Approximately 25% of the fair market value of the OPCO shares owned by Mr. A, who is one of its shareholders and who wants to extract its surplus, is not attributable to safe income on hand (“SIOH”). He transfers some of his OPCO shares to a new corporation (“HOLDCO A”) on a s. 85(1) rollover basis for HOLDCO A shares, and OPCO redeems its shares held by HOLDCO A, with the entire amount of the dividend is recharacterized by s. 55(2) as proceeds of disposition in the absence of a s. 55(5)(f) designation. HOLDCO A then pays a capital dividend to Mr. A equal to its CDA balance.
The overall result of this series of transactions is that the amount of tax payable by Mr. A, OPCO and HOLDCO A, with respect to OPCO’s surplus distributed first to HOLDCO A and then to Mr. A, is significantly less than the amount of tax that would have been payable if OPCO had distributed the same surplus to Mr. A as taxable dividends. Does CRA consider that GAAR should be applied? CRA responded:
Although the GAAR Committee considered that [similar] Transactions circumvented the integration principle, it recommended that the GAAR not be applied. The GAAR Committee was of the view that it would be unlikely that the GAAR could be successfully applied to the Transactions given the current state of the jurisprudence.
…The CRA…has expressed [its] concerns to the Department of Finance.