A transaction for the benefit of a shareholder who is an individual or a non resident taxpayer that results in the withdrawal or potential withdrawal of surplus (retained earnings) of a corporation in a manner that reduces the tax base and/or a return of capital in excess of the amount that reflects the investment made with after-tax funds.
Transactions undertaken to strip corporate surplus in a manner that defeats the object, spirit and purpose of sections 84, 84.1, 212.1 and subsection 89(1) of the Income Tax Act are subject to the application of the GAAR.
+Transactions undertaken to strip corporate surplus in a manner that defeats the object, spirit and purpose of sections 84, 84.1, 212.1 and subsection 89(1) of the Income Tax Act are subject to the application of the GAAR.
Before image
-The before image shows the situation before entering the series of transactions. An individual holds common shares and Class B shares of Holdco. In turn, Holdco holds Class A shares of Subco. The common shares of Holdco have nominal value. The Class B shares of Holdco held by the individual have a fair market value (FMV) of $ 4,000,000, an ACB of $750,000 (because of a previously crystallized capital gain exemption) and PUC of $1. Subco holds property A with a FMV of $925,000.
+The before image shows the situation before entering the series of transactions. An individual holds common shares and Class B shares of Holdco. In turn, Holdco holds Class A shares of Subco. The common shares of Holdco have nominal value. The Class B shares of Holdco held by the individual have a fair market value (FMV) of $ 4,000,000, an adjusted cost base (ACB) of $750,000 (because of a previously crystallized capital gain exemption) and PUC of $1. Subco holds property A with a FMV of $925,000.
After image
The after image shows the result of the transaction in which Subco transferred Property A to Holdco in consideration for Class B shares of Holdco. This transaction resulted in an increase of the PUC of the Class B shares held by the individual up to $ 750,000 (rounded amount).
@@ -149,7 +149,7 @@Before image
-The before image depicts the following: The individual holds common shares and preferred shares of Canco. The common shares have an FMV of $850,000 and a nominal ACB. The preferred shares are shares on which a capital gain exemption was crystallized. Hence, the PUC of the preferred shares was at $1 and the FMV and the ACB were at $850,000. Circle number 1 shows the preferred shares being redeemed. The blue rectangle on the left shows that the capital loss is added to the ACB of the common shares held by the individual. Circle number 2 illustrates the transfer of the common shares to Holdco.
+The before image depicts the following: The individual holds common shares and preferred shares of Canco. The common shares have an fair market value (FMV) of $850,000 and a nominal adjusted cost base (ACB). The preferred shares are shares on which a capital gain exemption was crystallized. Hence, the PUC of the preferred shares was at $1 and the FMV and the ACB were at $850,000. Circle number 1 shows the preferred shares being redeemed. The blue rectangle on the left shows that the capital loss is added to the ACB of the common shares held by the individual. Circle number 2 illustrates the transfer of the common shares to Holdco.
After image
The after image is the result of the transfer of the common shares to Holdco. The individual now holds common shares and preferred shares of Holdco. The common shares have a nominal ACB and FMV. The preferred shares have an FMV, PUC and ACB of $850,000. Holdco holds common shares in Canco. Circle number 3 shows the preferred shares held by the individual in Holdco being redeemed.
@@ -166,7 +166,7 @@Before image
-The before image depicts the following: Parent, a foreign corporation, holds shares of Forco. Parent holds common shares of Canco that have an FMV of $200 million, and an ACB and a PUC of $100 million. Canco holds common shares of Subco that have an FMV of $2 million, and an ACB and PUC of $40 million. Circle number 1 shows Canco selling its common shares of Subco to Forco at FMV.
+The before image depicts the following: Parent, a foreign corporation, holds shares of Forco. Parent holds common shares of Canco that have an fair market value (FMV) of $200 million, and an adjusted cost base (ACB) and a PUC of $100 million. Canco holds common shares of Subco that have an FMV of $2 million, and an ACB and PUC of $40 million. Circle number 1 shows Canco selling its common shares of Subco to Forco at FMV.
After image
The after image illustrates the result of the sale. Parent holds common shares of Canco. And Parent holds shares of Forco, which in turn holds common shares of Subco. Circle number 2 shows the horizontal amalgamation of Canco and Subco. The plus sign emphasizes that the tax attributes of the shares of the merged corporation are the sum of the tax attributes of the common shares of the merging corporations, resulting in a PUC of $140 million.
