Background
Transferor is a farming corporation whose Class A common and Class D preferred shares are both held by two resident brothers (A and B). Each has an adult son who is or will be engaged in the farming operations. There are balances in the Transferor’s CDA, ERDTOH, NERDTOH and GRIP accounts.
Proposed transactions
- Amounts in the NISA Fund No. 2 will be withdrawn.
- B will transfer all his shares (both Class A and D) of Transferor on a s. 85(1) rollover basis to a newly incorporated corporation (Newco) for shares of two classes, with the shares of one class having an FMV equalling the aggregate FMV of the transferred shares.
- Transferor will transfer to Newco on a partial s. 85(1) rollover basis a portion of its property and Newco will assume a portion of Transferor's liabilities, such that Newco will receive its pro rata share of the net FMV of the "cash", "investment property" and "business property" held by Transferor immediately prior to the transfer. Newco will issue preferred shares with a redemption value equal to the net FMV of the transferred assets.
- Immediately after the issuance of those shares, an agreement in respect of those shares will be entered into specifying an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled for the purposes of s. 191(4), which does not exceed the FMV immediately before the entering into of the agreement of each such share.
- Included in the transferred assets will be an undivided interest in a life insurance policy, with the proceeds of disposition thereof to Transferor being determined under s. 149(7), without such interest being included in the s. 85(1) election.
- Before the end of Newco's taxation year, Newco will purchase for cancellation the Newco preferred shares held by Transferor in consideration for a demand note.
- After the end of Newco's first fiscal period, Transferor will purchase for cancellation the Class A shares and Class D shares of its capital stock held by Newco in consideration for a demand note.
- The two notes will be set off.
- Approximately one week later, B will give certain shares of Newco to his son.
- Up to a number of months later, A will effect a s. 51 exchange of Class A shares of the Transferor for Class B preferred shares thereof, and thereafter will give Class A shares of Transferor to his son.
- Newco will engage in an asset purchase, or acquire shares of a corporation and merge with it.
Rulings
Including:
- re exception in s. 55(3)(b),
- division of the UCC under s. 85(1)(e) based on the relative FMV of the transferred depreciable property,
- Newco being subject to Pt. IV tax given the generation of a dividend refund to Transferor, whereas Transferor will not be subject to Pt. IV tax since Newco is not entitled to a dividend refund, and
- ss. 73(4) and (4.1) applying to the share gifts to the sons.