CRA rules on a s. 55(3)(a) spin-off that includes a s. 86 exchange of identical shares

CRA ruled on the s. 55(3)(a) spin-off by DC (held by three siblings through holding companies and, in turn, holding three Opcos as well as three Landcos, one of them 50% owned by a third party) of the three Landcos to newly-formed TC held by the same holding companies. This ruling letter departed somewhat from the expected.

First, although no s. 86 ruling was given, the letter described a preliminary s. 86 reorganization to create the DC special shares that could then be transferred on a s. 85(1) rollover basis by the Holdcos to TC. The s. 86 reorganization entailed an exchange of the old common shares (and old special shares) for “new” common shares and the new special shares, with the new common shares apparently having the same attributes as the old common shares. For s. 86 to apply, all the old shares must be disposed of. CRA has indicated (e.g., in 2013-0495821C6 and 2004-0092561E5) that there has been no disposition if the “new” common shares have the same attributes as the old. Accordingly, it is common for there to be some change in the share attributes, e.g., amending the old shares immediately before the exchange so that they have two votes per share (2014-0558831R3) or according the new shares an explicit right to receive quarterly financial statements (2013-0491651R3). Is this sort of thing now unnecessary?

Second, there is a representation, that:

TC does not intend to sell or otherwise transfer any of the assets it will receive in the course of the Proposed Transactions.

This does not appear to be a requirement for a s. 55(3)(a) spin-off. Was this offered up by the taxpayer, or did Rulings insist on it?

Neal Armstrong. Summary of 2020 Ruling 2020-0854401R3 under s. 55(3)(a).