C7 Anti-Avoidance: Sec 84.1, Sec 55(2), GAAR

What is GAAR?

GAAR = General anti avoidance rules They deny tax benefits that result from avoidance transactions (transactions that have no other purpose than to obtain a tax benefit)

What is hard cost?

Hard cost (shares transferred) = Greater of: 1. PUC shares transferred 2. Modified ACB (ACB - any prior CGE used in NAL transaction)

What are the consequences/effects of s55?

Offensive dividend less safe income and/or any dividend subject to part IV tax is deemed not to be a dividend but a CG

When will s84.1 not apply? (exceptions to s84.1)

S84.1 will not apply on genuine intergenerational transfers. This is proved if the following are met: 1. Shares transfers are QSBC shares 2. Purchaser corp is controlled by children aged 18 or older 3. Children include: grandchildren, stepchildren, niece/nephew, grand niece/nephew 4. All voting shares transferred to children within 36 months The effect is that the parties are deemed to be dealing at AL (not NAL) so s84.1 does not apply

What is dividends stripping

Taxpayer attempts to turn a taxable dividend into a CG through NAL sale of shares, usually to use CGE (to make the CG not taxable)

What are the conditions for s84.1

1. Disposition must be made by a taxpayer resident in Canada OTHER than a corporation 2. Subject shares must be shares of a corporation resident in Canada and must be capital property to taxpayer 3. Disposition must be NAL transaction to corp 3. Subject corp must be connected with purchaser corp immediately after disposition

When will s55(2) not apply? (exceptions to s55(2))

1. Dividend attributable to safe income 2. Dividend subject ot part IV tax 3. Bona fide corp reorganization (estate freezes and butterfly transactions)

How do you determine if GAAR applies?

1. Does any other provision of the ACT or other rule of law apply to stop the taxpayer from achieving the intended advantage? → YES 2. Does the transaction result, directly or indirectly, in a tax benefit? → YES 3. Can the transaction reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit? → NO 4. Can it be reasonably considered that the transaction would result, directly or indirectly, in a misuse of the provisions of the ITA? → YES if these criteria are met, then GAAR applies

What are some key factors that may signal the application of s55?

1. Intercorp dividends (ordinary or deemed) has occurred 2. Main purpose of dividend was to create a reduction of potential unrealized CG on a share, FMV of any share, or increase the cost of property of the dividend recipient 3. Dividend is not the result of a share redemption, acquisition, or cancellation or shares as part of RP reorganziation 4. Dividend is followed by AL disposition of shares of a corporation (siblings deemed AL unless QSBC shares) 5. Dividend is not the result of share redemption, acquisition, or cancellation of shares as part of a series of transactions resulting in disposition to a RP

What are the consequences/effects of s84.1?

1. PUC reduction: PUC new shares = hard cost old shares - boot 2. DD: DD if boot > hard cost + DD must be grossed up and included in taxpayers' income 3. Adjustment to POD: reduces POD on transfer, so taxpayer may not be able to use CGE + If s84.1 applies, then PUC reduction under s85 does not apply, and is calculated hard cost instead of EA

When is mandatory reporting of aggressive tax avoidance required?

1. When transaction is classified as "avoidance transaction" (any transaction that results for the sole purpose of obtaining a tax benefit) 2. 2 of 3 exist: a) tax advisor fees are based on tax savings b) tax advisor requires confidential protection c) tax payer obtains contractual protection There is a penalty for failure to report

What does "connected" mean

1. purchaser corp controls the subject corp OR 2. purchaser owns more than 10% voting shares and more than 10% FMV of all shares issued of subject corp

What is capital gains stripping?

Corporate shareholder attempts to convert CG on disposition of shares held in another corp into a dividend to avoid tax (bc intercorp dividends may not be subject to tax)

What is safe income?

any income after 1971

What is the anti-avoidance mechanism for capital gains stripping?

s55(2) reverses the offensive dividend that is not attributable to "safe income" back into a CG

What is the anti-avoidance mechanism for dividends stripping?

s84.1 reverses CG back into a taxable DD where control is not given up