Holdco's Active Shareholders set up a corporate asset protection structure and introduced certain key employees into the shareholding structure, through the following steps:
(i) creation of a new family trust by each Active Shareholder involved in Holdco's business, whose spouse and minor children were the beneficiaries;
(ii) Opco incorporated a new corporation ("Group Opco") for the protection of Opco's assets;
(iii) Group Opco created a new corporation ("Opco 2") for Opco's day-to-day operations;
(iv) Opco transferred all of its business assets (excluding excess cash and investments) to Group Opco, on as. 85(1) rollover basis in consideration for the assumption of liabilities, a promissory note and preferred rollover shares of its capital stock (i.e. non-voting, dividend-paying, redeemable, non-voting shares for an amount equal to the value of the consideration received on the issue of those shares);
(v) Group Opco transferred to Opco 2, on a s. 85(1) rollover basis, its accounts receivable, inventory and goodwill in consideration for the assumption of accounts payable, and the issuance to Group Opco of a note and common shares.;
(vi) The newly created family trusts and certain key employees subscribed for common shares of Group Opco for a nominal amount;
(vii) Group Opco purchased for cancellation the common shares of its capital stock held by Opco for an amount equal to the subscription price for the latter;
(viii Holdco and Opco amalgamate;
(ix) each family trust shareholder of Holdco was wound-up and its assets (i.e. common shares of the capital stock of Holdco) were distributed to a holding corporation controlled by the Active Shareholder who had proceeded with a freeze of their interest in Holdco in favour of a family trust.
CRA stated that “it appears, prima facie, that the transactions described in [(iv)] above would not result in the application of subsection 74.4(2), even at a time when Group Opco and Opco 2 would no longer qualify as an SBC.