The Permissibility of Surplus Stripping: A Brief History and Recent Developments

Canadian Tax Journal/Revue fiscale canadienne, Vol. 69, No. 1, 2021, pp. 1-33

34 Pages Posted: 28 Apr 2021

See all articles by Eytan Dishy

Eytan Dishy

Davies Ward Phillips & Vineberg LLP

Chris Anderson

Davies Ward Phillips & Vineberg LLP

Date Written: April 2021

Abstract

"Surplus stripping" seeks to structure payments received by an individual from a corporation as capital gains rather than dividends, so that the payments are taxed at a lower rate. While Canada's courts have typically held that there is no anti-surplus-stripping scheme in the Income Tax Act, recent decisions of the Tax Court of Canada and the Federal Court of Appeal have found against taxpayers that have engaged in surplus-stripping transactions. This article considers the extent to which surplus strips remain permissible under the Act and, in particular, considers the application of subsection 84(2), section 245 (the general anti-avoidance rule [GAAR]), and the specific anti-surplus-stripping provisions in sections 84.1 and 212.1. In assessing the permissibility of surplus-stripping transactions, the authors briefly review the relevant legislative history and identify various themes that have emerged from the jurisprudence on GAAR and subsection 84(2). The authors conclude that, notwithstanding recent court decisions, certain surplus-stripping transactions should remain permissible.

Keywords: Surplus stripping, history, anti-avoidance, GAAR, statutory interpretation, jurisprudence

Suggested Citation

Dishy, Eytan and Anderson, Chris, The Permissibility of Surplus Stripping: A Brief History and Recent Developments (April 2021). Canadian Tax Journal/Revue fiscale canadienne, Vol. 69, No. 1, 2021, pp. 1-33, Available at SSRN: https://ssrn.com/abstract=3822617

Eytan Dishy (Contact Author)

Davies Ward Phillips & Vineberg LLP

Toronto, Ontario M5X 1B1
Canada

Chris Anderson

Davies Ward Phillips & Vineberg LLP

Toronto, Ontario M5X 1B1
Canada

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