Principal Issues: Whether the CRA maintains its long standing position that subsection 84(2) should not apply to "tuck under" transactions carried out in the context of "safe income extraction" scenarios.
Position: Yes.
Reasons: Wording of the Act and previous positions.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 17
Impact of the Tremblay decision on "Tuck Under" transactions
In Tremblay et al. v. The Queen (footnote 1), the Minister attempted to apply subsection 84(2) in a "tuck under" transaction. The Tax Court of Canada concluded that subsection 84(2) did not apply. The Federal Court of Appeal upheld the decision in a judgment rendered on May 17, 2010. A "tuck under" transaction generally allows a shareholder who holds the shares of a target through a holding corporation to directly hold the shares of the target. The transaction aims to transfer the holding corporation under the target to achieve the targeted result.
Consider the following situation:
- Target Corporation is the object of an offer to purchase all of its shares. Some minority shareholders wish to enter into a series of transactions in order to benefit from the safe income on hand attributable to the shares of Target.
Here is the structure of one of the shareholders before planning:
- Holdco 1 incorporates a new corporation (Holdco 2) and transfers the Target shares to it on a rollover basis.
- The directors of Holdco 2 proceed with an increase in the paid-up-capital in the amount of the safe income.
- Holdco 1 transfers the Holdco 2 shares to Target in exchange for Target shares.
- Holdco 2 is wound-up into Target.
- Holdco 1 can now sell Target shares and benefit from the increase in ACB.
We understand that the long-standing position of the CRA is that subsection 84(2) should not apply with respect to the transaction described above.
Question to the CRA
Is this still the position of the CRA?
CRA Response
It should first be noted that the decision of the Federal Court of Appeal in the Tremblay case included a dissent by Blais CJ, who found that subsection 84(2) applied on the basis in particular of Smythe v. M.N.R., [1970] S.C.R. 64 of the Supreme Court of Canada.
It should also be noted that section 245 was not raised in the Tremblay case.
Consequently, and despite the Tremblay decision, the CRA intends to continue to challenge surplus stripping situations that are considered abusive, including those in the form of "tuck under" transactions, in particular by reviewing the potential application of subsections 84(2) and 245(2) in the particular situations.
That being said, it is possible that, under appropriate circumstances, "tuck under" transactions may be performed without triggering the application of subsections 84(2) and 245(2). For example, the CRA maintains its long-standing position that subsections 84(2) and 245(2) should not apply to a "tuck under" transaction to extract the safe income on hand relating to the interest of a corporate taxpayer in a target corporation, of the type described in this question. However, and on the basis of the foregoing, the CRA is of the view that the Tremblay decision cannot be interpreted as having the effect of automatically validating all other types of "tuck under" transactions.
Stéphane Prud'Homme
(613) 957-8975
October 8, 2010
2010-037329
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Tremblay et al. v. The Queen, 2009 TCC 6 and The Queen v. Vaillancourt-Tremblay et al., 2010 FCA 119