CRA confirms an anomaly under the current s. 84.1(2)(e) rule

S. 84.1(2)(e) as it currently reads deemed a taxpayer who had disposed of qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation (the “subject shares”) to a purchaser corporation to be dealing at arm’s length with it if the purchaser corporation was controlled by one or more children or grandchildren of the taxpayer who were 18 or older and if the purchaser corporation did not dispose of the subject shares within 60 months of their purchase. In addition, s. 84.1(2.3)(a)(i) provided that if, otherwise than by reason of death, the purchaser corporation disposed of the subject shares within 60 months of their purchase, s. 84.1(2)(e) was deemed never to have applied.

CRA confirmed that on this wording, the effect of the purchaser corporation thereafter amalgamating (within the 60-month period) with the “subject corporation” was that, pursuant to s. 87(11)(a), the parent corporation would be deemed to have disposed of the subject shares so that the exclusion in s. 84.1(2.3)(a)(i) would be engaged. CRA considered such loss of the safe harbour to be anomalous, and had notified Finance accordingly.

The draft legislation subsequently released with the March 28, 2023 Budget would substantially amend these rules.

Neal Armstrong. Summary of 15 February 2023 External T.I. 2022-0953991E5 F under s. 84.1(2)(e).