Section 85.1

Parent, a listed corporation with a specified shareholder (and perhaps with two classes of multiple voting and single voting shares), wishes to spin off one of its subsidiaries, whose shares are held, in part, through a subsidiary of Parent (Sub1) and partly by Parent directly. CRA provided butterfly and other ruling on two successive spin-off butterflies pursuant to which Sub1 spins-off its shares of the subsidiary to Parent, then Parent drops all of its shares of the subsidiary into a Newco which then is spun-off to its shareholders.

In addition:

• S. 85.1 applies to the component of the second spin-off pursuant to which the Parent shareholders exchange special shares of Parent received by them under a s. 86 reorg to Newco in exchange for Newco shares (unless they choose to jointly elect with Newco under s. 85(1)).

CRA provided s. 85.1 rulings respecting "Acquireco" acquiring all of the shares of the members of a widely-held credit union under s. 85.1 in exchange for Acquireco treasury shares (with the exception of the Class D shares of the target, which will be redeemed for cash).

See summary under s. 88(1).

The fact that shares are divided into two blocks -one of which is exchanged for cash and the other which is exchanged for shares - in order to bring the transaction within s. 85.1, does not by itself result in the application of GAAR.

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 gross and net fair market value of the assets of Opco having an FMV of $1,000). 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. A and Aco deal at arm's length with Opco.

Subsection 85.1(2.1) will apply to grind the paid-up capital of the Opco shares from $300 down to $30.

Ruling respecting the combined operation of s. 95(2)(c) (similar in this regard to s. 85.1(3)) and s. 93.2) on a joint contribution by the three foreign affiliate shareholders of a foreign affiliate of their respective shareholdings to a Dutch co-operative (with membership interests rather than share capital) in consideration for credits to their respective membership interest accounts.

S. 95(2)(c) which, insofar as relevant to the question of how it dovetails with s. 93.2, is essentially identical to s. 85.1(3). Respecting the transfer by a foreign affiliate (FA1) of Canco of all its the shares of FA2 to another non-resident subsidiary of FA1, viz., a non-share corporation (“FA3”), as a capital contribution, CRA noted that, as a technical matter, s. 93.2(3)(a) does not appear to go quite far enough so as to permit the particulars of the cost-apportionment formula in s. 95(2)(c) to be filled in. However, CRA went on to find that despite these “textual challenges,” the s. 95(2)(c) rollover would be available provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares.

CRA provided s. 55(3)(a) rulings respecting a spin-off by one Canadian subsidiary (CanSub1) of a public company (ParentCo) of CanSub1’s foreign subsidiary (ForSub1) to another wholly-owned Canadian subsidiary (CanSub2) of ParentCo. It was proposed that the acquisition by CanSub2 of the ForSub1 shares be followed by their s. 85.1(3) drop-down to a foreign subsidiary of CanSub2 in consideration for common shares of equivalent value. CRA ruled that this double transfer of the ForSub1 shares would not result in those shares not qualifying as capital property:

For purposes of subsection 85.1(3), provided that the ForSub1 Common Shares constitute capital property to CanSub1 immediately prior to the transfer of the shares by CanSub1 to CanSub2 … the transfer by CanSub1 of the ForSub1 Common Shares to CanSub2 … and the subsequent transfer by CanSub2 of such shares to ForSub2 … will not, in and by themselves, cause such ForSub1 Common Shares not to be capital property of CanSub2.

The reorganization also included a similar double-transfer of shares of another subsidiary (ForSub3), and CRA provided a similar ruling.

The taxpayer, a Canadian corporation, transferred all its voting and participating shares of Subco, a non-resident subsidiary wholly-owned corporation, to Forco (another controlled foreign affiliate) in consideration for shares of Forco. Forco also exercised an option to acquire IP from a group member. Forco sold its IP to an arm's length US purchaser ("Purchaseco") and another company in the Purchaseco group, and then sold all its shares of Subco to Purchaseco.

In finding that s. 69(11)(b) did not apply to deny a rollover under s. 85.1(3) for the drop-down of Subco to Forco, the Directorate stated:

The fact that there is no tax payable under the Act by Forco with respect to its gain on the disposition of the Subco shares is due to the fact that the disposition does not result in any income under the Act (Forco is simply not subject to tax under subsection 2(3) of the Act), not because an exemption from tax payable under the Act is available to Forco. Consequently, paragraph 69(11)(b) of the Act would not apply… .

The Directorate went on to state:

[A] court would probably be reluctant to apply subsection 69(11) of the Act to deny the benefit of the 85.1(3) rollover where the conditions to apply subsection 85.1(3) of the Act are met (considering paragraph 95(6)(b) of the Act) and where subsection 85.1(4) of the Act does not apply in a particular situation.

S. 85.1(4) was not considered here because there was to be a separate referral on that issue.

Proposed Transactions

Holdco (resident in Canada) transfers a portion of its shares of a Netherlands private limited liability company (“BV”) to a newly-incorporated Canadian subsidiary (“Newco”) under s. 85(1), following which BV is converted to a Dutch cooperative (“DC”), as a result of which all the shares of BV are cancelled and Holdco and Newco automatically become members of DC holding membership interests in proportion to their previous respective shareholdings. The parent of Holdco (“Canco”) then transfers shares of directly-held foreign affiliates (“FAs”) to Holdco in consideration for Holdco shares, and Holdco then transfers such FA shares to DC (and to Newco under s. 85(1)) in consideration for an increase to its membership interest in DC by an amount equal to the FMV of such transferred shares (and for the issuance of Newco shares – with Newco then dropping down its FA shares to DC in consideration for a correlative increase in its membership interest).

Rulings

Including that Holdco and Newco are each considered to own shares of DC in the indicated respective proportions, and that s. 85.1(3) will apply to their respective drop-down transactions on the basis that they received treasury shares of DC.

S.85.1(4) will not apply where Canco, which owns 100% of USco, transfers its shares of USco for fair market value consideration to a U.S. holding company ("Holdco") that also is a foreign affiliate of Canco, and Holdco then issues common shares to the public and has some of its shares sold by Canco to the public.

Shares of a foreign public company (“Foreign Target”) were exchanged by a Canadian partnership (“Vendor”) for treasury shares of another foreign public company (“Foreign Purchaser”) and cash. Although the cash received for each share tendered was specified in the offer, the fraction of the total consideration that it represented could not be determined until the date of the exchange because the total exchange consideration was dependent upon the average trading price of Foreign Purchaser’s shares immediately before the exchange. Except respecting the treatment of the cash consideration, all the s. 85.1(5) conditions were satisfied. Was the s. 85.1(5) rollover applicable?

CRA quoted S4-F5-C:

Subsection 85.1(1) may apply where a vendor receives newly issued shares of the purchaser and non-share consideration for each exchanged share. The purchaser’s offer must clearly indicate which fraction of each exchanged share is exchanged in consideration for the newly issued shares of the purchaser and which fraction of each exchanged share is exchanged for non-share consideration.

and then stated:

[W]e note that the position in point 2 of paragraph 1.7 [of S4-F5-C1] would equally apply to a foreign share for share exchange… . Nonetheless, where the purchaser’s offer does not clearly specify the fractional information noted in point 2 of paragraph 1.7 of the Folio…the requirements of 85.1(5) will not be met in a situation where a vendor receives newly issued shares of the purchaser and non-share consideration for each exchanged share.

Where a U.S. public company of which the taxpayer's employer was a Canadian subsidiary merges with another corporation, s. 85.1(5) will not provide rollover treatment in respect of the issuance of shares by the merged corporations to the taxpayer in exchange for his employee stock option rights.