Background
Prior to the preliminary transactions, Opco’s issued and outstanding shares were held by three unrelated individuals: Messrs. A and B held the Class A voting common shares; and Mr. C held the non-voting Class B common shares.
Preliminary transactions
Advances owing by Opco to two subsidiaries (Opco 2 and 3) are eliminated or reduced by those subsidiaries paying dividends-in-kind out of their safe income through the issuance of notes (including to employee minority shareholders), and then setting those notes off, to the extent owing to Opco, against all or a portion of the respective advance.
Estate freezing transactions are implemented (in which Mr. C participated in form) as a result of which:
- the following will each hold non-voting Class B common shares of Opco: (i) Trust A (settled by Mr. B for the benefit of Mr. A’s family and with Mr. and Mrs. A, and Mr. C as trustees), (ii) Trust B (settled by Mr. A for the benefit of Mr. B’s family, and with Mr. B, his daughter, and Mr. C as trustees), and (iii) Mr. C;
- holding companies for Mr. A and for Mr. B (Newcos A and B), and Mr. C himself, will hold non-voting preferred shares of Opco; and
- the Class E voting shares will be held by Newcos A and B and by Messrs. A and B directly.
Proposed transactions
- The shareholders of Opco will transfer their shares on a s. 85(1) rollover basis to a newly-incorporated corporation (Holdco – which had no shares issued on its incorporation by Messrs. A and B) in consideration for shares issued to each transferor whose attributes are collectively similar to those so transferred by the transferor.
- Holdco will transfer some of its preferred shares of Opco on a s. 85(1) rollover basis to a newly-incorporated corporation (Realtyco) in consideration for Class A voting common shares and Class C non-voting preferred shares of Realtyco, so that Realtyco (which had no shares issued on its incorporation by Holdco) is wholly-owned by Holdco.
- Opco will transfer realty properties to Realtyco in consideration for the assumption of mortgage obligations and the issuance of non-voting preferred shares, and with an s. 85(1) election being made.
- Realtyco will redeem the preferred shares issued in 2 above, and Opco will redeem the preferred shares transferred to Realtyco in 3 above, in each case through the issuance of a non-interest bearing demand promissory note, with the two notes then set off.
Additional information
The estate planning transactions … will not be carried out with a view to completing the series of transactions that includes the Proposed Transactions and would be completed notwithstanding the implementation of the Proposed Transactions, and vice versa.
Rulings
Including that the proposed transactions will not be considered in themselves to result in a disposition or increase in interest described in any of ss. 55(3)(a)(i) to (v) and, in particular, the transaction in 1 above will not be described in s. 55(3)(a)(ii) by virtue of s. 55(3.01)(g).
Other comments
CRA has not reviewed the allocation of safe income between Opco and Realtyco but is "generally of the view that Safe Income should be allocated in a manner consistent with documents 2020-0861031C6 and 2021-0889611E5".