Brent Kern Family Trust v. Canada (SCC – Leave Application Dismissed – April 9, 2015).
Précis: On April 9, 2015 the Supreme Court of Canada released its decision dismissing the application of the Brent Kern Family Trust for leave to appeal from a decision of the Federal Court of Appeal holding that the attribution rule in subsection 75(2) of the
Income Tax Act does not apply to sales for valuable consideration.
Decision: The underlying facts are set out in the Tax Court decision:
http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/98264/index.do 
[7] Counsel greatly shortened the proceedings through two Statements of Agreed Facts applicable to each phase of the hearing. The material facts relevant to this appeal concerning the transaction structure are:
1. From 1997 to July 2004 Mr. Kern was originally the sole shareholder and controlling mind of Wilf’s Oilfield Services (1997) Ltd. (“OPCO”);
2. An Alberta limited company, 905558 Alberta Ltd., was created in November of 2000 (“Holdco”);
3. Two trusts were created on July 30, 2004: the Appellant, the Brent Kern Family Trust (the “Brent Trust”), and the Kern Family Trust (“the Kern Trust”);
4. Mr. Kern ordered his affairs such that he became a preferred shareholder in OPCO and Holdco. Mr. Kern and OPCO were beneficiaries, along with other family members in the Brent Trust, whereas Holdco, Mr. Kern and family members were beneficiaries in the Kern Trust;
5. Through share exchanges, the common shares previously held by Mr. Kern in OPCO and Holdco, were exchanged for preferred shares; and
6. For valuable consideration, OPCO common shares were sold to Kern Trust and similarly Holdco’s shares of OPCO were sold to the Appellant, Brent Trust.
The dividends that were at issue were paid in 2005 and 2006.
[8] The material facts concerning the reassessed transactions, which occurred after the creation of the structure, described in paragraph 7 above are essentially the same in each of the two reassessed taxation years, namely:
2005
1. OPCO declared a dividend in favour of Kern Trust for $245,000.00;
2. Kern Trust allocated $245,000.00 to Holdco;
3. Holdco declared a dividend on the common shares owned by the Brent Trust in the amount of $245,000.00;
4. The Appellant contends that subsection 75(2) applies and deems the dividend of Brent Trust to be received by OPCO (the “Attributed Dividend”), because OPCO is the person which transferred the property to Brent Trust while OPCO was an enduring potential beneficiary;
5. On that basis, the Brent Trust reported no income from the declared dividend on its T-3 trust income return;
6. This Attributed Dividend in OPCO’s hands was a dividend received by a corporation pursuant to section 112 of the Act which section affords the non-taxable payment of inter-corporate dividends; and
7. The amount of the dividend, $245,000.00 (“Dividend Amount”) was allocated and paid to Mr. Kern, who in turn lent the Dividend Amount to OPCO.
2006
Similar transactions and income tax reporting occurred in 2006, save and except that the amount of the 2006 dividend declared was $155,000.00 and through incremental reduction, the amount ultimately lent to OPCO by Mr. Kern was $151,591.99.
Well after the planning was implemented, in 2012 the Federal Court of Appeal in
Sommerer v. The Queen came down with a decision that subsection 75(2) did not apply to transfers of property for valuable consideration. The Tax Court applied
Sommerer and dismissed the appeal.
The Federal Court of Appeal dismissed the appeal with costs on October 14, 2014. The application for leave to appeal to the Supreme Court was dismissed with costs.
Source: Supreme Advocacy Letter #19
http://supremeadvocacy.ca/ 