Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.

Overview of aggregation rule (p. 283)

In addition, the bump will be denied if distributed property or substituted property is acquired as part of the series by two or more persons (other than specified persons) who, if treated as one notional person, would constitute a specified shareholder of the target at any time during the series and before the parent last acquired control of the target. This means that in analyzing whether the bump is available, in addition to specified shareholders, other persons acquiring prohibited property and their share ownership of the target (if any) should be considered. For example, employees could receive shares of a parent, or be issued employee stock options, as a bonus in the context of an acquisition such that the shares or options would not constitute specified property. If such employees owned in aggregate 10 percent or more of a class of shares of the target prior to its acquisition, the bump would be denied. No connection or relationship between the persons acquiring prohibited property for the purpose of this aggregation rule is necessary.

Aggregation of different property types (p. 284)

Moreover, any category of distributed or substituted property acquired as part of the series must be taken into account and aggregated. For example, if the employees referred to above (employees receiving stock options) held in total 6 percent of the shares of the target, and other shareholders of the target that in total held 4 percent of the shares of the target prior to its acquisition also subscribed for shares of an upstream foreign corporation as part of the series, the bump would be denied. In those circumstances, two or more persons who, if treated as one notional person, would be a specified shareholder, would have acquired substituted property. There is also no specific quantification relevant in respect of the distributed property or substituted property acquired by an aggregation of persons. The aggregation of persons need not acquire shares or options in respect of the acquiror that total at least 10 percent of the value of the target (for example). The relevant measure is the percentage of the shares of the target held prior to the acquisition of control by persons acquiring prohibited property as part of the series.

Look-through to pre-AOC subscribing partners (p. 284)

This aggregation rule can be relevant where the ultimate acquiror is a partnership such as a private equity fund. If the partnership raised equity financing for the acquisition by requiring its partners to subscribe for additional partnership units, the bump would be denied if the partners in aggregate held 10 percent or more of the shares of the target before the acquisition of control and as part of the series. Since the partnership units would be substituted property, an aggregation of persons (that, if treated as one notional person, would be a specified shareholder) would acquire substituted property as part of the series….

2012-0451421R3: "part of the relevant series" (p. 284)

In a recently released technical interpretation, the Canada Revenue Agency (CRA) has provided some comfort on the issue of whether substituted property acquired by persons described in subclause 88(1)(c)(vi)(b)(ii) would occur as part of the series. Specifically, in the document, the CRA provided an opinion (but not a ruling) that the acquisition of shares or debt of a parent (and other relevant entities) by persons that would not be described in clause 88(1)(c)(vi)(b) if subclause (ii) was ignored (for example, if the persons were not specified shareholders) would "not necessarily" occur as part of the relevant series….

Non-aggregation of shares held by non-arm's length persons (p. 285)

For the purpose of the application of the aggregation rule in subclause 88(1)(c)(vi)(b)(ii), shares held within a non-arm's-length group are not aggregated. That is, in determining whether a person is a specified shareholder, shareholdings of all non-arm's-length persons are aggregated. If the 10 percent threshold is met, then all non-arm's-length group members are specified shareholders of the target. If the 10 percent threshold is not met within the non-arm's-length group, in applying the aggregation test in subclause 88(1)(c)(vi)(b)(ii ), only the shareholdings of the persons actually acquiring distributed or substituted property are aggregated (not the shareholdings of non-arm's-length persons)….

Purpose of bump denial rules (p. 276)

…Generally, the bump denial rules were introduced into the Act to prevent so-called back-door butterflies.

…A "purchase butterfly" facilitated the transfer of a portion of the assets of a corporation ("the transferor") to another corporation ("the transferee") in conjunction with the sale of the shares of either the transferor or the transferee without the incidence of corporate-level tax. A similar result could be obtained through a bump transaction pursuant to which a purchaser acquired a target corporation from its shareholder, bumped the tax cost of the target corporation's underlying non-depreciable capital property to its fair market value, and then sold the bumped property back to the shareholder without incurring corporate-level tax.

Look-through specified shareholder definition v. s. 88(1)(c.2)(ii) entity approach (p. 288)

As a result of the interaction of subparagraph 88(1)(c.2)(ii) and the definition of "specified shareholder," it is not clear whether or when the bump denial rules may apply in respect of an acquisition by a partnership.

…For example,… if two or more shareholders of the target (other than specified persons) whose shareholdings in the target were at least 10 percent in aggregate were members of a partnership and the fair market value of their aggregate partnership interests was at least 10 percent of the fair market value of all partnership interests, the bump would be precluded as a result of the combined operation of sub-subclause 88(1)(c)(vi)(B)(iii)(2) and subparagraph 88(1)(c.2)(ii). That is, a deemed corporation of which two or more persons (other than specified persons), if treated as one notional person, would constitute a specified shareholder, and would also constitute a specified shareholder of the target, would have acquired prohibited property….

Partnership not qualifying as specified person (p. 289)

[T]he rule in subparagraph 88(1)(c.2)(ii) that deems a partnership to be a corporation is applicable to the definition of "specified person" (subparagraph 88(1)(c.2)(i)). For example, a partnership (such as a private equity fund) that establishes an acquisition corporation should be a specified person because, as a deemed corporation, the fund should be related to the acquisition corporation….[W]here a fund establishes a toehold position in a target of at least 10 percent, causing it to constitute a specified shareholder prior to the acquisition of control of the target… [i]f the fund does not control the acquisition corporation, it likely will not constitute a specified person. Consequently, any acquisition of attributable property (other than specified property) by the fund would preclude the bump.

Dissent payment rights under a plan of arrangemnt as indebtedness (p. 292)

If the plan of arrangement ultimately receives shareholder approval, dissenting shareholders will be entitled to receive fair value for their shares at a later date. The dissent right represents indebtedness the value of which would be attributable to distributed property. If the plan of arrangement provides that the shares held by dissenting shareholders are to be acquired by the acquiror in exchange for payment, such indebtedness will constitute specified property since it will be issued by the parent as consideration for the acquisition of the shares of the subsidiary. In contrast, if the plan of arrangement provides that the shares held by dissenting shareholders are to be cancelled for payment, while such indebtedness will constitute substituted property, it will not be specified property. Thus, in the latter example, the acquisition of such substituted property (being the right of dissenting shareholders to receive fair value for their shares) will have to be taken into account in determining whether prohibited persons have acquired property….

Convertible debt as specified/determinable property (p. 293)

Proposed clause 88(1)(c.4)(ii)(B) provides that indebtedness that was issued for consideration that consists solely of money will be specified property. Thus, acquisition financing, assuming that it is issued solely for money, will constitute specified property. On its face, this proposal includes convertible debt or other participating debt issued solely for money as specified property. However, consideration should be given to whether such debt may constitute determinable property. [described in s.88(1)(c.3)(ii)] In such case, it may be prohibited property.