Canco owns all the shares of FA1, which owns all the shares of FA2 and all the member interests of FA3, which is a “non-resident corporation without share capital” as per s. 93.2(1). Based on the application of ss. 93.2(2)(a), (b) and (d), FA3 has 100 shares of a single class of its capital stock, which shares are deemed to have rights and obligations that are the same as those of the corresponding equity interests. FA1 transfers all of its shares of FA2 to FA3 as a capital contribution, i.e. no new member interests are issued by FA3. How would the CRA apply s. 95(2)(c)?
CRA responded:
[D]espite whatever textual challenges might exist… on a unified textual, contextual and purposive analysis paragraph 95(2)(c) applies so as to result in a rollover… .
More specifically, provided this transfer is done in a manner that increases the fair market value of the deemed class of shares of the capital stock of the “non-resident corporation without share capital” (FA3) by an amount equal to the fair market value of the FA2 shares transferred and provided no election is made under paragraph 93.2(3)(b), paragraph 95(2)(c) would apply with the result that the cost of the FA3 shares that are deemed to be owned by FA1 immediately before the transfer will be increased by an amount equal to the relevant cost base to FA1 of the shares of FA2 so transferred and FA1 will be deemed to have disposed of the shares of FA2 for that same amount.