.<br />
In making its alternative argument, the Crown relied on the decision of the Tax Court of Canada<br />
in RMM 35 for the proposition that the wording “in any manner whatever” found in subsections<br />
84(2) and 84(3) is to be interpreted broadly such that a person (in this case, the trust) who did<br />
33<br />
34<br />
35<br />
Some commentators have also suggested that even if the CRA were correct that subsection 84(2) could<br />
otherwise apply on a pipeline, as the deemed dividend would be inconsistent with the treatment accorded by<br />
section 84.1, the more specific wording of section 84.1 should govern. See, for example, Manu Kakkar and Nick<br />
Moraitis, “Post Mortem Planning: Does the “Pipeline” Work” (2011) 11:1 Tax for the Owner Manager, 6-7; and<br />
Stuart Bellefer, “Summary of the CRA Round Table Held at the 13 th National STEP Canada Conference” (August<br />
2011) 199 CCH Estate Planner Newsletter, 4-6.<br />
Supra, note 6.<br />
Supra, note 32.<br />
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