@@ -201,7 +201,7 @@Targeted abuse is the offsetting of a capital gain with an artificial capital loss (a loss that does not reflect a true decline in value of a capital asset or where there was no change in the taxpayer's overall economic power), which results in a misuse and abuse of sections 38, 39, 40 of the Income Tax Act when read as a whole.
+Targeted abuse is the offsetting of a capital gain with an artificial capital loss (a loss that does not reflect a true decline in value of a capital asset or where there was no change in the taxpayer's overall economic power), which results in a misuse and abuse of sections 38, 39, 40 of the Income Tax Act when read as a whole.
Transactions referred to as value shifts are where losses are created through a series of transactions designed to shift value from an existing class of shares to a newly issued class of shares. The initial shares are then sold to a non-affiliated person resulting in an artificial capital loss that is used to offset a pre-existing or future capital gain.
@@ -217,7 +217,7 @@Before image
-The before image depicts the following: Circle number 1 shows an individual subscribing to common shares of Canco. The common shares have a high FMV and a high ACB . Circle number 2 shows that a high FMV/low PUC stock dividend is declared on the common shares of Canco.
+The before image depicts the following: Circle number 1 shows an individual subscribing to common shares of Canco. The common shares have a high fair market value (FMV) and a high adjusted cost base (ACB) . Circle number 2 shows that a high FMV/low PUC stock dividend is declared on the common shares of Canco.
After image
The after image depicts the following: Circle number 3 shows the sale by the individual of the common shares (that now have a low FMV and a high ACB ) for a nominal amount to a non-affiliated person. This triggers a capital loss. Finally, the image shows the individual still holding preferred shares of Canco resulting from the stock dividend that have a high FMV and a low PUC .
@@ -226,8 +226,8 @@The purpose of subsection 104(4) of the Income Tax Act is to prevent the use of trusts to defer indefinitely the recognition for tax purposes of gains accruing on certain types of property, mainly capital property. Subsection 104(4) generally treats capital property of a trust (other than certain trusts for the benefit of the settlor, for a spouse or common-law partner of the settlor, or for their joint benefit) as having been disposed of and reacquired by the trust every 21 years at the property's fair market value.
-Moreover, subsection 104(5.8) of the Income Tax Act is an anti-avoidance rule designed to prevent the avoidance of the 21-year rule through the use of trust-to-trust transfers that do not involve dispositions of property at fair market value.
+The purpose of subsection 104(4) of the Income Tax Act is to prevent the use of trusts to defer indefinitely the recognition for tax purposes of gains accruing on certain types of property, mainly capital property. Subsection 104(4) generally treats capital property of a trust (other than certain trusts for the benefit of the settlor, for a spouse or common-law partner of the settlor, or for their joint benefit) as having been disposed of and reacquired by the trust every 21 years at the property's fair market value.
+Moreover, subsection 104(5.8) of the Income Tax Act is an anti-avoidance rule designed to prevent the avoidance of the 21-year rule through the use of trust-to-trust transfers that do not involve dispositions of property at fair market value.
As stated during the 2017 CTF Annual Conference, the CRA will consider the application of the GAAR where transactions result in the "avoidance of the 21-year rule by trusts."
This planning involves a transaction(s) or arrangement designed to avoid, or resulting in the avoidance of the 21-year rule by trusts, whether these are situations involving the distribution of property from a family trust to a Canadian corporation with non-resident shareholders, or the distribution of property by a Canadian resident discretionary family trust to a Canadian corporation whose shares are owned by another Canadian resident discretionary family trust [circumventing the application of subsection 104(5.8)].
@@ -262,7 +262,7 @@Before image
-The before image shows the following: Old Trust has non-resident beneficiaries and property with a high FMV and a low ACB . A footnote says that the property is not a property described in subparagraph 128.1(4)(v)(i) to (iii) of the Income Tax Act.
+The before image shows the following: Old Trust has non-resident beneficiaries and property with a high fair market value (FMV) and a low adjusted cost base (ACB). A footnote says that the property is not a property described in subparagraph 128.1(4)(v)(i) to (iii) of the Income Tax Act.
After image
In the after image, blue arrows show that property of Old Trust is distributed on a tax-deferred basis to Canco, a corporation held by non-resident beneficiaries of Old Trust. The red X shows that Old Trust ceases to exist.