Background
ACo wholly-owns BCo, which is a foreign corporation with its central management and control in Canada, and FA1, the fair market value of whose shares exceeds their ACB and the consolidated net surplus of FA1, all of which is exempt surplus. Substantially all the property of FA1 is excluded property.
Subject transactions
- ACo transferred all of its FA1 shares to a newly-incorporated foreign affiliate (New FA) for FMV consideration satisfied by the issuance of common shares, and with the stated capital of those shares equalling the principal amount of the BCo Note referenced in 2 below.
- New FA transferred to BCo all of its FA1 for a purchase price equalling the “Transfer Amount,” being the sum of the FA1 Shares’ relevant cost base and the consolidated net surplus of FA1 (but not exceeding the shares’ FMV), to be satisfied by the issuance of the BCo Note (whose amount is subject to a price adjustment clause).
- ACo subscribed for additional BCo Common Shares for cash in an amount equal to the principal amount of the BCo Note.
- BCo repaid the BCo Note.
- Such amount was distributed by New FA as a stated capital distribution to ACo, with ACo electing under Reg. 5901(2)(b) to treat the distributions as having come out of New FA’s pre-acquisition surplus.
Proposed transaction
New FA will be liquidated and dissolved, and its property and obligations (principally respecting potential operation of price adjustment clauses respecting 2 and 3) will be distributed to and assumed by ACo.
Purpose
The purpose for the transfer in 2 occurring at the Transfer Amount rather than FMV is “to address certain policy concerns of the CRA by restricting BCo’s aggregate ACB of its FA1 Shares to the Transfer Amount.”
Rulings
Re application of s. 85.1(3) to drop-down in 1.
To the extent of any capital gain otherwise realized by New FA from the disposition of its FA1 Shares to BCo in 2:
(a) ss. 93(1), (1.1) and (1.11) and the relevant Regulations applied to cause the amount prescribed under Reg. 5902(6) to be treated as a dividend received by New FA from FA1 immediately before the disposition and not to be proceeds of disposition of such FA1 Shares; and
(b) provided that the FA1 Shares were excluded property of New FA at the time of the disposition, the amount of any capital gain (determined after the application of s. 93(1)) from the disposition of such shares would not have been included in the FAPI of New FA.
The distribution in 5 came first out of pre-acquisition surplus and, to the extent of any amount that otherwise would be a s. 40(3) gain, the Reg. 5902(6) amount was deemed to be a dividend received by ACo from New FA immediately before the time of such distribution (presumably coming out of exempt surplus), with any excess (apparently none) being a s. 93(1) capital gain of ACo.,
Ss. 15(1), 56(2), 69(4) and 246(1) did not apply to the transfer by New FA of all of its FA1 Shares to BCo in 2.