A CRA response at the 2005 APFF Roundtable (2005-0141061C6) dealt with the situation where Mr. X, an arm’s length shareholder owning 20% of the shares of OPCO (a private corporation) accomplished a sale of his shares so as to produce capital gains treatment as a result of OPCO subscribing $200,000 in cash for shares of a Newco (Subco), with Subco then buying the OPCO shares of Mr. X for such cash. CRA stated:
[A]ssuming that after the acquisition of the shares, Subco would be merged with OPCO by way of an amalgamation or winding-up, we note that the Given Situation would be similar to the example given in paragraph 4 of Supplement 1 … IC 88-2. The CRA's position is generally not to apply subsection 245(2) in situations similar or identical to [such] example … . However, if Subco were not merged with OPCO following the acquisition of the shares, other elements may have to be considered … .
When asked to elaborate on this response, CRA stated:
The latter statement, although within the scope of the Given Situation, was rather aimed at situations that could involve taxpayers who, for example, would be tempted to use tax base created between Opco and Subco in an abusive manner.
Furthermore, in light of the above comments, whether or not the shares of the capital stock of the corporation acquired by the subsidiary are redeemed should generally not change the tax treatment of the selling shareholder in a situation similar to that described in the [above] statement … .