An individual ("A") holds preferred shares in a holding corporation ("HOLDCO") with an ACB equaling their FMV of $500,000 as a result of a previous capital gains crystallization transaction, and a nominal PUC. HOLDCO owns an investment portfolio as well as common shares of an operating corporation ("OPCO"). A third party is interested in the OPCO shares. Instead of HOLDCO transferring its portfolio to another corporation and A then selling his shares of HOLDCO to UNRELATEDCO, the following transactions took place.
A disposed of his HOLDCO preferred shares to OPCO in consideration for OPCO shares with the same tax attributes. HOLDCO then redeemed its shares owned by OPCO. Finally, A and HOLDCO disposed of their OPCO shares to the third party. Whether section 84.1 or 245 would apply in the given fact situation.
In the course of making general comments after having indicated that there were insufficient facts, CRA stated:
A could be not dealing at arm's length with UNRELATEDCO with respect to A's disposition of the shares of OPCO … . Section 84.1 could therefore apply in this regard. This could in particular be the case if it turns out that UNRELATEDCO is party to certain transactions that have no real commercial basis, for the sole purpose of accommodating A.