Hybrid sales transactions still may be worthwhile

Although hybrid sales transactions (in which individual shareholders of a target Canadian –controlled private corporation utilize the capital gains exemption by exchanging a portion of their shares for preferred shares, which then are sold to the arm’s length purchaser, with the purchaser retracting the prefs and effecting an asset purchase payable in part by set-off against the redemption note) are less attractive following the repeal of the eligible capital property regime, they can still offer significant benefits if the vendor CCPC has sufficient funds or high-basis assets. The authors provide a numerical example showing an integrated tax rate of 26.0% on a hybrid sale in Alberta v. 29.5% for an asset sale, and state:

If the vendor has enough cash on hand or high-basis assets, it can successfully recover its RDTOH balance and retain the full benefit of hybrid sales (on an integrated basis)….

[In this example] the full recovery of RDTOH is possible because the vendor has $2 million of high-basis capital assets….

In Alberta, if one assumes that there is no recapture on the depreciable property, a rule-of-thumb breakeven point is one dollar of basis or cash per dollar of CGE claimed. For example, if a single exemption of $835,000 is claimed, the vendor should fully recover RDTOH if it has cash or basis in its capital assets of at least $835,000….

Neal Armstrong. Summary of Matthew Clark, Josh Proulx and Rami Pandher, "Hybrid Sales," Canadian Tax Highlights (Canadian Tax Foundation), Vol. 25, No. 5, May 2017, p. 4 under s. 110.6(2.1).