CRA rules that s. 84.1 did not apply to a leveraged buyout financed by the target

The shares of Holdco - which holds real estate that it leases to Opco (carrying on a Canadian active business) – are held by three individuals: Ms. Y (an executive of Opco); Mr. Z (her son); and Mr. X (an unrelated investor);.

CRA ruled that s. 84.1 would not apply to transactions in which Ms. Y forms a Buyco (Newco), and uses money borrowed from Holdco (which, in turn, takes out a secured loan from its bank) to acquire Mr. X’s shares, with Newco then repaying the loan over time. CRA’s summary simply states, “Mr. X and [Newco] are dealing with each other at arm’s length” – and the body of the ruling letter noted that representations were submitted to this effect.

Neal Armstrong. Summary of 2021 Ruling 2020-0868661R3 under s. 84.1(1).