Subsection 55(3.01)

Paragraph 55(3.01)(g)

Administrative Policy

2015 Ruling 2015-0605901R3 F - Présomption de gain en capital

separation of real estate assets beneath new holdco formed by unrelated shareholders

Background. Opco, a CCPC, in addition to holding residential condos on upper floors, holds the “Vacant Premises” for the purpose of leasing them under long-term commercial leases, as well as storage lockers for use by the residential condos (the “Lockers”). The only issued and outstanding shares of Opco are Class A shares which are held by Holdco 1 (held by Holdco A, which is controlled by A and his mother), Holdco 2 (held by Holdco B, which is wholly–owned by B, and by Holdco C, which is wholly-owned by C), Holdco 3 and Opco 3 (each held by Holdco D, which is wholly-owned by D), and Holdco 4 (wholly-owned by Trust E, a discretionary personal trust for E and members of E’s family).

Proposed transactions.

  1. Holdco 1, Holdco 2, Holdco 3, Opco 3 and Holdco 4 incorporate Holdco and (following the incorporation of Realtyco by Holdco) transfer their shares of Opco to Holdco on a rollover basis under s. 85(1) in consideration for Class A common shares of Holdco.
  2. By articles of amendment, the Class A shares of Opco are exchanged for new Class A common shares, and for non-voting discretionary-dividend redeemable retractable Class B shares with a value equal to that of the Vacant Premises, Lockers and related parking spaces (and with paid-up capital allocated on a pro rata basis).
  3. Holdco transfers its Class B shares of Opco to Realtyco on a s. 85(1) rollover basis in consideration for Class A common shares of Realtyco.
  4. Opco redeems its Class B shares for a demand note (the “Note”) and makes an eligible dividend designation respecting the resulting deemed dividend. (Per para. 17, "the fiscal period of Realtyo will be fixed at a date which will permit the avoidance of Part IV tax circularity.")
  5. Immediately following an early termination of the fiscal period end of Opco made pursuant to an advance [“préalable”] request to CRA, Opco transfers the Vacant Premises and related parking spots to Realtyco on a rollover basis under s. 85(1) in consideration for “Note 1”) and for Class C non-voting, non-participating non-cumulative redeemable retractable preferred shares of Realtyco (whose share provisions have a price adjustment clause).
  6. Realtyco redeems the Class C shares held by Opco in consideration for Note 2.
  7. Realtyco uses proceeds of a third-party secured borrowing to partly repay Note 1, with Opco using that amount to partly repay the Note.
  8. A second amount received by Realtyco on signing a new lease is used to repay the balance of Note 1 due to Opco, with Opco using that amount to repay a further portion of the Note to Realtyco.
  9. The balance of the Note and Note 2 are then set-off.

Purpose. The Opco shareholders wish to have the Vacant Premises and related assets held in a separate corporate vehicle to insulate them from operational risks of the Opco business.

Ruling: The proposed transactions will not by themselves be considered to result in a disposition or increase described in ss. 55(3)(a)(i) to (v), and will be deemed by s. 55(3.01)(g) to not be described in s. 55(3)(a)(ii).

Opinion. Re s. 55(2) not applying under the July 31, 2015 proposals to the deemed dividends arising in 4 and 6.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) spin-off of real estate beneath new common holdoc of unrelated shareholders 105
Tax Topics - Income Tax Act - Section 249.1 - Subsection 249.1(7) taxation year end changed to immediately before building spin-off 93
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) year end selection to avoid Pt. IV circularity 91

14 April 2015 External T.I. 2015-0570021E5 F - Présomption de gain en capital

application of safe harbour where holdco interposed before spin-off transaction

After referring to the CRA response to Q. 14(b) [16(b) below?] at the 2014 APFF Roundtable including the caution provided, the questioner referred to a situation where two unrelated individuals (A and B) are equal shareholders of Opco.

  1. A and B incorporate Holdco, Holdco incorporates Realtyco and A and B transfer their Opco shares to Holdco under s. 85.
  2. Holdco transfers part of its shares of Opco, having a value equal to that of the real estate, to Realtyco under s. 85(1).
  3. Opco transfer the real estate to Realtyco in consideration for preferred shares of equal value, electing under s. 85(1).
  4. Opco purchases for cancellation its shares held by Realtyco for a note.
  5. Realtyco redeems its preferred shares held by Opco for a note.
  6. The notes are set off.

Does s. 55(2) not apply in light of s. 55(3.01)(g)? CRA responded (TaxInterpretations translation):

The increase in the interest of A and B in Holdco resulting from the transfer of shares in the capital of Opco would be an increase described in subparagraph 55(3)(a)(ii) since neither A nor B would be related to Opco and Realtyco, the dividend recipients. However, these increases in interest could ["pourraient"] be excluded by virtue of paragraph 55(3.01) (g). For purposes of paragraph 55(3.01) (g), Holdco would be the "particular corporation." On this basis, the conditions provided in subparagraphs paragraph 55(3.01) (g)(i) to (v) would be satisfied and, consequently, the increase in the interest of A and B in Holdco, otherwise described in subparagraph 55(3)(a)(ii), would be deemed not to be described in that subparagraph.

Consequently…it is possible that Opco and Realtyco could access the exception to the application of subsection 55(2) provided in paragraph 55(3)(a)… .

