Section 84

Subsection 84(1) - Deemed dividend

See Also

R. v. Golini, 2016 TCC 174

policy of 84(1)

The sole individual shareholder (“Paul Sr.”) of an Ontario corporation (“Holdco”) received a loan from an accommodation party (”Metropac”). This loan was guaranteed by Holdco, with the guarantee secured by a life insurance policy on Paul Sr.’s life owned by Holdco. The loan terms limited Metropac’s recourse thereunder to realization of such security. The purchase price for the policy had indirectly funded (through four intermediaries) the making of the loan to Paul Sr. Paul Sr. used the loan proceeds to subscribe for preferred shares of another Ontario corporation having full paid-up capital.

After finding that there was a shareholder benefit arising from Holdco permitting its policy to be used to pay off the Metropac loan, C Miller J went on, in the alternative, to find (at para. 139) that if it had been necessary to rely on GAAR, he would have found “there is an abuse of the underlying policy of subsection 84(1) of the Act and the Minister’s assessment of a deemed dividend is correct,” after having noted that the policy of s. 84(1) was “a limitation on returns to shareholders on a tax‑free basis to only the shareholder’s tax paid investment in a corporation, where such investment creates an equivalent increase in the company’s assets or decrease in its liabilities.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) a loan to a shareholder with recourse limited to an asset pledged by the corporation was a shareholder benefit 536
Tax Topics - General Concepts - Sham sham doctrine did not apply to a "minor pretence" 326
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) interest deduction on limited recourse loan 293
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) use of corporate asset to create PUC was abuse of s. 84(1) 244

Aylward v. The Queen, 97 DTC 1097 (TCC) (Informal Procedure)

shares satisfied liability for services

The issuance to the taxpayer of shares having a paid-up capital of $350,000 did not give rise to a deemed dividend because they were in respect of past services he had provided to the corporation having an agreed value of the same amount. It was not relevant that the corporation's financial statements did not record the value of the services as a liability.

Administrative Policy

2015 Ruling 2015-0584151R3 - Conversion of Contributed Surplus to PUC

cross-border inbound continuance of corporation with different labels for capital and surplus followed by conversion of capital surplus to stated capital
Background.

The central management and control of ACo, which was originally incorporated under the Country A Corporate Act, shifted to Canada. In order to avoid any deemed dividend under paragraph 128.1(1)(c.2), it did not elect under s. 128.1(2)(b)(i) to add the amount of the positive PUC adjustment available to it under s. 128.1(2)(a) in computing its PUC. Its common shares had a nominal value, which had been added to its “Issued Capital” and also had a “Share Premium Account” which among other elements included premiums received by it in excess of the Issued Capital on share issuances (the “Share Issue Surplus”). As a result of a share-for-share exchange, it became a wholly-owned subsidiary of CCo.

Proposed transactions.
  1. ACo will be continued to Province 2. The Articles of Continuance will provide that the issued common shares in the capital of ACo will be converted into common shares without par value, and that ACo’s Issued Capital will become the initial stated capital of such common shares, and that ACo’s Share Premium Account will be renamed as its “Contributed Surplus Account”.
  2. Pursuant to the Province 2 Corporate Act, the board of directors of ACo will pass a resolution whereby ACo will add a portion of its Contributed Surplus Account equal to the Share Issue Surplus to its Stated Capital Account in respect of its common shares.
Ruling

Re no s. 84(1) dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Paid-Up Capital corporate PUC and capital surplus flowed through on a cross-border continuance 104

2014 Ruling 2014-0533601R3 - Spin-off butterfly - subsection 55(2)

stated capital distribution effected by set-off

A spin-off butterfly reorganization by DC includes a preliminary step for distributing a small portion of DC's retained business from its immediate subsidiary (Subco 1) to DC. This involves Subco 1 selling that business on a taxable basis for a note, and then setting that note off against amounts that became owing by Subco 1 to DC as a result of a stated capital and dividend distribution.

See summary under s. 55(1) – distribution.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) matching of PUC of cross-shareholdings to match Part IV tax 144
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution spin-off by CCPC under Plan of Arrangement of two businesses/matching of PUC of cross-shareholdings to match Part IV tax/leased property as business property 916
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) new common shares distinct on basis of right to interim financials 89

S4-F3-C1 - Price Adjustment Clauses

additional payment following redemption

Where the consideration received on the transfer of property to which a price adjustment clause that meets the conditions listed in ¶1.5 is in the form of shares and the shares are redeemed before the price is adjusted as a result of the application of a price adjustment clause and the corporation subsequently makes an additional payment as a consequence of that adjustment, the additional payment to the shareholders whose shares were redeemed will be included in the shareholder's income in the year of receipt under subsection 84(3) of the Act.

17 February 2003 External T.I. 2002-017645 -

no 84(1) application on tuck under

Aco holds 30 common shares of Opco (30% of the common shares) having an ACB and PUC of $30 and an FMV of $300 (the net fair market value of all Opco assets being $1,000). A and Aco deal at arm's length with Opco. A (an individual who is the sole shareholder of Aco) transfers all his common shares of Aco (being 30 common shares having an FMV of $300 and ACB and PUC of $30) to Opco in exchange for 30 Opco shares, realizing a capital gain of $270.

There is no deemed dividend under s. 84(1) by virtue of s. 84(1)(b)(i) because the value of Opco's assets increase by $300 when Opco acquires the Aco common shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(2.1) 101

12 August 1994 External T.I. 5-932594 -

Where an individual transfers his 5% shareholding in Opco, having a paid-up capital and ACB of $100,000 and a fair market value of $1 million, to Holdco in exchange for shares of Holdo whose stated capital is limited under s. 24(3)(a) of the Business Corporations Act (Ontario) to $100,000 and an election is filed under s. 85(1) to limit the proceeds of disposition to $600,000, RC is of the view that s. 84(1)(c.3)(iii) is not available. In its view, Holdco used s. 24(3)(a) to set the stated capital of Holdco at $100,000, rather than initially setting the stated capital at a higher figure and reducing it.

23 September 1992 T.I. (Tax Window, No. 24, p. 1, ¶2190)

Where preferred shares having a low paid-up capital are transferred by the shareholder to the corporation in exchange for common shares having a high paid-up capital, s. 84(1) will apply to deem the receipt by the shareholder of a dividend, without any relief under s. 85(2.1).

92 C.R. - Q.27

Where convertible preference shares having a high stated capital and a low paid-up capital are converted into common shares having both a stated capital and paid-up capital equal to the stated capital of the preference shares, s. 84(1) will apply.

1992 June Hong Kong Seminar, Q. B.8 (May 1993 Access Letter, p. 226)

S.84(9) applies for purposes of s. 94(1).

1992 A.P.F.F. Annual Conference, Q. 1 (January - February 1993 Access Letter, p. 49)

Where an individual exchanges all the outstanding common shares of Opco, having a paid-up capital of $500,000 and a fair market value of $600,000, for treasury shares of another class having a stated capital and fair market value of $600,000, he will be deemed under s. 84(1) to receive a dividend of $100,000.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(2.1) 73

28 August 1991 Memorandum (Tax Window, No. 8, p. 6, ¶1435)

Where preferred shares having a stated capital of $2 million and a paid-up capital of $1 are converted into common shares having a stated capital of $2 million, the net increase in the paid-up capital of the corporation will be deemed to be a dividend.

81 C.R. - Q.6

Where consequences of receiving a s. 84(1) dividend as a result of the paid-up capital of shares issued on a s. 85(1) roll exceeding the fair market value of the property transferred are "extremely harsh", RCT is prepared to consider whether administrative relief is warranted.

Articles

Brussa, "Capital Reorganizations", 1991 Conference Report, c. 16.

Paragraph 84(1)(b)

Administrative Policy

7 October 2016 APFF Roundtable Q. 21, 2016-0655901C6 F - Section 7 and bonus paid in share

PUC of shares issued in satisfaction of bonus equal to bonus amount

After noting that it considers that where a Canadian-controlled private corporation has agreed in writing “to award a bonus based on the employee reaching certain measurable performance objectives and the employer agrees to pay this bonus in shares,” then the value of the shares generally will not be included in the employee’s income when issued by virtue of ss. 7(3)(a) and 7(1.1), CRA addressed the question, can the corporation add the full $50,000 bonus amount to the paid-up capital of the shares it so issues, and stated:

To the extent that the liabilities of the CCPC were reduced by an amount not less than $50,000, subsection 84(1) would not be applicable by reason of the exception in paragraph 84(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(a) s. 7 can govern bonuses paid in shares where discretion ceases prior to the issuance 254
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.1) 7(1.1) applicable to non-discretionary bonus payable in shares 174

Paragraph 84(1)(c)

Articles

Doron Barkai, Alexander Demner, "Dealing with New Subsection 55(2): Issues and Strategies", 2016 Conference Report (Canadian Tax Foundation), 6:1–56

PUC-streaming under s. 84(1)(c) (pp. 6:45-46)

…CRA has not made any specific comments regarding the potential application of new section 55 to PUC-streaming transactions. …

Fundamentally, since PUC is primarily a class concept this planning requires the use of separate share classes. In its simplest form, PUC of the class of shares to be redeemed can be reduced with a correlating increase in the PUC of another class. On a technical application, paragraph 84(l)(c) would prevent such a migration of PUC from giving rise to a deemed dividend.

Although the strategy is technically defensible, GAAR needs to be considered….

If no other strategy is feasible, consideration should be given to minimizing the risk that a "series of transactions" will be found….

Subsection 84(2) - Distribution on winding-up, etc.

Commentary

Benefit of coming within s. 84(2)

Along with the exception described in draft ss. 84(4.1)(a) and (b), and a reorganization of capital described in s. 86, s. 84(2) (as well as a further exemption for distributions of one-off sale proceeds contemplated in s. 84(4.1) itself) represents an exception to the general rule in s. 84(4.1) that any distribution of paid-up capital of a public corporation will be deemed to be a dividend. Where a distribution of paid-up capital qualifies under s. 84(2), it will be deemed to be a dividend only to the extent that the value of the property distributed exceeds the reduction in the paid-up capital of the corporation occurring on the distribution.

The exception in s. 84(2) is available when property (including funds) of a corporation resident in Canada are distributed (or otherwise appropriated) in any manner whatever to or for the benefit of shareholders of any class of shares of the corporation on the winding-up, discontinuance or reorganization of the corporation's business.

Scope of distribution concept

The meaning of the phrase "distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders" is broader than a direct transfer of property of the corporation to those shareholders. There has been found to be an indirect distribution of corporate property to a shareholder where the shareholder sells a corporation, whose principal assets consist (perhaps as a result of a sale of business assets) principally of liquid assets, to an accommodation party for cash consideration, where that purchaser, as part of the same series of transactions, merges with or receives distributions from the purchased corporation in order to recoup the funds used to pay the purchase price (RMM, see also Smythe, David). The Federal Court of Appeal has emphasized that the words "in any manner whatever" even encompass situations where the recipient is no longer a shareholder when the funds are distributed (MacDonald). In any event, where the taxpayers sell their shares to an arm's length purchaser who is not an accommodation party as described above, the cash sale price received by the taxpayers likely should not be considered to be an indirect distribution to them of the property of the corporation which was sold (Geransky, but cf. Merritt). Similarly, it would appear that there is no distribution of the property of a corporation to a shareholder where, as part of the series of transactions, the shareholder receives and then disposes of securities which may be equivalent in value to property of the corporation but which were never property of the corporation (Vaillancourt-Tremblay, Geransky).

Meaning of reorganization, discontinuance or winding-up

In the context of s. 84(2), surplus stripping transactions under which the assets of a professional corporation, which had invested income of the practice in investments, were liquidated by a purchaser represented a reorganization of its business as well as a discontinuance of that business (MacDonald TCC). In the context of s. 15(1), a reorganization of a business has been referred to as entailing the conclusion of the conduct of the business in one form and its continuance in a different form (Kennedy). Accordingly, the disposition of a major asset or assets of a business would not by itself qualify as a reorganization of that business (Kennedy, Perrault, McMullen). It is not necessary for there to be a formal liquidation or winding-up of a corporation under the applicable corporate statute in order for it to be considered to have wound-up or discontinued its business (Smythe). Somewhat similarly, a distribution of proceeds of sale of a substantial portion of the assets of a corporation as part of a plan (albeit, one that is postponed) to subsequently wind-up the corporation will qualify as a distribution made "on" the winding-up or discontinuance of the corporation's business (Gilmour).

Pipeline transactions

CRA has been willing not to apply s. 84(2) to "post-mortem pipeline transactions" in which an estate, whose cost of shares of an Opco have been stepped up on the death of the deceased under s. 70(5), sells the shares of Opco (or a Holdco holding an Opco) to a Newco in consideration for a promissory note, which then is paid off by Newco from distributions out of the Opco assets - provided that there is a one-year delay before such distribution occurs (see, most recently, 2012-0464501R3, 2012-0401811R3 and 2011 STEPs Roundtable, Q. 5 2011-0401861C6). However, in MacDonald TCC (rev'd on other grounds), Hershfield J. indicated that this timing requirement of CRA was arbitrary and not justified.

Although in 2011 STEPs Roundtable, Q. 5 2011-0401861C6, CRA also stated that the circumstances which "could" lead to the application of s. 84(2) included the company having no business and instead holding mostly cash, CRA subsequently ruled (2013-0503611R3) that a company whose only activity is investing in marketable securities (whose basis is bumped under s. 88(1)(d)) is eligible for a pipeline transaction, although it noted that the amalgamated company "intends to continue carrying on its investment business with the remaining Marketable Securities left."

Spin-offs of public company subsidiaries

It is quite unlikely that when the statutory predecessor of what now is s. 84(2) was drafted, it was contemplated that the application of the provision could be avoided by the corporation holding all its assets through subsidiaries (and disposing of and distributing the proceeds of its shares of those subsidiaries) rather than carrying on its business or businesses directly. Thus, the predecessor of s. 84(2) applied to a corporation's whose only signficant assets were three subsidiaries (Gilmour). Accordingly, for the purposes of s. 84(2), a holding company likely qualifies as having a business. CRA has ruled on numerous occasions that the distribution (on a paid-up capital reduction) by a public company of a significant subsidiary carrying on a business qualifies as a distribution occuring on a winding-up, discontinuance or reorganization of its business. It also has ruled that s. 84(2) applies where the share consideration received on the sale of a newly-incorporated business of the public company is distributed to the purblic company's shareholders (2012 Ruling 2012-0435291R3), although presumably such distribution would be exempted from deemed dividend treatment under the proposed amendments to s. 84(4.1) (one-time distribution of proceeds of disposition) if it were not already exempted by s. 84(2).

Most or all s. 84(2) rulings for paid-up capital distributions by a public company have described a distribution of the shares of one or more subsidiaries of the public company, or the distribution of proceeds of the sale of such shares or of the assets of a business carried on directly. However, CRA has also ruled that s. 84(2) applies where a public corporation, engaged in a refocusing of its business, makes two separate PUC distributions of both the proceeds of sale of a business and of surplus cash on hand (2012-0470281R3).

Cases

Canada v. MacDonald, 2013 DTC 5091 [at 5982], 2013 FCA 110, rev'g 2012 TCC 123

In order to make use of available capital losses before emigrating to the United States, the taxpayer sold the shares of his former professional corporation ("PC") to his brother-in-law ("JS") for a $525,000 promissory note, which was $10,000 less than the net asset value of PC (in the form of liquid assets). JS then transferred his shares of PC to a newly-incorporated holding company ("601") in consideration for a promissory note of 601 in the same amount and for the issue of common shares. The assets of PC were distributed within the following several months to 601, with $525,000 of such assets being applied to repay the two promissory notes in succession; and PC was dissolved.

Hershfield J found that s. 84(2) did not apply because the taxpayer was not a shareholder at the time he received the distributed funds - he found that "the McNichol approach which was to look to section 245 when subsection 84(2) does not apply on a strict construction of its language, is the correct approach" (TCC para. 59).

