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FEDERAL INCOME TAX - Calculation or gains and losses - Corporations - Capital dividend

Thursday, October 15, 2020 @ 7:42 AM  

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Appeal by Gladwin Realty from a decision of the Tax Court that dismissed its appeal from a notice of determination issued by the Minister of National Revenue with respect to its 2008 taxation year. The appellant had undertaken a series of transactions that involved rolling real estate assets into a partnership, disposing of the assets to an arm’s length party and distributing the proceeds to the limited partner. The order and timing of the transactions allowed the appellant to distribute the entire capital gain of $23,346,822 realized from the sale as a tax-free capital dividend by the planned inflation of the appellant’s capital dividend account. The appellant and the partnership ceased operations after the transactions were completed. The notice of determination reduced the appellant’s capital dividend account available for distribution by $12,153,827. The Tax Court held the avoidance transactions were abusive.

HELD: Appeal dismissed. Declaring the capital dividend before electing the deemed loss was not, in and of itself, objectionable. The appellant managed to isolate and use for the benefit of its shareholders the upward impact that the deemed gain had on its capital dividend account in circumstances where it continued to hold, but would never have to contend with, the negative capital dividend account balance that resulted from the corresponding deemed loss that had to be elected in the process. The transactions defeated the rationale that underlay the capital dividend account regime because they allowed for the payment of a $12,000,000 capital dividend in circumstances where the $12,000,000 deficit that had to be created in the process would never be accounted for. The plan that deliberately set out to create a permanent $12,000,000 capital dividend account deficit to extract a commensurate tax-free dividend broke the integrity of the capital dividend account regime. The use made of sections 40(3.1) and 40(3.12) of the Income Tax Act to achieve the result amounted to a plain misuse of the provisions.

Gladwin Realty Corp. v. Canada, [2020] F.C.J. No. 914, Federal Court of Appeal, M. Noël C.J. and Y. de Montigny and R. LeBlanc JJ.A., September 14, 2020. Digest No. TLD-October122020005