2018 Ruling 2018-0749491R3 - 55(3)(a) Reorganization -- summary under Subparagraph 55(3)(a)(ii)

Background

DC’s Class B and C non-voting and Class A voting preferred shares are owned by Parent (giving him control) and its voting common shares are held equally by his four adult children (Child 1 to 4). DC’s assets consist of cash and a portfolio (the “Transaction Assets”) and a rental property and related assets (the “Rental Property”). Its liabilities consist of nominal accounts payable and a demand non-interest bearing note currently due to Parent (the “Parent Note”)

Proposed transactions

1. Articles of amendment will increase the votes per Class A preferred share (so as “to ensure that Parent maintains control of DC at all relevant times”), the PUC of the Class C shares will be increased with an s. 83(2) election being made respecting the resulting deemed dividend and the Class B and C preferred shares of DC will be redeemed for the “Parent Note 2.”
2. After the subscription by Parent for special voting shares and by each Child for common shares of a newly-incorporated TC for each Child (TC1, TC2, TC3 and or TC4), each Child will transfer under s. 85(1) to that Child’s TC a portion of the Child’s DC Common Shares (having an FMV equaling ¼ of the Transaction Assets FMV net of the Parent Note and Parent Note 2 amounts) in each case in consideration for a demand non-interest bearing promissory note of the TC having a principal amount and FMV equal to the PUC and ACB of the transferred shares and for the issuance of additional common shares of the TC. DC will continue to hold the Rental Property.
3. Each TC will exchange its common shares of DC for non-voting redeemable retractable Class D shares.
4. DC will transfer 1/4 of the Transaction Assets to each TC in consideration for the assumption of ¼ of the Parent Note and Parent Note 2 and the issuance of non-voting redeemable retractable TC preferred shares, with a joint s. 85(1) election being made.
5. Each TC will redeem its preferred shares (issued in 3) in exchange for a demand non-interest bearing promissory note.
6. The first taxation year end of each TC will end on the day after that of the above transactions so as to prevent circularity in the calculation of the refund of RDTOH and Part IV tax of the TCs and DC. On the next day, DC will redeem its preferred shares held by the four TCs in exchange for demand non-interest bearing promissory notes.
7. The notes issued in 5 and 6 will be set off.

Additional information

Parent’s will bequeaths his voting shares of the TCs to the respective Children.

Parent will control DC and each TC in order to retain control over the property currently owned by DC and the investment decisions related thereto in the same manner as before and to protect his economic interest in the Parent Note and Parent Note 2.

Parent has no intention of ceasing to control the TCs, is in good health and expects to continue to be fully involved in the day-to-day management of DC.

Rulings

Include that the proposed transactions will not by themselves be considered to result in a disposition or increase in interest described in ss. 55(3)(a)(i) to (v).