Principal Issues: Each of two brothers owns all of the issued and outstanding shares of the capital stock of a holding corporation ("Holdco 1 and "Holdco 2"). More specifically, each brother owns Holdco common shares and Holdco preferred shares. The preferred shares have a fair market value ("FMV") and an adjusted cost base ("ACB") of approximately $XXXXXXXXXX . The paid-up capital ("PUC") of theses preferred shares is nominal. The high ACB is the result of a previous crystallisation of the capital gains deduction by the brothers. Each of Holdco 1 and Holdco 2 owns 50% of the issued and outstanding shares of an operating corporation ("Opco"). First, each of Holdco 1 and Holdco 2 would redeem its preferred shares owned by the brothers. As a result and pursuant to subsection 84(3), each of the brothers would be deemed to receive a dividend. This dividend would be a taxable dividend. As a result of the redemption of shares, each brother would also realize a loss that would be denied under paragraph 40(3.6)(a). The amount of such loss would be added to the ACB of the common shares of the capital stock of Holdco 1 and Holdco 2 held by the brothers under paragraph 40(3.6)(b). Each of the brothers would then dispose of the common shares of the capital stock of Holdco 1 or Holdco 2, as the case may be, in favour of another corporation ("NewHoldco 1" and "NewHoldco 2") in consideration for preferred shares having a FMV, ACB and PUC of $XXXXXXXXXX , and common shares of the capital stock of the NewHoldcos. Finally, each of NewHoldco 1 and NewHoldco 2 would redeem its preferred shares owned by the brothers for cash.
Position: Section 84.1 would technically not apply in this file. However, if a similar file was presented in the context of an income tax ruling request, such a file would be presented to the GAAR Committee, XXXXXXXXXX
Reasons: Wording of the Act.