2016 Ruling 2015-0623731R3 - Subsections 55(2) and (2.1) -- summary under Forgiven Amount

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 under s. 85(1) 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”).
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. 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.
5. 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”).
6. 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

Provided that the amount owing under the two notes is equal, s. 80(1) will not apply to the settlements in 6. The summary answered the question of “Whether administrative position in respect of section 80 applies” with “No,” stating: “Set-off and cancellation of debts not occurring in context of a distribution as defined in subsection 55(1).”