See the diagram for the quite similar transactions ruled upon in 2016-0630761R3.
A Canadian-resident corporation (ACo) wished to transfer its shares of a foreign subsidiary (FA1) to a Canadian subsidiary of ACo (BCo). This was to be accomplished by ACo transferring its FA1 shares on a s. 85.1(3) rollover basis to a newly-formed non-resident subsidiary (New FA), with New FA then transferring its FA1 shares to BCo for a note – which then was to be repaid in cash out of share subscription proceeds from ACo, and with FA1 then distributing such cash to ACo (with a Reg. 5901(2)(b) designation being made). FA1 then is wound up.
In order to satisfy a CRA requirement that the cost to BCo of the FA1 shares (which were excluded property) be limited to the sum of their relevant cost base and the net surplus (being exempt surplus) of FA1 – rather than being stepped up to their higher fair market value, the note equalled such sum. S. 69(1)(c) deemed the proceeds to New FA to be the higher FMV. However, the FA1 shares were excluded property (not giving rise to FAPI), their exempt surplus was levitated under s. 93(1.11)(a) to New FA, and the note repayment proceeds were received by ACo out of pre-acquisition surplus and (to the extent of any amount that otherwise would be a negative ACB gain) out of New FA’s exempt surplus pursuant to s. 93(1.11)(b) and Reg. 5902(6).
CRA ruled inter alia:
Subsection 69(11) will not apply to the Proposed Transactions to deem ACo’s proceeds of disposition from the disposition of the FA1 Shares to New FA, as described in Paragraph 18, to be equal to the FMV of the FA1 Shares.
The CRA summary stated:
The “one of the main purposes” condition has not been met.