CRA ruled on a s. 55(3)(a) split-up of a real estate rental corporation (Canco) whose common shares were held by Son Holdco and Daughter Holdco and whose prefs were held by a Holdco for the father and mother of Son and Daughter (Holdco 1). The transfer of the real estate to Newco 1 (whose common shares and prefs were acquired on the spin-off by Son Holdco and Holdco 1, respectively) and to Newco 2 (whose common shares and prefs were acquired on the spin-off by Daughter Holdco and Holdco 1, respectively) was stated to occur within the range permitted by s. 85, and the facts included a statement that “Canco does not have a material balance of CDA or RDTOH.”
CRA commented that to the extent that Canco has a balance in its RDTOH at its year-end immediately following the redemptions and purchases for cancellation of its shares held by Newco 1 and Newco 2, this could give rise to a “circular” calculation of RDTOH, resulting in each of Newco 1, Newco 2 and Canco being subject to Part IV tax, and stated:
Since the problem will affect the assessment of the income tax returns of Canco, Newco 1 and Newco 2, the district taxation office at which each of the corporations files its T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b) described in these comments.