In Macdonald v. The Queen, 2013 FCA 110, the Federal Court of Appeal (FCA) held that corporate funds were distributed to a sole shareholder “in any manner whatever” on the winding up of the corporation’s business, with the result that the shareholder did not realize a capital gain under s. 39 (as reported) but rather a deemed dividend under s. 84(2). This finding made it unnecessary to consider whether the same result could arise under the general anti-avoidance rule in s. 245 (the GAAR).

  • The facts involved a medical doctor (DR) who planned to move to the United States. In contemplation of this move, a plan was devised whereby assets of DR’s professional corporation (PC) would be liquidated and the shares of PC would be sold to DR’s brother-in-law (BIL). BIL incorporated his own company (601) for this purpose.
  • In short, the steps were as follows: PC converted its assets to cash or near cash, DR sold the PC shares to BIL, BIL sold the PC shares to 601, PC paid dividends to 601, 601 used these dividends to pay BIL, and BIL used these funds to pay DR.
  • In reversing the Tax Court judge’s decision, the FCA held that the judge erred in focusing exclusively on the legal character of the various transactions in the series. This led the judge to fail to give proper effect to the text, context, and purpose of the phrase “in any manner whatever” in s. 84(2).
  • In this case, in the course of the winding up of PC’s business, all of PC’s money (less $10,000 paid to the accommodating BIL) ended up, through circuitous means, in the hands of DR. These facts were sufficient to engage s. 84(2) on a textual, contextual, and purposive analysis.