In Lucie Descarries v. The Queen, 2014 TCC 75, the Tax Court of Canada (TCC) held that one result of the taxpayer’s share transactions was toindirectly extract from her company, on a tax-free basis, value that had accumulated before 1971 (V-Day Value) (see paragraphs 56 and 57). This result defeated the underlying rationale of s. 84.1, and could therefore be set aside as abusive tax planning under the general anti-avoidance rule in s. 245(1). Although the amounts in the judgment are difficult to follow, it appears the abusive result was achieved as follows:
- creating a capital gain in respect of post-V-Day Value, and generating stepped-up tax cost (including hard ACB), on an internal share-for-share exchange with the existing operating company (Opco) under s. 85(1);
- transferring the new Opco shares to a new holding company (Holdco) in exchange for Holdco Shares, allowing for the operation of s. 84.1 to eliminate any V-Day Value from the PUC of the Holdco Shares – but preserving all the ACB and the PUC created in respect of the hard ACB;
- redeeming the Holdco shares, resulting in a deemed dividendand a capital loss in respect of V-Day Value; and
- using the capital loss in respect of V-Day Value in 3 above to offset the capital gain in respect of post-V-Day Value in 1 above.
Also of interest is the Court’s decision that s. 84(2) could not apply on the redemption of the Holdco shares because: (A) none of Opco’s assets were actually distributed at the time the Holdco shares were redeemed (paragraph 27), (B) the redemption of Holdco shares did not coincide with a winding-up, discontinuance or reorganization of Opco’s business (paragraphs 29 and 34), and (C) s. 84(2) and s. 84(3) cannot be applied at the same time to the same distributions (paragraph 37).