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 " ... 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).
Respecting its s. 84(2) concerns, CRA noted the broad wording of s. 84(2), that the funds received on the redemption of the shares of Quebec Inc. "corresponded closely in dollars to the advance which was provided to Quebec Inc. by Oka," so that , paraphrasing RMM, the funds in the shareholders hands "were actually the funds of Oka, notwithstanding the interposition of Quebec Inc.," and that the "restrictive interpretation" accorded by Hogan J to the word "on" was inconsistent with the meaning of "as a result of" suggested in David, where there was a delay of five months. As for any potential double taxation arising from the applicability of s. 84(3), in practice CRA would avoid double taxation through applying s. 248(28)(a).
After also articulating its concerns about the decision's GAAR analysis, CRA concluded that it 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. 245(4).