Background
Aco, and its subsidiary Bco, had available capital losses that they did not anticipate using. The proposed transactions relate to certain of the registered trademarks (the “Trademarks”) which Bco uses in the course of carrying on its business and which are Class 14.1 property (presumably having a modest capital cost).
Proposed transactions
- Pursuant to a share exchange agreement between Aco and Bco (the “Share Exchange Agreement”), Aco will exchange, on a s. 51 rollover basis, a number of Bco Common Shares having a FMV equal to the FMV of the Trademarks for non-voting redeemable retractable shares of Bco (the “Bco Reorganization Shares”) having an aggregate FMV equal to the FMV of the Trademarks.
- Aco will transfer on a s. 85(1) rollover basis to a newly-incorporated subsidiary (“Newco”) all of its Bco Reorganization Shares in consideration for Newco Common Shares.
- Bco will transfer the Trademarks to Newco in consideration for non-voting redeemable preferred shares (the “Newco Preferred Shares”), electing under s. 85(1), but so as to generate a gain.
- Newco will license the Trademarks to Bco for specified royalties.
- Bco will redeem all of the Bco Reorganization Shares in consideration held by Newco in consideration for a demand non-interest bearing promissory note (the “Bco Note”), and make an eligible dividend designation under s. 89(14) respecting the resulting deemed dividend..
- Newco will redeem all of the Newco Preferred Shares held by Bco in consideration for a demand non-interest bearing promissory note (the “Newco Note”), and make an eligible dividend designation under s. 89(14) respecting the resulting deemed dividend.
- The two notes will be set off.
- Newco will be wound up into Aco, with the trademarks' capital cost being the same to Aco.
- Aco will transfer the Trademarks to Bco for Bco Common Shares, electing under s. 85(1), but so as to generate a gain.
Rulings
Including re application of s. 13(7)(e)(ii) 1/2 step-up in Steps 3 and 9.