Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
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the taxpayer, Brother, Canco and Holdco entered into a further agreement
confirming the transactions and providing that on September 1, 2002:
• Canco would pay a final dividend to Holdco equal to Canco’s then
remaining cash balance less all liabilities;
• Holdco would direct that the amounts owed by Canco to Holdco be paid
to Brother as payment of the remaining balance of the Holdco Note, and
Brother would, in turn, direct that such amounts be paid to the taxpayer
as payment of the remaining balance of the Brother Note;
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the taxpayer crossed the border, moving to the United States;
• on July 15, 2002, Canco paid Holdco $10,000;
• on September 1, 2002, Canco declared a final dividend as contemplated in the June 25,
2002 agreement and Canco booked the amount as being owed to the taxpayer pursuant
to directions from Holdco and Brother.
In completing his tax return for the 2002 taxation year, the taxpayer reported a capital gain on
the disposition of the Canco shares equal to $524,967 39 and applied the Losses to offset the
gain. In 2008, the Minister reassessed the taxpayer to include in his income for the 2002
taxation year a taxable dividend in the amount of $524,967. 40 In so doing, the Minister relied
upon subsection 84(2) and, alternatively, the GAAR in maintaining that the transactions
triggered a deemed dividend to the taxpayer. The Minister also maintained that the transactions
were a sham such that, on this basis as well, the taxpayer received dividends or deemed
dividends.
At trial, the principal issues were whether subsection 84(2) or the GAAR applied to recharacterize
as a dividend the amount received by the taxpayer for the Canco shares. 41,42
Comparables
Before reviewing the Tax Court of Canada’s decision, it is useful to consider the Canadian
income tax consequences that would have arisen under several alternative arrangements.
Had the taxpayer simply sold the shares to an arm’s length party, he would have realized a
capital gain equal to the amount by which his proceeds of disposition exceeded his ACB of
$101; however, the decision reports that there was no market for the shares of Canco, either as
a professional corporation or a holding company.
As noted above, had the taxpayer emigrated from Canada while he still owned the Canco
shares, he would have been deemed to have disposed of the shares on leaving Canada and
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The amount of the Brother Note less the taxpayer’s ACB of $101.
The Minister also revised the capital gain from $524,967 to $10,000. This revision was consequential upon the
inclusion of the deemed dividend.
The sham basis for the assessment was abandoned at trial.
In the event that the Court were to determine that subsection 84(2) or the GAAR applied, the taxpayer asked the
Court to find that he was not a resident of Canada at the time of any deemed dividends.
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