Mr. X holds all 100 of Opco's Class A shares with a fair market value of $1,000,000 and nominal ACB and PUC. Opco pays a stock dividend comprising Class B shares which have a retraction right for $900,000; the 100 Class shares are exchanged for estate freeze Class C preferred shares; and the family trust subscribes for Class A shares for $10. (a) Does s. 15(1.1) not apply so that Mr. X only includes the $1 increase in PUC of the Class B shares in his income? (e) If the shares of the corporation instead were held equally by three shareholders and the steps otherwise were the same except that the new common shares would be issued to three family trusts, would s. 15(1.1) would apply to the stock dividend. CRA responded (Tax Interpretations translation):
…(a)…[S]ubsection 15(1.1) generally does not apply when a corporation pays a stock dividend solely to a person who holds all of the issued and outstanding shares…of the corporation.
…(e)..An increase or reduction in the value of the interest of a shareholder does not generally result if the stock dividend is payable to all the shareholders in proportion to their interest in the corporation, as would appear to be the case in [this] situation… .