Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
In the view of the authors, the language and clear policy of section 84.1 permit pipeline
transactions, provided that the aggregate of the FMV of the non-share consideration and of the
increase in PUC of the shares of the purchaser corporation does not exceed the Hard ACB of
the shares of the transferee corporation.
For purposes of section 84.1, ACB is generally reduced in respect of both pre-1972 gains and
capital gains exemptions claimed on the share (or a share for which the share was substituted)
of the taxpayer or a person with whom the taxpayer did not deal at arm’s length. In the pipeline
transaction contemplated in the example above, provided that pre-1972 gains and capital gains
exemption claims are not in issue, section 84.1 would appear to be intended to permit the form
of surplus stripping contemplated (i.e., where the estate has “Hard ACB” by reason of the
deemed disposition on death).
Subsection 88(1) governs the winding-up of XCo into Newco in the example contemplated. On
such a wind-up, paragraph 88(1)(d.1) provides that subsection 84(2) does “not apply to the
winding-up of the subsidiary”.
In light of the above provisions, the CRA’s position that subsection 84(2) may apply in respect of
a basic pipeline appears to be doubtful in the example contemplated for the following reasons:
• Subsection 84(2) is expressly made inapplicable to the winding-up of XCo into Newco by
reason of paragraph 88(1)(d.1).
• On its face, subsection 84(2) applies to distributions or appropriations “to or for the
benefit of the shareholders […] on the winding-up” of XCo. On the winding-up of XCo,
XCo’s sole shareholder is Newco (and subsection 84(2) should not apply to deem there
to be a dividend triggered on the winding-up of Newco into the estate to the extent that
$100,000 is paid on the note rather than on the Newco shares). 32
• The provisions of section 84.1, which govern transactions of the type contemplated in a
basic pipeline, permit the extraction of “Hard ACB” such as the estate’s ACB in the XCo
shares.
• Where the Act has deemed there to be a disposition at FMV by reason of a taxpayer’s
death, particularly given the provisions of section 84.1, in the authors’ view, at least in
the ordinary course, the estate should not be regarded as an “accommodation party” that
has been inappropriately used to extract corporate assets. Therefore, GAAR should not
normally be engaged.
• Further, subsection 84(2) can apply only where assets have been distributed or
appropriated “on the winding-up, discontinuance or reorganization of [… XCo’s]
business”. Accordingly, where XCo is not carrying on a business (and, if it was formerly
carrying on a business, where the distribution does not occur on the winding-up,
32
It is acknowledged that some jurisprudence has taken a broad view of this aspect of subsection 84(2) (see, for
example, RMM Canadian Enterprises Inc. et al v. The Queen, 97 DTC 302 (TCC) [“RMM”], but see also Collins
& Aikman Products Co. et al v. The Queen, 2009 DTC 1179 (TCC), affirmed 2010 DTC 5164 (FCA)).
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