S. 84(2) generally should not apply to a hybrid sale transaction

Hybrid transactions typically are engaged in where some of the shareholders of Target (a small business corporation) wish to utilize the capital gains exemption whereas the purchaser wishes to achieve a step-up in the tax basis of Target’s assets. The transactions might entail the sale of some Target shares to the purchaser to utilize capital gains exemption, sale of Target assets (preferably mostly goodwill rather than appreciated real estate in light of Part IV tax considerations) to the purchaser and redemption of Target shares held by purchaser.

CRA seems to accept that s. 84(2) would not apply to recharacterize the proceeds as dividends from Target where the vendor shareholders and the purchaser are dealing at arm's length and, essentially, the purchaser is using its own funds to purchase Target's shares.

In a hybrid transaction in which a redemption of the shares will trigger a deemed dividend, an exemption in s. 191(4) will treat the deemed dividend as an excluded dividend, so as to exempt it from Part VI.1 tax, where the specified amount for which the shares are redeemed does not exceed the fair market value of the consideration for which they were issued.  Although at the 1989 CTF Roundtable, CRA indicated that the specified amount must be a dollar amount and cannot be fixed at a later date, or be subject to a price adjustment clause or described by way of a formula, "in a private ruling, the CRA accepted a redemption amount that was subject to a price adjustment clause where a separate specified dollar amount was also provided."

Neal Armstrong.  Summaries of Charles P. Marquette, "Hybrid Sale of Shares and Assets of a Business," Canadian Tax Journal, (2014) 62:3, 857 – 79 under s. 84(2) and s. 191(4).