http://decision.tcc-cci.gc.ca/tcc-cci/decisions/fr/item/71346/index.do 
Gervais c. La Reine (April 23, 2014 – 2014 CCI 119) is a recent decision of the Tax Court of Canada that has yet to be translated into English.
Paul Prokos and John J. Lennard of Davies have been kind enough to provide the following commentary (I am indebted to Guy Du Pont, Ad. E., for initiating the collaboration):
In Gervais, the Tax Court of Canada (the “TCC”) characterized the sale of the shares as on account of income and not of capital hereby overturning the desired tax effects of a series of transactions between spouses, the purpose of which was to maximize the use of the capital gains exemption upon the sale of the shares of a small business corporation.
The Appelants were spouses. Monsieur was a shareholder of a family business (“Opco”), along with his brother. A non-related third party corporation (“Buyerco”) offered to purchase the shares of Opco.
Prior to the sale, Monsieur sold a portion of his shares to Madame at fair market value approximately $1,000,000 (the “Purchased Shares”) in consideration for a promissory note. No rollover election was made under ss. 73(1) of the
Income Tax Act, RSC 1985, c 1 (5th Supp.) (“ITA”) and the Purchased Shares therefore had an adjusted cost base (“ACB”) of $1,000,000. In addition, Monsieur gifted to Madame shares of an approximate value of $1,000,000 subject to ss. 73(1) ITA rollover (the “Donated Shares”). The Donated Shares therefore had the same ACB as they did when held by Monsieur, which, for all intents and purposes, was Nil.
Pursuant to the purchase agreement with Buyerco, Madame sold the Purchased Shares and the Donated Shares to the latter for their fair market value, of approximately $2,000,000. In the relevant taxation year, Madame included in her income the capital gain for the sale of the shares. The combined ACB of the shares sold by Madame was approximately $1,000,000, which would result in a total capital gain of approximately $1,000,000 in the hands of Madame.
However, Madame sought the application of ss. 47(1) ITA in order to average the ACB of the Purchased Shares and the Donated Shares at $500,000. The result was the attribution of approximately $500,000 of the capital gain to Monsieur in the relevant year and the remainder of the capital gain $500,000, was sheltered by the capital gain exemption under s. 110.6 ITA. Thus, Madame paid no tax on the disposition of shares of Opco.
The TCC held in favour of the CRA, who had taken the position that the gain created by the sale of shares of Opco should be treated as income and not as capital gain.
With respect to the Purchased Shares, the TCC held the following:
[94] The facts relating to acquisition of shares by Mme Gendron are not compatible with an investment and do not favour the conclusion that the sale was on account of capital:
a) Even before Mme Gendron had acquired the shares, she had the intention of selling them in the short term.
b) The shares did not generate any income while she held them.
c) The shares were sold less than two weeks after their acquisition.
[95] These three indications support a characterization of income. A fourth indication which favours a characterization of income is the absence of payment of funds by Mme Gendron at the time of purchase; she paid Mr. Gervais over a period of five (5) years. […]
[100] Traditionally, the nature of the property in question, shares, is considered to be an indication of an investment. However, in the circumstances at hand, the fact that they are shares, the nature of the property, only has a minimal impact.
The TTC distinguished the facts of this decision with those found in the majority judgment in
Irrigation Industries Ltd. v. Minister of National Revenue, [1962] SCR 346:
[117] Be that as it may, there are two important differences between the circumstances here and those in
Irrigation Industries. First, in the vast majority of purchases where the shares already existed, the vendor ends his investment in the company and the purchaser is the replacement. In Irrigation Industries, the situation is different, since, in purchasing previously unissued shares, Irrigation Industries did more than purchase an investment, it also increased the capital of the issuing corporation.
[118] Economically, there are different consequences than with the purchase of existing shares, because, in the vast majority of cases, when people purchase the already existing shares of a company, there would be no effect on the capital of the company.
[119] Purchasing previously unissued shares which increases the capital of the issuing company is an indication of an investment.
[120] Here, Mme Gendron did not purchased previously unissued shares.
[121] Second, in this case there are “clearer” indications of an adventure in the nature of trade. There was not only a resale in the short term but the resale of the shares to BW Technologies was arranged in advance. I cannot see how there could be a “clearer” indication than the pre-arranged resale of shares.
[122] Consequently, Irrigation Industries is not applicable and considering the indications greatly favour the determination of an adventure in the nature of trade, I conclude that there is an adventure in the nature of trade and that the gain on the sale of the shares is on account of income.
While, in the final analysis, the income inclusion will be nil, the TCC’s characterization of the sale of shares as being on account of income is nevertheless notable.
The TCC takes a different position with respect to the Donated Shares, emphasizing the method by which the shares were acquired:
[129] Receiving a donation or an inheritance is of a very different nature that the purchase of property for resale. The intention to accept is not at all the same thing as the intention to purchase, because the decision to donate rests upon the donor and not the recipient of the gift.
[130] The simple desire to realize the value of the gift by reselling the received gift, even rapidly, and even if the intention existed before the receipt of the gift, does not signify that the sale of the property is an adventure in the nature of trade. There must be more.
[131] For example, the simple fact that a child who expects to inherit a family cottage has the intention of reselling it as quickly as possible because he has the intention of reducing the mortgage on his personal home does not signify that the resale of the cottage is an adventure in the nature of trade.
[132] A different analysis of the sale must be made, because, by the nature of things, the person who receives a gift cannot have made an investment. Consequently, certain indications, when property is purchased, will not have any application in the context of a gift.
[133] There are no other indications here that would favour a conclusion that there is an adventure in the nature of trade. There is not, for example, any effort on the part of Mme Gendron to increase the value of the shares received as a gift.
The TCC ultimately held that the Donated Shares were held on account of capital. Since the Purchased Shares were disposed of as an adventure in the nature of trade and did not give rise to a capital gain, s. 47 ITA could not apply to average the ACB between the Purchased Shares and the Donated Shares. Therefore, the full $1,000,000 of ACB applied to the Purchased Shares, and upon their sale for $1,000,000, there was no gain and no income to report. However, the ACB of the Donated Shares was nil and the entire $1,000,000 capital gain was attributed back to Monsieur.