CRA accepts that public trading in the shares of a dividend recipient is not part of the same series

In connection with a group reorganization to consolidate income and deductions, Pubco will acquire a royalty interest from a general partnership (Partnership D) which is mostly owned by it and a wholly-owned subsidiary (Subco), with Pubco’s cumulative Canadian development expense account being boosted by the fair market value of the royalty, and with the fair market value proceeds proportionately reducing the CCDE of the partners (mostly it and Subco).

In connection with a subsequent transfer of Subco’s partnership interest in Partnership D to it, it will receive a deemed dividend from Subco. CRA ruled that the exclusion in s. 55(3)(a)(iv) would not apply to taint this deemed dividend notwithstanding that trading will occur in the shares of Pubco (viewed as the dividend recipient), and employees may exercise options. This may reflect the (appropriate) view that irrelevant transactions are not part of the same series. This ruling is more robust than 2013-0501811R3, where representations were given that (to management’s knowledge) the Pubco shareholders did not know about the loss consolidation transactions.

In what hopefully is a trite point, CRA also ruled that s. 97(2) applied to a contribution of property to a partnership (i.e., no equity consideration was given by the partnership).

A s. 88(1) ruling was given respecting the winding-up of a wholly–owned subsidiary without any apparent fussing about articles of dissolution not being filed for XX months.

Neal Armstrong. Summaries of 2014 Ruling 2013-0505431R3 under s. 55(3)(a), s. 66.2(5) – Canadian development expense – (e), s. 97(2) and s. 88(1).