Near JA granted the Minister's appeal. The trial judge's approach "led him to fail to give effect to the statutory phrase 'in any manner whatever,'" and "[was] not consistent with Merritt, Smythe, or RMM" (para. 28). McNichol was distinguishable. Near JA stated (at para. 29):

In this case, at the end of the winding up, all of PC's money... ended up through circuitous means in the hands of Dr. MacDonald, the original and sole shareholder of PC who was both the driving force behind, and the beneficiary of, the transactions.

Canada v. Vaillancourt-Tremblay, 2010 DTC 5079 [at 6833], 2010 FCA 119

In order to convert their shares of a private company ("MHT") that held preferred shares of a Canadian public corporation ("Videotron") into excluded property, the taxpayers transferred their shares of MHT to a newly incorporated corporation ("8855") in exchange for shares of 8855, and then had MHT transfer its Videotron securities to 8855 on a rollover basis in consideration for convertible securities of 8855. The taxpayers then sold their shares of 8855 to Videotron in consideration for shares of Videotron and Videotron wound up 8855 on a rollover basis, with the securities that 8855 held in Videotron thereby being cancelled.

Section 84(2) did not apply to this transaction because the property received by the taxpayers (the shares of Videotron) was never the property of 8855: "the property received by the Respondent simply never existed in the hands of 8855" (para. 40).

Gilmour v. The Queen, 81 DTC 5322, [1981] CTC 401 (FCTD)

The taxpayer was the sole individual shareholder of a personal corporation ("LVG") which, in turn, owned approximately 1/3 of the common shares of another corporation ("Trident") which was engaged in the oil business through holding controlling shareholdings in three corporations. Trident realized proceeds as a result of a sale of the most valuable of these subsidiaries and distributed the proceeds to its shareholders, including LVG, on March 22, 1971 and on August 3, 1971 in anticipation of the liquidation and winding-up of Trident.

Collier J. found (at p. 5324) that "as a practical matter there was a 'discontinuance or reorganization' of Trident's business in 1971 and that the amounts received were "on" such event notwithstanding that they were in anticipation of the formal winding-up of Trident and that there was a possibility, due to warranties given on the sale, that some of the money received might have to be returned.

Words and Phrases
winding-up

Perrault v. The Queen, 78 DTC 6272, [1978] CTC 395 (FCA)

A substantial dividend was not paid on the "winding-up, discontinuance or reorganization" of a company's business because, following the payment (and the sale of one of the company's two plants), the company continued to carry on business for over a year, "albeit on a reduced scale". (p. 6277) (s.81(1) of the old Act)

Words and Phrases
winding-up

David v. The Queen, 75 DTC 5136, [1975] CTC 197 (FCTD)

Approximately four months after the corporation of which the taxpayers (the "David group") were shareholders sold its principal business assets, the taxpayers sold their shares of the corporation to the corporation's pension plan (acting through the "Dunn group"), with the individuals associated with the pension plan then causing a distribution of the assets of the corporation.

Walsh J. concluded that although the payments made to the taxpayers were "made to them in an indirect manner as a result of actions taken by third parties over whom the David brothers had no control, the end result was nevertheless that it was the funds of the company, including its undistributed income, which were used to pay for their shares and that the words 'otherwise appropriated in any manner whatsoever to or for the benefit of one or more of its shareholders' are wide enough to cover what took place".

Respecting the issue as to whether this appropriation occurred 'on' a winding-up, discontinuance or reorganization of a business (which after the August sale was that of an investment company), Walsh J. stated (at p. 5148) "that if any meaning is to be given to the word 'on' it must at the very least mean at the 'same time as' or possibly 'as a result of' or 'consequential to', and went on to find that even though it was "not at the time of or 'on' the discontinuance of the commercial operations of the company in August that the funds were appropriated for the benefit of the David group but only five months later", it nonetheless was "evident that the Dunn group planned to wind-up not only the commercial but all business of the company immediately after they took over, so that a winding-up was part of the plan." Accordingly, s. 81(1)(b) of the pre-1972 Act (similar to what now is s. 84(2)) applied to the amounts received by the taxpayers.

Words and Phrases
on

Smythe et al. v. Minister of National Revenue, 69 DTC 5361, [1969] CTC 558, [1970] S.C.R. 64

The taxpayers were shareholders of a company (the "old company") who effectively converted its assets to cash through a series of transactions: those assets were sold to a related company owned in essentially the same manner (the "new company") in consideration for a promissory note; the note was paid-off through bank borrowings of the new company; the old company used those cash proceeds to invest in preference shares of two unrelated companies (the "dividend-stripping companies"); and the taxpayers sold the shares of the old company to the dividend-stripping companies for a cash amount based on the old company's net asset value. A portion of the cash proceeds of the sale were reinvested by the taxpayers in debentures of the new company. In finding that these transactions were governed by s. 81(1) of the pre-1972 Act, with the result that the taxpayers were deemed to receive a dividend, Judson J. stated (p. 5364) that:

"There was a winding-up and a discontinuance of the business of the old company, although it is apparent that there was no formal liquidation under the Winding-Up Act or the winding-up provisions of the Ontario Companies Act."

Judson J also found that the purported sale of the shares of the old company to the dividend-stripping companies should be disregarded.

Words and Phrases
winding-up

Merritt v. MNR (1941), 2 DTC 513 (Ex Ct), rev'd [1942] S.C.R. 269, 2 DTC 561

rev'd on other grounds [1942] S.C.R. 269, 2 DTC 561

The Security Loan and Savings Company ("Security") acquired all the shares of the taxpayer and other shareholders of the Premier Trust Company ("Premier") in consideration for (at the option of the shareholder) shares of Security or a combination of shares and cash. Security then amalgamated with Premier. The Minister assessed under s. 19(1) of the Income War Tax Act, which provided that:

on the winding-up, discontinuance or reorganization of the business of any incorporated company, the distribution in any form of the property of the company shall be deemed to be the payment of a dividend to the extent that the company has on hand undistributed income.

A portion of the consideration so received by the taxpayer would have been includable in her income (under s. 19(1)) to the extent of her share of the "undistributed income" (i.e., accumulated retained earnings) - but for the fact that the Act was interpreted as excluding from undistributed income the income which Premier had earned prior to 1935. McLean J. noted that on the facts there clearly was a discontinuance ("whether that was bought about by a sale to or amalgamation with the Premier Company") or a winding-up of the business (notwithstanding the absence of a formal liquidation procedure), and that the transactions resulted in a distribution of Security property notwithstanding "that the consideration received by the Appellant for her shares happened to reach her directly from the Premier Company and not through the medium of the Security Company (p. 516).

See Also

Kvas v. The Queen, 2016 TCC 199

involuntary dissolution was not a s. 84(2) winding-up

The general contracting company (“CIA”) of two brothers was dissolved in January of 2008 (the “Dissolution Date”) for failure to file Ontario corporate tax returns. Although “upon such dissolution, the property of CIA technically and legally escheated to the provincial Crown” (para. 40), in fact, a CIA bank account was thereafter used to pay various CIA creditors. In addition to being assessed under s. 160 on the basis of alleged property transfers to them after the Dissolution Date, they were treated as having received a deemed dividend under s. 84(2). However, this position was implicitly dropped by Crown counsel in closing argument, where no mention was made of it.

In indicating that s. 84(2) did not apply, Bocock J stated (at para 23):

Factually, CIA was dissolved involuntarily… . A winding-up transaction referenced in subsection 84(2) involves a more orderly and conceived transaction or series of transactions undertaken by the directors during winding-up, culminating in the final act of dissolution, reorganization or arrangement. This did not factually occur.

Words and Phrases
winding-up
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) involuntary dissolution did not render the corporation a transferor 183

Latham v. The Queen, 2015 DTC 1104 [at 617], 2015 TCC 75

deemed dividend not possible where foreclosure eliminated corporations's assets

The taxpayers ("John and Diane Latham") owned a corporation ("Farmers"), which rented out buildings to third parties, and to a related company. In November 2000, Farmers established two credit facilities with the CIBC. In 2002, John Latham transferred $100,000 of investments he held in a personal portfolio service account with the CIBC to that bank as a payment under a guarantee. John Latham testified that the CIBC had destroyed the records of that transaction.

All of the assets of Farmers, including the building, were sold in early 2005 pursuant to a foreclosure action. Farmers ceased operations in 2006. On March 24, 2005, Farmers received $117,976 from the sale of its assets, $94,000 of which was paid to John Latham. CRA found that this amount constituted a shareholder benefit under s. 15(1) or deemed dividend under s. 84(2).

D’Arcy J allowed the taxpayers' appeal. He found that Farmers paid the $94,000 to Mr. Latham as a partial repayment of amounts he had paid personally to the CIBC in 2002 pursuant to the Guarantee.

D’Arcy J further concluded that there was not a deemed dividend, on the basis that “Farmers suffered a loss on the disposition of its assets” which “wiped out the retained earnings” (para. 32).

Other locations for this summary
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) distribution to shareholder reimbursed him for loss as guarantor

Descarries v. The Queen, 2014 DTC 1143 [at 3412], 2014 TCC 75 (Informal Procedure)

holdco distribution made out of loan from still-operating sub - s. 84(2) did not apply

The six taxpayers, who were siblings (or a step-daughter of their deceased father), held all the shares, having an aggregate fair market value (FMV), adjusted cost base (ACB) and paid-up capital (PUC) of $617,466, $361,658 and $25,100 respectively, of a Canadian real estate company (Oka). They sought through the transactions described below to reduce the deemed dividend of $592,362, that otherwise would have arisen on the redemption of their shares, to approximately $265,505 (see 4 and 7 below [minor discrepancy in figures]). CRA assessed on the basis that a deemed dividend of the larger amount had been realized, as there had been an indirect distribution from Oka described in s. 84(2).

  1. Oka lent $544,354 to a newly-incorporated company (9149) in December 2004.
  2. In March 2005, the taxpayers exchanged their shares of Oka under s. 85(1) for Class B and C preferred shares of Oka, so that they realized a capital gain of $361,658 (which was offset by the current year's capital loss realized in 4 below and a carryback of the capital loss in 7 below) and with the Class B and C preferred shares having ACBs of $269,618 and $347,848 and low PUC.
  3. They exchanged their shares of Oka for Class A common shares of 9149 having an ACB and PUC of $347,848 (with such PUC "step-up" complying with s. 84.1) and Class B preferred shares of 9149 having an ACB and PUC of $269,618 and nil.
  4. Also in March 2005, 9149 redeemed the Class A common shares for their PUC and ACB of $347,848 (so that no deemed divided or capital gain resulted) and redeemed approximately ¾ of the Class B preferred shares, giving rise to a deemed dividend and capital loss of $196,506 to the taxpayers.
  5. Oka sold its real estate in December 2005, but with title issues not resolved until December 2006.
  6. Oka was wound-up into 9149 in December 2006, with the loan in 1 being extinguished.
  7. At the end of 2008, 9149 redeemed the (¼) balance of the Class B preferred shares for $69,000, giving rise to a deemed dividend and capital loss to the taxpayers of $69,000 and $73,112.

Before going on to find that the transactions were subject to s. 245(2) as being contrary to the object of s. 84.1, Hogan J found that s. 84(2) did not apply. He noted (paras. 19-20) that at the alleged time of the distribution (in 4), Oka continued as a creditor of 9149, so that at this time its "overall assets remained unchanged" (para. 27), with such asset not being extinguished until the winding-up 20 months later (in 6). Furthermore, there was no change in Oka's real estate business until the sale nine months after the alleged distribution (step 5), and its real estate business did not cease for a further year – whereas s. 84(2) required such a change to occur contemporaneously with the distribution. Finally, after noting that the rule in s. 84(3) according priority to s. 84(2) did not apply as the redemption (by 9149) and the mooted distribution (by Oka) were by different corporations, he stated (at para. 37) that ss. 84(2) and (3) could not "be applied at the same time to the same distributions."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) free to raise an interpretation not advanced by either party 71
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) use of outside basis to step up PUC abused s. 84.1 495

MacDonald v. The Queen, 2012 TCC 123, rev'd 2013 DTC 5091 [at 5982], 2013 FCA 110

In order to make use of available capital losses before emigrating to the United Statees, the taxpayer sold the shares of his former professional corporation ("PC") to his brother-in-law ("J.C.") for a $525,000 promissory note, which was $10,000 less than the net asset value of PC (in the form of liquid assets). JC then transferred his shares of PC to a newly-incorporated holding company ("601") in consideration for a promissory note of 601 in the same amount and the issue of common shares. The assets of PC were distributed within the following several months to 601, with $525,000 of such assets being applied to repay the two promissory notes in succession; and PC was dissolved.

Hershfield J. rejected the Minister's position that the series of transactions gave rise to a deemed dividend under s. 84(2). He disagreed with the finding in RMM that the words "in any manner whatever" were broad enough to apply to a former shareholder at the time of the distribution or appropriation. He stated (at para. 59):

In my view, the McNichol approach which was to look to section 245 when subsection 84(2) does not apply on a strict construction of its language, is the correct approach.

S. 245 also did not apply.

Hershfield J. also indicated (at para. 80) that the position of CRA that s. 84(2) did not apply to the somewhat similar "post-mortem pipeline transactions" (see 2011 STEPs Roundtable, Q. 5 2011-0401861C6) only if the liquidating distribution does not take place within one year of the sale and the subject corporation (the equivalent of PC) continues to carry on its pre-sale activities during that period, represented "arbitrary conditions" that were "not invited by the express language in subsection 84(2)," so that such conditions should not apply.

He indicated obiter dicta (at para. 85) that in addition to entailing a winding-up of PC's business, the transactions also entailed a reorganization of PC's business (as "it went from carrying on a medical business that fed its investment activities to a holding vehicle").

McMullen v. The Queen, 2007 DTC 286, 2007 TCC 16

The taxpayer and an unrelated individual ("DeBruyn") accomplished a split-up of the business of a corporation ("DEL") of which they were equal common shareholders by transactions under which (i) DeBruyn converted his (Class A) common shares into Class B common shares, (ii) the taxpayer sold his Class A common shares of DEL to a newly-incorporated holding company for DeBruyn's wife ("114") for a purchase price of $150,000, (iii) DEL issued a promissory note to 114 in satisfaction of a $150,000 dividend declared by it on the Class A shares, (iv) 114 assigned the promissory note to the taxpayer in satisfaction of the purchase price for the Class A shares, (v) the taxpayer transferred the promissory note owing to him by DEL to a holding company ("HHCI"), and HHCI purchased assets of the Kingston branch of the business of DEL in consideration for satisfaction of the promissory note.

In finding that the transactions did not effect a reorganization of DEL's business, so that s. 84(2) did not apply, Lamarre J. found that the transactions did not result in a discontinuance of the business of DEL (it continued to operate a heating and air conditioning business (albeit at just one location rather than two locations), that the taxpayer subsequently to the transactions no longer had any dealings with DEL and that the transactions were no different than a sale to a third party.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) 266
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 194
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) mutual benefit and same advisors insufficient to establish non-arm's length in structured sale transaction 253
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) arm's length: negotiation based on self-interest 253

Geransky v. The Queen, 2001 DTC 243 (TCC)

The taxpayer who owned a portion of the shares of a holding ("GH") which, in turn, owned an operating company ("GBC") which was engaged in a cement construction business. GBC owned a cement plant which produced all of the cement needed by GBC, with its remaining output (approximately 1/3) being sold to third parties. Following a determination that the cement plant would be sold to an arm's length purchaser ("Lafarge") in transactions which sought to utilize the enhanced capital gains exemption, the following transactions were implemented: the taxpayer and the other shareholders of GH transferred a portion of their shares of GH to a newly-incorporated company ("Newco") in consideration for shares of Newco having a value of $500,000; GBC paid a dividend-in-kind of most of the cement plant assets (having a value of $1 million) to GH; GH redeemed the common shares held in its capital by Newco by transferring to Newco the assets which it had received from GBC; and the shareholders of Newco sold their interests in Newco to the Lafarge (who also purchased the remaining cement-plant assets directly from GBC).

Bowman T.C.J. found that s. 84(2) did not apply to deem the taxpayer to have received a dividend: there was no discontinuance, winding-up or reorganization of any company's business, as both GH and GBC continued to do what they had done before (Bowman TCJ having previously found that the cement construction and cement production activities of GBC were one business given the integration of personnel and operations); the taxpayer was a shareholder only of GH and not of GBC, and the only "business" of GH was the holding of shares of GBC, which state of affairs was not altered by the reorganization; and under the transactions no funds or property of either GBC or GH ended up in the taxpayer's hands.

