In the recent Fiducie Financière Satoma case, the corporate taxpayer tried to have the best of both worlds. The corporation contributed shares to a trust to deliberately fall within the reversionary trust rule. Subsequently, over $6 million of dividends were paid on the shares, and the taxpayers took the position that the corporation, rather than the trust, was required to include the dividends in income. In addition, since the dividends were deductible to the corporation in computing its taxable income as noted above, the corporation paid no tax on the $6 million of dividends. In the meantime, the dividends were retained by the trust, rather than being paid to the corporation.
The CRA challenged the transactions under the Income Tax Act’s general anti-avoidance rule (“GAAR”). On the corporation’s appeal to the Tax Court of Canada, the Court upheld the CRA assessment. The Court found that the transactions were abusive of the relevant tax provisions, and so the GAAR applied and allowed the Court to uphold the CRA’s assessment that the dividends were taxable to the trust.