2016-0669661C6 2016 CTF - Q. 6 - 84.1 and the Poulin/Turgeon Case

Principal Issues: With respect to the Tax Court of Canada decision in Ghislain Poulin v. The Queen (Poulin) and Herman Turgeon v. The Queen (Turgeon), 2016 TCC 154: a) Could CRA comment on what it regards as the differentiating factors identified by the Court in this decision? b) Does this decision impact CRA's view of employee buyco arrangements? c) What is CRA's view of a share sale identical to Mr. Turgeon's except the holding corporation, an employee buyco, benefits from its involvement via dividends on the shares it purchased? The benefit is real in that such dividends are in addition to subsequent share redemption amounts received by the holding corporation and used to pay off debt owed to the original vendor of shares. Would CRA’s view differ if the holding corporation was compensated for its involvement otherwise than by dividend?

Position: General comments provided.

Reasons: The question as to whether an employee and an employee buyco are, upon the sale of the shares of the capital stock of a particular corporation, dealing with each other at arm’s length is a question of fact. Such determination can only be made following a review of all facts and circumstances relating to a particular situation. However, in a particular situation, it could be concluded that an employee and an employee buyco are acting in concert without separate interests. For example, the particular facts and circumstances could establish that the employee buyco assumes no risks associated with the purchase of the shares of the capital stock of the particular operating corporation, does not benefit from buying such shares, has no interest other than to enable the employee to realize a capital gain and claim the capital gains deduction, and has no role independent of the employee or the operating corporation. In other words, the facts of a particular situation could support the position that the employee buyco is only involved in the transaction as an accommodating party for the benefit of the employee.

Author: Lafrenière, Jean
Section: 84.1

CRA Roundtable

Question 6: Section 84.1: Poulin v. The Queen and Turgeon v. The Queen

On June 14, 2016, the Tax Court of Canada (the “Court”) released its decision in the cases of Ghislain Poulin v. The Queen (“Poulin”) and Herman Turgeon v. The Queen (“Turgeon”)(2016 TCC 154, heard on common evidence).  These cases involve two unrelated shareholders, both of whom attempted to extract corporate surplus as a capital gain to which they could claim the capital gains deduction by selling shares of a subject corporation to a holding corporation owned and controlled by another employee/shareholder of the subject corporation.  The Court determined that section 84.1 did not apply in Poulin as Mr. Poulin and the holding corporation dealt at arm’s length; whereas, the Court determined that section 84.1 did apply in Turgeon as Mr. Turgeon and the holding corporation did not deal at arm’s length. 

Questions

a)    Could CRA please comment on what it regards as the differentiating factors identified by the Court in this decision?

b)    Does this decision impact CRA’s view of employee buyco arrangements? If so, how? And, if not, why not?

c)    What is CRA’s view of a share sale identical to Mr. Turgeon’s except the holding corporation benefits from its involvement via dividends on the shares it purchased? The benefit is real in that such dividends are in addition to subsequent share redemption amounts received by the holding corporation and used to pay off debt owed to the original vendor of shares. Would CRA’s view differ if the holding corporation was compensated for its involvement otherwise than by dividend?

CRA Response

The issue raised in this case stems from the sale of frozen preferred shares in the context of a reorganization of the corporate structure of Les Constructions de l’Amiante Inc. (“Amiante”), the purpose of which was twofold: 1) to implement the departure of Mr. Poulin; and 2) to integrate a key employee of Amiante, Mr. Hélie, into its share structure. 

As such, Mr. Poulin sold his freeze shares of the capital stock of Amiante to a corporation (“Gestion Turgeon”) controlled by Mr. Turgeon. In turn, Mr. Turgeon sold his freeze shares of the capital stock of Amiante to another corporation (“Gestion Hélie”) controlled by Mr. Hélie.  Both individuals declared a taxable capital gain on the sale and claimed the capital gains deduction pursuant to subsection 110.6(2.1).

Based on all of the evidence, the Court was of the view that Mr. Poulin wanted to leave Amiante, selling his interest in it at the best price and under the most optimal possible conditions — one of which was to benefit from his capital gains deduction.  On the other hand, Gestion Turgeon wanted to acquire the shares of Amiante held by Mr. Poulin, which allowed Mr. Turgeon to ultimately control Amiante.

In the case of Mr. Poulin, the Court concluded that section 84.1 did not apply since the parties did not act in concert without separate interests and, consequently, were dealing at arm’s length. 

In view of the above, the CRA generally agrees with the Court when it acknowledges that “[t]he fact that Mr. Poulin and Mr. Turgeon had structured the transaction such that Mr. Poulin could benefit from his capital gains deduction does not mean that the parties acted in concert without separate interests.” (footnote 1)

However, the Court pointed out that this possibility is not limitless: “That being said, while it is completely acceptable for an entrepreneur to want to benefit from tax relief available to them, it is, however, necessary to ensure that the method used is permitted.” (footnote 2).  As such, the Court held that Mr. Turgeon and Gestion Hélie acted in concert, without separate interests and, consequently, were not dealing at arm’s length. 

The CRA is and has always been of the view that the question as to whether unrelated persons are dealing at arm’s length at any particular time is a question of fact that requires a review of all the facts and circumstances surrounding a specific situation. 

In this regard, the mere fact that an employee/shareholder, such as Mr. Poulin, wants to dispose of all his shares of the capital stock of a corporation to an employee buyco which wants to acquire them, is not sufficient to conclude that these taxpayers deal with each other at arm’s length. 

Indeed, in a particular situation it could be established that the employee/shareholder and the employee buyco are acting in concert, without separate interests.  For example, it could be established that, as is the case with Gestion Hélie, the employee buyco: assumes no economic risks associated with its involvement in the transaction; does not benefit from acquiring the shares of the capital stock of the operating corporation; has no interest other than to enable the employee/shareholder to realize a capital gain and claim the capital gains deduction; and has no role independent of the employee/shareholder or the operating corporation.  In short, the facts of a particular situation could support the position that the employee buyco is only involved in the transaction as an accommodating party for the benefit of the employee/shareholder. 

In closing, where taxpayers intend to carry out transactions to which section 84.1 may apply, we recommend that they obtain an advance income tax ruling beforehand.

Jean Lafrenière
2016-066966
November 29, 2016

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Ghislain Poulin v. The Queen and Herman Turgeon v. The Queen, 2016 TCC 154, at paragraph 81. 
2  Ibid. at paragraph 90. 

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