James v. The Queen, 2000 DTC 2056 (TCC)

After the taxpayer's company was struck from the B.C. Register of Companies and dissolved for failure to file annual returns, the Minister reassessed the taxpayer on the basis that an amount, shown in subsequent accounts (that had been prepared without knowledge of the dissolution) as owing to him by the company, had been distributed to him for purposes of s. 84(2), Bowman TCJ. allowed the appeal on the basis that such amount was not owing at the time of dissolution.

RMM Canadian Enterprises Inc. v. The Queen, 97 DTC 302, [1998] 1 C.T.C. 2300 (TCC)

A non-resident corporation ("EC") approached a business associate who, along with two other individuals, formed a Canadian corporation ("RMM") to buy the shares of a Canadian subsidiary ("EL") of EC for a cash purchase price approximating the cash and near cash on hand of EL and a Canadian subsidiary of EL ("ECL"). Immediately following the purchase, EL was wound-up into RMM and ECL was amalgamated with RMM; and three or four days later, RMM used the cash received by it from EL and ECL to pay off a loan that had financed the acquisition.

In finding that s. 84(2) deemed the difference between the sale price and the paid-up capital of the shares of EL to be a dividend, Bowman TCJ. noted that "RMM was interested only in earning what was in essence a fee for acting as a facilitator or accommodator in the transaction the purpose of which was to enable EC to get its hands on EL's and ECL's cash and near cash without paying withholding tax", and that although there had been a sale of the EL shares, he did "not think that the brief detour of the funds through RMM stamps them with a different character from that which they had as funds of EL distributed or appropriated to or for the benefit of EC".

McNichol et al. v. The Queen, 97 DTC 111 (TCC)

The taxpayers sold their shares of a corporation ("Bec"), whose assets (following a sale of real estate) consisted largely of cash, to a corporate purchaser for a cash purchase price that reflected, in part, the savings that would accrue to the taxpayers from effectively receiving that cash as an exempt capital gain rather than as a liquidation dividend from Bec. Following the acquisition, the purchaser amalgamated with Bec and used the cash received on the amalgamation to pay off a bank loan that had funded the acquisition.

Bonner TCJ. found that s. 84(2) did not operate so as to recharacterize the cash received as dividends, on the basis that the taxpayers were not in fact shareholders at the time. He stated:

The respondent's argument involves the conversion of the transaction which in fact took place into something else which is regarded as its equivalent and the application of the subsection to the latter. I know of no authority for such a process. Subsection 84(2) is not ambiguous.

However, he proceeded to find the taxpayers liable under the general anti-avoidance rule (s. 245).

Kennedy v. MNR, 72 DTC 6357 (FCTD), aff'd 73 DTC 5359 (FCA)

A corporation of which the taxpayer was the sole shareholder purchased a property for use as the new site for its car dealership business, paid for some renovation work and then sold the property to the taxpayer at a price that was less than its total cost including that of the renovation work, with the property then being leased back to the corporation for use in its business.

Cattanach J. stated (at p. 6362):

"If an undertaking of some definite kind is being carried on but it is concluded that this undertaking should not be wound-up but should be continued in an altered form in such manner that substantially the same persons will continue to carry on the undertaking, that is what I understand to be a reorganization.

...

[T]he word 'reorganization' presupposes the conclusion of the conduct of the business in one form and its continuance in a different form.

In the Shorter Oxford Dictionary ... the words 'reorganization' is defined as 'a fresh organization' ... .

Here, there was no "fresh" organization as the same corporation continued the same business in the same manner in the same form - the sale by it of a capital asset did not result in the end of its business.

Accordingly, there was no "reorganization" of the business for purposes of s. 8(1) of the pre-1972 Act (now, s. 15(1)).

Words and Phrases
reorganization

Administrative Policy

2017 Ruling 2016-0646891R3 - Pipeline and subsequent Split-up butterfly

pipeline coupled with split up butterfly in favour of TCs for grandchild residuary trusts

Background

As a result of the death of A, the estate of A acquired A’s Class A common shares of Predecessor1, exchanged such shares for Class B common shares and Class D redeemable preferred shares, received a stock dividend from Predecessor1 of Class E redeemable preferred shares, and received redemption proceeds for its Class D preferred shares (giving rise to a deemed dividend and a s. 164(6) carryback). Predecessor1 then amalgamated with its subsidiary (Predecessor2) to form DC, whose main assets comprised marketable securities (and is not anticipated to have any business property for butterfly purposes), and which has an RDTOH and CDA balnce. Pursuant to A’s will, the residue of the Estate (including the Class B common shares and Class E preferred shares) is transferred to Grandchild1 Trust, Grandchild2 Trust and Grandchild3 Trust.

Proposed transactions
  1. Each Grandchild1 Trust transfers its Class B common shares and Class E preferred shares under s. 85(1) to newly-incorporated TC1, TC2 or TC3, as the case may be in consideration for Class A common shares of the TC.
  2. After XX has elapsed, DC will transfer under s. 85(1) equal portions of its two types of property to TC1, TC2 and TC3 in consideration for the assumption of liabilities and in consideration for non-voting redeemable retractable “Butterfly Shares.”
  3. TC1, TC2 and TC3 redeem the Butterfly Shares for Notes and select their first taxation years to end on that day.
  4. After at least XX has elapsed since the above transactions, DC will be wound-up, so that the respective redemption notes will be assigned to the TCs and be extinguished.
  5. To the extent that there is a CDA balance in its CDA, DC will elect under s. 83(2) respecting portions of the winding-up dividends to treat them as capital dividends, and TC1, TC2 and TC3 will elect under s. 83(2) on the proportion of such separate dividend described in s. 88(2)(b)(iv).
  6. To the extent it has a positive GRIP balance, DC will designate, pursuant to s. 89(14), to treat a portion of the winding-up dividend referred to in subsection 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by timely notifying TC1, TC2 and TC3 in writing.
  7. Following receipt of the dividend refund to which it will become entitled, DC will immediately transfer the cash received on the dividend refund in the form of a dividend to each of TC1, TC2 and TC3 in the same proportions as described above, and then be dissolved.
  8. Subsequently, TC1, TC and TC3 may gradually sell their remaining investment, provided that the sale of their remaining investment does not result in an acquisition of property in the circumstances described in s. 55(3.l)(c) and transfer the proceeds to TC1, TC2, and TC3 over a period of at least one year. The amount paid in any quarter of that year on a class of shares will not exceed XX% of the PUC of such class of shares of TC1, TC2 and TC3.
Rulings

Including re s. 84.1 and s. 55(3.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution combined pipeline and split-up butterfly 140
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) circularity avoided through 2nd dividend arising on winding-up of DC 141

29 May 2018 STEP Roundtable, Q.10

in a pipeline ruling, the business must be continued for 12 months

In the course of confirming that its position on pipeline transactions has not changed as a result of s. 246.1 being proposed, nor of it being dropped, CRA referenced with approval the positions taken at STEP 2011 (2011-0401861C6).

If the funds or property of the original corporation were to be distributed to the estate in a short timeframe following the death of the testator, that would raise concerns.

CRA will continue to issue favourable rulings where the facts of the proposed transaction do not involve a cash corporation, and contemplate the continuation of the particular business for a period of at least one year, to be followed by a progressive distribution of the corporate assets over a period of time.

2017 Ruling 2016-0629511R3 - Post-Mortem Planning and Extraction of "Hard ACB"

pipeline transfers of shares with both “soft” and “hard” ACB
Background

A (a Canadian resident like the other persons mentioned), who is the residuary beneficiary of the estate of C (“Trust C”) and also Trust C’s executor, holds shares of Opco 1 whose ACB is attributable in part to V-Day basis and in part to “Hard ACB” resulting from the application of s. 70(5) on C’s death, and likewise for A’s common shares of Opco 3 except that a portion of their ACB also is attributable to an s. 110.6 deduction claimed by C immediately before her death. A also holds an interest in a rental property (“Property 2”).

B has Hard ACB in her shares of Opcos 4, 5 and 6 resulting from the application of s. 70(5) respecting the death of E in addition to ACB respecting V-Day basis or the capital gains deduction (and somewhat similarly for B’s shares of Opco 2 and shares held by Trust D&E, described below) - and also has an interest in Property 2. Trust D&E is a spousal trust that came into existence upon the death of E, the late husband of D and whose Trustees are A and B.

Proposed transactions
  1. Newco 2 and 3 will be incorporated, with B subscribing for Class A voting preferred shares and Class G common shares of Newco 2 and Class C voting preferred shares of Newco 3.
  2. B and Trust D&E will transfer their interests in various rental properties to Newco 3 under s. 85(1) for consideration including Class A common shares.
  3. B will transfer various Opco shares and her Newco 2 common shares to Newco 2 under s. 85(1) in consideration for a non-interest-bearing demand promissory note equalling most of the Hard ACB of the transferred shares, and for Class B preferred shares of Newco 2 as to the balance – and similarly for Trust D&E.
  4. Newco 1 will be incorporated, with A subscribing for Class A voting preferred shares and Class G common shares.
  5. A and Trust C will transfer their interests in rental properties to Newco 3 under s. 85(1) for consideration including Class A common shares.
  6. A will transfer his Opco 1 shares and his common shares of Opco 2, Opco 3 and Newco 3, to Newco 1 under s. 85(1) in consideration for a non-interest-bearing demand promissory notes equalling most of the Hard ACB of the transferred shares, and for Class B.1 or Class B.2 preferred shares of Newco 1 as to the balance.
  7. Trust C will transfer its Class A common shares of Newco 3 to Newco 1 under s. 85(1) in consideration for a non-interest-bearing demand promissory note equalling most of the Hard ACB of the transferred shares, and for Class C preferred shares of Newco 1 as to the balance.
  8. Newco 1 and Opco 1 will not be amalgamated, nor will Opco 1 be wound-up into Newco 1 for a period of at least one year following the transfer of the Opco 1 shares. Opco 1 will continue to operate the business in the same manner as before.
  9. In XXXX, Newco 1 will repay to A an amount not exceeding $X of the promissory note issued in 6 respecting the Opco 1 share transfer. After this payment, it is not envisioned that A would seek any repayment of the notes issued in 6 before XXXX. Moreover, the amount of the repayment, if any, in the year ending XXXX will not exceed XX% (inclusive of the $X already repaid) of the sum of the original principal amount of such notes.
Rulings

S. 84.1 will not apply to deem A to have received a dividend from Newco 1 on the share transfers in 6 provided that the FMV, immediately after the transfers, of the notes received therefor by A is equal to or less than the ACB to A of the transferred shares as modified by ss. 84.1(2)(a) and (a.1).

S. 84(2) will not apply to deem A to have received a dividend on the common shares of Opco 1 and Opco 3 held by A.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1) pipeline transfer of inherited shares for their "hard" ACB (excluding CGD and V-Day step-up by deceased) 112

2017 Ruling 2016-0670871R3 - Post-mortem pipeline

pipeline timing: Newco holds acquired shares of portfolio company for 30 months before amalgamation; and Amalco repays notes of estate at 15% per quarter

Background

On A’s death, he owned appreciated common and preference shares of PCo, which operated a business of dealing and investing in marketable securities (bonds, shares and cash), and also held a life insurance policy on A’s life and an illiquid note owing by a company owned directly or indirectly by A’s children. No s. 110.6 deduction will have been claimed respecting the PCo shares by A or a non-arm’s length person; and no V-Day basis is included in their ACB.

Application of life insurance proceeds

Within a year of the death, PCo purchased for cancellation a portion of its common shares held by the Estate (which had been stepped up under s. 70(5)(b)) in consideration for a note, elected under s. 83(2) on the resulting deemed dividend and used the insurance proceeds and other cash to repay the note. The Estate will report a capital loss equal to the difference between the proceeds of disposition of such common shares (determined pursuant to para. (j) of the definition thereof) and the ACB of such shares, less the adjustments under subsection 112(3.2); and the executor will elect under s. 164(6) so that such capital loss will be deemed to be a capital loss of A in A’s terminal year.

Proposed transactions
  1. The Estate will incorporate Newco and subscribe for 100 Newco Common Shares for $100.
  2. The Estate will transfer its remaining PCo Shares (electing under s. 85(1)) to Newco in consideration mostly for a note (the “Newco Note”) with a principal amount and FMV equal to the lesser of such shares’ current FMV and their FMV on A’s death, minus $100. As additional consideration, it also will receive 100 Class A Newco Preferred Shares with a stated capital of $100, and a redemption value and FMV of $100 plus any appreciation in the remaining PCo Shares from A’s death to such transfer date.
  3. PCo will continue to carry on its marketable securities business for at least 30months following the transfer in 2 above.
  4. After 30 months have elapsed from such transfer, PCo will amalgamate with Newco to form Amalco as described in s. 87(1). Amalco’s authorized share capital, as well as the PUC and ACB of each of its outstanding share classes, will be the same as Newco’s.
  5. Amalco will begin repaying the Newco Note owing to the Estate, but “for greater certainty, the amount paid in any single quarter of the first year that the Newco Note is outstanding after the amalgamation will not exceed 15% of the principal amount of the Newco Note when it was first issued.”
  6. Amalco will continue to carry on the business, but will sell some of its marketable securities to fund Newco Note repayments.
Rulings

Standard ss. 84.1, 84(2) and 245(2) rulings.

7 October 2016 APFF Roundtable Q. 12, 2016-0655911C6 F - Partial Leveraged Buy-Out and Monetization of ACB

amalgamation does not cause reorg etc. of business

A holds 50 common shares of Opco with a nominal adjusted cost base and paid-up capital and fair market value of $500,000, and B holds the other 50 common shares (also with a $500,000) FMV) with the same nominal PUC and an ACB of $100,000. A wishes to sell 30 of his shares to B for $300,000. B transfers his shares to Newco under s. 85 in exchange for a $100,000 note and common shares. Newco borrows $300,000 from a bank and purchases 30 Opco shares from A. Newco and Opco then amalgamate. Would CRA consider that s. 84(2) or 245(2) applied to the sale of shares by A or B to Newco?

CRA acknowledged that it was unlikely that s. 84(2) applied given that the amalgamation by itself would not produce a “winding-up, discontinuance or reorganization” of Opco’s business. However, it could not be clear on this point in the absence of more information, viz.:

information regarding the nature of the business carried on by Opco, the composition of the assets of Opco (for example, the level of liquidity), the magnitude of the surplus of the corporation or the time within which the loan from the financial institution and the note due to Mr. B would be repaid by Amalco.

CRA indicated that whether s. 84.1 applied turned on the factual question whether there was arm’s-length dealing, without commenting much further, nor could it comment on the application of GAAR to the bare-bone facts.

27 April 2016 External T.I. 2016-0625001E5 F - Surplus Stripping

using a trust to funnel a deemed dividend from creating PUC to a Holdco beneficiary and funnelling that PUC to the individual beneficiary, is surplus stripping

An individual (Mr. X), and a corporation (Holdco) wholly owned by him are the beneficiaries of a Quebec discretionary trust (Trust) holding all the shares of Opco. A deemed dividend of $100,000 generated under s. 84(1) from increasing the stated capital of Opco’s shares was allocated to Holdco pursuant to s. 104(19). This dividend did not exceed the applicable safe income. Opco then made a cash distribution of stated capital of $100,000 to Trust, which makes a capital distribution to Mr. X of $100,000.

After noting that these transactions would require the Trust to have the power to distribute amount equal to deemed income, that the determination to do so would need to be documented and that an amount would be considered to be payable “if a promissory note is issued that is payable on demand without any restriction,” CRA stated that the transactions appeared

to strip the Opco surplus by converting a taxable dividend to a payment of a capital nature that is not taxable to Mr. X. This type of tax planning appears prima facie to be contrary to the integration principle.

