In HLB Smith Holdings Limited v R, 2018 TCC 83, each of Holdco and a family trust (“Trust1”) held 50% of the shares in the capital of Opco. Another family trust (“Trust2”) held all of the issued shares in the capital of Holdco. Trust1 was for the benefit of W’s family; it appears Trust2 was for the benefit of M’s family. W and M were unrelated. They were the directors of Opco at all times. Opco paid dividends to its shareholders at a time when it owed income tax. Holdco paid dividends to Trust2, which allocated the dividends to M and his wife. Were the recipients of the dividends liable under section 160? Put another way, did Opco deal at arm’s length with its shareholders, who were unrelated to it? Continue reading
The Federal Court of Appeal has affirmed the Tax Court’s finding that an employee-controlled buyco acted as an “accommodation party” that allowed a key shareholder to use the capital gain exemption to strip out corporate surplus. As a result, section 84.1 applied to the sale instead. Turgeon v R, 2017 CAF 103, aff’g Poulin v R, 2016 TCC 154.
Marissa Halil and Manu Kakkar, “Section 84.1 and Factual Non-Arm’s-Length Considered” Tax for the Owner-Manager 17:1 (January 2017) summarizes Poulin v R, 2016 TCC 154, in which the Court held that conflict between parties and hard bargaining does not mean that they deal at arm’s length with respect to a particular transaction. Rather, the questions are whether the parties had separate interests in the transaction and whether they dealt with each other on ordinary commercial terms in respect of it.