The Permissibility of Surplus Stripping


My Davies tax group colleagues Chris Anderson and Etyan Dishy (both of whom are former Osgoode students of mine!) have published a terrific article in the latest Canadian Tax Journal on “The Permissibility of Surplus Stripping”.

The authors begin with a review of the legislative and judicial context surrounding sections 84.1, 212.1 and subsection 84(2).  At the end of the paper they give three examples of surplus stripping (where a taxpayer effectively converts a taxable dividend into a more lightly taxed capital gain), and make the case that under current law, the surplus stripping in those examples should be permissible.

These examples should be familiar to students in our Taxation of Business Enterprises class.  Do you think the Act should allow taxpayers to structure around the specific anti-avoidance rule in section 84.1 to generate an internal sale that triggers capital gains and avoids taxable dividends that would otherwise have been paid out of corporate solution?

In class we discussed the “unfinished business” of the Department of Finance following the withdrawal of their surplus stripping proposals in the July 2017 consultation paper.  This article throws down the gauntlet to Finance – if there is to be a clearly established anti-surplus stripping scheme in the Act, legislative amendments are required.


- Professor Geoffrey Turner