What is the CRA position on Descarries? After noting that the case was not appealed because in the result it was favourable and it was only an informal procedure case, CRA then summarized the facts, stating that the Oka shareholders engaged in "three avoidance transactions" (TaxInterpretations translation) for appropriating the surplus of Oka which, in December 2004, had already "liquidated around 93% of its business assets... and was in the course of liquidating the remainder of its assets:"
First, on March 1, 2005, there was an internal rollover of their shares in the capital stock of Oka in order to crystallize in the adjusted cost base ("ACB") of new shares, the excess of the fair market value ("FMV") of the transferred shares over their ACB, thereby realizing a capital gain in respect of which the capital gains deduction in section 110.6 was not claimed.
The second transaction, effected on March 15, 2005, was to roll those new shares in the capital stock of Oka to a new corporation (9149-7321 Quebec Inc., hereafter « Quebec Inc. ») in exchange for shares of two classes in the capital of Quebec Inc.: the first class of shares having a low PUC and an ACB equal to their FMV (the "1971 FMV Shares") and the second class of shares having a high PUC (which was the purpose of the second transaction) and a high ACB equal to their FMV (the "Stripping Shares").
The third transaction was to redeem for cash on March 29, 2005 all of the Stripping Shares, and part of the 1971 FMV Shares, so as to generate a capital loss sufficient to eliminate the capital gain generated in the first transaction.
The CRA continues of the view that ITA subsection 84(2) should have applied in this case especially by reason of …MacDonald… . Furthermore, the CRA is concerned by the approach adopted by the TCC respecting the analysis of the avoidance transactions for purposes of the application of ITA subsection 245(2).
After describing how the decision failed to recognize the broad scope of s. 84(2), CRA discussed its concerns respecting the GAAR analysis:
The Tax Court in its analysis of abuse of the provisions of the ITA as a whole for purposes of determining whether the avoidance transactions were abusive in this case, had limited its analysis to two provisions: subsection 84(2) and section 84.1…as being the sole anti-avoidance provisions applicable to surplus stripping,
…One should also…take into account…[ss. 82(1)(b). 121, 84(1) to (4) and 15(1)] which support a tax policy whose purpose is to tax exclusively in the form of dividends direct payments of corporate surplus to shareholders… . These provisions reflect…a clear and unambiguous tax policy…called the integration rules, which also is supported by a wide range of provisions (among others, section 84.1 as well as subsections 84(2), 246(1) and 245(2), taking into account former subsection 247(1) and particularly the related explanatory notes of the Department of Finance) whose purpose is to prevent individual shareholders from indirectly accessing the surplus of a corporation otherwise than as a dividend. In short, in a situation such as in the Descarries case, the three avoidance transactions are…an abuse of the Integration Rules. …
We also are concerned by the specificity of the principle proposed by the TCC to the effect that in carrying out the three avoidance operations, subsection 84.1(1) could be utilized to distribute surplus of a corporation in the form of a capital gain to the extent that that the capital gain was not reduced y a capital loss which was sustained from the disposition of shares whose ACB is derived from the FMV of those shares on Valuation Day… . [This ] analysis…effectively modifies the nature of the "tax benefit," which consisted in a reduction of tax resulting from a transformation of part of a deemed dividend under subsection 84(2) into a capital gain. …
CRA will seek a decision of the Federal Court of Appeal or the Supreme Court of Canada:
…confirming the broad scope of subsection 84(2) recently established….in… MacDonald …and, also, whether or not there is a specific scheme under the Act for taxing any direct distribution of surplus of a Canadian corporation as taxable dividends in the hands of individual shareholders; as well as a specific scheme under the Act against indirect surplus stripping.
See also summary under s. 84(2).