ParizConsulting Group

2026-10-19

Turgeon, 2017 FCA 103: a non-arm's length finding that triggered section 84.1 and cost the capital gains deduction stands on appeal

2017 FCA 103 · Federal Court of Appeal

Provisions

ITA s. 110.6ITA s. 251ITA s. 84.1

Text

Author: Sas Tullo

This is an income tax case about selling shares of a family construction business to a holding company and claiming the capital gains deduction on the sale. The Canada Revenue Agency took the position that the seller and the purchaser were not dealing at arm’s length, so that section 84.1 of the Income Tax Act applied and the deduction was lost. The Tax Court of Canada agreed, and the Federal Court of Appeal dismissed the further appeal from the bench in five paragraphs. The decision matters to anyone planning a share sale inside a corporate reorganization, because it confirms that a finding on arm’s length dealing is a factual one that an appellate court will rarely disturb.

Facts

Herman Turgeon appealed from a judgment of D’Auray J. of the Tax Court of Canada dated June 14, 2016, reported as 2016 TCC 154 (para 1). The Tax Court had dismissed his appeal from an assessment by the Minister of National Revenue disallowing the capital gains deduction under subsection 110.6(2.1) of the Income Tax Act, on the ground that there was a non-arm’s length relationship in the sale of Class D shares (para 1). The sale was part of a reorganization of the corporate structure of the share ownership of Les Constructions de l’Amiante inc., and the purchaser was Gestion Hélie (paras 2-3). The reasons are an English translation of reasons delivered in French.

The decision under appeal

The Tax Court heard Mr. Turgeon’s appeal on common evidence with that of his fellow shareholder Ghislain Poulin; the reasons are reported as Poulin v. The Queen, 2016 TCC 154. Both men had frozen their common shares of Les Constructions de l’Amiante inc. in 2005, each taking preferred shares with a redemption value of $450,004, the amount needed to claim the capital gains deduction (TCC para 16). In the 2007 reorganization that followed Mr. Poulin’s decision to leave, Mr. Turgeon brought in the company’s controller, David Hélie, as a shareholder (TCC paras 22-24). On November 7, 2007, Mr. Turgeon sold 388,861 Class D preferred shares to Gestion Hélie for $388,861, financed by a promissory note at 4%; Amiante was to pay out at least 80% of its annual net profits, and Gestion Hélie was to apply 90% of what it received to the note (TCC paras 29-30 and 94). Amiante later redeemed most of those shares, and a balance on the note was still outstanding nine years after the sale (TCC paras 34 and 96).

The only question was whether the parties were in a de facto non-arm’s length relationship under paragraph 251(1)(c), the other conditions of paragraph 84.1(1)(b) being conceded (TCC paras 58-59). Applying the McLarty criteria, in particular whether the parties acted in concert without separate interests (TCC paras 63-64), D’Auray J. allowed Mr. Poulin’s appeal, because his sale to Mr. Turgeon’s holding company was ordinary bargaining between a departing vendor and a purchaser seeking control (TCC paras 83-84 and 105), but dismissed Mr. Turgeon’s. The freeze shares could not increase in value, paid no dividend, and carried no vote, so Gestion Hélie “had no interest other than to enable Mr. Turgeon to realize a capital gain” (TCC para 98); the note had no repayment schedule; and in 2014 the unredeemed shares went to a corporation of which Mr. Turgeon was president (TCC paras 95-102). Mr. Turgeon and Gestion Hélie therefore acted in concert without separate interests, and section 84.1 applied (TCC paras 103-104 and 106).

Issues

The only issue was whether the Tax Court judge erred in determining that the appellant did not deal at arm’s length with Gestion Hélie within the meaning of paragraph 251(1)(c) of the Act (para 2).

Holding

Appeal dismissed with costs (para 5). The question was one of mixed fact and law, reviewable for palpable and overriding error, and the Court was not satisfied that the judge had committed such an error in finding that section 84.1 applied (paras 2 and 4).

