28 March 2003 External T.I. 2002-016665

Two shareholders collectively holding 24% of the shares of Opco transfer their shares of Opco to a newly-incorporated holding company ("Xyco") and Xyco purchases shares held by two of the other shareholders for a non-share consideration. CCRA indicated that the shareholders of Opco

"Appear to be acting in concert to direct Xyco in connection with the sale of the shares of Opco. While there may be arm's length bargaining concerning the price to be paid for the shares of Opco, the shareholders appear to be acting in a highly independent manner to avoid tax in the transactions. In our view, Xyco may be viewed as merely accommodating the shareholders by structuring the transactions in this manner, since it does not appear to have any independent interest in acquiring the shares of Opco. Consequently, section 84.1 may apply to the above-described situation".

Mr. and Mrs. A, and Mr. and Mrs. B, hold 26%, 12%, 26% and 12%, respectively of the common shares of a small business corporation (“OPc”) and two unrelated individuals (X and Y) each hold 12% of the Opco shares. X and Y incorporate “Xyco,” roll their Opco shares into Xyco and Xyco uses a bank borrowing to fund the purchase of the Opco shaes of Mrs. A and Mrs. B. If Xyco and Opco do not amalgamate, Xyco will service its debt through dividends on its Opco shares.

In indicating that s. 84.1 may apply, CRA stated:

While there may be arm's length bargaining concerning the price to be paid for the shares of Opco, the shareholders appear to be acting in a highly interdependent manner to avoid tax on the transactions. In our view, Xyco may be viewed as merely accommodating the shareholders by structuring the transactions in this manner, since it does not appear to have any independent interest in acquiring the shares of Opco.