A holds preferred shares of Corporation A directly (Class B shares with a redemption amount and ACB (reflecting a previous crystallization transaction) of $500,000 and nominal PUC and, through Holdco A, holds Class C preferred shares with an FMV of $3,000,000 and nominal ACB and PUC. Corporation A’s common shares, having an FMV of $3,000,000 and nominal ACB and PUC, are held by Trust A.
In order that the six restaurants operated by Corporation A can be held by corporations (Corporation A and Newco) for the respective benefit of A’s two children (X and Y):
- A incorporates and subscribes a nominal amount for special voting shares of Newco that give him control at all times.
- Corporation A sells the assets of three of its restaurants to Newco under s. 85(1) in consideration for the assumption of debt and Newco preferred shares.
- A, Holdco A and Trust A sell ½. ½ and ¼, respectively, of their shares of Corporation A on a s. 85(1) rollover basis in exchange for similar-attribute shares of Newco.
- A subscribes a nominal amount for special voting preferred shares of Corporation A, giving him de jure control.
- There is a cross-redemption of the shareholdings between Corporation A and Newco for notes for $3,000,000, followed by their set-off.
- With the exception of the special voting shares (retained by A), the shares of Corporation A and Newco are sold for their FMV to the respective children for cash purchase prices that are funded with loans from a financial institution and A to the children.
- The resulting capital gain realized by Trust A may be distributed to A as a discretionary beneficiary, with A utilizing the balance of the capital gains exemption.
In discussing whether the s. 55(3)(a) exemption would be available for the dividends deemed to arise in 5 above in the absence of any application of s. 55(4), CRA indicated that this would turn on “the extent that each of A, Newco and Corporation A was related to all of the beneficiaries of Trust A described in subparagraph 55(5)(e)(ii) at the relevant times.”