2016 Ruling 2016-0635101R3 - 55(3)(a) Spin-Off to Use Parent Losses -- summary under Paragraph 55(3)(a)

Background

Subco is wholly-owned by Parent, which holds all of its common shares (“Subco Old Common Shares”) and all of its non-voting, redeemable and retractable preferred shares (“Subco Old Preferred Shares”). Subco is the beneficial owner of parcels of land held as capital property together with buildings thereon (collectively, “Property”). Subco has entered into an agreement of purchase and sale (the “Property Sale Agreement”) to sell the Property for its FMV to an arm’s length third party (“Purchaser”). Subco is not prohibited from assigning its rights as vendor under the Property Sale Agreement to Newco and Parent.

Proposed spin-off of Property to Parent before closing of sale

1. Parent will transfer all of the Subco Old Preferred Shares to Subco in consideration for one newly issued Subco Old Common Share, electing under s. 85(1) at the nominal ACB of the transferred shares.
2. Subco will add Subco A Preferred Shares and Subco A Common Shares to its capital by articles of amendment. In order to distinguish the new shares, the Subco A Preferred Shares will be entitled to a non-cumulative dividend, and the Subco A Common Shares will be entitled to more than one vote per share.
3. Pursuant to a share exchange agreement, Parent will exchange all of the Subco Old Common Shares for (a) newly issued Subco A Preferred Shares having an aggregate FMV equal to the FMV of the Property, net of the Assumed Liabilities; and (b) newly issued Subco A Common Shares having an aggregate FMV equal to the balance of the Exchanged Shares’ FMV. No s. 85(1) election will be made. The aggregate amount to be added by Subco to the stated capital accounts for the Subco A Preferred Shares and the Subco A Common Shares issued on the exchange of the Exchanged Shares will be equal to the aggregate PUC of the Exchanged Shares and will be allocated between the two classes based on their relative FMV.
4. Parent will transfer its Subco A Preferred Shares to a newly-incorporated subsidiary (“Newco”) in consideration for newly issued common shares of Newco, with the elected amount under s. 85(1) being equal to the transferred shares’ FMV and less than their ACB, thereby resulting in a suspended loss under s. 40(3.4).
5. Subco will transfer the Property to Newco in consideration for the assumption of liabilities and the issuance of redeemable Newco Preferred shares. An s. 85(1) election will be made only respecting the Land parcels, with the agreed amount for each parcel equalling its ACB plus the terminal loss that, but for ss. 13(21.1) and (21.2), would be recognized on the disposition of the Building thereon (except that the elected amount will not exceed the parcel’s FMV).
6. Newco will redeem all of the Newco Preferred Shares held by Subco and Subco will redeem all of the Subco A Preferred Shares held by Newco, in each case, for a note, and the two notes will be settled by way of set-off.
7. Newco will be wound up into Parent.
8. Parent will sell the Property to Purchaser and apply a portion of its net capital losses and/or non-capital losses to reduce its taxable income resulting from the sale.

Ruling

The proposed transactions by themselves will not be considered to result in any disposition or increase in interest described in any of ss. 55(3)(a)(i) to (v).