Under a proposed ruling request, Canco, which directly owned approximately 99.99% of all the common shares of ForOpco, which was resident in Country A (with the other .01% held by another foreign affiliate of Canco), would reduce the number of outstanding shares by a factor of 100,000 (so that 100,000 previously outstanding shares would be represented by 1 share). ForOpco would return capital to Canco, which would use such funds to subscribe for additional common shares in ForHoldco (which was newly incorporated by Canco in Country B), with ForHoldco using those proceeds to invest in preferred shares of ForOpco. ForOpco then would pay a stock dividend, consisting of common shares, to ForHoldco. After the stock dividend, ForHoldco and Canco would hold approximately 99.8% and 0.2% respectively of the outstanding common shares of ForOpco.
In describing its refusal to rule that s. 15(1.1) did not apply to the proposed stock dividend, CRA noted that its purpose "was to transfer over 99% of the equity in ForOpco from Canco to ForHoldco," and that it is "not relevant whether the Canadian income tax effects of a stock dividend paid by a corporation would be similar to the effects of a transfer of shares under subsection 85.1(3), or under any other "rollover" provision."