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.
In finding 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)), CRA stated (TaxInterpretations translation):
Childco acquired the control of Parentco from the child, who was not dealing at arm's length with it. Furthermore, the child acquired the control of Parentco from Parent with whom the child was not dealing at arm's length. Consequently ... the time that Childco last acquired the control of Parentco was deemed [by s. 88(1)(d.2)] to be the time when Parent acquired the control of Parentco.
The time when Parent acquired control of Parentco could be ...the time of the incorporation of Parentco, if Parent was the incorporator. The incorporator of a new corporation generally acquires its control at the moment of its incorporation if no share is issued at that time. ...
[T]he marketable securities which were acquired several months later would not be eligible for the bump of 88(1)(d) given that they did not belong to Parentco at the time 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).
The response…would not be different…if the marketable securities were [instead] acquired several hours after the time when the control of Parentco was acquired by Parent as the marketable securities could not belong to the subsidiary at the time of its incorporation.
The analysis did not change if shares were issued by Parentco not only to Parent but also to a minority third party.