The court’s reasoning

Boivin J.A. delivered the reasons of the Court from the bench, for a panel that also included Scott and de Montigny JJ.A. The Court began with the standard of review. Whether two persons deal at arm’s length under paragraph 251(1)(c) is a question of mixed fact and law, so the trial judge’s findings attract the standard of palpable and overriding error under Housen v. Nikolaisen, [2002] 2 S.C.R. 235, 2002 SCC 33 (para 2).

The Court then described what the trial judge had done. She analyzed “the overall context of the reorganization of the corporate structure” of which the share sale formed part, and applied the principles stated by the Supreme Court of Canada on arm’s length dealing, in particular in Canada v. McLarty, [2008] 2 S.C.R. 79, 2008 SCC 26, referring to the Tax Court’s reasons at paragraphs 63 to 65 (para 3). Against that approach, and “despite the skilled representation by counsel for the appellant”, the Court was not satisfied that the judge had committed a palpable and overriding error in her assessment of the relevant facts when she found that section 84.1 of the Act applied (para 4). The appeal was therefore dismissed with costs (para 5).

The reasons do not set out the text of subsection 110.6(2.1), paragraph 251(1)(c), or section 84.1, and do not describe the facts that led the trial judge to find a non-arm’s length relationship; those are summarized above from the Tax Court’s reasons. Both section 110.6 and section 84.1 have been amended since the decision: the Justice Laws versions current to September 30, 2026 list amendments to section 110.6 in 2023 and 2026 and to section 84.1 in 2021, 2024, and 2026, which are not described here.

Practical implications

The decision adds nothing new to the law of arm’s length dealing, but it illustrates two points of practical importance. The first is procedural. The appellant accepted that the trial judge had stated the test correctly and argued only that she had applied it wrongly to the facts. Once the appeal was framed that way, the Housen standard left little room: a finding that parties acting in concert without separate interests, or that one party effectively controlled both sides of the transaction, is a factual conclusion, and the Court of Appeal will not re-weigh the evidence of the reorganization as a whole.

The second concerns planning. Subsection 84.1(1) applies, in its current text, where a taxpayer resident in Canada other than a corporation disposes of shares of a corporation resident in Canada to another corporation with which the taxpayer does not deal at arm’s length, and the corporations are connected immediately after the disposition; where it applies, what would otherwise be a capital gain eligible for the deduction under subsection 110.6(2.1) can be recharacterized, which is the result the appellant was contesting. In my view, the lesson of Turgeon is that the arm’s length analysis is not confined to the formal relationship between the vendor and the purchasing corporation. The Tax Court looked at the whole reorganization, and the Court of Appeal endorsed that approach by reference to McLarty. Advisers structuring a sale of qualified small business corporation shares to a corporation owned by a business associate, a family member, or a long-standing partner should assume that the surrounding steps, the sources of funds, and the degree of coordination will all be examined.

The appeal reasons do not disclose the amount at stake; the Tax Court’s reasons record that Mr. Turgeon reported a taxable capital gain of $194,402 and that the Minister treated the sale as a deemed dividend of $388,802 (TCC para 7, agreed statement paras 43-44). Whether an application for leave to appeal was made is not verified here.

For a shareholder thinking of selling to a corporation controlled by someone close to the business, the takeaway is to test the arm’s length question before the sale, not after. When a trial judge has examined the whole reorganization and found that the parties were not at arm’s length, this bench judgment shows how quickly the appeal will end.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Turgeon v. Canada, 2017 FCA 103. Judgment delivered from the bench at Montréal, Quebec, on May 16, 2017 (English translation of French reasons). Panel: Scott, Boivin, and de Montigny JJ.A.; reasons for judgment of the Court delivered by Boivin J.A. Docket A-320-16. Reasons on the Federal Court of Appeal’s site. Also on CanLII. Decision under appeal: Poulin v. The Queen, 2016 TCC 154 (D’Auray J., June 14, 2016; Mr. Turgeon’s appeal heard on common evidence with Mr. Poulin’s; official English translation). Reasons on the Tax Court’s site. Also on CanLII.