The taxpayers ("Brianne and Steven") were minors and beneficiaries of a family trust (the "Trust"). The Trust held all the common shares (as well as Class C preferred shares) of a management corporation ("FHDM") for a dental practice of the beneficiaries' father (Dr. Gwartz). The following transactions occurred:
- 1a. In 2003 and again in 2005, FHDM declared a stock dividend consisting of 150,000 Class D preferred shares, redeemable and retractable for $1 each, and having a total paid up capital of $1 (300,000 shares, $2 total PUC).
- 1b. In each of 2003 to 2005, the Trust disposed of 75,000 Class D shares to Dr. Gwartz for a $75,000 promissory note.
- 2. In 2005, Dr. Gwartz sold the 225,000 Class D shares to a numbered corporation ("206"), wholly owned by Dr. Gwartz's spouse, for $225,000 in promissory notes.
- 3. FHDM redeemed 206's Class D shares for $225,000.
- 4. Both sets of notes were repaid out of such redemption proceeds, effecting a transfer of $225,000 from 206 to the Trust.
The Trust reported a capital gain of $74,999.50 from step 1b for each of 2003 to 2005, which it allocated to the taxpayers for inclusion (as to the taxable capital gains portions) in their returns. The Minister reassessed the taxpayers under the general anti-avoidance rule on the basis that, by effecting the realization of capital gains and their distribution to the beneficiaries, rather than the distribution of taxable dividends, the series of transactions had abusively circumvented s. 120.4 of the Act. (The Minister conceded that reassessment of Steven's 2005 taxation year should be vacated as he was 18 in that year.)
Hogan J. allowed the taxpayers' appeals. Although s. 120.4 was circumvented, there was no abuse. He stated (at para. 65):
The fact that specific anti-avoidance provisions were enacted long before the introduction of section 120.4 leads me to infer that Parliament was well aware of the fact that taxpayers could arrange to distribute corporate surpluses in the form of taxable dividends or of capital gains subject to the application of those specific anti‑avoidance provisions. The fact that those provisions were not amended and that a specific rule was not included in section 120.4 to curtail well-known techniques leads me to infer that Parliament preferred simplicity over complexity when it enacted section 120.4.
The present case was distinguishable from Triad Gestco, which involved the creation of an artificial capital loss, rather than the shifting of an already-accrued capital gain on common shares of a taxpayer to other shares (namely, the Class D shares) of the taxpayer.