A parent wishes to access the s. 84.1(2.31) or (2.32) rules regarding a transfer of the shares of Parent Inc. (which are qualified small business corporation shares) to a holding company controlled and owned by the parent’s adult children, who have been actively engaged in the business of Parent Inc. As a result of an estate freeze, the parent now held voting preferred shares (the “Control Shares”) according voting control, as well as retractable preferred shares (the “Freeze Shares”) of Parent Inc.; and Parent’s adult children hold its voting common shares.
Regarding where the parent sold the Freeze Shares (assumed to qualify as “non-voting preferred shares”) in three annual tranches, and retained the Control Shares until the third such sale (or, alternatively, sold them in three tranches, with the Freeze Shares), CRA noted that since the s. 84.1(2)(e) exception (the “Exception”) can only apply to the first disposition of shares by the taxpayer for which it is claimed, the second and third dispositions of the Freeze Shares could not qualify for the Exception. Furthermore, the Exception would not be available for the first disposition if the parent retained the Control Shares (since inter alia they would not qualify as non-voting preferred shares as defined in ss. 84.1(2.31)(d)(i) and 84(2.32)(d)(i)) even if, as assumed by CRA, the parent ceased to exercise de facto control after that disposition.
Where the shares held and then sold to the children’s corporation also included preferred shares with a nominal PUC, but with an ACB equaling their redemption value due to a prior capital gains deduction crystallization transaction, CRA indicated that ss. 84.1(2.31) and (2.32) do not distinguish between typical freeze preferred shares and “crystallized” preferred shares, and indicated that an election could be made in respect of such shares sold, to the extent that no other Exception had previously been claimed.