Background
FA6, which is an indirect wholly-owned subsidiary of Canco, directly or indirectly holds eight other wholly-owned subsidiaries (the “Regional FAs”), including FA1 and FA9, which own offices used in their regulated active businesses, while FA5 owns commercial real estate whose income is included in computing its income from an active business. Although the other Regional FAs (FA3, FA4, FA7 and FA8) do not own any commercial real estate, each may acquire commercial real estate prior to the proposed transactions.
Proposed transactions
FA6 will establish FA Holdco, which will establish one or more Property Cos that will be held by it directly or indirectly. The property owned by FA1 will be transferred to a Property Co in exchange for cash or shares of that Property Co, with any such shares then being transferred by FA1 to FA Holdco in exchange for FA Holdco shares – and similarly for the real estate of FA5 and FA9.
For new property acquisitions, FA1, FA2, FA3 and FA4 will subscribe for shares of FA Holdco in cash equal to the FMV of the relevant property to be acquired, FA Holdco in turn will, directly or indirectly, subscribe in cash for shares of the relevant Property Cos and each Property Co will then acquire the relevant property for cash equal to the property’s FMV. Due to local regulatory requirements, FA5, FA7, FA8 and FA9 may directly acquire shares in a Property Co that holds real estate in the jurisdiction in which FA5, FA7, FA8 and FA9, respectively, carries on its business rather than acquiring shares of FA Holdco. At the completion of the Proposed Transactions, all of the outstanding voting shares of FA Holdco, having a limited value, will be held by FA6, and all of the outstanding non-voting common shares of FA Holdco will be held by FA1, FA2, FA3 and FA4.
The investments in FA Holdco by FA1, FA2, FA3 and FA4, or in a Property Co by FA5, FA7, FA8 and FA9, will be determined based on the needs of their respective active businesses from time to time. Specifically, each such investment will be held as part of the active regulated businesses carried on by the Regional FAs and to support such business within the quantum and in the manner required by the relevant local regulatory authority.
Purpose of proposed transactions
They will create a combined pool of real estate investments that will facilitate real estate acquisitions and reduce risks to the various regulated companies in the group through diversification.
Ruling
S. 95(2)(a)(i) will apply to include in computing the income or loss from an active business of a particular Property Co for the taxation year a portion of the income or loss that would otherwise be the income or loss from property of the particular Property Co. Specifically, s. 95(2)(a)(i) will apply to the proportion of the income or loss that the average of all amounts each of which is the FMV of the shares of the particular Property Co that are held (either directly or indirectly) by the Regional FAs (taking into account, where applicable, their pro rata share of the FA Holdco shares) at the beginning of each month throughout the relevant taxation year is of the average of all amounts each of which is the FMV of all the outstanding shares of the particular Property Co at the beginning of each month throughout the relevant taxation year.