Mr. X holds 100 Class A voting participating shares of Opco with a fair market value of $5M and nominal adjusted cost base and paid-up capital. He incorporates Holdco whose shares have nominal fair market value, adjusted cost base and paid-up capital and exchanges his Class A shares of Opco for preferred shares of Opco with the same FMV, ACB and PUC as the exchanged Class A shares. Opco issues Mr. X 100 Class A shares for nominal consideration and also issues 100 discretionary dividend shares to Holdco. In order to limit the net asset value of Opco to $5M (i.e., for creditor-proofing purposes), Opco annually pays dividends of $500K on the discretionary shares held by Holdco.
After noting that these transactions could result in the application of s. 15(1) or s. 110.6(7), CRA also stated that s. 245(2) could apply and noted (TaxInterpretations translation) that the Directorate:
would take into account, inter alia, paragraph 85(1)(e.2) which does not permit a taxpayer to accord a benefit upon a corporation unless it is a wholly-owned subsidiary of the taxpayer.