"Half-loaf" Gone Wrong: Gervais, G. et al. v. The Queen ("Gervais").

A recent case from the Tax Court of Canada ruled against a taxpayer who implemented a tax plan known as the "half-loaf" plan.  The purpose of a half-loaf plan is essentially to multiply the life time capital gain exemption between two spouses.

The "half-loaf" plan works by having a spouse acquire one-half of an identical property (typically shares of a company) from a spouse in two separate transactions. In the first transaction, the spouse pays fair market value which results in the spouse having a high adjusted cost base ("ACB") in the shares acquired (equal to the fair market value paid). In the second transaction, the spouse acquires shares of the same class on a rollover basis, which results in the spouse initially having an ACB equal to the other spouse's ACB (which is typically a nominal amount). Pursuant to section 47 of the Act, there is an averaging of ACB where a taxpayer acquires identical properties with the result being that the transferee spouse owns