CRA finds that the testing of a NAL relationship regarding the ACB grind under ss. 84.1(2)(a.1) and 84.1(2)(a.1)(ii) occurs when the shares are acquired, rather than when transferred as described in s. 84.1

In 2020, Mr. X married the daughter of Mr. Y and also acquired the shares of PME Inc. from Mr. Y (who claimed the capital gains exemption). In 2022, Mr. X ceased to be related to Mr. Y by virtue of the death of his spouse or the rupture of their marriage.

If in 2024, Mr. X transferred his shares of PME Inc. on a s. 85 rollover basis to his holding company, would s. 84.1 reduce the ACB of his shares of PME Inc., or is the determination of the non-arm’s length relationship under s. 84.1 to be made, not in 2020, but at the time it is engaged (in 2024 in this rollover transaction)? CRA stated:

At the time Mr. X acquired the shares of the capital stock of PME Inc., there was a non-arm's length relationship between Mr. X and Mr. Y, and the CGD was claimed by Mr. Y in respect of that disposition. There was therefore a non-arm's length relationship both at the time referred to in paragraph 84.1(2)(a.1) and at the time referred to in subparagraph 84.1(2)(a.1)(ii). Consequently, for the purposes of applying section 84.1 to the sale to his holding company, the ACB of the shares of the capital stock of PME Inc. held by Mr. X must be reduced by the CGD claimed by Mr. Y.

Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.12 under s. 84.1(2)(a.1)(ii).