Section 84.1 of the Income Tax Act (Act), in
its current form, was introduced in 1985 (concurrent with the
introduction of the capital gains deduction), and the provision has
always been a source of heartburn for planners. It is a very broad
anti-avoidance rule that tries to prevent surplus from being
stripped from corporations as a tax-free capital distribution,
rather than a taxable distribution in the form of dividends. In
order for section 84.1 to apply, there needs to be a transfer of
shares of a corporation by an individual or trust to another
corporation with which the individual does not deal at arm's
length, and immediately after the disposition, the purchaser
corporation and the corporation whose shares are being transferred
are connected. While the Act deems related persons to not
deal at arm's length, it also states that it is a question of
fact whether persons who are not related to each other are, at a
particular time, dealing with each other at arm's
