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.
DIVISIVE REORGANIZATION
QUESTION
For the purposes of paragraph 55(3)(b) of the Act, all of the properties owned by the particular corporation are of one type. Certain of the properties (the "target properties") are to be transferred by the particular corporation to its shareholders on a proportionate basis. In order to ensure that the reorganization that includes the transfer of the target properties by the particular corporation to its shareholders complies with the other requirements of paragraph 55(3)(b) of the Act, all of the properties owned by the particular corporation will be transferred to its shareholders on a proportionate basis (the "initial transfers") and, immediately after the initial transfers, the former shareholders of the particular corporation will transfer all of the properties so transferred to them, other than the target properties, to a corporation or to a partnership of which the former shareholders of the particular corporation are shareholders or partners, as the case may be (the "subsequent transfers").
Will the subsequent transfers preclude the reorganization that includes the initial transfers from complying with the requirements of paragraph 55(3)(b) of the Act?
DEPARTMENT'S POSITION
The reorganization that includes the initial transfers will not comply with the requirements of paragraph 55(3)(b) of the Act if that reorganization also includes the subsequent transfer to a corporation because, as a result of the initial and subsequent transfers, property of the particular corporation will be transferred, indirectly, in the course of the reorganization to a corporation that was not a shareholder of the particular corporation immediately before the reorganization. However, as indicated in our 1984 paper, where the subsequent transfer is to a corporate partnership of the transferees, the Department will rule favourably provided that the use of the partnership is not primarily designed to gain a tax advantage.
Whether or not the reorganization that includes the initial transfers also includes the subsequent transfers is a question of fact that can only be determined by reference to all of the facts and circumstances of a particular case. Generally, where a rollover provision of the Act (for example, subsection 85(1), 85.1(1), etc. of the Act) applies to the subsequent transfers and the initial transfers are made in contemplation of the subsequent transfers, it is the Department's view that the reorganization that includes the initial transfers will also include the subsequent transfers.
Prepared by: H.K. Tilak
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