Words and Phrases - "main reason"
S3-F2-C1 - Capital Dividends
Main reason test
1.95 ... Groupe Honco...confirmed that a person can have more than one main reason for the acquisition of shares. If subsection 83(2.1) is not to apply, it must be shown that none of those main reasons is the receipt of a capital dividend.
Asymmetrical application
1.96 Where subsection 83(2.1) applies, the dividend will be deemed to be received by the shareholder as a taxable dividend that will be included in the shareholder’s income. If the dividend recipient is a corporation it will not be included in computing that recipient corporation’s CDA. However, the amount elected for the purposes of subsection 83(2) will be a capital dividend for the purpose of determining any liability of the payor corporation for Part III tax in respect of an excessive election and for the purpose of computing the payor corporation’s CDA balance.
Gerbro Holdings Company v. Canada, 2016 TCC 173, briefly aff'd 2018 FCA 197
The taxpayer (“Gerbro”) was a Canadian investment corporation (owned by a family trust but with an elderly income beneficiary, so that Gerbro was required to have liquid investments) whose board-established investment guidelines specified that between 0% and 30% of its holdings be of directional hedge funds and 0% to 30% be of non-directional hedge funds (i.e., uncorrelated with the equity markets). Gerbro invested in both types of hedge funds, which typically were offshore feeder funds (in a low-tax rate jurisdiction) in a master-feeder structure and with most or all returns reinvested rather than distributed.
In finding that the hedge funds derived their value “primarily” (i.e., “more than 50% of their value” (para. 120)) from portfolio investments, Lamarre ACJ stated (at paras. 101-103):
[T]he ordinary commercial meaning of portfolio investment in the international investment context is an investment in which the investor … is not able to exercise significant control or influence over the property invested in.
... [T]he definition suggests thresholds ranging from 10% to 25% ownership … [although] a small group of well-organized investors could have a controlling interest while having less than 10% ownership… .
[P]ortfolio investments are passive investments that do not entail active management of, or control over, the operations of the underlying investment… .
Turning to the “main reason” test, Lamarre ACJ found (at para. 158) that “while tax deferral was an ancillary reason prompting Gerbro to invest in the Funds, none of its main reasons was tax deferral.” In this regard, she stated (at para. 165) that “the more important a reason for investing is, the harder it will be to elevate another reason, such as obtaining a tax deferral benefit, to the same level” before referring (at para. 167) to “overarching commercial reason[s] for investing" in these Funds,” (at para. 170) that “Gerbro was very concerned with the reputation of the mangers it invested with” and (at para. 172) that “access to the mangers of the Funds was only possible for Gerbro through offshore hedge funds, and these types of alternative investments only made up a part of Gerbro’s investment portfolio.” Furthermore, the Funds satisfied Gerbro’s liquidity criteria (para. 173).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Onus | no taxpayer burden to displace assumptions of mixed fact and law | 71 |
| Tax Topics - Statutory Interpretation - Hansard, explanatory notes, etc. | Minister's statement was false | 130 |
| Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 145 - Subsection 145(3) | expert's report did not include all the underlying data | 115 |