2018 Ruling 2017-0731971R3 - Reorganization and distribution on PUC reduction -- summary under Subsection 84(2)

Background

The Taxpayer, a listed public corporation, has CCEE, CCDE and no-capital loss pools, has two resource properties used in its first business and a third property used in its second business.

Proposed transactions under Plan of Arrangement

1. After purchasing for cancellation any common shares of dissenting shareholders, the Taxpayer will transfer the third property to a newly-incorporated subsidiary (“Newco”) in consideration for common shares of Newco (the “Newco Distribution Shares”) equaling in number the number of outstanding common shares of the Taxpayer. This transfer will take place at FMV, with no s. 85(1) election made.
2. Pursuant to an authorization received from the Board of Directors, the Taxpayer will reduce its Stated Capital Account by an amount equal to the aggregate FMV of the Newco Distribution Shares and, concurrently with such reduction, the Taxpayer will make a pro-rata distribution of the Newco Distribution Shares to its common shareholders.
3. Newco (which now will be listed) will purchase for cancellation its one Newco Common Share issued to the Taxpayer on incorporation.

Additional information

The FMV of the Newco Distribution Shares distributed to the Taxpayer’s common shareholders will not exceed the portion of the PUC of the Taxpayer’s common shares at that time that arose from cash subscriptions for common shares of the Taxpayer.

The reduction and distribution in 2 above are one-time transactions made outside of the ordinary course of the Taxpayer’s business, and are not being made in lieu of ordinary course dividends.

Rulings

S. 84(2) will apply, and s. 84(4.1) will not apply to the distribution of the Newco Distribution Shares in 2 such that a dividend will be deemed to be paid only to the extent that the aggregate FMV of the Newco Distribution Shares received by the common shareholders exceeds the aggregate amount by which the PUC of the Taxpayer’s common shares is reduced on the distribution of the Newco Distribution Shares.

An amount equal to the aggregate FMV of the Newco Distribution Shares received by that common shareholder on the distribution shall be deducted in computing the ACB of their common shares (held on capital account) pursuant to s. 53(2)(a)(ii), and where such amount exceeds that common shareholder’s ACB thereof, the excess will be deemed to be an s. 40(3) gain.

The cost of a Newco Distribution Share received by a common shareholder of the Taxpayer as a consequence of the distribution will be equal to the FMV of that Newco Distribution Share at the time of such distribution.