There is to be a division of the assets of a family group of corporations among the respective holding companies for the four children of Mr. X, most notably, the holding company (HoldcoF) for Mr. A, who manages a group of companies beneath Dco, and the holding company (HoldcoB) for Mr. B, who manages a group of companies which, as a preliminary matter, are transferred on a rollover basis into a new subsidiary company (PBco1), which issues special voting shares to Mr. X so that he can maintain control (and Mr. X also has held special voting shares in Dco all along.)
Transactions are implemented in reliance on s. 55(3)(a) (and on the absence of the application of s. 55(4) having regard to the continued control by Mr. X of the spun-off companies and of the transferee corporations whose equity ended up being mostly held by HoldcoB or HoldcoF) to effectively spin-off PBco1 to HoldcoB and Dco to HoldcoF (along with further transactions for the benefit of the holding companies of the other two children).
Here, the application of the formula in 2020-0861031C6 for the allocation of direct safe income (DSI) would lead to a disadvantageous result for the taxpayers involved since it would result in an undue loss of ACB/DSI. More specifically, the ACB, to HoldcoB or HoldcoF, of the shares the property (shares of NewAco) transferred to PB1co or Dco will be nominal and the ACB, to the transferor corporation (NewCco) of the shares of PB1co or Dco will be eliminated. To avoid this result, the DSI would be calculated as follows:
A. The DSI of the transferor corporation (“Transferor”) that has accrued on the shares of its capital stock held by shareholders other than the transferee corporation (“Transferee”), determined immediately after the reorganization, will be calculated in accordance with the following formula:
DSI on shares of capital stock of Transferor held by all shareholders immediately after the reorganization = DSI immediately before the reorganization X total net cost amount of property retained by Transferor / total net cost amount of all property of Transferor immediately before the reorganization.
B. The DSI of the shares of capital stock of Transferee held by shareholders immediately prior to the Reorganization shall be increased in accordance with the following formula:
DSI of the shares of the capital stock of Transferor held by all of its shareholders immediately prior to the Reorganization - DSI of the shares of the capital stock of Transferor held by the remaining shareholders immediately after the Reorganization as calculated under item A above.