CRA confirms that the s. 95(2)(c) rollover can apply on a dropdown of shares made to an LLC as a contribution of capital rather than for “share” consideration

FA1 transfers all of its shares of FA2 to another non-resident subsidiary of FA1, which is a non-share corporation (“FA3”), as a capital contribution, i.e. no new member interests are issued by FA3. S. 93.2(3)(a) deems FA3 to have issued shares to FA1 in respect of the transfer if the fair market value of a class of its shares (i.e., the FMV of its membership interest) is increased as a result of the transfer.

CRA noted that, as a technical matter, s. 93.2(3)(a) does not appear to go quite far enough so as to permit the particulars of the rollover formula in s. 95(2)(c) to be filled in. However, CRA went on to find that despite these “textual challenges,” the s. 95(2)(c) rollover would be available provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares.

Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 10, 2016-0642101C6 under s. 93.2(3).