2017 Ruling 2016-0675881R3 - Paragraph 55(3)(a) Internal Reorganization -- summary under Paragraph 55(3)(a)

Current structure

Canco is a Canadian-controlled corporation holding “Parcel One” and “Parcel Two” (consisting in each case of the beneficial ownership of two of the four buildings of Canco, a percentage of Canco’s interest in a rental real estate joint venture, near-cash assets and marketable securities plus, in the case of Parcel Two, the “Equalization Amount,” whose purpose is to equalize the net value of the assets received by each of Newco 1 and Newco 2 from Canco in 5 below, so as to effectively compensate Newco 2 for the excess value so received by Newco 1. Canco’s shareholders are Holdco 1 (whose shareholders are Mr. and Mrs. A, each holding common shares and Class A or Class B preferred shares), Holdco 2 (Holdco 1 Holdco owned by Child 1 (their son) and Holdco 3 (owned by Child 2, their daughter). Canco does not have a material balance of CDA or RDTOH.

Proposed transactions

1. Holdco 1 will incorporate Newco 1 and Newco 2 and subscribe (presumably, a nominal amount) for super-voting redeemable retractable non-dividend-bearing shares of each. "The reason that Holdco 1 will acquire super-voting shares and redeemable, preferred shares of Newco 1 and Newco 2 as part of the Proposed Transactions is to preserve Holdco 1’s economic interest in the underlying assets as it was before the Proposed Transactions."
2. Following articles of amendment to create Canco Super-Voting Shares (similar to those of Newco 1 and 2), Holdco 1 will subscribe for Canco Super-Voting Shares of Canco.
3. Holdco 1 under s. 85(1) will transfer XX% and (100-XX)%) of each of its Class A and Class B preferred shares to Newco 1 and 2, respectively, in consideration for non-voting redeemable and retractable Newco 1 or 2 Class A Preferred Shares.
4. Holdco 2 and 3 under s. 85(1) will transfer all of their Canco common shares to Newco 1 and 2, respectively in exchange for Newco 1 or 2 Common Shares.
5. Canco will transfer Parcel One and Two to Newco 1 and 2, respectively, in consideration for assumption of liabilities (including mortgages) and for Newco 1 or 2 Class B Preferred Shares. The s. 85(1) elected amounts will be within the permitted range.
6. Newco 1 and 2 will redeem all of the Newco 1 and 2 Class B Preferred Shares respectively held by Canco, and issue a demand, non-interest bearing promissory note in full payment of the respective redemption amounts (the “Newco 1 Note” and “Newco 2 Note,” respectively).
7. Canco will purchase for cancellation all of the Canco Ordinary Shares, and redeem the Class A and B preferred shares (held by Newco 1 and Newco 2), and issue a demand, non-interest bearing promissory note to each of Newco 1 and 2 in full payment of the respective purchase and redemption amounts (the “Canco 1 Note” and “Canco 2 Note,” respectively).
8. The Newco 1 Note and the Canco 1 Note, and the Newco 2 Note and the Canco 2 Note, will be set off.

Rulings

Including re s. 55(3)(a).

For the purposes of determining the elected amount under s. 85(1)(e) in 5 above:

the reference to “the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to Canco of all the property of that class that the capital cost of the property so transferred before the disposition is of the capital cost of all property of that class immediately before the disposition.