In 2005-0134731R3 F, Mr. X realized a capital gain of selling all of the common shares of HOLDCO to his children in consideration for promissory notes, but did not claim the capital gains deduction (“CGD”) under s. 110.6(2.1). On a redemption by HOLDCO of all of the HOLDCO preferred shares owned by Mr. X, which had nominal paid-up capital (“PUC”) and a high adjusted cost base (“ACB”) as a result of a previous crystallisation of the CGD, Mr. X realized a deemed dividend and a capital loss. A portion of the capital loss was applied to offset the capital gain that arose on the earlier sale of the HOLDCO common shares to the children.
Following the Descarries decision (2014 TCC 75) would CRA still issue such a ruling? CRA responded:
In Descarries…the individual shareholders of…OKA… exchanged their OKA shares for shares of another corporation (“NEWCO”), some of which (the “NEWCO V-day Shares”) had low PUC and a high ACB equal to the FMV of the OKA shares on V-Day (December 22, 1971). As a result, the V-Day value of the OKA shares became isolated/crystallized in the ACB of the NEWCO V-day Shares.
The NEWCO V-day Shares were repurchased, giving rise to a deemed dividend to the individual shareholders as well as a capital loss that was applied to offset a capital gain realized earlier in the same series of transactions. ...
The [2005-0134731R3] transactions result in the extraction of corporate surplus as capital gains. Furthermore, such capital gains are offset or reduced by capital losses realized on a disposition of shares whose ACB was increased by the CGD or V-day value.
In these circumstances and based on the Descarries decision, the CGD or the V-day value has been used to enable corporate surplus to be distributed to the shareholders tax-free, in a manner contrary to the object, spirit and purposes of section 84.1.