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. (Consistently with 2003-0004125 F) would s. 74.4(2) not apply to the Class B shares issued on the stock dividend? What would be the safe income attributable to the Class B shares issued as the stock dividend? 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):
In general, a stock dividend paid by a corporation does not constitute in itself a transfer directly or indirectly (by means of a trust or otherwise) to a corporation by an individual. Thus, the provisions of ITA subsection 74.4(2) would not apply so as to calculate deemed income on the value of the Class B shares received in satisfaction of the stock dividend.
In contrast, the exchange of the 100 Class A shares of Opco for preferred Class C freeze shares would constitute a transfer made directly or indirectly (by means of a trust or otherwise) to a corporation by an individual for purposes of ITA subsection 74.4(2).