The interposition of a Middleco in a spin-off transaction can put it back onside s. 55(3)(a)

Suppose that Opco is owned on an 85-15 basis by two arm’s-length shareholders, Aco and Bco. If Opco wishes to spin off the real property used in its active business to a Newco owned in the same proportions by Aco and Bco, the s. 55(3)(a) exception will not be available since Bco, which is not related to either Opco or Newco, has a significant increase in its interest in Newco occur contrary to s. 55(3)(a)(ii) and (v).

Instead suppose that there is a preliminary step under which Aco and Bco transfer their shares of Opco to newly-incorporated Middleco on an s. 85(1) rollover basis. Then, Opco spins off the real estate to a Newco incorporated by Middleco. Done this way, the spin-off would come within the s. 55(3)(a) exception given, inter alia, the relieving effect of the rule in s. 55(3.01)(g). See also 2015-0570021E5 F.

­­­­­­­­­­­­­­­­­­­­­­­­Neal Armstrong. Summary of David Carolin, Manu Kakkar and Boris Volfovsky, “Tax Alchemy and Paragraph 55(3.01)(g): Converting a 55(3)(b) Divisive Reorganization into a 55(3)(a) Related-Party Butterfly,” Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 7 under s. 55(3.01)(g).