Descarries v. The Queen, 2014 DTC 1143 [at at 3412], 2014 TCC 75 (Informal Procedure) -- summary under Subsection 84(2)

The six taxpayers, who were siblings (or a step-daughter of their deceased father), held all the shares, having an aggregate fair market value (FMV), adjusted cost base (ACB) and paid-up capital (PUC) of $617,466, $361,658 and $25,100 respectively, of a Canadian real estate company (Oka). They sought through the transactions described below to reduce the deemed dividend of $592,362, that otherwise would have arisen on the redemption of their shares, to approximately $265,505 (see 4 and 7 below [minor discrepancy in figures]). CRA assessed on the basis that a deemed dividend of the larger amount had been realized, as there had been an indirect distribution from Oka described in s. 84(2).

1. Oka lent $544,354 to a newly-incorporated company (9149) in December 2004.
2. In March 2005, the taxpayers exchanged their shares of Oka under s. 85(1) for Class B and C preferred shares of Oka, so that they realized a capital gain of $361,658 (which was offset by the current year's capital loss realized in 4 below and a carryback of the capital loss in 7 below) and with the Class B and C preferred shares having ACBs of $269,618 and $347,848 and low PUC.
3. They exchanged their shares of Oka for Class A common shares of 9149 having an ACB and PUC of $347,848 (with such PUC "step-up" complying with s. 84.1) and Class B preferred shares of 9149 having an ACB and PUC of $269,618 and nil.
4. Also in March 2005, 9149 redeemed the Class A common shares for their PUC and ACB of $347,848 (so that no deemed divided or capital gain resulted) and redeemed approximately ¾ of the Class B preferred shares, giving rise to a deemed dividend and capital loss of $196,506 to the taxpayers.
5. Oka sold its real estate in December 2005, but with title issues not resolved until December 2006.
6. Oka was wound-up into 9149 in December 2006, with the loan in 1 being extinguished.
7. At the end of 2008, 9149 redeemed the (¼) balance of the Class B preferred shares for $69,000, giving rise to a deemed dividend and capital loss to the taxpayers of $69,000 and $73,112.

Before going on to find that the transactions were subject to s. 245(2) as being contrary to the object of s. 84.1, Hogan J found that s. 84(2) did not apply. He noted (paras. 19-20) that at the alleged time of the distribution (in 4), Oka continued as a creditor of 9149, so that at this time its "overall assets remained unchanged" (para. 27), with such asset not being extinguished until the winding-up 20 months later (in 6). Furthermore, there was no change in Oka's real estate business until the sale nine months after the alleged distribution (step 5), and its real estate business did not cease for a further year – whereas s. 84(2) required such a change to occur contemporaneously with the distribution. Finally, after noting that the rule in s. 84(3) according priority to s. 84(2) did not apply as the redemption (by 9149) and the mooted distribution (by Oka) were by different corporations, he stated (at para. 37) that ss. 84(2) and (3) could not "be applied at the same time to the same distributions."