Surplus stripping

A seller who takes cash out of a company before a sale, or sells shares to a company they or family control, may meet this term. It names a result, not one transaction. The CRA’s page on the general anti-avoidance rule, the GAAR, defines it as a transaction for the benefit of an individual or non-resident shareholder that withdraws or may withdraw surplus in a way that reduces the tax base, or that returns capital beyond what reflects an investment made with after-tax funds.

How the Act and the CRA deal with it

The CRA’s GAAR page lists surplus stripping among its examples. It says transactions undertaken to strip corporate surplus in a manner that defeats the object, spirit and purpose of sections 84, 84.1 and 212.1 and subsection 89(1) are subject to the GAAR. Section 84.1 can deem a dividend to be paid by the purchaser corporation when its conditions are met; see section 84.1.

What to ask

• Whether the steps move cash out of a company, and how each step is taxed
• Whether the buyer is a corporation the seller does not deal with at arm’s length
• Whether the seller’s tax adviser has reviewed the steps as a series for the GAAR

For dividends paid before a sale, see paying a dividend before you sell your shares.