Source: Thorsteinssons LLP via International Law Office
The anti-surplus stripping rule in Section 84.1 of the Income Tax Act can apply where an individual taxpayer transfers shares of a corporation to another corporation with which the taxpayer does not deal at arm’s length. If the rule applies, a dividend is deemed to be paid to the taxpayer by the transferee corporation equal to the amount by which the value of the non-share consideration received by the taxpayer on the transfer exceeds the greater of the paid-up capital and the ‘hard’ adjusted cost base of the transferred shares.
However, Section 84.1 does not apply where the taxpayer transfers the shares to an arm’s-length party. The recent case of Poulin v The Queen involved two taxpayers who attempted to use their capital gains exemptions to access corporate surplus by selling their shares to an arm’s-length party. Interestingly, one of the two taxpayers succeeded in court, while the other did not.
The court’s decisions are based on the premise that a sale between a buyer and seller dealing at arm’s length should reflect ordinary commercial dealings between persons acting for their own respective benefits. Poulin demonstrates the importance of a commercial benefit in an arm’s-length analysis.
With respect to the Poulin sale, Poulin’s intention to retire coupled with Turgeon’s desire to acquire control of Opco evidenced valid commercial motives. The existence of a reciprocal commercial benefit satisfied the court’s scrutiny of the arm’s-length relationship.
By contrast, the absence of a discernible commercial benefit in respect of Helie Holdco’s decision to purchase the fixed-value non-voting preferred shares led to an unfortunate result for Turgeon.