A and B, who have been cohabiting in a conjugal relationship for 10 years and who each owned 50% of the common shares of Opco, commenced on January 1 of Year 11 to start living apart as a result of a breakdown of their conjugal relationship.
They then implemented a divisive reorganization of Opco under which B disposed of her Opco common shares to Newco (newly-incorporated by her) in consideration for Newco common shares, Opco disposed of a portion of its business property to Newco in consideration for Newco preferred shares and the two shareholdings were cross-redeemed for notes that were then set off. Any tainting events described in ss. 55(3)(a)(i) to (v) occurred on March 26 of Year 11(i.e., less than 90 days after they started to live separate and apart).
For purposes of s. 55(3)(a), were A and B related immediately before the tainting events, and would the application of the s. 55(3)(a) exception be compromised if A and B remained separate and apart for more than 90 days?
After noting that individuals connected by common-law partnership are related to each other pursuant to s. 251(2)(a) and that the determination of there being, a common-law partnership determination is to be made immediately before the time of occurrence of the potential tainting events (the “Determination Time”) and further referencing the deeming rule in the “common-law partner” definition in s. 248(1) that once a conjugal relationship established, it was deemed to continue until the couple were living separate and apart for more than 90 days because of a breakdown of their conjugal relationship, CRA went on to state:
Because A and B had ceased cohabiting for less than 90 days on the occurrence of any of the Tainting Events, they will be common-law partners prior to the completion of the Reorganization. Accordingly, the dividends received by the Newco and Opco will not be subject to subsection 55(2) because A will be related to B pursuant to paragraph 251(2)(a) … .
The application of paragraph 55(3)(a) will not be retroactively changed if A and B remain separate and apart for more than 90 days after they ceased cohabiting because of the breakdown of their conjugal relationship.