Each of two brothers, who already held some of “their” shares of Opco through their respective holding companies (Holdco 1 or Holdco 2) had, in a capital gains crystallization transaction in which the s. 110.6(2.1) deductions were claimed, transferred further common shares of Opco to Holdco 1 or 2, respectively, in consideration for Class E preferred shares with an ACB equaling their FMV and nominal PUC. Subsequently, each brother disposed of all their shares of Holdco 1 or Holdco 2 to two new respective personal holding companies (Holdco 3 or Holdco 4) in consideration for Class A common shares (having a nominal ACB and PUC in light of a s. 85(1) election) and for Class E preferred shares (also with a nominal PUC, but with a high ACB pursuant to s. 85(1)(g).) Holdco 1 and Holdco 3, and Holdco 2 or Holdco 4, then amalgamated to form Amalco 1, and Amalco 2, respectively (having the same share attributes as Holdco 3 or 4).
Now, each of Amalco 1 and Amalco 2 redeemed its Class E preferred shares (still with nominal PUC and full ACB) owned by the brothers, so that each brother realized a s. 84(3) dividend, and a capital loss that was denied under s. 40(3.6)(a), and added to the ACB of their Class A common shares of their respective Amalco. Each brother then disposed of such common shares to a new respective holding company (Holdco 5 or Holdco 6) in consideration for Class B preferred shares of such new Holdco, and also in consideration for Class A commons shares. By virtue of s. 85(1), elections, the Class B preferred shares had a high ACB pursuant to s. 85(1)(g) and high PUC, and the Class A common shares had nominal ACB (pursuant to s. 85(1)(h)) and nominal PUC. Finally, each of Holdco 5 and Holdco 6 redeem its Class B preferred shares (owned by the respective brother) for cash.
The Directorate stated:
[P]aragraph 84.1(1)(a) would not apply to the disposition by each of Brother 1 and Brother 2 of the Class A shares … of Amalco 1 or Amalco 2 … to reduce the ACB in respect of the Class B preferred shares … of Holdco 5 and Holdco 6 received as consideration. … [F]or the purposes of paragraph 84.1(1)(a), the ACB to Brother 1 or Brother 2 … of the Class A shares of Amalco 1 or Amalco 2, as the case may be, would technically be deemed to be approximately $XXXXXXX. This is because there would technically be no amount each of which is an amount determined after 1984 under subparagraph 40(1)(a)(i) in respect of a previous disposition of a Class A share of the capital stock of Amalco 1 or Amalco 2, as the case may be, or to an earlier disposition of a share for which that Class A share of the capital stock of Amalco 1 or Amalco 2 would have been substituted (i.e., a Class A share of the capital stock of Holdco 3 or Holdco 4, as the case may be, or, having regard to subsection 248(5), a Class A share of the capital stock of Holdco 1 or Holdco 2, or any of the 149 Class A shares of the capital stock of Opco referred to in (1)(c) above).
… [However] in the event that taxpayers apply for advance rulings in respect of a series of proposed transactions similar to the one described above …[we] would … refer such a case to the General Anti-Avoidance Rule ("GAAR") Committee.