2016 Ruling 2015-0623731R3 - Subsections 55(2) and (2.1) -- summary under Paragraph 55(3)(a)

Background

As described in 2015-0601441R3, Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent, a public corporation) accomplished a winding-up of a general partnership (“Partnership”) through a transfer by Sub2 of its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and for a non-interest bearing demand promissory note (the “Sub1 Note”) with a principal amount equal to the non-interest-bearing demand promissory note (the “Sub2-Partnership Note”) owing by Sub2 to the Partnership, jointly electing under s. 85(1).

Proposed transactions

1. The Sub1 Note and the Sub2-Partnership Note will be settled in full by way of set-off.
2. Sub1 will redeem the Sub1 Preferred Shares held by Sub2. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub1 Redemption Note”), whose redemption amount may include an amount respecting accrued and unpaid dividends. Sub1 will designate a portion of the resulting deemed dividend as an eligible dividend per s. 89(14).
3. Sub2 and Parent will undertake a s. 86 reorganization of Sub 2’s capital so that, following articles of amendment, Parent will exchange all of the issued and outstanding shares of Sub2 for Sub2 New Common Shares and (non-voting redeemable retractable) Sub2 Preferred Shares. The aggregate redemption amount of the Sub2 Preferred Shares will be equal to the amount owing by Sub1 under the Sub1 Redemption Note, and the aggregate FMV of the Sub2 New Common Shares and Sub2 Preferred Shares will be equal that of the exchanged Sub2 Shares, which will be greater than the FMV of the Sub1 Redemption Note.
4. A paragraph (no. 42.1) was added stating: "The agreement described in paragraph 42(b) above will also provide that the aggregate Capital of the newly issued Sub2 New Common Shares and Sub2 Preferred Shares for purposes of Act 2 will be equal to the PUC of the Exchanged Sub2 Shares, immediately before the exchange, and that such Capital will be allocated to the newly issued Sub2 New Common Shares, as a class, and to the newly issued Sub2 Preferred Shares, as a class, proportionately based on each classes respective FMV."
5. Parent will transfer to Sub1 all of the Sub2 Preferred Shares (the “Transferred Sub2 Shares”) in consideration for the issuance of Sub1 common shares (the “New Sub1 Shares”), electing under s. 85(1) at Parent’s ACB of the Transferred Sub2 Shares.
6. Sub2 will redeem the Transferred Sub2 Shares held by Sub1. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub2 Redemption Note”), with Sub2 making an s. 89(14) designation.
7. The Sub1 Redemption Note and the Sub2 Redemption Note will be settled by way of set-off and cancelled in full satisfaction of the obligations under the Sub1 Redemption Note and the Sub2 Redemption Note.

Ruling

Ss. 55(2) and (2.1) will not apply to the deemed dividends arising in 2 and 6 by virtue of the exception in s. 55(3)(a), provided that, as part of the series of transactions or events as part of which these dividends are received, there is no event described in ss. 55(3)(a)(i) to (v) which has not been described above, and that the transactions and events described in a redacted paragraph were carried out in the manner described.