11 January 1990 Income Tax Severed Letter EAC89976 - Take-over Bid by a "Shell" Corporation

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, 1990 Question #6 Prepared by: A.A. Cameron