Section 84.1 of the Income Tax Act is an anti-avoidance rule aimed at surplus stripping — extracting a corporation's retained earnings as a lower-taxed capital gain rather than as a dividend through non-arm's-length share transfers. It applies where an individual transfers shares of a corporation to another corporation with which the individual does not deal at arm's length, and the two corporations are connected after the transfer.
Where the rule applies, it can grind the paid-up capital of the shares received and deem part of the non-share consideration to be a dividend, removing the intended advantage. The cost base used in the calculation excludes amounts previously sheltered by the lifetime capital gains exemption. A separate exception exists for qualifying intergenerational business transfers that satisfy strict statutory conditions. The provision is a frequent consideration in estate freezes and family business succession.