2023 Ruling 2022-0923451R3 F - 55(3)(a) internal reorganization -- summary under Paragraph 55(3)(a)

Background

Mr. X and Ms. X are the parents of Messrs. A, B, C and D. Mr. X has direct or indirect voting control of most of the corporations referred to below, generally by virtue of holding voting non-participating shares in them or their direct or indirect parent.

Mr. B and Mr. A work full-time (as president) in managing a group of entities beneath NewCco and Eco, respectively. NewCco (a successor by amalgamation to Cco and its subsidiary, Ico) is wholly-owned by NewAco (a successor by amalgamation to Aco and its subsidiary, Bco) which, in turn, is held as to its preferred shares and its voting non-participating shares, by Mr. X, and as to its Call A voting common shares, by a family trust (T1).

Eco is a wholly-owned subsidiary of Dco. A discretionary family trust (T2) holds Class A shares of Dco, Mr. X holds its voting non-participating shares and its preferred shares (resulting from an estate freeze) are held by NewCco.

Purpose of transactions

It is intended that:

• the participating shares of the entities managed by Messrs. B and A will be transferred to their respective holding companies (HoldcoB and HoldcoF);
• the investments held by NewAco and NewCco will be held directly or indirectly by Mr. X and his children's holding corporations, HoldcoA, HoldcoB, HoldcoF and HoldcoJ; and
• control of the owners of the properties referred to above, namely, NewAco2, AH and JH (see 3 below), NewDco and PB1co (see 5 below) will remain in the hands of Mr. X. and pass to his children on the death of the survivor of him and Ms. X.

Proposed transactions

1. Mr. X will exercise his discretion under the trust deed for T2 to distribute Class A shares of Dco to a holding company (HoldcoF) for his son, Mr. A).
2. NewAco will declare and pay dividends out of its capital dividend account and the safe income attributable to its shares through issuing notes (NewAco Note1, Note2 and Note 3) to T1.
3. T1 will distribute Note1 to Mr. X and Note2 and Note3 to newly-formed holding companies controlled by Mr. X and mostly owned by two of his children (AH for Mr. C, and JH for Mr. D) as a payment of such dividends and make s. 104(19) designations.
4. Mr. X will lend the amount so received by him to NewAco.
5. NewAco will transfer pursuant to s. 85(1) its shares of various subsidiaries to a wholly-owned subsidiary (PB1co) so that PB1co becomes the parent of that group.
6. Mr. X will subscribe for voting shares of PB1co.
7. Pursuant to a s. 86 reorganization, T1 will exchange its Class A shares of NewAco for shares of four newly-created classes of common and preferred shares.
8. T1 will distribute its entire corpus, being such shares of the four classes, to HoldcoB (a holding company for Mr. X's son, Mr. B), HoldcoF, AH and JH, respectively.
9. Each of AH and JH will transfer to NewAco its NewAco Note2 or Note3 in consideration for NewAco preferred shares of separate classes.
10. HoldcoB will transfer to PB1co pursuant to s. 85(1) its preferred shares of NewAco in consideration for Class A shares of PB1co.
11. HoldcoF will transfer to Dco pursuant to s. 85(1) preferred shares of NewAco in consideration for Class A shares of Dco.
12. NewAco will redeem the preferred shares held in it by PB1co, and by Dco, in each case in consideration for a note.
13. PB1co will redeem the preferred shares held in it by NewCco in consideration for a note.
14. The shares of Dco held by NewCco (a subsidiary of NewAco) will be reduced to a nominal amount.
15. Dco will redeem the preferred shares held in it by NewCco in consideration for the Dco Note.
16. NewCco will be wound up into NewAco under s. 88(1).
17. The notes issued in 12 and 14 will be paid by way of set-off.
18. Dco will amalgamate with its subsidiary Eco, to form NewDco.

Rulings

Including that the Proposed Transactions, in and of themselves, will not be considered to result in a disposition of property or a significant increase in interest described in any of ss. 55(3)(a)(i) to (v).