A newly-launched public corporation ("Birchcliff") sought to access the losses and credits of a lossco ("Veracel"). A substantial subscription receipt offering by Veracel closed about one month before the implementation of a Plan of Arrangement under which the subscription receipts were converted into Class B common shares and then immediately converted on the amalgamation of Vercel with Birchcliff into common shares of the amalgamated corporation. As these investors received a majority voting equity interest in Amalco, the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided.
In rejecting a Crown submission that the Class B shareholders, by subscribing to buy those shares and by giving a proxy to a promoter of the transaction, formed a group of persons having acquired control of Veracel immediately prior to the amalgamation, Jorré J stated (at paras 100 and 101):
…[T]he entire structure of the transaction makes it impossible to exercise the proxy for Class B shares since those shares are replaced at the same time as they are created. …
At the most, the proxy links them as Class B shareholders to assist in implementing the plan of arrangement; it does not give them the ability to change the direction of Veracel and it does not give them control of Veracel.
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|Tax Topics - General Concepts - Sham||ephemeral transactions under a Plan of Arrangement were not a sham||205|
|Tax Topics - Income Tax Act - Section 245 - Subsection 245(3)||series of transactions found to be an avoidance transaction||288|
|Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)||raising share equity through a lossco immediately before its amalgamation was abusive||268|
The common shares of Opco are held as follows: A-20%; B-9%; C-10%; D-25%; E-10%; F-13%; G-13%. A, B and C are a related group as are E, F and G. D is unrelated to the others. All the shareholders act in concert to control Opco.
Will there be an acquisition of control of Opco if: (i) A acquires the shares of E, F and G; (ii) such shares instead are acquired by a Holdco wholly-owned by A; or (iii) A, B, C and D acquire the shares of E, F and G in proportion to their respective existing percentage ownership? CRA responded (TaxInterpretations translation):
[B]y acquiring the common shares…held by E, F and G, A would hold 56% of the common shares of Opco. Consequently, A would control Opco. In these circumstances, the jurisprudence recognizes that control by one person excludes simultaneous control by a group [citing Southside and Emory]… .
Respecting your second question…the control of Opco also would have been acquired by A. With his direct and indirect (through Holdco) interest in Opco, A would control Opco after the share transfer. …
Respecting your last question, the described acquisition of the shares…of Opco by A, B and C and would establish respective interests of 31%, 14%, 16% and 39%. …[T]he related group comprising A, B and C would have an interest of 61%... .That could ["pourrait"] represent a sufficient common link to indicate that a new group controlled Opco. In such determination, it also is necessary to take into account that a significant number of the shareholders of Opco (three out of seven) would cease to be such and the total interest of the departing shareholders would represent a significant percentage (36%) of the totality of the shares of Opco. This situation differs significantly from the case of a departing shareholder with little or no common link or common interest with the other shareholders with which it did not act in concert, and thus did not form part of the control group. …[I]t is quite likely ["fort probable"] that there would be a resulting acquisition of control of Opco… .
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|Tax Topics - Income Tax Act - Section 249 - Subsection 249(4)||reduction in CCPC shareholders from 7 to 4 likely would result in AOC||279|
Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.
Application where trustees vest all interests of a beneficiary (pp. 154-155)
Paragraph 251.2(3)(b) provides that variations or amendments to a trust and the exercise or failure to exercise a power do not give rise to a loss restriction event for the trust, provided that each majority-interest beneficiary or member of a majority-interest group of beneficiaries is affiliated with the trust immediately before the variation, amendment, or failure to exercise a power. This exception should apply when the trustees of a discretionary trust vest all of the income or capital interests in a beneficiary, because the trust is affiliated with the discretionary beneficiary immediately before the exercise of discretion pursuant to paragraph 251.1(4)(d).