Three individuals (A, B, and C) each held 1/3 of the shares of Holdco, and Holdco and another individual, D, each held ½ of the shares of Opco. D transferred D’s Opco shares to Holdco in consideration for a non-voting preferred share and a note. Did s. 84.1(2)(b) deem this to be a non-arm’s length transfer?
Before going on to note that it might be a non-arm’s length transfer as a factual matter, the Directorate stated:
Initially, D (the Taxpayer) and Holdco (the Purchaser) form a group (the Initial Group) which controls Opco (the Subject Corporation).
[Thereafter] … the Purchaser … is controlled by a group of 4 persons consisting of A, B, C and D (the Final Group).
…[I]ndividuals A, B and C do not own shares of the capital stock of Opco immediately before the disposition. Furthermore, paragraph 84.1(2.2)(a) would not apply to deem the shares of the capital stock of Opco owned by Holdco to be owned by individuals A, B, and C.
Consequently, Holdco is not a member of the Final Group. In addition, A, B and C are not members of the Initial Group. Consequently, the deeming provision in paragraph 84.1(2)(b) could not apply … .