Background
Holdco (a.k.a. Gesco) holds real estate which it leases to Opco, which carries on an active business in Canada. Mr. X (an investor), Ms. Y and Mr. Z (teh son of Ms. Y) hold the Class A voting participating shares of Holdco, and Ms. Y (who has a position with Opco and is unrelated to Mr. X) also holds Class B non-voting shares and Class F special voting shares.
Proposed transactions
- Ms. Y will incorporate Newco and subscribe for Class A voting participating shares.
- Holdco will take out a secured loan from its financial institution to make an interest-bearing term loan to Newco.
- Mr. X will transfer his Class A shares of Holdco to Newco for the agreed sale price, payable in cash, and will claim the s. 110.6(2.1) deduction. (Representations were submitted that Newco and Mr. X dealt with each other at arm’s length.)
- Newco will repay the loan in accordance with its terms.
Ruling
S. 84.1(1) will not apply such that no dividend will be deemed to be received by Mr. X by reason of the transaction in 3 above.