Were such transaction submitted in a ruling request, the Directorate:

would recommend to the General Anti Avoidance Committee to confirm the application of subsection 245(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) funnelling deemed dividend to holdco trust beneficiary and resulting PUC to individual beneficiary/shareholder was surplus stripping 126
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distribution of s. 84(1) dividend effected with note issuance 223

22 January 2016 External T.I. 2015-0617601E5 F - Pipeline followed by butterfly

pipeline transaction can be coupled with a butterfly split-up

An estate acquires the shares of Corporation 1 on a stepped-up basis under s. 70(5) and, in August 20X0, transfers the shares to Corporation 2 (whose common shares are held by it) in consideration for preferred shares with full paid-up capital and adjusted cost base (and without s. 84.1 applying). One year later, Corporation 1 is wound up into Corporation 2 under s. 88(1). The estate then distributes its shares of Corporation 2 to the two beneficiaries in full or partial satisfaction of their capital interests. Corporation 2 does not massively redeem the preferred shares and continues to carry on the business previously carried on by Corporation 1.

Two months after the wind-up, both shareholders of Corporation 2 transfer their shares thereof to Corporations 3 and 4, respectively; and Corporation 2 makes a distribution as described in s. 55(1) to Corporations 3 and 4 within the s. 55(3)(b) butterfly exception, with Corporations 3 and 4 using the property received to continue to carry on a business. Is such a post-pipeline butterfly permissible? CRA responded (TaxInterpretations translation):

[W]e have been willing to confirm the non-application of subsection 84(2) when the corporation continues to carry on its business for a year before the winding-up of the corporation in favour of its shareholder (the new corporation) and when the reimbursement of the note was effected gradually during the course of the second year of the implementationputting in of the structure (or when…shares…were redeemed progressively).

…Corporations 3 and 4 continued to carry on the business of Corporation 1.

The question is whether the interposition of Corporations 3 and 4 and the distribution of the property of Corporation 2 in favour of these corporations in a butterfly transaction would permit us to conclude that the property or funds were distributed or otherwise appropriated in any manner whatever by the first corporation (Corporation 1) to its initial shareholder (the estate and the beneficiaries of the estate).

One of the important facts …is that following the winding-up…there would not be a bulk redemption of the preferred shares in the capital of Corporation 2…and there would not be a bulk redemption of the shares in the capital of Corporations 3 and 4…received in consideration for the preferred shares in the capital of Corporation 2. …[T]he beneficiaries of the estate, who would remain the holders of such shares…of Corporation 3 or Corporation 4…would only receive progressively...the property or funds of which could derive from Corporation 1, and only over a period of months that we have accepted in the past…. [W]e could accept, in such a case, that the beneficiaries of the estate would not receive the property or funds of Corporation 1, in any manner whatever, on the winding-up, discontinuance or reorganization of the business of Corporation 1 and that what they received came instead from Corporation 2, or Corporations 3 or 4. In such circumstances, subsection 84(2) would not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(b) where pipeline transaction followed by split-up butterfly, the opco also is a distributing corporation 431

2015 Ruling 2015-0569891R3 - Ss. 164(6) carry-back and post-mortem pipeline

proceeds of share redemption (generating s. 164(6) carryback) allocated to U.S. beneficiary before pipeline for Cdn beneficiaries

Background. All of the shares of Mr. A in A Co (which carried on a "business activity" of trading a portfolio) at the time of his death were deemed under ss. 70(5)(a) and (b) to be disposed of and reacquired at fair market value (“FMV”) and were bequeathed along with the residue equally to his four children (Child 1, 2, 3 and 4). They also were the executors of the resident Estate, and were resident in Canada, except for Child 2, who was resident in the U.S. The shares had no V-day value basis and no deduction had been or could be claimed under s. 110.6.

Completed transactions. After two preliminary s. 86 reorganizations, including an exchange by the Estate of shares of three classes (which had been created on the first s. 86 reorganization) for shares of a further new Class (Class B shares), and following the subscription by the Estate for shares of a new class (Class C), A Co repurchased Class B shares (the “Purchased Shares”), being XX% of all outstanding shares, for their FMV, thereby resulting in the receipt by the Estate of a deemed dividend. Such redemption proceeds will be allocated and paid (less withholding tax) by the Estate to Child 2 through its issuance of a non-interest bearing demand promissory note. The Estate will claim a capital loss from the share repurchase based on its proceeds of disposition being reduced under para. (j) of the definition thereof. By virtue of an election under s. 164(6), that loss will be deemed to be a terminal year loss.

Proposed transactions. A conventional pipeline transaction will be implemented respecting the the remaining Class B shares, as well as the Class C shares, of A Co now held by the Estate:

  1. The Estate will transfer the shares to its newly-incorporated subsidiary ("Newco") in consideration for a note equal to the ACB of the transferred shares minus $X, and for additional Class A shares, electing under s. 85(1).
  2. After at least one year (during which A Co will continue to carry on its portfolio business activity), A Co will be amalgamated with Newco to form Amalco.
  3. Thereafter, Newco may gradually repay (out of proceeds of marketable securities) the note payable to the Estate over a period of at least one year (and without discontinuing its portfolio-trading business activity), but with any quarter's payments not exceeding XX% of the note's original principal.
  4. After full repayment of the note, Amalco will distribute its assets (net of discharged obligations) to the Estate pursuant to winding-up proceedings.
  5. Within a reasonable time following the receipt of any dividend refund, Amalco will be dissolved. By virtue of written agreement of the four legatees/trustees, no portion of the amount received by the Estate under Amalco's winding-up will be allocated to Child 2, so that any capital dividend account will only be distributed to Canadian resident legatees.

U.S. tax considerations. A Co is a PFIC. The manner of Child 2's removal as an A Co shareholder ensures that he can receive the distribution from A Co "as a capital gain" for Code purposes and avoid the complications of being a PFIC shareholder. Unless Amalco is dissolved within a reasonable time following the purchase of the Purchased Shares by Newco [sic, A Co], Child 2 will suffer adverse U.S. tax consequences with respect to the dividend received by him. The transactions are being undertaken as a “Plan of Liquidation” of A Co, which encompasses all of the completed and proposed transactions. As long as all distributions directly or indirectly from A Co are made pursuant to such Plan of Liquidation, they will be received by Child 2 as "capital gains...rather than as dividends" for Code purposes. [TaxInterpretations comment: the quoted references to capital gains treatment are potentially confusing. The estate would have acquired its A Co shares with a stepped up basis, so that they could then be disposed of with no gain being recognized, provided that dividend treatment was avoided through receiving Code s. 331 liquidation treatment.]

Rulings. For ss. 84.1, 84(2) and 245(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) redemption of Canco shares bequeathed to U.S. resident (coupled with s. 164(6) carryback) before pipeline strip of Canco 141

2015 Ruling 2014-0548621R3 - Post Mortem Pipeline Planning

double pipeline on marketable securities company by s. 104(4)(a) trust and estate/amalgamation at 12 mo's folowed by note redemption over following year/existing debt repayment in interim

Background

On the death of B (the surviving spouse of A), B was deemed under s. 70(5)(a) to have disposed of the Class C common shares of the Corporation for their fair market value and the Trust (which had been settled for the exclusive benefit of A and B for their lifetimes, with the beneficiaries on the death of the survivor being their four children), was deemed to have disposed of Class F and I preferred shares of the Corporation under s. 104(4)(a) for their FMV, as well as non-interest bearing demand notes which the Corporation had issued to the Trust as consideration for a previous redemption of preferred shares ("Debt1"). The only assets of the Corporation were marketable securities.

Proposed transactions
  1. The estate will transfer its Class C common shares of the Corporation to a newly-incorporated corporation ("Newco") in consideration for a promissory note ("PN") and for non-participating voting common shares of Newco, with a joint election being made under s. 85(1).
  2. The Trust will transfer its Class F and I preferred shares of the Corporation to Newco in consideration for a promissory note ("PN1") with a principal equal to the FMV of such shares.
  3. The four holding companies ("Holdcos") for the four children (and their spouses) will transfer their respective Class D common shares of the Corporation to Newco in consideration for Class B non-voting participating shares of the Corporation with par value, with a joint election being made under s. 85(1).
  4. During the following one year, the Trust will transfer Debt1 to Newco in exchange for a promissory note with the same principal amount and terms.
  5. During the one year following 1 to 3, the Corporation will pay part of Debt1 up to a maximum amount of $XX, with Newco, in turn, paying part of the promissory note payable by it to the Trust. Dividends funded out of the earnings of the Corporation will be paid on the Class B common shares of the Holdcos.
  6. At least one year after 1 to 4, Newco and the Corporation will amalgamate.
  7. The PN and PN1 will be repaid over a period of no less than one year after the amalgamation, and the repayment in any given quarter of the period of one year after the date of the amalgamation will not exceed XX% of the aggregate principal amount of the PN and PN1 when they were issued. The amalgamated corporation ("Amalco") will continue carrying on the investment business with the remaining marketable securities.
  8. The Trust and estate will distribute their properties to the four children.
Rulings

Re ss. 84.1 and 84(1) not applying to the Trust or estate, and s. 245(2) not applying.

2014 Ruling 2014-0540861R3 F - Post-Mortem Planning

Investmentco pipeline (with amalgamation after 12 mo. and note repaid quarterly) coupled with share redemption to generate s. 164(6) carryback

Background

At death, X was the sole shareholder of Investments (a CCPC, whose shares did not qualify as QSBCs), which held bank balances, shares of public companies and fixed income investments. Although X's spouse was a beneficiary (as well as their adult children), X's estate made the election in s. 70(6.2) for the shares bequeathed to the surviving spouse to be disposed of for their fair market value.

Proposed transactions
  1. Investments will redeem preferred shares held by the estate for cash.
  2. Investments will purchase for cancellation a portion of its Class A common shares for Note 1 thereby giving rise to a capital loss to be carried back under s. 164(6).
  3. The estate will transfer its remaining Class A shares to Newco in consideration for Newco issuing Note 2 (with an amount equal to the ACB of the transferred shares) and a common share, with a joint election being made under s. 85(1).
  4. At least one year following 3, Investments will be wound-up into or amalgamated with Newco (thereafter, "Amalco").
  5. Amalco will repay the Notes and its other debts, then be liquidated. The Note repayments will occur at a maximum rate of XX% per quarter for the year following the amalgamation.
  6. At the opportune time, the estate will distribute the funds to its beneficiaries.
Rulings

Standard ss. 84(2), 84.1 and 245(2) rulings.

2015 Ruling 2014-0563081R3 - Post-mortem pipeline

pipeline for holding company with one year delay before amalgamation

Current structure

All the shares of A Co (being Class A voting common shares and Class B non-voting common shares) are held by a spousal trust (the "Trust"), which reported a deemed disposition of its assets at their fair market value on the death of the surviving spouse (Mrs. X). The sole asset of A Co is all the shares of C Co, whose sole asset is all the shares of D Co. D Co carries on a business directly and through four U.S. subsidiaries. The Trust will continue until the X anniversary of Mrs. X's death.

Proposed transactions
  1. The Trust will transfer its shares of A Co to its newly-incorporated subsidiary ("Newco") in consideration for a note equal to their combined fair market value and for a preferred share, electing under s. 85(1). A capital loss on the transfer will be suspended under s. 40(3.4).
  2. After at least one year, A Co and C Co will be amalgamated with, or wound-up into, Newco.
  3. Thereafter, Newco may gradually begin to make payments on the note payable to the Trust and/or to the Beneficiaries and Grandchildren, to whom the note will be distributed on XX. For greater certainty, the amount paid in any quarter of the first year that the note is outstanding after the amalgamation or wind-up in 2 will not exceed XX% of the note' original principal.
Rulings

. For ss. 84.1, 84(2) and 245(2).

2015 Ruling 2014-0559481R3 F - Post Mortem Planning

classic pipeline transaction for investment portfolio company/note paid off up to 25% per quarter for following 12 months

Current structure

Since the death of A (who used Investmentco in his professional practice but had Investmentco accumulate investments, Investmentco has been a portfolio investment company holding bank deposits, fixed income investments and shares. On the death of A, his Estate acquired his shares of Investmentco for their fair market value. None of the shares of Investmentco were qualified small business corporation shares at any time, and their adjusted cost base was not based on the tax-free zone. A's Class A common shares of Investmentco were bequeathed to his three adult children (Child 1, 2 and 3) and Child 1 was his executor.

Proposed transactions
  1. The Estate of A will subscribe for common shares of newly-incorporated "Newco."
  2. The Estate of A will transfer its Class A common shares of Investmentco to Newco in consideration for a demand non-interest bearing note ("Newco Note") and in consideration for Class B non-voting retractable preferred shares of Newco and with a s. 85(1) election made.
  3. The preferred shares of Investmentco held by Child 1, 2 and 3 will be redeemed by them.
  4. One year after 2, Investmentco will be wound-up into Newco under s. 88(1).
  5. Newco then will proceed to repay the Newco Note held by the Estate of A at the rate of 25% at the beginning of each trimester.
  6. Newco then will be liquidated, with ss. 88(2) and 84(2) applying.
Standard Rulings

respecting ss. 84.1, 84(2) and 245(2).

2015 Ruling 2014-0541261R3 F - Post-Mortem Planning

pipeline transaction by estate of deceased sibling holding prefs of portfolio investment company ("Holdco")/Pt. IV tax avoided by controlling shareholder of Holdco holding voting shares of pipeline company

Current Holdco structure

Holdco is a portfolio investment company holding bank deposits, certificates of deposit, notes payable and preferred shares of Opco, and some real estate. Its sole liability is demand notes (Notes A to D) payable to its "Shareholders" (Brother 1, Brother 2, Sister, and the Estate of A, who was the fourth child of deceased Father.) Trust 2 holds the Class A voting common shares of Holdco, Brother 1 and 2, and Sister along with the Estate of A, hold its Class B non-voting retractable preferred shares and Trust 1 holds its Class D voting retractable preferred shares, giving Trust 1 de jure control of Holdco.

Trusts 1 and 2, A Estate and Opco

Opco carries on an active business and its Class A common shares are held by Trust 2. Trust 1 is a testamentary trust that came into existence on the death of Father, with the Shareholders (including now the Estate of A) as equal beneficiaries and with Brother 2, Sister and an Opco employee as trustees. Trust 2 is a discretionary inter vivos trust that participated in an estate freeze, and whose beneficiaries are Mother, the Shareholders and their issue or any of their corporations, and an income beneficiary (X). The principal beneficiary of the Estate of A is Trust 3, which, in turn, has A's two children as beneficiaries.

Proposed transactions
  1. Trust 1 will subscribe for Class A common shares of newly-incorporated "Newco," so that Holdco will be connected to Newco by virtue of ss. 186(4)(a) and 186(2)
  2. The Estate of A will transfer its Class B preferred shares of Holdco (which were stepped up under s. 70(5) on the death of A, without the s. 110.6(2.1) deduction being available) to Newco in consideration for a demand non-interest bearing note ("Note 1").
  3. Holdco will subscribe for Class A common shares of newly-incorporated "Investmentco."
  4. Holdco will redeem the Class B preferred shares held by Sister, Brother 1 and Brother 2, in consideration for a demand non-interest bearing note, with Holdco making eligible dividend designations.
  5. Holdco will transfer its GICs to Investmentco in consideration for Class B non-voting retractable preferred shares, with the sale agreement containing a price adjustment clause, and with a s. 85(1) election made.
  6. Holdco will redeem the Class B preferred shares which Newco acquired in 2, in consideration for a demand non-interest bearing note ("Note 2"), with Note 2 containing a price adjustment clause. Newco thereby will realize a capital loss, which will be deemed to be nil by s. 40(3.6).
  7. Investmentco will be wound-up into Holdco under s. 88(1).
Subsequent transactions

The Estate of A will demand repayment of Note A by Holdco. At an opportune time, the Estate of A will distribute Note 1 to Trust 3 as described in s. 107(2). At least one year following 2, the Estate of A (or Trust 3, as the case may be) will progressively over various years demand the repayment of Note 1 in order to generate distributions to its beneficiaries. Newco will generate the necessary liquidity to satisfy such demands by making demands for repayments of Note 2 owing by Holdco. It is contemplated that Holdco and Opco will continue their activities in a similar manner as before (including maintaining their separate existence.)

Standard Rulings

respecting ss. 84.1, 84(2) and 245(2).

