Canco owns 100% of the shares of FA1 and FA1 owns 100% of the shares of FA2. FA3 is either formed with nominal assets by FA1 or comes into existence as part of the legal division of FA2 into two legal entities pursuant to the corporate laws of the foreign country where FA2 and FA3 are resident. As a result of the reorganization, FA2 transfers some of its assets for no consideration to FA3 and FA3 issues shares to the shareholders of FA2 pro rata based on the number of shares they hold in FA2. As FA1 is FA2's sole shareholder, FA1 becomes the sole shareholder of FA3. The legal paid up capital of the shares of FA2 is reduced by the book value of the transferred assets, and the legal paid up capital of the shares of FA3 is equal to such book value.
CRA agreed that there is a pro rata distribution for purposes of draft s. 90(2) in this situation so that the exception under s. 15(1)(b) for dividends would apply. CRA further indicated that it would come to the same conclusion if a Canadian corporation were the holding company rather than a non-resident company (FA1).