CRA accommodates the s. 90(2) “pro rata” requirement in a foreign divisive reorganization

Canco holds, say, 25% of the shares of FA1 directly and 75% of its shares through a grandchild foreign affiliate (Forsub2).  In using a foreign divisive reorganization to create a new Finco for the group ("Newco"), 25% of FA1’s assets (being loans to other FAs) are transferred by operation of law to Newco and Canco’s shares of FA1 become shares of Newco.  CRA confirmed that s. 90(2) deems there to be a dividend on the FA1 shares in the amount of the transferred loans.

Although somewhat similar to Q.2 at the 2013 IFA Round Table (where in effect Forsub2 started off as a 100% rather than 75% shareholder of FA1), this one requires mental gymnastics: a transfer of the loans effectively 100% in favour of Canco is treated as a pro rata distribution on the shares of FA1 held by both shareholders.

Neal Armstrong.  Summary of 2013 Ruling 2012-0463611R3 under s. 90(2).