On the death of Y, his co-ownership interest in shares held with his spouse (X) passed to a spousal trust for her following the settling of the estate. In describing the application of the s. 248(21) or (20) rules to a partition of the shares (followed by their consolidation) if the co-ownership interests therein had first been transferred to the spousal trust, CRA stated:
[T]o date, the opinions issued by this Directorate with respect to the application of subsections 248(20) and (21) to the partition of shares have always dealt with situations where each of the shares held in undivided co-ownership that are subject to a partition gave rise to the issuance of fractional shares. In this context, the corporation must legally be able to issue fractional shares to its shareholders. The partition of a share must therefore give rise to the issuance of fractions of the same share issued prior to the partition to each of the co-owners in order to represent their respective rights in that share. The totality of the fractions of shares issued upon partition must represent the same property as the share previously held in undivided co-ownership. Following the partition, each co-owner then holds a divided part of each share.
Subsequently, a consolidation of divided shares of a corporation held by a shareholder could be effected without tax consequences. …
… In your opinion, it would be appropriate ... to divide … the shares into two lots of equal value. This approach does not permit the application of subsections 248(20) or (21). In particular, a block of shares cannot be considered as a single property for the purposes of subsections 248(20) and (21).