5 October 2007 APFF Roundtable Q. 10, 2007-0243171C6 F - Surplus Stripping -- summary under Paragraph 251(1)(c)

CRA considered that where an individual (Mr. X) holding all the common shares of Opco exchanged all his common shares for retractable preferred shares and then he and a new corporation for key employees (Employeeco) subscribed for common shares on a a 65/35 basis, a sale by him of 35% of the preferred shares to Employeeco followed by an immediate retraction of those preferred shares in order for Employeeco to pay the purchase price, constituted a non-arm’s length transaction. On the other hand the purchase of 35% of the existing common shares of Opco by Employeeco from Mr. X, with the unpaid purchase price to be paid over time out of dividends received by Employeeco on the purchased shares, would likely be an arm’s length transaction.