Principal Issues: Whether paragraph 95(2)(c) applies in a situation where a taxpayer transfers shares of a foreign affiliate to another foreign affiliate that is a “non-resident corporation without share capital”, within the meaning of subsection 93.2(1), without any “shares” being issued as consideration?
Position: Yes, provided the conditions set out in subsection 93.2(3) are met.
Reasons: See below.
2016 International Fiscal Association Conference
CRA Roundtable
Question 10 – Interaction of section 93.2 and paragraph 95(2)(c)
It is our understanding that subsection 93.2(3) was introduced with the specific purpose of facilitating the application of paragraph 95(2)(c), among other provisions, to “non-resident corporations without share capital”, within the meaning of subsection 93.2(1). However, the deeming rule in paragraph 93.2(3)(a) arguably does not go far enough in providing all the elements necessary for the proper application paragraph 95(2)(c).
For illustrative purposes, assume the following facts:
a) Canco, a corporation resident in Canada, owns all the shares of FA1.
b) FA1 owns all the shares of FA2 and all the member interests of FA3.
c) FA1, FA2 and FA3 are all non-resident corporations, and FA3 is a “non-resident corporation without share capital” within the meaning of subsection 93.2(1).
d) FA1 and FA2 have only one outstanding class of shares of their capital stock.
e) Based on the application of paragraphs 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 paragraph 95(2)(c) in these circumstances?
CRA Response
It appears to us that the deeming rule in paragraph 93.2(3)(a) only deems the vendor to have received new shares of the class of the “non-resident corporation without share capital” as consideration in respect of the disposition or exchange so as to meet the conditions of the preamble of paragraph 95(2)(c). However, in order for subparagraph 95(2)(c)(ii) to apply properly, there also has to be shares to which one can attribute a cost or, for variables C and D of the formula in that subparagraph, a fair market value. Furthermore, it is not clear how to reconcile the 100 shares already deemed to exist under paragraph 93.2(2)(b) with the undefined number of additional shares that are deemed to be issued under paragraph 93.2(3)(a).
However, we agree that the context and purpose of paragraph 95(2)(c) and section 93.2 suggest that paragraph 95(2)(c) should be capable of being applied in situations such as the one presented above where no new equity interests are issued as consideration for the acquisition of shares of another foreign affiliate. Thus, despite whatever textual challenges might exist, we are of the view that on a unified textual, contextual and purposive analysis paragraph 95(2)(c) applies so as to result in a rollover in these circumstances.
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.
Yannick Roulier
Dave Beaulne
2016-064210
May 26, 2016