S. 84.1(2)(e) as it currently read deemed a taxpayer who had disposed of qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation (the “subject shares”) to a purchaser corporation to be dealing at arm’s length with it if the purchaser corporation was controlled by one or more children or grandchildren of the taxpayer who were 18 or older and if the purchaser corporation did not dispose of the subject shares within 60 months of their purchase. In addition, s. 84.1(2.3)(a)(i) provided that if, otherwise than by reason of death, the purchaser corporation disposed of the subject shares within 60 months of their purchase, s. 84.1(2)(e) was deemed never to have applied.
CRA stated:
Pursuant to paragraph 87(11)(a), on an amalgamation of a parent and its subsidiary wholly-owned subsidiary, the parent is deemed to have disposed of the shares of its subsidiary immediately before the amalgamation for proceeds equal to the lesser of the paid-up capital in respect of those shares (or the amount determined pursuant to subparagraph 88(1)(d)(i)) and the adjusted cost base to the parent of the shares immediately before the amalgamation.
On the current wording of paragraph 84.1(2)(e), it appears to us that an amalgamation of the Purchaser Corporation and the Subject Corporation, a subsidiary wholly-owned subsidiary of the Purchaser Corporation, within 60 months of the Purchaser Corporation's purchase of the shares of the capital stock of the Subject Corporation would have the effect of rendering paragraph 84.1(2)(e) inapplicable, taking into account subparagraph 84.1(2.3)(a)(i), since there would be a deemed disposition pursuant to paragraph 87(11)(a) of the Subject Shares by the Purchaser Corporation during the relevant period.
CRA considered such loss of the safe harbour to be anomalous, and had notified Finance accordingly.