Finance is not contemplating any amendments to fix the problems with the Pt IV tax refund exception to s. 55(2)

Comments on the s. 55(2) rules include:

• Given that CPL Holdings found that a creditor-proofing transaction, which had the effect of significantly reducing the capital gain that would have been realized on the disposition of shares, did not have that purpose, the position of CRA in 2015-0623551C6, that creditor-proofing transactions offend the new purpose tests, is questionable.
• The mechanics of the amendment to the Part IV tax exception (so that it is not available even if the Part IV tax is refunded as a consequence of the payment of a dividend to an individual) create a host of issues that may not have been anticipated by the Department of Finance (including over-integration or under-integration). “However, the department is now fully aware of these issues and has indicated that it currently has no intention of making any further amendments to the provision, as suggested in the submissions by the joint committee.”
• In 2015-0610681C6, CRA indicated that it would challenge a preliminary transaction segregating pre-existing ACB from shares to be subsequently redeemed (i.e., shunting ACB away from shares that are being redeemed in reliance on the s. 55(3)(a) exception). However, what if a dirty s. 85 reorg had resulted in common shares of Opco, with an FMV of $1,000,000 and an ACB of $100,000, being converted into preferred shares with an ACB and FMV of $100,000 and new common shares with a nil ACB and an FMV of $900,000? Quaere whether it would be acceptable to engage in a preliminary cost base consolidation transaction to ensure that a redemption of the preferred shares would result in the disappearance of only $90,000 of ACB.
• CRA has not made any specific comments regarding the potential application of the new s. 55 to PUC-streaming transactions. In its simplest form, PUC of the class of shares to be redeemed, in reliance on the s. 55(3)(a) exception, can be reduced with a corresponding increase in the PUC of another class.

Neal Armstrong. Summaries of Doron Barkai and Alexander Demner, "Dealing with New Subsection 55(2): Issues and Strategies", 2016 Conference Report (Canadian Tax Foundation), 6:1–56 under s. 55(2.1)(b), s. 55(2.1)(c), s. 55(2.3), s. 55(2), s. 55(3)(a), s. 248(10) and s. 55(1) – safe income determination time.