Mother along with an arm’s length business associate (“Investor”) wanted to use some of the assets of the family business corporation (“Amalco”) to engage in some sort of development project, whereas her daughter did not want any part of this. Accordingly, it was agreed that one of the two businesses would be spun off to the Daughter’s Newco under s. 55(3)(a). It was also contemplated that thereafter the business retained by Amalco would be sold by Amalco at fair market value to a recently formed development company (XCo) which was controlled by Mother but in which Investor had made a significant equity investment.
Respecting the cross-redemption transactions that concluded the spin-off transactions referred to above, Newco redeemed the Newco Class B Special Shares held by Amalco (which, going into the transactions, had no RDTOH balance), caused its first taxation year to end at the end of that day, and the redemption by Amalco of its Amalco Class B Voting Comon Shares held by Newco occurred on the following day. The disclosed Purposes state:
The reason for Newco causing its first Taxation Year to end at the end of the day on which the Newco Class B Special Shares are redeemed ... is to avoid a possible Part IV tax “circularity” issue.