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.
- After having repaid a portion of their bank loans, the children transfer their shares of Holdco A and Corporation A, as the case may be, to a newly-formed holding company for each child (Holdco X and Holdco Y) in consideration for the assumption of the debt remaining from 6 above and for high-low preferred shares.
- Holdco X and Corporation A, and Holdco Y and Newco, may amalgamate.
In discussing whether the s. 55(3)(a) exemption would be available for the dividends deemed to arise in 5 above in light of the s. 55(4) exclusion, and after noting that it had insufficient information to answer this question, CRA stated:
In connection with a request for an advance ruling, we would require additional information such as, inter alia, the age of the parent and children, the involvement of the parent and children in the businesses prior to the reorganization and thereafter, the experience and training of the children to operate such businesses, the identity of the trustee or trustees of Trust A, the length of time that A has held voting shares of the capital stock of Newco and Corporation A, etc.
Furthermore, although we have previously issued advance rulings that subsection 55(4) did not apply where the principal reason was to protect the economic interests of the person holding the voting shares, we were satisfied that in those cases there was not another principal reason that corresponded to the one set out in s. 55(4). Although you indicated in your letter that one of the main reasons would be to protect the economic interests of A because of the loans it would have made to X and Y, which loans would ultimately be assumed by Holdco X/Amalco X and Holdco Y/Amalco Y respectively, it cannot be precluded that we could come to the conclusion that one of the main reasons corresponded to the one indicated in subsection 55(4) considering a set of factors including, inter alia, the identity of the persons who control Corporation A prior to the described reorganization. In this regard, we note that A's economic interest in the businesses would amount to $4.5 million before the described reorganization and only $1 million after the reorganization. In addition, as a result of the transactions, each of the children would have a greater economic interest in Corporation A or Newco, as the case may be, than their father.