Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
APFF - 1995
Question 38
Creditor protection and subsection 55(2)
In a recent technical interpretation, Revenue Canada determined that subsection 55(2) of the Act would apply in circumstances where an asset was transferred from a corporation owned by A and B (unrelated persons) to a new corporation owned by the same shareholders in the same proportions. The facts were as follows:
1. A and B are two unrelated individuals who each own 50% of OPCO.
2. A and B wish to transfer the land and buildings currently owned by OPCO to another corporation to shield its assets from potential creditors.
3. A and B each purchase 50% of the common shares of Newco and each of them transfers an equal number of common shares in OPCO to Newco in exchange for the common shares in Newco. The market value of the common shares in OPCO that were transferred is equal to the fair market value of the land and buildings that were transferred.
4. Opco will transfer the land and buildings to Newco in exchange for preferred shares in Newco that have a redeemable value equal to the fair market value of the land and buildings. A rollover under subsection 85(1) of the Act will be carried out on the transfer.
5. OPCO will purchase and then cancel, at their fair market value, the common shares held by Newco in exchange for a bill payable. Newco will then redeem at their fair market value all the preferred shares held by in exchange for a bill payable. The bills payable will then be set-off.
It would appear that Revenue Canada is currently reconsidering its position with respect to this situation. Could you please enlighten us on this subject?
Answer by the Department of Revenue
The Department’s position has always been and will continue to be that subsection 55(2) of the Act can be applied in this type of situation (assuming that the conditions set out in paragraph 55(3)(b) are not met). As a result of the latest amendments to paragraph 55(3)(a) of the Act, the concept of non-arm’s length has been replaced by the concept of related persons. It is therefore now impossible for a taxpayer to cite the existence of a non-arm’s length relationship to take advantage of this provision.
It should be noted, however, that the Department does not regard subsection 55(2) of the Act as applicable when the shares in Opco are held through Holdco, which is owned equally by A and B. The assets would be segregated in Newco, which would be a subsidiary of Holdco and a sister to Opco. Under these circumstances, although it is possible to consider A and B as having increased their indirect interest in Newco, the Department will not normally do so in a situation of this type, which means that the exception in paragraph 55(3)(a) of the Act could apply. In this regard, reference should be made to question 24 of the APFF special session of February 10, 1993 concerning section 55 of the Act.