Why can't you just sell your shares to your own holding company and pay ordinary capital gains tax?

The rule: a deeming provision, not a facts-and-circumstances test

Paragraph 84.1(2)(b) is a bright-line deeming rule, not a factual inquiry into whether the parties actually acted independently. A management buyout structured through a newly formed acquisition company, where the same small group of individuals controls both the target and the purchaser before and after closing, falls inside the deeming rule automatically — there is no argument that the deal was negotiated at genuine arm’s length that gets around it.

When it changes

The non-resident counterpart to section 84.1 is section 212.1, which reaches the same economic structure — a non-arm’s-length sale of shares to a connected Canadian-resident purchaser corporation — where the seller is not a Canadian resident. The two sections are not interchangeable: which one applies turns on the seller’s residency, and getting that wrong means modelling the wrong deemed dividend rule entirely.

Where this played out — Case Files

One file shows a transaction every party genuinely believed was arm’s length, decided instead by a rule that does not ask what anyone believed. A companion file shows the advisors modelling section 84.1 when the vendor’s own non-resident status put the transaction under section 212.1 instead.

Sources

• • Income Tax Act s.84.1(1) and s.84.1(2)(b) — laws-lois.justice.gc.ca.
• • Income Tax Act s.212.1(1), the non-resident equivalent — cited for the contrast; see the next question.
• • Treadstone Academy — rollover equity that changed the seller's answer — a related but distinct rollover-equity structure, where the buyer rather than the vendor controlled the acquisition vehicle.