GAAR Trilogy – Federal Court of Appeal Strikes Down Stock Dividend “Value-Shift” Planning

The Federal Court of Appeal (the "FCA") found in favour of the Crown in three separate "value shift" cases, in each case applying the general anti-avoidance rule ("GAAR") to disallow losses incurred by a corporate taxpayer on the disposition of common shares. Simplified, the planning in each case involved the following steps:

  • the taxpayer ("Canco") incorporated a new wholly-owned subsidiary ("Newco");
  • Canco transferred property to Newco in exchange for common shares of Newco;
  • Newco paid a "high-low" stock dividend on the common shares held by Canco; and
  • Canco sold the common shares to a newly-created trust for fair market value ("FMV") proceeds and realized a significant loss on the sale since the effect of the stock dividend was to shift the value of the common shares to the stock dividend shares without affecting the cost to Canco of the common shares.

The first two cases, 1207192 Ontario Limited v. The Queen and Triad Gestco Ltd. v. The Queen, dealt with a loss on shares that were held as capital property for purposes of the Income Tax Act (Canada) (the "Act"). In those cases, the FCA determined that the transactions that had been undertaken abused the provisions of the Act dealing with capital losses on the basis that those provisions are intended to provide relief only for "true economic losses".

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