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With the ongoing increases to dividend tax rates, its worthwhile to review the possibility of removing funds from a corporation at capital gains rates. Pursuant to section 84.1 “hard ACB” is derived from a recognized capital gain (as opposed to capital gain wherein the small business capital gains exemption was taken). Capital Gains on shares can be recognized a share for share exchange (for example) under s.86 by having the transferor shareholder retain 1 share and not filing an election under Section 84. In this case the transferor shareholder recognizes a capital gain on the share exchange at 25%.

Subsequently the Transferor Shareholder transfers the newly acquired share to a related corporation in exchange for cash or a note payable. Section 84 is avoided due to the hard ACB created earlier.

The possible application of Section 84 (2) has to be considered. There are a number of scenarios under which 84 (2) may not apply; they are:

1. If the related corporation is not a business section 84 (2) won’t apply;

2. If the related corporation that purchases the shares does not wind up, liquidate, discontinue or reorganize in the two year period following the share purchase; (Descarries Case) AND if the assets of the purchased company are retained and not distributed to the purchasing company then 84(2) should be avoided.

In the second instance the purchasing company would have to rely on its own funds to pay for the purchased shares. Lastly the case law suggests that GARR is not applicable as long as the Small Business Deduction for Capital Gains is not used.

DISCLAIMER: This document is written for general information only. It is not intended as legal advice or opinion.

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