2014 Ruling 2014-0537161R3 - Reduction of stated capital

distribution of warrants and common shares of holdco for foreign exploration subs

underline;">: Current structure. The Company is a listed public corporation carrying on the "Business" (comprising resource projects) directly and through subsidiaries and, with the exception of one non-resident individual shareholder, its common shares are widely held. It holds one common share (being all the issued shares) and non-interest-bearing advances (the "Subco1 Loan") of Subco1, which is a holding company for the "investments" (including advances) of the Company (likely foreign resource project subsidiaries held directly or through a further holdco), other than a share and warrant investment in another public company, which is held through Subco2.

Proposed transactions

"The Company proposes to reorganize its Business as follows" pursuant to a Plan of Arrangement:

  1. The Company will exchange a portion of the Subco1 Loan for Subco1 treasury common shares (the "Subco1 Distribution Shares") and "Subco1 Warrants," entitling the holder to purchase one common share of Subco1 at an exercise price which will increase after XX months.
  2. The Company will distribute the Subco1 Distribution Shares and Subco1 Warrants as a paid-up capital reduction (with the fair market value of each distributed share or warrant being approximately $XX and $XX, respectively), and with the Subco1 common shares thereafter being listed.
Rulings

Ss. 15(1) and 246(1) will not apply to the distribution. S. 84(2) will apply and ss. 84(4.1) and 212(2) will not apply to such distribution. The cost to the Company shareholders of the distributed shares and warrants will be equal to their FMV at that time.

10 October 2014 APFF Roundtable Q. 21, 2014-0538091C6 F - 2014 APFF Roundtable, Q. 21 - Impact of the Descarries Case

Descarries failed to recognize breadth of s. 84(2)

What is the CRA position on Descarries? After noting that the case was not appealed because in the result it was favourable and it was only an informal procedure case, CRA then summarized the facts, stating that the Oka shareholders engaged in "three avoidance transactions" (TaxInterpretations translation) for appropriating the surplus of Oka which, in December 2004, had already " ... and was in the course of liquidating the remainder of its assets:"

First, on March 1, 2005, there was an internal rollover of their shares in the capital stock of Oka in order to crystallize in the adjusted cost base ("ACB") of new shares, the excess of the fair market value ("FMV") of the transferred shares over their ACB, thereby realizing a capital gain in respect of which the capital gains deduction in section 110.6 was not claimed.

The second transaction, effected on March 15, 2005, was to roll those new shares in the capital stock of Oka to a new corporation (9149-7321 Quebec Inc., hereafter « Quebec Inc. ») in exchange for shares of two classes in the capital of Quebec Inc.: the first class of shares having a low PUC and an ACB equal to their FMV (the "1971 FMV Shares") and the second class of shares having a high PUC (which was the purpose of the second transaction) and a high ACB equal to their FMV (the "Stripping Shares").

The third transaction was to redeem for cash on March 29, 2005 all of the Stripping Shares, and part of the 1971 FMV Shares, so as to generate a capital loss sufficient to eliminate the capital gain generated in the first transaction.

The CRA continues of the view that ITA subsection 84(2) should have applied in this case especially by reason of …MacDonald… . Furthermore, the CRA is concerned by the approach adopted by the TCC respecting the analysis of the avoidance transactions for purposes of the application of ITA subsection 245(2).

Respecting its s. 84(2) concerns, CRA noted the broad wording of s. 84(2), that the funds received on the redemption of the shares of Quebec Inc. "corresponded closely in dollars to the advance which was provided to Quebec Inc. by Oka," so that , paraphrasing RMM, the funds in the shareholders hands "were actually the funds of Oka, notwithstanding the interposition of Quebec Inc.," and that the "restrictive interpretation" accorded by Hogan J to the word "on" was inconsistent with the meaning of "as a result of" suggested in David, where there was a delay of five months. As for any potential double taxation arising from the applicability of s. 84(3), in practice CRA would avoid double taxation through applying s. 248(28)(a).

After also articulating its concerns about the decision's GAAR analysis, CRA concluded that it will seek a decision of the Federal Court of Appeal or the Supreme Court of Canada:

…confirming the broad scope of subsection 84(2) recently established….in… MacDonald …and, also, whether or not there is a specific scheme under the Act for taxing any direct distribution of surplus of a Canadian corporation as taxable dividends in the hands of individual shareholders; as well as a specific scheme under the Act against indirect surplus stripping.

See also summary under s. 245(4).

Words and Phrases
on
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) Descarries failed to recognize scheme against indirect surplus stripping 696
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) will not impose double taxation under s. 84(2) and (3) 36

2014 Ruling 2011-0415811R3 - Internal reorganization

cash distribution to parent of indirect proceeds of internal reorg

underline;">: Current structure. Parent, a public corporation which previously had been spun-off by Subco 2 (also a public corporation, but with Subco 1 holding all its common shares), owns all the common shares of Subco 1, Subco 3, Can Holdco (as well as preferred shares of Subco 1), and a portion of the common shares of FA2. Subco 3 owns the remaining common shares of FA2 and Subco 2 owns all the common shares of FA 1. The assets held in Subco 2 and FA 1 constitute the majority of the assets in the Parent group.

Proposed transactions
  1. Parent will transfer to Can Holdco (which currently has nominal assets) all its FA 2 shares in consideration for common shares of Can Holdco having an equal FMV, and elect at the lesser of under s. 85(1)(c.1)(i) and (ii).
  2. Subco 3 will transfer all its FA 2 shares to Can Holdco for a purchase price equal to the shares' adjusted cost base (and with a price adjustment clause based only on any adjustment to such ACB), and Can Holdco will issue in consideration therefor redeemable retractable Class B shares having a redemption amount, apid-up capital and FMV equal to such purchase price. Subco 3 and Can Holdco will elect at the lesser of the s. 85(1)(c.1)(i) and (ii) amounts.
  3. Similarly, Subco 2 will transfer its FA 1 shares to Can Holdco for Can Holdco Class C preferred shares with a redemption amount, paid-up capital and FMV equal to the ACB of the transferred shares, with a similar s. 85(1) election made.
  4. Can Holdco will transfer all its FA 1 shares to FA 2 in consideration for additional FA 2 shares with an equivalent FMV.
  5. Can Holdco will redeem its Class C shares held by Subco 2 for demand notes (accepted as full payment, and with their terms acknowledging that their principal amount is subject to adjustment based on the Class C share price adjustment clause).
  6. Similarly, Can Holdco will redeem its Class B shares held by Subco 3 for demand notes.
  7. Parent will draw down under its credit facility and subscribe for Can Holdco common shares in amounts sufficient to fund the note redemptions in 8 below.
  8. Can Holdco will satisfy the notes owing to Subco 2 and 3 in cash.
  9. Subco 2 will reduce the stated capital of its common shares by making a single cash distribution, within XX months from the transfer in 3, with the reduction being subject to a price adjustment clause.
  10. Subco 1 will make a corresponding stated capital distribution in cash to Parent.
  11. Subco 3 will reduce the stated capital of its common shares by making a cash distribution, subject to a price adjustment clause.
  12. Parent will repay the advance in 7.
Rulings

Ss. 85(1)(e.2), 15(1), 56(2), 69(4) and 246(1) will not apply to the transfers in 2 and 3. The transfer of FA 1 shares in 4 will not by itself cause those shares to cease to be capital property. S. 84(2) will apply and s. 84(4.1) will not apply to the distribution in 9.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e.2) s. 85(1)(e.2) non-application to transfers at ACB to sisters in order to limit ACB shift 604

2014 Ruling 2014-0526361R3 F - Post Mortem Pipeline

step up of PUC of freeze pref shares for purposes of pipeline transaction

Background

Prior to the death of B (who had been predeceased by her spouse), the Class A common shares of Investmentco, which was a portfolio investment company, were held by Trusts A and B, and its non-voting non-cumulative redeemable retractable Class F shares were held by B and a spousal trust (B2 Trust). Accordingly, the Class F shares were deemed to be disposed of and reacquired under s. 70(5) or 104(4)(a) for their fair market value. The adjusted cost base of the Class F shares was not based on the tax free zone.

Proposed transactions

Following capital dividends on the Class A and F shares paid through the issuance of demand promissory notes:

  1. Trusts A and B will sell their Class A shares of Investmentco to newly-incorporated Newco for Class A shares of Newco with identical attributes and elect under s. 85 with Newco.
  2. B2 Trust and the estate of B will sell their Class F shares of Investmentco to newly-incorporated Newco for shares of Newco with identical attributes and with a paid-up capital equal to the fair market value of the transferred shares (being also their FMV on death).
  3. After a period of XX, during which it will continue its portfolio investment activities, Investmentco will amalgamate with Newco.
  4. Thereafter, Amalco will proceed with partial seriatim redemptions of its Class F shares held by the Estate of B and by B2 Trust in maximum amounts of $XX per quarter.
Rulings

Respecting non-application of s. 84.1 to the transfer of the Class F shares and non-application of s. 84(2) to B Estate and B2 Trust to deem a dividend on their Class F shares of Investmentco.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) step up of PUC of freeze pref shares for purposes of pipeline transaction 99

2014 Ruling 2013-0503611R3 - Post-Mortem Planning

pipeline following death of spouse for a spousal trust where company holds mostly marketable securities

Overview

A testamentary spousal trust (the "Spousal Trust") whose basis in pref shares of a portfolio investment company ("Holdco") was stepped up under s. 104(4)(a) on the death of the spouse in question (B), will engage in a "pipeline" transaction under which it will transfer those shares to a Newco for inter alia the "Newco Note," with Newco then amalgamating with Opco (at least one year later) so that marketable securities of "Amalco" may be used to pay down the Newco Note.

Prior to B's death

Following the death of A, the Spousal Trust engaged in an estate freeze transaction under which it received redeemable retractable non-cumulative Class A preferred shares of Holdco under s. 86 in exchange for its common share, and inter vivos trusts for her son (Trust C) and daughter (Trust D) each subscribed for one common shares. Spousal Trust also subscribed cash for redeemable retractable non-cumulative Class B preferred shares of Holdco, and holds debt of Holdco. Holdco's only activity is to hold marketable securities.

B's death and preliminary transactions

On B's death, there was a deemed disposition at fair market value by Spousal Trust under s. 104(4)(a) of its property including its Class A preferred shares. Newco was incorporated with Trusts C and D as nominal common shareholders.

Proposed transactions

:

  1. Spousal Trust will transfer its Class A and B preferred shares of Holdco to Newco in consideration for the Newco Note (in the case of the A's) and voting redeemable retractable non-cumulative Class B preferred shares (in the case of the B's).
  2. Trusts C and D will each transfer its common share of Holdco to Newco under s. 85(1) for one Newco common share.
  3. Holdco and Newco will amalgamate to form Amalco no sooner than one year after the above transfers. Any dividends paid in the interim by Holdco or Newco will not be funded through a disposition of corporate investments. Pursuant to ss. 87(11) and 88(1)(d), Amalco will designate an amount to increase the cost amount of some or all of the Marketable Securities. "The shares of the capital stock of Holdco will not be acquired by a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Holdco with Newco."
  4. The Newco Note "will be gradually repaid over a period of at least one year after the amalgamation date, but the amount of the repayments in any given quarter of that year will not exceed X% of the principal amount of the Newco Note when it was issued. …While Amalco may sell some of the Marketable Securities in order to enable it to make the above-mentioned repayments of the Newco Note, it intends to continue carrying on its investment business with the remaining Marketable Securities left."
  5. On completion of its administration, Spousal Trust will transfer its remaining assets to its beneficiaries (C and a testamentary trust for D).
Rulings

:

  • S. 84.1 will not apply to the transfer of shares by Spousal Trust to Newco.
  • S. 84(2) will not apply to deem Spousal Trust to have received a dividend on the Class A preferred shares.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(vi) bump of marketable securities (no ruling) occurring as part of post-mortem pipeline transactions 218

2013 Ruling 2012-0470281R3 - Reduction of paid-up capital

Background

Pubco (which is a listed Canadian public corporation engaged in the commercialization of innovative products, and is reorganizing to concentrate on XX) and its indirect Canadian subsidiary, Subco, completed an arm's length sale of the X Business. Following the sale, the Board announced an X% reduction in the workforce. No material amount of the PUC of Pubco was the result of its "acquisition of shares of previously unaffiliated corporations for FMV that was significantly less than the aggregate PUC of such corporations or the result of an acquisition that involved non-capital losses…being made available to Pubco" (para. 7).

Proposed transactions

Pubco may effect a distribution (Distribution #1) of its paid-up capital in an amount equal to or less than the proceeds of the sale of its X Business, with Distribution #1 being derived from such sale and occurring within X months thereof.

Within the same time period, Pubco may effect a distribution (Distribution #2) of its paid-up capital which is derived from cash or near cash on hand of it or its subsidiaries.

Rulings

Standard.

2 April 2013 External T.I. 2013-0479651E5 F - Leveraged buy-out

s. 84(2) not engaged on an amalgamation

X and Y each hold half of the common shares of Opco. X deals at arm's length with Y and Buyer. Buyer incorporates Holdco and subscribes $100,000 for its shares. Opco borrows $500,000 and on-lends at interest to Holdco. Holdco purchases X's shares for $1,000,000, with $600,000 paid on closing, with the deferred $400,000 portion of the purchase price bearing interest.

Holdco and Opco then amalgamate. Buyer and Y each receive 50% of the voting common shares of Amalco, and Amalco preferred shares with a value of $100,000 and $1,000,000 respectively, minus the value of the common shares. Amalco continues to carry on the Opco business.

In response to a query as to whether s. 84(2) applied, CRA stated (TaxInterpretations translation):

As we understand it, Holdco was incorporated solely to borrow from Opco and to acquire the shares of X. Holdco did not carry on any businesses. In addition, you indicated that Opco's business continued after the amalgamation. In light of these facts, we are of the view that it would be difficult to consider that this business was reorganized by virtue of the amalgamation as the amalgamation would not entail a change to that business. Your request does not provide any other information that would permit us to conclude that there was a winding-up, discontinuance or reorganization of Opco's or Amalco's business.

18 June 2013 External T.I. 2012-0433261E5 F - 55(5)(f) and Surplus Stripping

partial conversion of retained earnings to capital dividends through deliberate failure to make s. 55(5)(f) designation was abusive stripping

Two Canadian-resident brothers (Messrs. A and B), who each hold a 50% block of the common shares of a small business corporation (Dividend Payor) having a fair market value of $1.5M and nominal adjusted cost base and paid-up capital, and safe income on hand of perhaps $1M, transfer their respective shareholdings to wholly-owned Newcos (Holdco A and Holdco B), utilizing the s. 85(1) rollover, in consideration for common shares of Holdco A and Holdco B with the same attributes (FMV- $1.5M; nominal ACB and PUC). Each of the two Holdcos then transfers its common shares of Dividend Payor under s. 85(1) to Dividend Payor in consideration for the issuance by Dividend Payor of preferred shares, also with such attributes (FMV- $1.5M; nominal ACB and PUC). Immediately thereafter, A and B subscribe equally for common shares of Dividend Payor.

Thereafter, Dividend Payor annually redeems preferred shares held by each of the Holdcos for $150,000. Although $100,000 of the resulting deemed dividend of approximately $150,000 is attributable to safe income on hand, no s. 55(5)(f) designation is made, so that the full amount of such deemed dividend is converted to a capital gain under s. 55(2). Each Holdco then pays a capital dividend of $75,000 to its individual shareholder (A or B).

In indicating that the general anti-avoidance rule could be applied to this and similar transactions involving trusts, CRA stated (TaxInterpretations translation):

[T]he surplus of Dividend Payor is annually stripped in favour of Mr. A and Mr. B given that annual taxable dividends of $150,000 which otherwise would be paid by Dividend Payor (namely, its accumulated surplus) directly to each are, through a series of transactions entailing the insertion of Holdco A and Holdco B, converted in form into capital dividends free of tax (in the amounts of $75,000), through utilizing, inter alia, section 55.

...[T]he insertion of Holdco A and Holdco B is part of a surplus-stripping scheme respecting Dividend Payor with a purpose of converting annual taxable dividends paid by Dividend Payor, which dividends would normally be inter-corporate dividends eligible for the subsection 112(1) deduction in the computation of taxable income of HoldcoA and HoldcoB, into proceeds of disposition of shares in a manner that abuses subsections 84(3), 55(2) and 83(2).

