The surplus recasting rule in Reg. 5907(2.02) can extend to non-rollover reorganizations

Reg. 5907(2.02) recasts exempt earnings a taxable earnings if they were generated in an avoidance transaction disposition to a non-arm’s length person or partnership. although the main target may have been be intercompany excluded-property transfers, the rule might also encompass a dividend in kind paid by an FA, a non-QLAD (qualifying liquidation and dissolution) liquidation; an FA-to-FA liquidation or merger that is not structured as a rollover - and it also might apply to an asset-packaging rule described in Reg. 5907(2.01) in circumstances where surplus maximization was a strong motivator. Moreover, Finance's technical notes suggest the dubious proposition that it could apply to exempt earnings generated from a deemed disposition of active business assets under the fresh start rules.

Neal Armstrong. Summary of Paul Barnicke, Melanie Huynh, "Exempt Earnings Anti-Avoidance," Canadian Tax Highlights, (Canadian Tax Foundation), Vol. 23, No. 12, December 2015, p. 5 under Reg. 5907(2.02).