Principal Issues: Whether we can rule that the GAAR does not apply to the proposed transactions?
Position: No.
Reasons: The proposed transactions in the ruling request involved proposed transactions similar to those in ruling F 2005-0134731R3 (Previous ITR) in which we gave a favourable ruling regarding the GAAR. However, in many ways the proposed transactions in the ruling request can be distinguished from those in the Previous ITR. On this point, an important distinguishing factor is that the Previous ITR involved an intergenerational transfer of a family business while in the present ruling request, essentially, a minority shareholder is transferring his interest in a business to his sibling. In our opinion, the proposed transactions in the ruling request results in abusive dividend stripping and all the conditions to apply the GAAR are met.
XXXXXXXXXX
May 27, 2008
Dear Sir,
Subject: Request for Advance Income Tax Rulings XXXXXXXX
This is further to your email of May 21, 2008 in which you informed us that you are withdrawing your request for advance rulings of February 18, 2008. You withdrew your request because, as discussed in a telephone conversation (LeBlond /XXXXXXXXXXXX) on April 24, 2008, we are of the view that the general anti-avoidance provision ("GAAR"), provided for in subsection 245(2) of the Income Tax Act (the "Act"), would apply to the series of proposed transactions described in your request.
The series of proposed transactions you have presented to us is similar to the one described in advance ruling letter F 2005-0134731R3 (the "Advance Ruling") in which we confirmed that GAAR did not apply. Unfortunately, the situation in your case is different in several respects from the Advance Ruling. Among others, one important distinction is that the Advance Ruling was essentially an intergenerational transfer of a family business whereas, in your case, a minority shareholder is essentially transferring his interest in a corporation to his brother. We are of the view that the series of proposed transactions submitted constitutes a mechanism to strip the corporation's surplus and that all the conditions for the application of the GAAR of the Act would be met.
We therefore consider your file to be closed. A statement of our fees for the time spent reviewing your file will be sent to you under separate cover.
Yours sincerely,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.