FMV Sale to a Trust: Sommerer Invoked
In Sommerer, the TCC (and ultimately the FCA) found that
subsection 75(2) does not apply where assets are sold to a trust for FMV
consideration. This conclusion was accepted by the minister, and then
by the court, in Brent Kern Family Trust v. The Queen (2013 TCC 327).
Subsection 75(2) is an anti-avoidance provision, but in this case the
taxpayer was apparently using it as a tool to achieve tax savings. The
CRA has generally expressed concern with this technique (see, for
example, CRA document nos. 2011-0401951C6, 2011-0412131C6, and
2012-0433261E5). It commonly attacks such plans by using GAAR (and it
was successful in Lipson v. Canada, 2009 SCC 1). This was the CRA’s initial approach in Kern, but the situation changed as the case progressed because of the release of the FCA’s decision in Sommerer (2012 FCA 207).
In the Kern case, Mr. Kern intended to invoke subsection
75(2) by having a corporate beneficiary (Opco) sell property (Holdco) at
FMV to the Brent Kern family trust. Because Opco was both a contributor
to and a beneficiary of the trust, subsection 75(2) was meant to apply
such that any dividend income realized by the trust on the shares of
Holdco would be attributed to back to Opco. Opco would, in turn, claim
an intercorporate dividend deduction pursuant to subsection 112(1),
leaving cash from the dividend in the trust with no taxable income. The
cash could then be distributed to Mr. Kern, who was a beneficiary of the
trust, as a tax-free distribution of the trust’s capital.
The application of subsection 75(2) was essential for the plan in Kern
to work as intended. At the initial hearing, however, the minister did
not challenge the application of subsection 75(2), and instead argued
that the series of transactions in issue was subject to GAAR.
Interestingly, while the TCC was deliberating after the initial hearing,
the FCA’s decision in Sommerer was released. On the basis of this change in law, the minister in Kern
applied to the TCC for an opportunity to present additional
submissions. The TCC granted the minister’s request, and further
submissions on the application of subsection 75(2) to the facts in Kern were heard.
In his decision in Kern, Bocock J found that Sommerer
was applicable and that the TCC was obligated to follow and apply the
statements of law handed down therein. As a result, Bocock J concluded
that subsection 75(2) was not applicable in Kern, since there
was an FMV sale of the shares of Holdco to the Brent Kern family trust.
As a result of the court’s finding that subsection 75(2) did not apply,
the application of GAAR was not considered.
The Kern decision is helpful in that it confirms that the minister generally accepts the Sommerer decision regarding the application of subsection 75(2). Kern provides additional comfort when one relies on Sommerer
in respect of an FMV sale to a trust. The decision also leaves open the
possibility of intentionally invoking subsection 75(2) in situations
where there is no FMV sale to a trust. Whether such planning is subject
to GAAR remains a question to be answered by the courts.
Cadesky & Associates LLP, Toronto