CRA finds that a lower tier internal spin-off transaction accompanied by an upper-tier sale by a minority shareholder was subject to s. 55(2)
Holdco A has wholly-owned Opco spin off Opco’s real estate to a newly-formed subsidiary of Holdco A (and sister of Opco), namely, to Realco. The spin-off entails a cross-redemption of shares and resulting s. 84(3) dividends. In the course of the spin-off transactions, an unrelated shareholder of Holdco A (Holdco C) with a direct and indirect equity interest in Holdco A of around 16% sells its interest at fair market value (giving rise to gain) to arm’s length purchasers. Does s. 55(2) apply to the s. 84(3) dividends?
CRA indicated that assuming (as appeared to be the case) that the sale by Holdco C was part of the same series as the spin-off, and that the shares of Opco and Realco represented more than 10% of the value of what Holdco C was selling, then ss. 55(3)(a)(iii)(B) and 55(3)(a)(iv)(B) would “technically apply” to oust the s. 55(3)(a) exemption. Was CRA troubled that the deemed dividends at the Opco and Realco level did not affect the capital gains arising on the share sales by Holdco C? It stated:
[P]aragraph 55(3)(a) is intended to provide an exemption from the application of subsection 55(2) for certain dividends received in the course of related-party transactions. … [S]ince the other direct or indirect shareholders of Holdco A are not related persons, and the transactions … include a sale of Holdco A shares as part of the same series as the deemed dividends … the application of subsection 55(2) is operating as intended.
This approach illuminates why advisors sometimes seek s. 55(3)(a) rulings on internal spin-off transactions beneath a public company.
Neal Armstrong. Summary of 10 September 2018 External T.I. 2018-0772501E5 under s. 55(3)(a)(iii)(B).