12 August 2010 External T.I. 2010-0370551E5 F - Tuck Under Transaction - Tremblay Decision

Principal Issues: Substantially all of the assets of a corporation ("Holdco") would consist in an interest of 40% in the common shares of the capital stock of an operating corporation ("Opco"). A non resident person ("Non-Resident") would own all of the issued and outstanding shares of the capital stock of Holdco. Non-Resident would also own 60% of the common shares of the capital stock of Opco. In order to simplify the corporate structure, Non-Resident would like to hold directly the shares of the capital stock of Opco owned by Holdco. For administrative reasons, Non-Resident does not want to amalgamate Opco with Holdco. Instead, Non-Resident would transfer his shares of the capital stock of Holdco to Opco, in consideration for the issuance by Opco of preferred shares of its capital stock. Holdco would then be wound-up into Opco.

Position: General comments provided. The Tremblay decision contains a strong dissent based on the Smythe decision rendered by the Supreme Court of Canada. Furthermore, the general anti-avoidance rule was not invoked in the Tremblay case. Consequently and despite the Tremblay decision, the CRA will continue to challenge abusive surplus stripping arrangements, including those taking the form of "tuck under" transactions. However, it is possible that, in appropriate circumstances, subsection 84(2) or 245(2) would not apply to a "tuck under" transaction. For example, the CRA maintains its long standing position that subsections 84(2) and 245(2) should not apply to "tuck under" transactions carried out in the context of "safe income extraction" scenarios.

Reasons: Wording of the Act and case law.

Principal Issues: Substantially all of the assets of a corporation ("Holdco") would consist in an interest of 40% in the common shares of the capital stock of an operating corporation ("Opco"). A non resident person ("Non-Resident") would own all of the issued and outstanding shares of the capital stock of Holdco. Non-Resident would also own 60% of the common shares of the capital stock of Opco. In order to simplify the corporate structure, Non-Resident would like to hold directly the shares of the capital stock of Opco owned by Holdco. For administrative reasons, Non-Resident does not want to amalgamate Opco with Holdco. Instead, Non-Resident would transfer his shares of the capital stock of Holdco to Opco, in consideration for the issuance by Opco of preferred shares of its capital stock. Holdco would then be wound-up into Opco.

Position: General comments provided. The Tremblay decision contains a strong dissent based on the Smythe decision rendered by the Supreme Court of Canada. Furthermore, the general anti-avoidance rule was not invoked in the Tremblay case. Consequently and despite the Tremblay decision, the CRA will continue to challenge abusive surplus stripping arrangements, including those taking the form of "tuck under" transactions. However, it is possible that, in appropriate circumstances, subsection 84(2) or 245(2) would not apply to a "tuck under" transaction. For example, the CRA maintains its long standing position that subsections 84(2) and 245(2) should not apply to "tuck under" transactions carried out in the context of "safe income extraction" scenarios.

Reasons: Wording of the Act and case law.

XXXXXXXXXX
									2010-037055
									S. Prud'Homme
									(613) 957-8975
August 12, 2010

Dear Sir,

Subject: Request for technical interpretation - "tuck under" operation - Subsection 84(2)

This is in response to your letter of June 8, 2010, in which you requested our opinion regarding the potential application of subsections 84(2) and 245(2) of the Income Tax Act (the "Act") in the context of a particular situation involving a "tuck under" transaction.

Unless otherwise indicated, any statutory reference in this letter is to a provision of the Act.

It appears to us that the situation described in your email and hereinafter summarized could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and in light of the fact that your letter only very briefly describes a hypothetical particular situation, our comments below may not be fully applicable in a particular situation.

1) Particular Situation

You provided the situation described below (the "Particular Situation") as part of your request for a technical interpretation.

(a) Substantially all of the assets of a private corporation incorporated in Canada ("Holdco") consist of a 40% interest in the common shares of the capital stock of another private corporation incorporated in Canada ("Opco") carrying on a business.

(b) The non-resident shareholder (the "Non-Resident") holds all of the issued and outstanding shares of the capital stock of Holdco, as well as the balance (i.e. 60%) of the issued and outstanding common shares of the capital stock of Opco. Those shares held by the Non-Resident constitute capital property of the Non-Resident.

(c) In order to simplify the corporate structure, Non-Resident wishes to hold directly the shares of the capital stock of Opco held by Holdco. However, for what is identified as "administrative" reasons, Non-Resident does not wish to achieve this objective through an amalgamation of Opco with Holdco.

(d) Instead, Non-Resident transfers the shares of the capital stock of Holdco that it holds to Opco in consideration for Opco issuing redeemable preferred shares of its capital stock. The capital gain realized by Non-Resident in connection with the disposition of the shares of the capital stock of Holdco would not be taxable in Canada because of the application of a tax treaty.

(e) Holdco is eventually wound up into Opco.

(2) Your comments on the Particular Situation

You first referred to the decision The Queen v. Vaillancourt-Tremblay et al, 2009 TCC 6; 2010 FCA 119 (the “Tremblay” case), where the Federal Court of Appeal upheld what, in your view, was the decision of the Tax Court of Canada's that subsection 84(2) did not apply in the context of a "tuck under" transaction. However, you indicated that the general anti-avoidance rule was not at issue in that case.

You are of the view that subsection 84(2) would not be applicable in the Particular Situation to deem Holdco to have paid, and Non-Resident to have received, a dividend. Your position on this point is based on the decision in Tremblay, as well as on the fact that Non-Resident received as consideration, for the transfer of the shares of the capital stock of Holdco, preferred shares of the capital stock of Opco that were not identical to the shares of the capital stock of Opco held by Holdco before the "tuck under" transaction was effected.

You are also of the view that the general anti-avoidance rule would not be applicable in the context of the Particular Situation.

(3) Your Question regarding the Particular Situation

You wish to know if the CRA shares your interpretation of subsections 84(2) and 245(2) in the context of the Particular Situation.

(4) Our Comments on this Issue

Your letter only briefly describes the Particular Situation. Accordingly, we are unable to take a definitive position on the application of subsections 84(2) and 245(2) in this context. However, we can make the following general comments.

First you referred to the Tremblay case. In this regard, it should be noted that the decision of the Federal Court of Appeal in the Tremblay case included a dissent of Chief Justice Blais, who found that subsection 84(2) applied on the basis inter alia of the decision of the Supreme Court of Canada in Smythe v. M.N.R., [1970] S.C.R. 64.

Furthermore, and as you yourself point out, section 245 was not raised in the Tremblay case.

Consequently, and despite the Tremblay decision, the CRA intends to continue to challenge surplus stripping situations that are considered abusive, including those in the form of "tuck under" transactions, in particular by reviewing the potential application of subsections 84(2) and 245(2) in particular situations.

That said, it is possible that, under appropriate circumstances, "tuck under" transactions may be performed without triggering the application of subsections 84(2) and 245(2). For example, the CRA maintains its long-standing position that subsections 84(2) and 245(2) should not apply to a "tuck under" transaction to extract the safe income on hand relating to the interest of a corporate taxpayer in a target corporation. However, and on the basis of the foregoing, the CRA is of the view that the Tremblay decision cannot be interpreted as having the effect of automatically validating all other types of "tuck under" transactions.

In conclusion, we would be prepared to examine the Particular Situation in the context of a request for advance rulings.

We hope that our comments are of assistance.

Best regards,

Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.