1995 Ontario Tax Conference Round Table, Q. 5 (No. 952503)

Where $500,000 worth of common shares of Opco are sold by its individual shareholder to a corporate purchaser, following which the purchased shares are purchased for cancellation by Opco for $500,000 and the purchaser then purchases the remaining net assets of Opco from Opco, RC will consider that the economic substance of the transaction is that the purchaser is buying assets rather than shares, and that there is a series of transactions one of the effects of which is to affect a significant reduction in the assets of Opco in order to avoid tax that would have been payable on distribution of its property to the individual shareholder. Accordingly, GAAR will apply on the basis that former s. 247(1) would have applied to the transactions.

Where $500,000 of shares of Opco are sold by its individual shareholder to a corporate purchaser, following which the purchased shares are purchased for cancellation by Opco for $500,000 and the purchaser acquires the remaining net assets of Opco, RC will consider that the purchaser is merely accommodating the individual shareholder's desire to structure the transaction in order to realize a tax-free capital gain. Because the purchaser has no independent interest in acquiring the shares and its acquisition of the shares appears to be on the condition that they be immediately purchased for cancellation, RC will consider that the individual shareholder and the purchaser are not, in fact, dealing at arm's length in respect of this aspect of the transaction. Accordingly, s. 84.1 will be applicable if Opco was connected with the purchaser immediately after the purchaser's acquisition of the shares.