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Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP discontinuance or reorganization of that business), subsection 84(2) should not apply in any case. 33 In suggesting that subsection 84(2) may be engaged in a typical pipeline transaction, the authors respectfully suggest that the CRA may in effect be seeking to tax an estate based upon a transaction that the estate might have undertaken rather than the transaction actually undertaken. Clearly subsection 84(2) should not apply to deem the estate to have received a dividend in the example set out above and, it is suggested, GAAR should generally not be engaged in light of the provisions of section 84.1 and the circumstances in which the estate acquired its Hard ACB. Recent Jurisprudence In 2012, the Tax Court of Canada released two decisions which are not “pipeline” decisions per se, but should nonetheless be of interest to anyone who has been following the discussion about whether subsection 84(2) applies in the context of traditional pipeline planning. As discussed below, these decisions provide support for the proposition that subsection 84(2) should not be engaged in a typical post-mortem pipeline. McClarty Family Trust 34 In McClarty Family Trust, the Tax Court of Canada considered a series of transactions whereby a taxpayer was able to split income with his minor children through the use of a family trust notwithstanding the “kiddie tax” provisions in section 120.4. Simplified, in each of 2003 and 2004, a holding company paid a stock dividend to the trust, the trust sold the stock dividend shares to Mr. McClarty, Mr. McClarty sold the shares to another company and the holding company redeemed the shares owned by the other company. Since the stock dividend shares received by the trust had low cost (as well as low PUC), the trust realized a capital gain on the sale to Mr. McClarty. In reassessing, the Minister invoked the GAAR to treat as dividends the capital gains that were realized by the trust and were allocated by the trust to its minor beneficiaries. At trial, the Crown argued in the alternative that subsection 84(3) applied to deem the trust (rather than the company that owned the shares at the time of the redemption) to have received a dividend in each of the relevant years. Simplified, subsection 84(3) provides for a deemed dividend where “a corporation resident in Canada has redeemed, acquired or cancelled in any manner whatever […] any of the shares of any of its capital stock”. In making its alternative argument, the Crown relied on the decision of the Tax Court of Canada in RMM 35 for the proposition that the wording “in any manner whatever” found in subsections 84(2) and 84(3) is to be interpreted broadly such that a person (in this case, the trust) who did 33 34 35 Some commentators have also suggested that even if the CRA were correct that subsection 84(2) could otherwise apply on a pipeline, as the deemed dividend would be inconsistent with the treatment accorded by section 84.1, the more specific wording of section 84.1 should govern. See, for example, Manu Kakkar and Nick Moraitis, “Post Mortem Planning: Does the “Pipeline” Work” (2011) 11:1 Tax for the Owner Manager, 6-7; and Stuart Bellefer, “Summary of the CRA Round Table Held at the 13 th National STEP Canada Conference” (August 2011) 199 CCH Estate Planner Newsletter, 4-6. Supra, note 6. Supra, note 32. 560600/422632 MT DOCS 11864055v1G 10
Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP not hold shares immediately prior to their redemption nonetheless falls within the scope of the words “each person” in subsection 84(3). Mr. Justice Angers rejected this interpretation. He stated that the wording in subsection 84(3) (at paragraph 63): would warrant an analysis of how the shares in question were actually redeemed, acquired or cancelled in that the method of redemption, acquisition or cancellation could have an impact on who the actual persons are who hold the shares. The manner in which each person who holds the redeemed, acquired or cancelled shares came to be in possession of the shares is not what needs to be determined under subsection 84(3). (emphasis added) In other words, Mr. Justice Angers rejected the Crown’s argument that subsection 84(3) could apply to deem someone other than the shareholder to have received a dividend on the redemption. Accordingly, while 2011 amendments to section 120.4 have rendered obsolete the planning which enabled Mr. McClarty to split income with his minor children, the decision in McClarty Family Trust is nonetheless of current relevance for the Tax Court of Canada’s rejection of the Crown’s attempt to rely on RMM to support what, in the authors’ view, is an unduly broad interpretation of section 84. The decision is also noteworthy for its taxpayer-friendly GAAR analysis. The Crown has not appealed the decision. MacDonald 36 In MacDonald, the issue was whether subsection 84(2) applied to recharacterize as dividends amounts received by a former shareholder qua creditor in the context of a surplus strip. Mr. Justice Hershfield held in favour of the taxpayer and noted that he favoured the approach to subsection 84(2) adopted in McNichol 37 to that adopted in RMM. The decision in MacDonald is especially noteworthy since: • the transactions implemented were similar to those used in pipeline planning; • the Court devotes nearly a dozen paragraphs to pipeline planning specifically and is critical of the CRA’s recent position; and • the Court concludes that the GAAR – and not subsection 84(2) – is the appropriate provision to consider. More generally, the decision is of interest for the Court’s overall concern for fairness in determining whether GAAR should apply, as well as for its acceptance, on the facts in issue, of the use of an accommodation party to permit a shareholder to, in effect, indirectly access a corporation’s retained earnings as a capital gain rather than as dividends. 36 37 Supra, note 5. For a more detailed discussion of the decision in MacDonald, see the authors’ article “Pipeline Planning Alive and Well After All” (July 5, 2012) 2104 Tax Topics 1-8. Many of the comments that follow are based on that article. McNichol v. The Queen, 97 DTC 111 (TCC) [“McNichol”]. 560600/422632 MT DOCS 11864055v1G 11
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