CRA requires that a transfer of an FA with exempt earnings by FA Holdco to Can Subco occur at less than the shares’ FMV
A foreign affiliate (New FA) of a Canadian corporation (ACo) transferred all the shares of FA1 to a Canadian-resident subsidiary (BCo) of ACo in consideration for a note of BCo whose amount equalled the sum of the relevant cost base of the FA1 shares and the net surplus (being exempt surplus) of FA1 (such sum, the “Transfer Amount”). BCo then used share subscription proceeds received by it from ACo to repay the note, with New FA then distributing that cash to ACo and with ACo electing under Reg. 5901(2)(b) for the distributions to come out of New FA’s pre-acquisition surplus. CRA ruled inter alia as to the application of s. 93(1.11) to effectively convert part or all of the capital gain of New FA otherwise realized on its disposition of its FA1 shares into an exempt surplus dividend.
The ruling letter states:
The purpose for the transfer by New FA of its FA1 Shares to BCo … occurring at the Transfer Amount as opposed to occurring at their FMV, was not to confer a benefit on a person, but rather to address certain policy concerns of the CRA by restricting BCo’s aggregate ACB of its FA1 Shares to the Transfer Amount.
Having insisted that the transfer of the FA1 shares by New FA to BCo occur at the Transfer Amount rather than the higher FMV, CRA obligingly issued rulings that none of the usual conferral-of-benefit provisions applied.