Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
In declining to comment on the possible application of subsection 84(2) in this example, the
CRA noted that the provision requires that funds or property of a particular corporation must
have been distributed or otherwise appropriated in any manner whatever to or for the benefit of
the shareholders on the winding-up, discontinuance or reorganization of the business of the
particular corporation (i.e., ACo) (in which case a deemed dividend would result to the extent
that the redemption proceeds exceeded the PUC of the shares).
The CRA noted that while it had ruled favourably in prior advance rulings on the non-application
of subsection 84(2) (in addition to ruling favourably on section 84.1 and the general antiavoidance
rule in subsection 245(2) (“GAAR”)), 24 the ruling applications in those cases provided
that:
• the corporation in question (e.g., the equivalent of ACo and XCo in the examples set out
above) would remain a separate and distinct entity for at least one year (i.e., that it would
not be wound up into or amalgamated with another corporation);
• during this period, the corporation would continue to carry on its business in the same
manner as before; and
• only thereafter would the note be repaid (or would PUC of shares be reduced), on a
progressive basis.
The CRA indicated that, in these circumstances, it was reasonable to conclude that the
conditions for the application of subsection 84(2) had not all been satisfied.
While the CRA declined to comment on the application of subsection 84(2) in the example
considered, the CRA noted, from the perspective of tax planners perhaps somewhat hopefully,
that the three conditions summarized above that had been referred to in the favourable rulings
were facts submitted by the taxpayers in question and could not be considered CRA
requirements. 25
While the CRA’s position remained uncertain following this Round Table discussion, the
discussion placed tax planners on notice that the CRA might take the position that subsection
84(2) could give rise to a deemed dividend in a pretty typical pipeline plan.
Subsequently, in a withdrawn ruling request in respect of a proposed post-mortem pipeline plan
involving a holdco that was inactive and owned only liquid assets (which assets were possibly
only cash), the CRA took the position that the holdco’s surplus would be subject to dividend
24
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its $100,000 ACB. Provided that this capital loss was triggered in the estate’s first taxation year, subsection
164(6) would generally permit the executor or executrix to elect to have the capital loss treated as a capital loss
of the deceased in his or her terminal year rather than a capital loss of the estate. This capital loss could then be
used to offset the capital gain arising in the deceased’s terminal year by reason of the deemed disposition on
death.
CRA Document Nos. 2002-0154223, dated November 13, 2002, and 2005-0142111R3, dated November 2,
2005.
The CRA had previously explained these rulings in a similar manner in a technical interpretation (CRA Document
No. 2006-0170641E5, dated June 29, 2006).
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MT DOCS 11864055v1G
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