The appellant corporation appealed a reassessment that added a $31,500,000 capital gain to its income for the 2005 taxation year under the General Anti-Avoidance Rule (GAAR).
The appellant had engaged in a series of transactions, including the circular payment of capital dividends and cross-redemption of shares, to avoid the application of subsection 55(2) of the Income Tax Act and reduce the capital gain realized on the sale of its indirect interest in a pharmaceutical company.
The Tax Court of Canada found that while the transactions complied with the literal wording of the capital dividend account provisions, they frustrated the object, spirit, and purpose of subsection 55(2), which is intended to prevent the conversion of taxable capital gains into tax-free intercorporate dividends.
The appeal was dismissed.
