In 2000, an individual ("Parent") subscribed cash for common shares on the incorporation of "Parentco", with Parentco purchasing marketable securities a few months (or a few hours) later. In 2010, Parent sold his shares of Parentco to his child for FMV cash consideration (thereby realizing gain at which time the marketable securities were the only assets of Parentco.) The child shortly thereafter transferred the shares of Parentco to a newly incorporated corporation ("Childco") in consideration for a demand promissory note, and wound-up Parentco.
CRA found that the bump was not available because the marketable securities were deemed under s. 88(1)(d.2) not to be owned by Parentco at the time of its acquisition of control by Childco (as required in the midamble of s. 88(1)(c)): s. 88(1)(d.2) deemed Childco to have acquired control of Parentco when Parent acquired control of Parentco, and the marketable securities (which were subsequently acquired) "did not belong to Parentco at the moment of the acquisition of control of Parentco by Parent (being when Parentco was incorporated if Parent was the incorporator or otherwise when the first issuance of shares occurred in …2000)"... See the summary under s. 88(1)(d.2).
What if Parent owned the marketable securities, and acquired the shares of Parentco as consideration for the transfer to Parentco of the securities? After noting that the above response would not be different if control of Parentco was acquired on its incorporation, CRA stated (TaxInterpretations translation):
[I]f the time when Parent acquired control of Parentco was not the time of incorporation but the time of the first issuance of shares (for example, if Parentco was a "shelf" company and had, therefore, been incorporated by a third party unrelated to Parent not acting as Parent's agent), the marketable securities that would have been transferred in consideration for the initial issuance of Parentco's share capital would be owned by Parentco at the time that it was last deemed to have acquired control of Parentco under paragraph 88 (1) (d.2). ... [I]t would then be necessary to determine whether that investment had been owned by the subsidiary continuously from that time until Parentco's distribution of that investment to Childco on the winding-up. …
In the situation where Parent was not be considered to have acquired control of Parentco on the incorporation of Parentco and the marketable securities belonged to Parentco at the time when Parent acquired the control of Parentco, subparagraph 88(1)(c)(v) would apply if the assumptions you described in your request are taken into account, as modified by those stated in question (d). In such a situation, the marketable securities would have been acquired by Parentco from a person (Parent) who did not deal at arm's length with Childco (pursuant to subsection 88 (1.7)) other than by reason of a right referred to in paragraph 251(5)(b) where the acquisition was made as part of a series of transactions or events in which Childco had last acquired control of Parentco … . Given that the acquisition of the marketable securities was made in consideration for this issuance of shares, it is difficult to consider that this acquisition was not part of the same series of transactions or events as the acquisition of control of Parentco by Parent. Consequently, the marketable securities transferred to Parentco in consideration for the issuance of the shares of Parentco appear to us to constitute ineligible property by virtue of subparagraph 88(1)(c)(v).
…[S]ubsection 88(1.7) applies to deem Parent to not deal at arm's length with Childco even if they did not co-exist given that Parent did not deal at arm's length with Childco before the winding-up.