C.P.L. Holdings Ltd. v. Canada
T-3151-90
Cullen J.
11/4/95
19 pp.
Appeal from Minister's reassessment claiming dividend capital gain rather than deduction -- Reorganization of company including incorporation of plaintiff holding company (holdco); rollover of shares to holdco; dividend payment from original company to holdco -- S. 85(1) election giving shares acquired by holdco and shares issued pursuant to transfer same adjusted cost base, resulting in substantial unrealized gain prior to transfer -- Original company declaring dividend payable to holdco -- Holdco transferring certain shares to foreman -- Holdco deducting amount of dividend from taxable income resulting in no taxable income -- Minister applying Income Tax Act, s. 55(2) to dividend payment resulting in taxable capital gain -- S. 55(2) applying only where transfer to foreman at arm's length; transfer considered at arm's length -- S. 55(2) applying to series of transactions where (1) purpose of transactions to effect significant reduction in capital gain that, but for dividend, would be realized; and (2) disposition of holdco's shares to foreman part of dividend payment transaction -- Onus on holdco to demonstrate purpose of dividend not to effect capital gain reduction -- Avoidance of taxes not purpose behind declaration of dividend; reduction of fair market value of shares effect, but not purpose, of transaction -- Share transfer to foreman means of keeping him with company; transfer unrelated to rollover -- Transfer of shares to foreman not part of same transaction as declaration and payment of dividend; "series of transactions or events" requiring logical or reasonable connection between events (454538 Ontario Ltd. v. M.N.R., [1993] 1 C.T.C. 2746 (T.C.C.)) -- Appeal allowed -- Income Tax Act, S.C. 1970-71-72, c. 63, s. 55(2) (as am. by S.C. 1980-81-82-83, c. 48, s. 24; idem, c. 140, s. 25; S.C. 1984, c. 45, s. 15).