In order to make use of available capital losses before emigrating to the United Statees, the taxpayer sold the shares of his former professional corporation ("PC") to his brother-in-law ("J.C.") for a $525,000 promissory note, which was $10,000 less than the net asset value of PC (in the form of liquid assets). JC then transferred his shares of PC to a newly-incorporated holding company ("601") in consideration for a promissory note of 601 in the same amount and the issue of common shares. The assets of PC were distributed within the following several months to 601, with $525,000 of such assets being applied to repay the two promissory notes in succession; and PC was dissolved.
Hershfield J. rejected the Minister's position that the series of transactions gave rise to a deemed dividend under s. 84(2). He disagreed with the finding in RMM that the words "in any manner whatever" were broad enough to apply to a former shareholder at the time of the distribution or appropriation. He stated (at para. 59):
In my view, the McNichol approach which was to look to section 245 when subsection 84(2) does not apply on a strict construction of its language, is the correct approach.
S. 245 also did not apply.
Hershfield J. also indicated (at para. 80) that the position of CRA that s. 84(2) did not apply to the somewhat similar "post-mortem pipeline transactions" (see 2011 STEPs Roundtable, Q. 5 2011-0401861C6) only if the liquidating distribution does not take place within one year of the sale and the subject corporation (the equivalent of PC) continues to carry on its pre-sale activities during that period, represented "arbitrary conditions" that were "not invited by the express language in subsection 84(2)," so that such conditions should not apply.
He indicated obiter dicta (at para. 85) that in addition to entailing a winding-up of PC's business, the transactions also entailed a reorganization of PC's business (as "it went from carrying on a medical business that fed its investment activities to a holding vehicle").