After negotiations with a purchaser, who is interested in the assets of the business of Opco, it is agreed that the Opco shareholders will sell their Opco shares after Opco has transferred all its assets in a taxable transaction to a newly-incorporated subsidiary ("Subco"). The capital dividend account of Opco is distributed to the vendor shareholders of Opco immediately after the taxation year end resulting from the amalgamation of Opco and Subco and the acquisition of control of Opco. The sale price for the shares is adjusted to reflect the income tax payable on the asset drop-down and the funds distributed on payment of the capital dividend. The vendors utilize their capital gains exemption on the sale.
Would s. 84(2) (which was invoked in Geransky) be applied? Given that tax was paid on the asset sale, would s. 245(2) be applied? CRA responded:
[W]here none of Opco's funds or property are distributed or otherwise appropriated in any manner whatever to or for the benefit of the selling shareholders of Opco in the Given Situation, subsection 84(2) of the ITA would not be applicable. This could be the case where the selling shareholders and the purchaser are dealing at arm's length, the selling shareholders would receive a cash amount from the purchaser's own funds in return for their Opco shares, and Opco's assets would continue to be used in an active business by Opco or by another entity within the purchaser's corporate group.
Respecting the application of subsection 245(2)…it is possible to confirm that in a situation of the type described in the preceding paragraph, subsection 245(2) would not normally apply to the selling shareholders to redetermine the tax consequences arising from the sale of their shares.
…[I]t is not possible to comment definitively on the application of subsection 84.1 in the Given Situation given…the brief description [respecting facts relevant to arm's length dealing].
…[However] where the proposed transaction is a business transaction and is supported by bona fide business purposes (other than obtaining a tax benefit), where a purchaser is interested in the assets of an unrelated person (the "Target Corporation"), and where the purchaser and the shareholders of the Target Corporation are unrelated persons with distinct and different interests, the sole fact that the parties have finally agreed that the purchaser would acquire the Target Corporation's assets by purchasing shares of its capital stock would not be sufficient, in and by itself, to consider that the purchaser and the vendors are not dealing at arm's length, with respect to the disposition of the shares of the capital stock of the Target Corporation. …