A Simple Family Share Deal That Turned Into a CRA Dispute
Kathryn Carter worked for years in her family’s paving company in New Brunswick. The business had been passed down for generations. Her father, Wallace, led the company, and her cousin Corey managed operations. Kathryn had worked her way up from flagging traffic to running crews, estimating jobs, and managing compliance.
When Corey wanted more control over the company’s future, he asked Kathryn to sell her shares. She agreed, but only if she received full payment at closing and could use her lifetime capital gains exemption. The sale price was six hundred thousand dollars.
Corey created a holding company, Corco, to buy Kathryn’s shares. Brown’s Paving, the operating company, borrowed six hundred thousand dollars from the bank. The company gave the bank security over its assets, and Corey and Corco guaranteed the loan. Corco then bought Kathryn’s shares using a promissory note. Afterward, Brown’s Paving redeemed those shares from Corco for six hundred thousand dollars cash. Corco used that money to pay Kathryn.
Kathryn reported a capital gain and claimed her lifetime exemption. The deal looked straightforward. Then CRA reassessed her.
Why CRA Got Involved
CRA believed that the sale converted what should have been dividend income into a tax-free gain. They applied Section 84.1 of the Income Tax Act, a rule designed to prevent “surplus stripping.”
Surplus stripping happens when shareholders try to pull company profits out as capital gains instead of dividends. Dividends are fully taxable. Capital gains are taxed at lower rates and can even be exempt through the lifetime capital gains exemption.
Section 84.1 prevents this by treating certain share sales between related parties as dividends. It only applies when:
-
an individual sells shares of a Canadian company to another corporation
-
the buyer is not dealing at arm’s length
-
the buyer becomes connected to the original company after the sale
If these conditions exist, CRA can reduce the paid-up capital of the new shares and treat any cash or note received as a dividend.
In this case, CRA said Kathryn and Corco were not dealing at arm’s length and that Corco was connected to Brown’s Paving.
What the Court Found
The Tax Court looked closely at the facts. The evidence showed that Kathryn and Corey had separate interests. Kathryn wanted payment and tax efficiency. Corey wanted control and took on financial risk. They negotiated independently. Kathryn did not plan the transaction; Corey initiated it.
The Court also found that Corco was not connected to Brown’s Paving. Wallace Brown still held over ninety percent of the voting shares after the transaction. That meant Corco did not control the operating company.
Because Corco and Brown’s Paving were not connected, Section 84.1 did not apply. The Court allowed Kathryn’s capital gain and vacated CRA’s reassessments for 2015 through 2018.
What Business Owners Can Learn
This case offers valuable guidance for family businesses:
-
Keep clear records showing independent negotiation.
-
Ensure each side carries its own financial risk.
-
Review ownership and voting control before completing a family share transfer.
-
Seek professional advice early to structure deals that reflect real business intent.
How Cloudiverse CPAs Can Help
At Cloudiverse CPAs Inc in Burnaby, we help business owners design corporate structures and family transitions that align with CRA rules. Think of us as your tax GPS—guiding you around the complex turns of share transfers, reorganizations, and corporate tax planning.
If you are planning a family share transfer or ownership change, contact us for customized advice.
Email: aman@cloudiverse.ca
Phone: 604-200-4027
Watch it on Youtube
Read the Full Case
For more details, you can read the complete Tax Court of Canada decision here:
https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/521271/index.do?q=KATHRYN+J+CARTER%2C
Disclaimer
This article summarizes information from a publicly available Tax Court of Canada decision for educational purposes only. All visuals or people shown in related media are for illustrative purposes and are not connected to the actual individuals or businesses involved.