A wholly-owned subsidiary (Subco1) of Parentco effects an s. 55(3)(a) spin-off one of its assets (all the shares of Subco2) to Newco, which is newly-formed by Parentco. If the spin-off is done in the most obvious way, the result is that the shares of Newco held by Parentco will have a pro rata ACB (based on their relative fair market value and the starting ACB of the shares of Subco1). This means that if the shares of Subco2 had a disproportionately high ACB relative to the other assets of Subco1, then on an s. 88(1) winding-up of Subco1, that high ACB would generally flow through under s. 88(1)(c) to Parentco, so that its low-ACB shares of Newco would be replaced by high-ACB shares of Subco2.
CRA indicated that the reorganization results in a misalignment between outside and inside basis, and would consider applying GAAR, because there is an undue ACB increase in the hands of Parentco that is contrary to the scheme of the Act, and, more specifically, of s. 55(2). On the other hand, CRA indicated that it could be prepared to rule favourably on such a transaction if the transactions resulted in an increase in the ACB of the Newco shares corresponding to the ACB of the spun-off assets (the shares of Subco2).