After referring to the adverse view taken by the GAAR committee of the somewhat similar transactions in 2004-0099201R3, CRA stated that (notwithstanding the decision in Gwartz v. The Queen, 2013 TCC 86) (TaxInterpretations translation):

the CRA proposes, at the first favourable occasion, to demonstrate to the Court that there is a specific scheme under the Act for taxing the distribution of surplus of a Canadian corporation as a taxable dividend in the hands of individual shareholders who are the taxpayers; and that there is also an overall scheme of the Act against surplus stripping.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) deliberate engaging of s. 55(2) to convert annual taxable dividends into annual capital gains permitting annual capital dividends would engage s. 245(2) 143

2012 Ruling 2012-0464501R3 - Post-mortem planning

estate pipeline

Background

X's Class A, B and C shares of Amalco (a Canadian private corporation that was not a small business corporation) passed on his death to an estate (the Estate) of which two of his sons (Y and Z) were the executors. After giving effect to the immediate bequest of the Class B shares of Amalco to Y and Z, the shares of Amalco were held by the estate (holding Class A and C shares), Y and Z (each holding Class B shares and one common share) and a trust (the Trust) for the children of the other son of X (holding the other common share).

Proposed transactions

:

  • The Estate will transfer its Class A and C shares to a newly-incorporated corporation (Newco), whose common shares are owned equally by X, Y and the Trust, in consideration for two Notes
  • Y and Z will transfer their common and Class B shares, and the Trust will transfer its common share, of Amalco to Newco in consideration for non-voting preferred shares of Newco
  • Amalco will be amalgamated with Newco no sooner than one year after the above transfers
  • The Notes "will be gradually repaid over a period of at least one year after the amalgamation date, but the amount of the repayments in any given quarter of that year will not exceed X% of the principal amount of Note 1 and Note 2 when they were issued"
Rulings

:

  • S. 84.1 will not apply to the transfer of shares by the Estate to Newco for the Notes, except that it will so apply to the extent of the V-Day value of the Class A shares so transferred by it
  • S. 84(2) will not apply to deem the Estate to have received a dividend on the Class A and C shares

29 May 2012 CTF Prairie Tax Roundtable, 2012-0445341C6 - Meaning of business as used in subsection 84(2)

no differentiation on pipeline transactions between investment and active business corps

CRA would generally not differentiate between a corporation carrying on an active business and a corporation carrying on a business of earning income from property when considering whether funds or property of a corporation resident in Canada have been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders, on the winding-up, discontinuance or reorganization of the corporation's business.

Moreover, the Federal Court of Canada, Trial Division has mentioned in Conrad David v. The Queen, 75 DTC 5136, that the word "on" used in the expression "on the winding-up, discontinuance or reorganization of its business" may possibly mean "as a result of" or "consequential to". Therefore, it could be argued that, even if no business exists at the time of the distribution or appropriation of funds or property, such distribution or appropriation could still occur "on" the winding-up, discontinuance or reorganization of the corporation's business if it happens "as a result of" or is "consequential to" the winding-up, discontinuance or reorganization of the business. For example and depending on the circumstances, subsection 84(2) could apply to the distribution by a corporation to its shareholders of funds or investments resulting from the prior sale of operating assets linked to a former business.

2012 Ruling 2011-0425211R3 - Reduction of capital

PUC distribution of Spinco indirectly holding foreign affiliates

Pubco holds foreign affiliates owning non-core foreign exploration properties through two Canadian holding companies (Canco 1 and Canco 2). After preliminary transactions to capitalize these holdings (which are designed to increase the adjusted cost base of its shares of Canco 1 and Canco 2), Pubco transfers its shares of Canco 1 and 2 to a newly-incorporated Canadian subsidiary (Spinco), utilizing the s. 85(1) election. Spinco then may obtain equity financing from third parties on a private placement basis, thereby diluting Pubco's ownership of Spinco.

Pubco then distributes Spinco to its shareholders as a reduction in the paid-up capital of its common shares (such reduction being equal to the fair market value of the Spinco shares).

Rulings that s. 84(2) will apply, and s. 84(4.1) will not apply, to the distribution; and that subject to s. 47, the cost amount to a Pubco shareholder of the Spinco shares will be equal to their fair market value at the time of distribution.

2012 Ruling 2012-0435291R3 - Public Corporation PUC Reduction

sale of Spinco in reverse takeover of capital pool company followed by PUC distribution of share consideration

A CBCA Canadian public company (the "Corporation") transferred Canadian property, which represented substantially all of the assets used by it in an active business, to a CBCA Newco on an s. 85(1) rollover basis in consideration for common shares. It then sold Newco to PurchaseCo (a Canadian public company which was a "capital pool company") in consideration for PurchaseCo common shares and special warrants (apparently in order to qualify the issuance of the related common shares of PurchaseCo for securities law purposes).

Corporation will distribute the PurchaseCo common shares to its shareholders, as a one-time reduction of its paid-up capital.

Ruling that s. 84(2) will apply, and s. 84(4.1) will not apply, to the distribution.

2012 Ruling 2012-0432431R3 - Reduction of stated capital

PUC distribution of resource subsidiary

Ruling that s. 84(2) will apply to the distribution by a resource public company of a resource subsidiary as a reduction of stated capital, in order that the former can focus on its more promising projects.

2012 Ruling 2012-0401811R3 -

pipeline re investing holdco holding opco

At the time of death of Mr X, he held common and preferred shares of (and controlled) Holdco, which carried on an investing business and held a wholly-owned subsidiary carrying on a business (Opco). Mrs X held common shares and preferred shares of Holdco of a different class.

A testamentary trust created by Mr X will transfers the estate shares to a Canadian corporation (Newco) which is jointly owned by the trust and Mrs X and controlled by the trust in consideration for two promissory notes equal to the fair market value of such common and preferred shares at the death of Mr X, and for preferred shares having a redemption amount equal to any appreciation in the fair market value of the common shares subsequent to such death (and having a nominal paid-up capital so as not to engage s. 84.1). A s. 85(1) election is filed in due course. Mrs X effects a similar transfer of her Holdco shares to Newco.

After at least one year has elapsed since the transfer of the shares of the capital stock of Holdco to Newco, Holdco will be amalgamated with or wound-up into Newco. Pursuant to paragraph 88(1)(d) and within the limits of this provision, Newco will designate an amount to increase the ACB of the shares of the capital stock of Opco that will be distributed or acquired on the amalgamation/winding-up.

Subsequently to such amalgamation or winding-up, Newco may gradually begin to make payments on the notes owing by it to the testamentary trust in order to fund distributions to beneficiaries in accordance with the terms of the trust.

Ruling that s. 84(2) will not apply to deem Holdco to have paid a dividend to the testamentary trust.

2 June 2011 STEPs Roundtable Q. 5, 2011-0401861C6 - 2011 STEP - Q.5 - Post-Mortem Planning and 84(2)

triggers: quick distribution; mostly cash assets

An estate engages in a "pipeline" strategy in which it disposes of its shares of ACo (having a stepped-up adjusted cost base under s. 70(5)) to a newly-incorporated holdco ("AHoldco") in consideration for a promissory note, and AHoldco applies an intercorporate dividend from ACo to repay the promissory note. CRA stated that the circumstances which "could" lead to the application of s. 84(2) included: the funds or property of ACO being distributed in a short time frame following the death of the deceased; and ACo having no business and instead holding mostly cash.

12 August 2010 External T.I. 2010-0370551E5 F - Tuck Under Transaction - Tremblay Decision

tuck under

Given that the Tremblay decision contained a strong dissent based on the Smythe decision and given that the general anti-avoidance rule was not invoked in that case, CRA will continue to challenge abusive surplus stripping arrangements including those taking the form of "tuck under" transactions. However, it maintains its position that ss. 84(2) and 245(2) should not apply to "tuck under" transactions carried out in the context of "safe income extraction" scenarios.

26 April 2006 Ruling 2004-0099201R3 F - GAAR Surplus Stripping

Mr. A is the sole shareholder of Aco, which generates an annual profit from its operations of more than $100,000. His Aco shares have a significant fair market value and nominal paid-up capital and adjusted cost base.

In a given year, A transfers a portion of his shares of Aco, having a FMV of $100,000, to Aco in consideration for preferred shares of Aco having a redemption amount of $100,000 and a nominal PUC. As s. 84(5) applies, there is no deemed dividend and A realizes a capital gain of $100,000.

In the same year, A transfers his $100,000 preferred shares of Aco to a Newco formed by him (Bco) in consideration for a demand promissory note of $100,000. As his preferred shares had an ACB for purposes of s. 84.1(2)(a.1) of $100,000, no deemed dividend arises. Aco then redeems the $100,000 of preferred shares (giving rise to a deemed dividend to Bco of that amount – which is not subject to s. 55(2) as Bco had full ACB in those shares), and BCo uses the redemption proceeds to discharge the note owing to A.

CRA stated (TaxInterpretations translation):

The goal of the series of transactions which you presented to us was to convert an annual dividend, which otherwise would have been paid by your corporation, into a taxable capital gain, by the annual conversion, in a taxable transaction, of participating shares in your corporation into preferred shares and the transfer of such preferred shares to a holding company controlled by you….[This] series of transactions constitutes a mechanism for the stripping of surplus of your corporation so that all the conditions for the application of the GAAR are satisfied.

2004 Ruling 2004-007547 -

An indirect foreign subsidiary ("Forco 1") of a Canadian public company ("Opco 1" - likely, BCE Emergis Inc.) sold a foreign subsidiary of Forco 1 ("Forco 2" - likely BCE Emergis Corporation) in an arm's length sale to a purchaser. As a condition to the sale of Forco 2, a loan owing by Forco 2 to another indirect foreign subsidiary of Opco 1 ("Forco 3") was required to be paid off. Accordingly, Opco 1 used money borrowed by it from a Canadian bank to contribute, through a series of transactions, capital to Forco 2, in order that Forco 2 could pay off the loan owing by it to Forco 3. Upon completion of the sale of Forco 2, the sale proceeds were distributed, through winding-up of Forco 1 and its immediate parent to Opco 1 ,which used a portion of the proceeds so received by it to pay off the bank loan. Thereafter, Forco 3 uses the loan repayment proceeds received by it to effect a capital distribution to its immediate Canadian parent ("Sub 2") which, in turn, will effect a capital distribution directly (and through another intermediate corporation) to Opco 1, which will then effect a stated capital distribution of a portion of such cash proceeds on its shares.

CRA gave a favourable s. 84(2) ruling.

2003 Ruling 2002-018027 -

U.S.-resident shareholders of a Canadian investment company ("Canco") sell their shares of Canco to an unrelated Canadian purchaser ("Holdco"), and Holdco winds-up Canco, "bumps" the investments of Canco under s. 88(1)(d) and sells some of those investments to persons other than those described in s. 88(1)(c)(vi)(B)(I), (II) and (III). S.84(2) does not apply to the transactions as Holdco is not a special purpose corporation and has been an investment holding company since the 1970s, and sales by it of the bumped assets will be in the ordinary course of its business. "Therefore it cannot be said that Holdco is an instrumentality designed to facilitate these proposed transactions."

2003 APFF Roundtable Q. 1, 2003-0029955 -

hybrid sale: internal step-up followed by share sale

After negotiations with a purchaser, who is interested in the assets of the business of Opco, it is agreed that the Opco shareholders will sell their Opco shares after Opco has transferred all its assets in a taxable transaction to a newly-incorporated subsidiary ("Subco"). The capital dividend account of Opco is distributed to the vendor shareholders of Opco immediately after the taxation year end resulting from the amalgamation of Opco and Subco and the acquisition of control of Opco. The sale price for the shares is adjusted to reflect the income tax payable on the asset drop-down and the funds distributed on payment of the capital dividend. The vendors utilize their capital gains exemption on the sale.

Would s. 84(2) (which was invoked in Geransky) be applied? Given that tax was paid on the asset sale, would s. 245(2) be applied? CRA responded:

[W]here none of Opco's funds or property are distributed or otherwise appropriated in any manner whatever to or for the benefit of the selling shareholders of Opco in the Given Situation, subsection 84(2) of the ITA would not be applicable. This could be the case where the selling shareholders and the purchaser are dealing at arm's length, the selling shareholders would receive a cash amount from the purchaser's own funds in return for their Opco shares, and Opco's assets would continue to be used in an active business by Opco or by another entity within the purchaser's corporate group.

Respecting the application of subsection 245(2)…it is possible to confirm that in a situation of the type described in the preceding paragraph, subsection 245(2) would not normally apply to the selling shareholders to redetermine the tax consequences arising from the sale of their shares.

…[I]t is not possible to comment definitively on the application of subsection 84.1 in the Given Situation given…the brief description [respecting facts relevant to arm's length dealing].

…[However] where the proposed transaction is a business transaction and is supported by bona fide business purposes (other than obtaining a tax benefit), where a purchaser is interested in the assets of an unrelated person (the "Target Corporation"), and where the purchaser and the shareholders of the Target Corporation are unrelated persons with distinct and different interests, the sole fact that the parties have finally agreed that the purchaser would acquire the Target Corporation's assets by purchasing shares of its capital stock would not be sufficient, in and by itself, to consider that the purchaser and the vendors are not dealing at arm's length, with respect to the disposition of the shares of the capital stock of the Target Corporation. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 41

2000 Ruling 2000-001444 -

Ruling that a transfer by a Canadian public company in a taxable transaction of all the assets of a business to a Newco, followed by a distribution of Newco shares to its shareholders would give rise to a dividend only to the extent that the fair market value of the distributed shares exceeded the paid-up capital reduction associated with the distribution.

1997 Ruling 30970152

Description of reorganization of a public corporation in which the paid-up capital of its issued and outstanding common shares are reduced through the distribution of the common shares of Newco to the shareholders, with s. 84(4.1) not applying because of the application of s. 84(2).

22 June 1990 T.I. (November 1990 Access Letter, ¶1534)

Where Mr. A effectively wishes to withdraw cash from a corporation of which he is the sole shareholder and accomplishes this by selling the shares of the corporation to another unrelated corporation which then winds-up the purchased corporation, s. 84(2) may possibly apply to Mr. A.

88 C.R. - Q.34

The "amount or value" of the property distributed is reduced by liabilities assumed by the shareholder of the corporation.

Articles

Charles P. Marquette, "Hybrid Sale of Shares and Assets of a Business", Canadian Tax Journal, (2014) 62:3, 857 – 79.

Description of hybrid transaction using external step-up in basis method (pp. 878-9)

[T[he hybrid form of transaction for a corporate business sale utilizes both traditional elements of a business acquisition – the purchase of shares and assets – in order to limit the ultimate tax liability incurred by the vendor and to maximize the cost base of assets for the purchaser….

In our example, the family trust's shares in the target are sold to the purchaser, and the capital gains exemption is claimed by the individual beneficiaries of the trust. This aspect of the transaction may require a purification of the non-qualifyingj assets of the target.

Once the shares of the target have been sold by the family trust, the assets of the target, primarily composed of eligible capital property (goodwill), are sold to the purchaser at fair market value. This allows the purchaser to receive full basis in the assets.

When the target subsequently redeems the shares held by the purchaser, using the proceeds from the sale to pay the redemption price, in order to avoid the applicability of part IV tax (tax on taxable dividends received by a private corporation) the shares must represent more than 10 percent of the votes and value of the target's issued shares. Following the redemption, the parent/freezor owns all of the remaining issued and outstanding shares of the target. The effect is that the target is left with the balance of the proceeds from the sale of goodwill ($20 million in our example),, which will ultimately be distributed to the parent/freezor.

Ultimately, the full CDA of the target is used to reduce the overall tax liability for the parent/freezor.