…[I]f one or other of the equity investments of A and B in Opco were considered to be made as part of a series of transactions in the course of which the dividends were received by Opco and Realtyco… paragraph 55(3.01)(g) would not apply to the increase in interest described in subparagraph 55(3)(a)(v). Consequently, Realtyco could not utilize the exception to the application of subsection 55(2) provided in paragraph 55(3)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) application of safe harbour where holdco interposed before spin-off transaction 60

10 October 2014 APFF Roundtable Q. 16, 2014-0538031C6 - APFF 2014 Q. 16 - Capital gain

interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v)

Facts

The exception in s. 55(3)(a) would not be available where a new corporation was created in the series. Consider this example:

  1. Husband, Wife and (unrelated) Third Party each subscribe for 1/3 of the voting common shares of newly-incorporated Realtyco.
  2. They transfer equal portions of their current equal shareholdings of Opco to Realtyco under s. 85(1) in consideration for preferred shares of equivalent fair market value.
  3. Opco transfers realty to Realtyco under s. 85(1) in consideration for preferred shares of equivalent FMV.
  4. The cross-shareholdings between Opco and Realtyco are redeemed for notes, thereby giving rise to deemed dividends.
  5. The notes are set-off.
Questions

Does s. 55(2) not apply in light of s. 55(3.01)(g)(v)? Would this change if before Step 1 Husband and Wife incorporated Holdco and they and Third Party rolled all their Opco shares into Holdco before Holdco (rather than they) proceeds with Steps 1 to 5?

1st Scenario

In finding that the s. 55(3)(a) exception was not available for the deemed dividends arising in Step 4 under the first Scenario, CRA first indicated (TaxInterpretations translation):

Respecting the issuance of shares on an incorporation…prior to the first issuance…the incorporator controls [the corporation] and consequently…he will be considered as being related to that corporation before the first issuance of shares. …[T]he initial subscriptions by Husband and Wife (the incorporators) would not result in an increase in interest described by subparagraphs 55(3)(a)(iii) to (v).

CRA noted:

  • The initial subscription for Realtyco shares by Third Party resulted in a s. 55(3)(a)(ii) increase as Third Party was unrelated to the dividend recipients (Opco and Realtyco) as well as s. 55(3)(a)(v) increase of Third Party relevant to the deemed dividend paid by Realtyco to Opco.
  • Third Party also would have a s. 55(3)(a)(ii increase of interest from its transfer of Opco shares to Realtyco for preferred shares (Step 2), as well as when the cross-shareholdings were redeemed (Step 4).

CRA then stated:

Furthermore, as regards the dividend deemed to be received by Opco, an increase in interest of Third Party described in subparagraph 55(3)(a)(v) would result from the transfer of the shares of Opco by Third Party to Realtyco in consideration for preferred shares in the capital of Realtyco, as well as on the redemption of the preferred shares in the capital of Realtyco held by Opco. Finally, on the purchase for cancellation of the shares in the capital of Opco held by Realtyco, Third Party increased its interest in Opco, which is a particular described in subparagraph 55(3)(a)(v) regarding the dividend deemed to be received by Realtyco.

Because paragraph 55(3.01)(g) does not exclude an increase in interest described in subparagraph 55(3)(a)(v), the dividend recipients, Opco and Realtyco, would be unable to utilize the exception…provided in paragraph 55(3)(a). ... [In any event] the condition provided in subpargraph 55(3.01)(g)(v) would not be satisfied as the shares of the recipients of the dividends, Opco and Realtyco, were held by individuals at the moment of receipt of the dividends.

2nd Scenario

Respecting the second Scenario, CRA assumed that Holdco and Realtyco were incorporated by Husband or Wife, so that Holdco was related to Realtyco and Opco, and Husband and Wife were related to Realtyco, and that the original investment of Third Party in Opco was not part of the same series of transactions as the receipt of the dividends in Step 4.

CRA then stated:

The disposition of the shares … of Opco by Husband, Wife and Third Party to Holdco would not result in a disposition described in subparagraph 55(3)(a)(i), (ii) or (v) as, immediately before the disposition, Holdco would be related to Opco and Realtyco, the dividend recipients.

However, the investment of Third Party in Holdco … would result in an increase in interest described in subparagraph 55(3)(a)(ii) as Third Party would be…unrelated to Opco and Realtyco, the dividend recipients.

Finally, the investment of Holdco in Opco…would not constitute an increase in interest described in subparagraph 55(3)(a)(ii) and (v) as … Holdco would be related to Opco and Realtyco immediately before the transfer of the shares.

…[T]he "particular corporation" [under s. 55(3.01)(g)] would be Holdco. …[T]he increase in interest of Third Party in Holdco described in subparagraph 55(3)(a)(ii) would be deemed not to be described in that subparagraph [by s. 55(3.01)(g)].

...[T]he other transactions of the series…would occur between persons related to the dividend recipients since Holdco would control both Opco and Realtyco.

Consequently, based on paragraph 55(3.01)(g)…it is possible that Opco and Realtyco could utilize the exception to the application of subsection 55(2) provided in paragraph 55(3)(a).

...[However] it would be important that the transactions respecting the formation of Holdco and Realtyco (the dividend recipients) be properly effected. …For example, the disposition of the shares of Opco by Husband, Wife and Third Party to Holdco could technically be described by subparagraphs 55(3)(a)(iii) and (v) respecting the dividend deemed to be received by Realtyco. In effect, immediately before the disposition, Holdco would be considered to not be related to Realtyco if the latter did not exist at that moment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(b) - Subparagraph 251(2)(b)(i) incorporator related to corporation 61
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v) 845