Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
6(a) Take-over Bid by a "shell" Corporation
Question
A "shell" company (the Acquirer), having no assets, completes a Take-Over Bid, which is share-for-share exchange under subsection 85.1(1), whereby all shares of Target are acquired in exchange for like shares of the Acquirer and Target are related corporations by virtue of the fact that both corporations are controlled by the same person.
All shareholders of Target become shareholders of the Acquirer with no change in economic circumstances.
Coincident with completion of the Take-Over Bid, there is a transfer of assets by Target to a wholly-owned subsidiary, with an election under subsection 85(1) to defer the gain on the assets transferred, and share consideration is taken back. As part of these series of transactions, wholly-owned subsidiary then redeems a portion of those shares, triggering a deemed dividend pursuant to subsection 84(3).
There are no dividends to the minority shareholders in Target.
Does subsection 55(2) apply in these circumstances?
Answer
Provided that all shares of the Acquirer are owned by Target before the series of transactions that includes the Take-Over Bid commences, the provisions of subsection 55(2) of the Act would not be applied in this situation. However it should be noted that the provisions of subsection 85.1(1) of the Act are not available to the controlling shareholder by virtue of paragraph 85.1(2)(a) of the Act.
(b) Disposition of Property
Question
A Parent transfers assets to its wholly-owned subsidiary in exchange for share consideration, electing under subsection 85(1). The transfer if followed by a redemption of a portion of those shares which results in a substantial deemed dividend pursuant to subsection 84(3). Coincidentally, there is a disposition by Parent of property with a nominal value to an arm's length party which is part of the series of transactions including the above transfers. Wholly-owned subsidiary has no safe income.
Does subsection 55(2) apply, and if so what result?
Answer
Since there has been disposition of property to a person with whom Parent deals at arm's length for the purposes of the Act, the provisions of subsection 55(2) of the Act would apply provided the above constitutes a single series of transactions. The amount of the dividend deemed by subsection 84(3) to be received by the Parent shall be deemed by paragraph 55(2)(b) to be proceeds of disposition of the shares redeemed by the subsidiary.
Tax Executive Institute Meeting - January 11, 1990Question #6Prepared by: A.A. Cameron
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