Utility of hybrid transaction (p. 879)

[T]he hybrid sale has saved many transactions from failing, including in the following circumstances:

  • The purchaser wished to acquire business assets in order (among other reasons) to obtain a step-up in basis of the assets.
  • Certain shareholders preferred selling shares, as opposed to assets, in order to access their capital gains exemption.
  • The majority shareholder ended up with a yield equivalent to that which he would have received on a sale of his shares.
Non-application of s.84(2) to hybrid transaction: sale of some Target shares to purchaser to utilize capital gains exemption, sale of Target assets (mostly goodwill) to purchaser and redemption of Target shares held by purchaser (pp. 869-870)

[T]he CRA seems to accept that subsection 84(2) would not apply to recharacterize the proceeds as dividends from the target corporation where the vendor shareholders and the purchaser are dealing at arm's length and, essentially, the purchaser is using its own funds to purchase the target's shares. [fn 22: … 2003-0029955… See also Geransky v. The Queen, 2001 DTC 243…] The CRA has confirmed that in such a situation, subsection 84(2) or 245(2) would not normally apply provided that (1) the vendors and the purchaser deal at arm's length, (2) the vendor shareholders receive a cash amount from the purchaser's own funds in return for shares of the target, and (3) the target's assets continue to be used in an active business by the target, or by another entity within the purchaser's corporate group. [fn 23: … 2003-0029955…]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 191 - Subsection 191(4) 140

Perry Truster, "Turning Dividends into Capital Gains", Tax for the Owner-Manager, Volume 14, Number 1, January 2014, p. 7.

Sale of stock dividend shares for note which is repaid out of corporate surplus (p. 7)

[I]it is advantageous to convert distributions that would otherwise be dividends into capital gains….

…Assume that Opco pays X a stock dividend in the form of preferred shares that are redeemable and retractable for $100,000 but have a stated capital of $1 in the aggregate. X will be taxed on a $1 dividend. X realizes a capital gain by selling the shares to a related individual (say, an adult child) for a $100,000 note. The child transfers the shares to his Holdco, and his Holdco assumes the note owed to X. Holdco then tenders the shares to Opco for redemption. Opco pays the redemption proceeds with its $100,000 cash, and Holdco pays X the $100,000 cash to retire the note….

GAAR (p.7)

The obvious question is whether GAAR is a concern. At the moment, the answer appears to be no. This conclusion is based on Gwartz (2013 TCC 86), a case that involved a series of transactions similar to those described above that converted dividends into capital gains to avoid the section 120.4 kiddie tax….

Steve Suarez, Firoz Ahmed, "Public Company Non-Butterfly Spinouts", 2003 Conference Report, c. 32.

Subsection 84(3) - Redemption, etc.

Cases

Canada v. Macmillan Bloedel Ltd., 99 DTC 5454 (FCA)

The taxpayer redeemed U.S.-dollar denominated preferred shares at a time that the U.S. dollar had appreciated relative to the exchange rate at the time of issuance. The taxpayer was found to have realized a loss under s. 39(2) notwithstanding that s. 84(3) simultaneously operated to deem it to have paid a dividend to the shareholders.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) loss on redemption of U.S.-dollar preferred shares 95

See Also

McClarty Family Trust v. The Queen, 2012 DTC 1123 [at 3122], 2012 TCC 80

A family holding company ("MPSI") paid a stock dividend of preferred shares, having nominal paid-up capital and a redemption amount of $48,000, on the Class B non-voting shares of MPSI, which were held by a family trust ("MFT") whose sole trustee ("McClarty") was the father. MFT then sold these preferred shares to McClarty in consideration for a demand promissory note of $48,000. McClarty then sold these preferred shares to a corporation ("101 SK") of which he was the sole shareholder and director in consideration for a $48,000 demand promissory note, which 101 SK then repaid out of cash proceeds received by it on the redemption of the preferred shares.

The Minister contended that, because of the breadth of the words "in any manner whatever" in s. 84(3), the redemption resulted in a deemed dividend for MFT in the amount of $48,000. This contention was supported by the Tax Court's decision in RMM, which held that the breadth of the words "in any manner whatever" meant that "each person" in s. 84(3)(b) could include people who no longer held the shares.

Angers J. rejected the Minister's argument. RMM concerned a situation where the economic substance of the transactions was that the redeemed shares were still the property of the taxpayer. In the present case, none of the transactions were fictitious or lacking in economic substance. Angers J. stated (at para. 65):

Even if I were to look into the method by which the shares were redeemed, I would need to view the transactions as many steps in the process of redemption, acquisition or cancellation, which I do not believe to be the case here. The steps in this case were undertaken for a bona fide reason [namely, to protect assets from an anticipated civil suit] and I do not believe that, in these circumstances, subsection 84(3) can be applied so as to have MFT declared the recipient of a deemed dividend on the redemption of the 2003 and 2004 stock dividend shares.

Gagnon v. The Queen, 2008 DTC 3111, 2006 TCC 194

The taxpayer originally signed an agreement for the sale of his half interest in a business (which was found to be held in a corporation) to his brother. After receiving payment of the purchase price from the corporation, his brother purported to have the corporation retroactively issue two shares to the taxpayer and got the taxpayer to sign a second agreement providing for the purchase of those two shares by the corporation from the taxpayer in consideration for the two payments that the corporation had in fact made to him. In finding that the taxpayer had received deemed dividends, Lamarre J. stated (at para. 22) that "a person can be declared a shareholder retroactively" and found that the second agreement was the one that prevailed as it reflected the contractual reality negotiated by the two brothers.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date person declared a shareholder retroactively 141

MacMillan Bloedel Ltd. v. The Queen, 97 DTC 1446 (TCC)

The taxpayer was found to have realized a capital loss under s. 39(2) rather than to have paid a deemed dividend under s. 84(3) when it redeemed U.S.-dollar denominated preferred shares for the same U.S.-dollar amount for which they had been issued. The application of s. 84(3) was not appropriate because the shareholder had not received a benefit, whereas s. 39(2) was enacted to deal specifically with gains and losses on currency fluctuations.

Lalonde v. MNR, 90 DTC 1313 (TCC)

The taxpayer established that he purchased the shares of a fellow shareholder as agent for the corporation rather than as principal. Accordingly, he did not receive a deemed dividend when the shares subsequently were assigned to the corporation and cancelled.

Belair v. MNR, 89 DTC. 429 (TCC)

deemed dividends arose only as the shares were actually redeemed

In the face of inadequate evidence, Morgan J. found that if the corporation had agreed to purchase for cancellation 1/3 of the taxpayer's common shares in each of three years, then the taxpayer realized a deemed dividend only as the shares were paid for and cancelled. "[I]f a corporation has not paid for certain of its issued shares, then the corporation has not purchased or acquired or redeemed such shares." However, if all of his common shares had been purchased in the first year followed by a loan of 2/3 of the proceeds to the corporation, then all of the deemed dividend had been realized in the first year.

Cabezuelo v. MNR, 83 DTC 769 (TCC)

deemed dividend is crystallized at time of redemption

The taxpayer received $25,000 in cash for shares plus a further balance payable over three years. After finding that these payments should be construed as having been received from the corporation in question, Christie CJ stated (at para. 31):

I disagree that the deemed dividend in the subsection is to be determined by reference to what was actually paid and when. … As I construe subsection 84(3), a corporation is deemed to have paid a dividend at the time of the acquisition of its shares and, even if the consideration for the shares acquired is payable over a considerable period of time, it must, for the purposes of income tax law, be regarded as being payable at the time of the acquisition.

McArdle Estate [No. 2] v. MNR, 62 DTC 402 (TAB)

repurchase and re-allotment of shares was not a redemption

The president (McArdle) of a private company had been issued “employee redeemable shares,” whose terms provided that they participated on a per share basis equally with the common shares but that they were redeemable by the company and that the company could also require their holders to sell the shares to the company for their redemption price. Following the death of McArdle, the company required his executors to sell his shares to the company, with such shares for the most part being acquired by other employees at the same purchase price and with their purchase price being paid directly to the executors. The Minister assessed on the basis that the company was deemed to pay a dividend to the estate under s. 81(2) of the pre-1972 Act, which in relevant part applied where a corporation having undistributed income on hand had “redeemed or acquired any of its common shares or reduced its common stock.”

In finding that there was no deemed dividend, Mr. Boisvert stated (at pp. 408-9):

[The sum received by the Estate from [the Company] was not paid by the latter out of its own funds but out of the proceeds of resale of the said shares to some of its eligible employees, and, in my view, the issue of shares to the new shareholders was a re-allotment rather than an original issue. What took place cannot have been the payment of a deemed dividend because the financial position of the Company was not affected in any way by the payment made by it to the Estate. In other words, the amount paid to the Estate by the Company did not come from the company's till but from what the company received from the re-sale of the shares. As long as the capital surplus of the Company was not affected by the change of shareholders, the names of the holders of the said shares are immaterial. I fail to see how it could be held, in this case, that the relevant transactions with respect to the McArdle shares amounted to a redemption of stock within the meaning of section 81(2) of the Income Tax Act, for a true redemption of stock would have resulted in the reduction of the undistributed income of the Company.

Words and Phrases
redeem
Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance mistaken nomenclature ignored if inconsistent with governing intention 58

Administrative Policy

26 May 2016 IFA Roundtable Q. 3, 2016-0642111C6 - PUC of Shares of a FC Reporter

Canadian corporation with a USD functional currency can be subject to Part XIII withholding obligations on its USD prefs resulting from FX fluctuations

CRA considered that a Canadian corporation which has the U.S. dollar as its elected functional currency nonetheless is required to keep track of the paid-up capital of its shares, so that if it issued U.S.$100,000 of shares when the Canadian dollar was at par and redeemed those shares when their Canadian-dollar equivalent was $125,000, there would be a resulting deemed dividend of $25,000 to the shareholder (unless the shareholder was a Canadian corporation that also had the U.S. dollar as its functional currency for the relevant period.). Thus, a U.S. shareholder receiving such redemption proceeds would be subject to Part XIII tax. However, there would be no Part VI.1 tax, as that tax relates to the tax results of the corporation rather than its shareholder.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(1) - Canadian Tax Results deemed dividend calculation for shareholder not part of Cdn tax results 313

2015 Ruling 2014-0532201R3 - Corporate reorganization

cancellation of upstream shareholding on s. 88(1) wind-up

Towards the completion of an intricate internal reorganization for a privately-held Canadian corporate group, a newly-amalgamated corporation (“Amalco”) will be wound-up into Newco. At the time of the winding-up, Amalco holds Newco Non-Voting Preference Shares.

CRA ruled that the cancellation of these shares upon their distribution to Newco on the wind-up will not give rise to a deemed dividend under s. 84(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 38 - Paragraph 38(a.1) donation of pubco shares to foundation and immediate cash sale to affiliate 474
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts donation and sale-back of public company shares 82

S4-F7-C1 - Amalgamations of Canadian Corporations

no deemed dividend to dissenter on amalgamation

1.5 …[S]ubsection 84(3) will not otherwise apply to deem a shareholder of a predecessor corporation to have received a dividend where the shareholder exercises its statutory dissent rights in respect of the amalgamation and receives payment for its shares from the new corporation. In such circumstances, the new corporation is paying the dissenting shareholder for its shares of the predecessor corporation. Therefore the new corporation has not redeemed, acquired or cancelled shares of its capital stock as required for subsection 84(3) to apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 111 - Subsection 111(12) application following amalgamation 103
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) deemed tcp following amalgamation 155
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5.1) continuity of s. 13(5.1) on amalgamation 126
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1) Amalco can continue objection and receive refunds 145
Tax Topics - Income Tax Act - Section 169 Amalco can continue objection 97
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder shareholder need not hold shares 82
Tax Topics - Income Tax Act - Section 251 - Subsection 251(3.1) deemed non-arm's length relationship on amalgamation 164
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) realted party, majority and 50% group exceptions 448
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(iii) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(7) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 69 - Subsection 69(13) no disposition of predecessor property on general principles 103
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4) s. 87(5) not applicable 104
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) non-87 amalgamation/no FX gain 159
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) election filing by Amalco 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.1) s. 87(1.1) qualifies for all s. 87 purposes 60
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.2) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 87 - Subsection 87(10) deemed listing of temporary Amalco shares 114
Tax Topics - Income Tax Act - Section 87 - Subsection 87(11) gain if high PUC is sub shares 47
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) presumptive satisfaction of s. 87(1)(a)/dissent and squeeze-outs onside 260
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) new corp/deemed year end coinciding or not with acquisition of control 0
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(b) Amalco must follow predecessor's valuation method subject to truer picture doctrine 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(c) reserve after amalgamation 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(d) cost amount carryover 135
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(e.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(o) no continuity rule for non-security options 133
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(q) pre-amalgamation services 96
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) loss-carry back to parent 159
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) dovetailing with s. 88(1.1) 38
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3.1) 328
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3) PUC shifts 181
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) fractional share cash/ACB or value shift/implied non-recognition for predecessor shares 247
Tax Topics - Income Tax Act - Section 87 - Subsection 87(7) dovetailing with s. 78 and 112(12) 171
Tax Topics - Income Tax Act - Section 87 - Subsection 87(9) allocation of s. 87(9)(c)(ii) excess as parent chooses 218
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) late designation 106
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) dovetailing with s. 87(2.1) 56
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) partnership dissolution on amalgamation 123
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) deemed non-arm's length relationship on amalgamation 415
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) deemed non-arm's length relationship on amalgamation 323
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(14) class continuity on non-arm's length amalgamation 311
Tax Topics - Income Tax Regulations - Regulation 8503 - Subsection 8503(3) - Paragraph 8503(3)(b) pre-amalgamation services 96

29 October 2013 External T.I. 2013-0507881E5 - Price adjustment clause

price adjustment payment recognized as s. 84(3) dividend when received

A price adjustent clause in the share provisions for preferred shares issued by Opco to the taxpayer in Year 1 in consideration for the transfer of property to Opco provide that the redemption value of the shares issued will be changed if the FMV of the consideration for the shares is determined by CRA to be different than the determination at the time of the transaction (or an additional amount will be paid if the change is upward and the preferred shares issued are redeemed before the determination by CRA).

In year 5, Opco redeems all the preferred shares, in year 7, CRA determines that the FMV of the property and the redemption value of the preferred shares should have been higher, and "pursuant to the price adjustment clause" the taxpayer receives an additional payment from Opco in year 8.

When would the taxpayer have to include the additional payment as income? CRA stated:

[I]f the price adjustment… is valid…CRA's longstanding position is that the additional payment will be treated as a dividend that will be included in the taxpayer's income in the year of receipt under subsection 84(3) of the Act. …

However, as the additional payment is not determined at the time of the redemption of the shares… it should not be included in the income of the taxpayer in the year of the redemption as part of the amount paid under subsection 84(3)… .Rather, the CRA…[will] tax the additional payment pursuant to the general rules with respect to the dividends, that is, to tax such amount at the time it is received. …

[T]here would be no interest with respect to the income tax computed on that additional amount if the income tax is paid in a timely manner pursuant to the Act and if any instalment computed under the Act with respect to the income tax for the year of the receipt was remitted on time.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 316

3 July 2012 Internal T.I. 2012-0450821I7 F - Interaction of 84(3) and 69(1)(b)

s. 84(3) deemed dividend based on actual redemption proceeds rather than s. 69

A CCPC ("Opco"), whose voting common shares were owned by two individuals (B and R) and by a Canadian-controlled private corporation ("Management M") wholly owned by a third individual ("M"), purchased for cancellation all of its shares (having nominal paid-up capital and adjusted cost base) held by Management M. This was a non-arm's length transaction. The safe income on hand was in excess of the purchase price, so that all of the purchase for cancellation was reported as giving rise to a deemed dividend under s. 84(3) that was not subject to s. 55(2). CRA determined that the purchase price for the shares was less than their fair market value, and that a price adjustment clause was invalid as there was no intention at the time for the transaction to occur at the shares' fair market value.

The Directorate indicated that the shares were deemed by s. 69(1)(a) to be disposed of for their fair market value. Such proceeds were reduced by the deemed dividend arising under s. 84(3), which was based on the actual amount paid rather than being modified by the application of s. 69(1)(b). Accordingly, none of the unutilized safe income on hand attributable to the shares could be utilized.

