Aco held all the shares (having a minimal adjusted cost base) of Holdco (a small business corporation), which held all the shares (being common shares) of Opco. For creditor-proofing reasons, Holdco transferred inventory and other business assets to Opco on a. 85(1) rollover basis and Opco over the next few days paid dividends to Holdco approximating the value of the Opco common shares, with such proceeds then being lent back to Opco under a secured loan. Aco sold 35% of its Holdco shares to an unrelated third party as part of the same series of transactions, thereby realizing a significant capital gain.
In commenting on the purpose test, CRA stated:
[T]he capital gain realized by Aco on the sale of a portion of its interest in Holdco remained the same as if the dividend had not been paid.
… In addition, even though we are dealing with a situation described in subparagraph 55(3)(a)(iv), it should be noted that the main purpose of that subparagraph was to prevent a form of purchase butterfly. … [I]t would seem that we are not in such a circumstance.
Consequently … Holdco would have arguments in favour of concluding that the purpose test in subsection 55(2) would not be satisfied.