Case Update: Laplante v. Canada, 2018 FCA 193 (Multiplying Capital Gains Exemptions)

Key Takeaway

The decision in Laplante highlights a major pitfall that tax practitioners should be mindful of when advising clients on structures to multiply the lifetime capital gains exemption among family members. Family members who are allocated a capital gain to claim the lifetime capital gains exemption should be entitled to the money: they cannot merely act as an agent to facilitate a tax benefit for someone else.


  • The Taxpayer, Mr. Laplante, sold shares in his company, DTI. DTI had the typical estate freeze legal structure: Mr. Laplante and his family owned its shares through a family trust (DL Trust).
  • The capital gain relating to the shares owned by DTI Trust were allocated and distributed to its Beneficiaries (Mr. Laplante’s family) so that each can claim the lifetime capital gains exemption.
  • Beneficiaries gave the entirety of the money distributed to them from the DL Trust to Mr. Laplante.
  • The beneficiaries had to pay the Alternative Minimum Tax (“AMT”) due to the lifetime capital gains exemption; Mr. Laplante reimbursed the beneficiaries for AMT.
  • The CRA re-assessed Mr. Laplante and included the capital gains allocated to the beneficiaries on the basis that this arrangement was a “simulation” under section 1451 of the Quebec Civil Code (“QCC”).
  • A simulation is when the parties agree to express their true intent in a secret contract rather than the actual legal contract (i.e., what the parties wish to make others believe). In such cases, the secret contract (called the “counter letter”) prevails over the actual contract. This is similar to the sham doctrine in common law.

Diagram of Structure

Issue Before the Court

Was the nature of this arrangement between Mr. Laplante and the Beneficiaries a simulation? If this is the case, should the secret contract prevail to ascribe the capital gains to Mr. Laplante rather than the Beneficiaries?


The Tax Court of Canada (TCC) held that this transaction is a simulation and ruled in favour of the CRA. The Federal Court of Appeals upheld the TCC ruling. Mr. Laplante’s capital gains multiplication plan failed.


Following the principle laid out by the Supreme Court of Canada in Shell Canada that the courts are not bound by the designation given to a legal transaction if it does not adequately reflect the true legal effects of the transaction.

The TCC found that a simulation existed under the QCC based on the arrangement exhibiting the two elements that must be present to conclude that a simulation exists: material element and intentional element. We summarize the courts’ reasons below.

ElementsDescriptionTCC Conclusion
1. Material elementMaterial element is the existence of two distinct acts: the “apparent act,” which contains what the parties wish to make others believe, and the “secret act,” which expresses the true agreement.


The beneficiaries, “behind closed doors” had a secret agreement; they would give the money received from DT trust to Mr. Laplante (i.e., the secret agreement).

In reality, the secret contract was in the nature of a “Mandate” under CCQ 2130 where the beneficiaries were acting as agents under Mr. Laplante’s power.

2.  Intentional elementThe will to deceive the third parties about the existence or the content of a convention.The threshold to fall under this element is not as high as it seems. An intentional element is established by demonstrating the existence of a secret contract not disclosed to the CRA. There does not need to be an express intent to deceive.

Mr. Laplante and the Beneficiaries did not disclose the secret agreement (i.e., that the Beneficiaries would return the money distributed to them from DL Trust to Mr. Laplonte) to the CRA. Therefore, an intentional element is present.


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