21 November 2011 External T.I. 2011-0422191E5 F - Price adjustment clause and redemption of shares

price adjustment payment recognized as s. 84(3) dividend when received

if preferred shares with a redemption amount which is subject to a price adjustment clause are redeemed before there is an upward adjustment to the redemption amount pursuant to that clause, a payment of the resulting additional amount will be included in the shareholder's income in the year of receipt under s 84(3).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 52

23 July 2007 Internal T.I. 2007-0228601I7 F - Redemption of U.S. Denominated Shares

Where Parentco owns preferred shares of a subsidiary wholly-owned corporation (Subco) denominated in U.S. dollars and Subco purchases the preferred shares for cancellation in consideration for the issuance of preferred shares denominated in Canadian dollars, there is a good argument that Subco has not sustained a loss for purposes of s. 39(2) given that its patrimony is unaffected by the transaction. The only effect of the transaction is to change the claims of various classes of shareholders on its assets.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) s. 86 exchange of US-dollar denominated prefs does not affect patrimony of issuer 73

15 January 2007 Internal T.I. 2006-0216801I7 - Redemption of US $ Denominated Shares

Confirmation of a previous position that in light of the McMillan Bloedel decision, CRA intends to assess any redemption of foreign-currency-denominated redeemable and retractable preferred shares on the basis that s. 39(2) applies to the issuer corporation.

28 October 2005 External T.I. 2005-0145891E5 F - Redemption of Shares - Balance of Purchase Price

amount of deemed dividend arose on redemption date based on amount of covenanted future redemption payments

On January 1, 2005, Canco purchases for cancellation 100 common shares, having a fair market value of $100,000, in consideration for paying $25,000 per annum during the four following years to the redeemed shareholder (“Shareholder”). As a legal matter, the 100 shares were cancelled on January 1, 2005 and that, thereafter, the Shareholder held a debt claim of $100,000. How would s. 84(3) apply? CRA responded:

…The amount of the deemed dividend at the time of the purchase for cancellation of the shares … on January 1, 2005 would be equal to the value of all consideration given by Canco and received by Shareholder … on the purchase for cancellation of those shares, including any covenant or promise to pay subsequent amounts, that were in excess of the paid-up capital respecting those shares.

This position is in accord with the decision in Cabezuelo v. MNR (TCC) and Belair v. MNR, 89 DTC 429 (TCC). … We emphasize that the term “amount” in paragraph 84(3)(a) is defined … in a broad manner in subsection 248(1) … .

2004 APFF Roundtable Q. 15, 2004-008682 -

Respecting the situation where a subsidiary purchases for cancellation a portion of the common shares in its capital held by its wholly-owning parent, CRA noted that s. 69(1)(b) would apply only for capital gains purposes and not for purposes of determining the amount of a deemed dividend under s. 84(3), given that the presumption in s. 69(1)(b) applied only with respect to the person disposing of property.

31 December 2004 Internal T.I. 2004-0091781I7 -

In a situation where preferred shares were redeemed for an amount less than the fair market value, the Directorate stated that "where, in a non-arm's length situation, the fair market value of the shares exceeds the redemption amount, the difference will be taxed as a capital gain rather than as a deemed dividend. Paragraph 84(3)(a) speaks only of the 'amount paid' where shares are redeemed. It does not stipulate fair market value payment or the lack of fair market value payment or even the necessity for one as opposed to the other ... ."

2003 APFF Roundtable Q. 4, 2003-0030005 -

no deemed dividend on wind-up following tuck under

A purchaser is interested in purchasing an operating subsidiary ("Opco") of a management corporation ("Managementco") and not Managementco. Accordingly, the individual shareholder of Managementco transfers his shares of Managementco to Opco in consideration for shares of Opco and Managementco is wound-up into Opco. The individual then sells all his shares of Opco utilizing the capital gains deduction.

No dividends will be deemed to have been paid by Opco at the time the shares in its capital stock held by Managementco are cancelled because no amount would have been paid by Opco at the time of this cancellation.

1 November 2002 External T.I. 2002-0146775 -

sale of stock option shares to affiliate of employer

Where employees of Opco (who as a group, own 14% of its issued common shares) are terminated, they are required to sell their Opco common shares for cash consideration to a new corporation ("Newco") equal to the shares' fair market value; and Newco finances the purchase with a non-interest bearing loan from Opco and, shortly after the purchase, transfers the common shares to Opco for fair market value consideration.

Ss. 84.1 and 84(3) do not apply "as long the employees and the corporations are dealing with each other at arm's length and Newco is not purchasing the Opco shares as agent for Opco"; and s. 245(2) would generally not be applied.

2002 Ruling 2002-0138993 -

A foreign subsidiary ("Holdco") which is making a takeover bid for a public corporation in the same foreign jurisdiction ("Targetco'), acquires (without obtaining beneficial ownership) common shares of the taxpayer in order to provide such treasury shares to the public shareholders of Targetco as consideration for the acquisition of shares of Targetco. Any shares of the taxpayer that are subscribed for by Holdco and which are not delivered by Holdco to Targetco shareholders are returned by Holdco to the taxpayer and cancelled in accordance with section 38 of the Canada Business Corporation Act regulations, with the subscription proceeds previously paid for the shares also being returned.

S.84(3) would not apply to deem a dividend to be received by Holdco or the Targetco shareholders as a result of the return and cancellation of such shares.

10 August 2000 External T.I. 2000-001687 -

"Where an employee has income from employment under paragraph 7(1)(a) related to the disposition, by virtue of subsection 7(1.1), of shares and a deemed dividend under subsection 84(3) of the Act related to the redemption of shares in the same or a different year, we are of the view that subsection 248(28) of the Act will apply so that there will be no income inclusion under subsection 84(3) of the same amount as a deemed dividend resulting on the redemption of the shares."

26 October 1998 Memorandum 980394

deemed dividend on M2M shaes reduced by deemed dividend

Where shares held by a financial institution are redeemed, s. 84(3) will be considered to take precedence over s. 142.5(1), and s. 248(28) will apply to allow the financial institution to reduce its proceeds of disposition by the amount of the deemed dividend. The financial institution may claim a loss on the redemption.

6 June 1997 Internal T.I. 7-963186 -

S.142.5(1) takes precedence over s. 84(3). To the extent that an amount has been included in computing income under s. 142.5(1), such amount will not be taken into account again for purposes of s. 84(3), by virtue of s. 248(28).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 142.5 - Subsection 142.5(1) 36

6 July 1995 External T.I. 5-931646 -

In response to a proposal that a payment be made to a separated wife of a husband by her dissenting to the amalgamation of a corporation controlled by her husband and in which he had a minority interest with another corporation wholly-owned by her husband, RC stated that "where a payment to a shareholder pursuant to his/her right of dissent arises as a result of transactions the primary purpose of which is to realize a distribution of corporate surplus that is taxed as a capital gain rather than a dividend and the capital gains are taxed at a lower rate, it is our view that it would constitute an avoidance transaction and subsection 245(2) would be applicable unless it is not considered to result in an abuse ... . Transactions contrived to avoid the application of section 84.1 would be considered to result in an abuse for the purposes of subsection 245(4) of the Act".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 151

12 August 1994 External T.I. 5-941549 -

Where there is a wind-up of a wholly-owned subsidiary that also owns shares of its parent, s. 84(3) will not apply to the subsidiary because the parent will not pay any amount to the subsidiary on the cancellation of its shares.

30 March 1994 T.I. 933722 (C.T.O. "Shares Held as Inventory")

On the redemption of shares held as inventory, a deemed dividend will arise pursuant to s. 84(3) and, to the extent that the paid-up capital of the share exceeds its cost to the shareholder, the excess will be included as business income of the recipient under s. 9(1). Because s. 54(h)(x) is not applicable, any deemed dividend arising under s. 84(3) cannot result in the realization by the recipient of any loss.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit 70

93 C.R. - Q. 56

Cash payments received from an amalgamated corporation for shares held by shareholders dissenting from the amalgamation will be proceeds of disposition.

3 September 1991 T.I. (Tax Window, No. 8, p. 21, ¶1436)

S.84(3) does not apply to deem a dividend to have been paid when shares of a corporation owned by its wholly-owned subsidiary are cancelled on the winding-up of the subsidiary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) 30

3 July 1991 T.I. (Tax Window, No. 5, p. 13, ¶1334)

S.84(3) does not apply to an amalgamation to which s. 87 applies.

31 May 1990 T.I. (October 1990 Access Letter, ¶1469)

With respect to an argument that where a corporation purchases for cancellation only some of the shares of a given class and pays an amount greater than the average paid-up capital of each share, the paid-up capital of the class should be reduced by the entire amount paid, RCT indicated that a deemed dividend will arise under s. 84(3) where the amount paid for each share exceeds its paid-up capital.

87 C.R. - Q.59

A shareholder dissenting pursuant to s. 184 of the CBCA who receives cash from the amalgamated corporation realizes proceeds of disposition rather than a deemed dividend. Dissent in respect of a proposed sale results in deemed dividend treatment.

87 C.R. - Q.69

Where a share having a high stated capital and low paid-up capital is exchanged in a s. 86 reorganization for another share with a high stated capital, there is a deemed dividend.

84 C.R. - Q.45

The calculation of the amount of the dividend arising on a purchase for cancellation will include the value of any type of consideration given for the shares including a promise to pay.

Articles

Didier Fréchette, Ryan Rabinovitch, "Current Issues Involving Foreign Exchange", 2015 CTF Annual Conference paper

Whether deemed dividend on redemption of USD preferred shares (pp. 26:35-39)

A Canadian-resident corporation issues preferred shares for US$100 per share at a time when the US dollar and the Canadian dollar are trading at par. The shares are redeemed at a time when the US dollar is worth Cdn$1.33. ...

[T]he issuer...does not realize any foreign exchange loss on the redemption of the preferred shares. ...

It is less clear, however, what the impact of the redemption is on the holder of the foreign-currency-denominated preferred shares and, more particularly, whether the corporation is deemed to have paid, and the shareholder's deemed to have received, a dividend. ...

The "amount paid" upon the redemption appears to be Cdn$133, pursuant to paragraph 261(2)(b). ...

Assuming that it is permissible for the stated capital of a Canadian-resident corporation to be maintained in US dollars, the stated capital of the preferred shares in this case would be US$100. This amount would then have to be converted into Canadian dollars on the date on which it "arose" pursuant to paragraph 261(2)(b). On the basis of the historical position of the CRA, this would be the day on which the shares were issued, although it could be argued—given that the definition of PUC specifies that it is an amount that is to be determined "at any particular time"—that the PUC in respect of the shares should be considered to arise from time to time (that is, at any time that it is calculated). …

[A]ccording to [9634245], it is not possible to specify an amount in foreign currency. …

[T]his interpretation is arguably inconsistent with the tax policy underlying subsections 191(4) and (5)… [and] with [CRA's] position regarding the application of section 51.1... .

R. Durand, I.M. Freedman, "Dealing with Paid-Up Capital", 1997 Corporate Management Tax Conference Report, c. 17.

Subsection 84(4)

Articles

Didier Fréchette, Ryan Rabinovitch, "Current Issues Involving Foreign Exchange", 2015 CTF Annual Conference paper

Whether deemed dividend on returns of capital of USD shares (p. 26:39-40)

[A] Canadian corporation issues a preferred share for US$100 per share at a time when the US dollar and the Canadian dollar are trading at par. Subsequently, when the US dollar is worth Cdn$1.33, US$100 of stated capital is returned to the holder of the share. ...

[I]t appears that when capital is returned in respect of foreign-currency-denominated preferred shares, no deemed dividend arises until the tax PUC of the shares has been reduced to nil.

Subsection 84(4.1) - Deemed dividend on reduction of paid-up capital

Articles

Judith Paris, "Paid-Up Capital and Return of Capital Public Corporations", Business Vehicles, Vol. VI, No. 2, 2000, p. 290.

Subsection 84(5) - Amount distributed or paid where a share

Administrative Policy

18 Aug. 89 T.I. (Jan. 90 Access Letter, ¶1082)

On the transfer by Mr. A of 1/2 of the common shares of Opco to Opco in exchange for preferred shares of Opco having 1/2 the paid-up capital of the old common shares of Opco, s. 84(3) would not deem Opco to have paid a dividend to Mr. A because the amount paid by Opco by issuing preferred shares would be equal to the amount by which the paid-up capital in respect of the preferred shares increased by virtue of the issue of preferred shares to Mr. A.

Subsection 84(6) - Where s. (2) or (3) does not apply

Administrative Policy

7 January 1998 T.I. 971265

A normal course issuer bid would not give rise to deemed dividends.

1997 Ruling 971084

The purchase by the issuer of common shares held by a majority holding company would not taint the application of s. 84(6) with respect to its purchase of common shares of minority shareholders pursuant to a normal course issuer bid.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 183.1 - Subsection 183.1(2) 31

90 C.R. - Q50

The reference to the "manner in which shares would normally be purchased by any member of the public in the open market" means that the shares must be purchased on a stock exchange or over the counter through an independent middle man in accordance with the procedures and requirements of the relevant securities legislation and the by-laws of the relevant stock exchange.

Subsection 84(9) - Shares disposed of on redemptions, etc.

See Also

Gaumond v. The Queen, 2014 DTC 1024 [at 98], 2014 TCC 339 (Informal Procedure)

s. 84(9) not for greater certainty

The taxpayer renounced debt owing to him by his small business corporation pursuant to a bankruptcy proposal. Lamarre J found that, in the absence of a provision similar to s. 84(9) deeming the debt to have been disposed of to someone, all the taxpayer had was a disposition of the debt rather than a disposition to another person, which was a sufficient basis for finding that he did not have a business investment loss. Before so finding, she stated (at para. 27, TaxInterpretations translation):

in the absence of subsection 84(9) of the ITA, it can be assumed that a shareholder who deals at arm's length with the small business corporation which redeems or cancels his shares cannot benefit from a BIL

See summary under s. 39(1)(c).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) renounced debt is not disposed of to anyone/s. 50 not available where debt settled in year 261
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) s. 50 not available where debt settled in year 100

Special Risks Holdings Inc. v. The Queen, 86 DTC 6035, [1986] 1 CTC 201 (FCA)

The taxpayer, following a modification in the capital structure of a company ("RMC") exchanged its voting shares of that company for non-voting preferred shares. Pratte J., in responding to an argument that s. 89(5)(a)(ii) could not apply because "the disposition by the appellant of its shares of RMC was not a disposition 'to a person' as required by the subparagraph because RMC could not own its own shares" stated:

"In reality, the surrender by the appellant of its old RMC shares was neither a disposition by the appellant nor a disposition to RMC. However, it is common ground that the substitution of the new RMC shares for the old ones was deemed by section 86 to be a disposition of the old shares in consideration for the new ones. I have no difficulty in deciding that it logically follows that the substitution of the new shares for the old ones must also be deemed to be a disposition to RMC."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) relationship enabling one party to dictate terms 144
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) 160

Administrative Policy

20 February 1991 T.I. (Tax Window, No. 2, p. 8, ¶1182)

Where a corporation is wound up and the shares are cancelled as a result of the winding-up, s. 84(9) does not apply.

10 January 1990 T.I. (June 1990 Access Letter, ¶1257)

Under Canadian corporate law, the shares of a corporation which is being wound-up or liquidated are not disposed of "to a person" as a result of the liquidation. Consequently, the shareholders' shares of the corporation have not been redeemed, acquired or cancelled as a result of the liquidation and s. 84(9) would not apply to the disposition.

IT-484R "Business Investment Losses"

Articles

Gregory M. Johnson, Wesley R. Novotny, "An Update on Flow-through Shares in the Energy Sector", 2016 Conference Report (Canadian Tax Foundation),12:1-39

Flow-through shares issued after announcement of long-form amalgamation may be prescribed shares (p. 12:20-21)

...On an amalgamation, it is possible that subsection 84(9) will apply to deem the FTS to be disposed of to the PBC. [f.n. 78 The CRA stated that subsection 84(9) could potentially apply to an amalgamation in CRA document no. 9415495, August 12, 1994; CRA document no. 9429925, March 20, 1995; and CRA document no. 9130715, May 11, 1994].

...Assuming that subsection 84(9) applies to an amalgamation, FTS that are issued after an announcement of a long-form amalgamation may result in a prescribed-share issue under Regulation 6202.1(1)(d). This resuly occurs because the PBC, as a consequence of subsection 84(9), may reasonably be expected to acquire the FTS within 5 years.