Following a pre-closing reorganization, including an amalgamation of Canadian corporations within the same group to form Parent Amalco, all the shares of Parent Amalco were acquired by Foreign Parent pursuant to a plan of arrangement. In addition to Canadian subsidiaries, Parent Amalco held controlled foreign affiliates directly or through a Canadian subsidiary.
Parent Amalco engaged in various transactions to increase the PUC of its shares of a Canadian subsidiary (“Corporation”) to their adjusted cost base or ACB including transferring a Canadian royalty interest (providing a net smelter return) and shares of four subsidiaries (having, depending on the subsidiary, an FMV higher or lower than their PUC, before giving effect to full s. 111(4)(e) step-ups of the appreciated shares) in consideration for preferred shares with a PUC equal to the s. 85(1) elected amount.
CRA ruled that the above steps to increase the PUC of the shares in the capital of Corporation are effective and that s. 245(2) will not be applied to alter the ruled-upon consequences.