The CRA position on creditor-proofing suggested that if Opco, which has no safe income and whose common shares have a nominal adjusted cost base and paid-up capital, uses cash (or other assets) to pay a dividend to its shareholder (Holdco) to fund Holdco’s purchase of real property to be rented to it, that cash dividend likely would be considered to have a tainting purpose described in s. 55(2.1)(b)(ii). Accordingly, Opco avoids s. 55(2.1)(b) by using the cash to purchase most of its common shares for cancellation. CRA stated:
[S.] 55(3)(a) is intended to facilitate corporate reorganizations made in good faith by related persons but is not intended to accommodate the payment or receipt of dividends or transactions or events which seek to increase, manipulate or manufacture tax basis.
Thus, the application of the general anti-avoidance rule in subsection 245(2) should be queried, considering that the money given to Holdco would not come from the income that had already been taxed in Opco and that the adjusted cost base of participating shares in the capital stock of Opco would be nominal.