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. Would the Class B shares issued on the stock dividend be issued as part of an arrangement the main purpose of which was to permit any increase in the value of the property of the corporation to accrue to other shares that would, at the time of their issue, be prescribed shares, so that ITR subparagraph 6205(2)(a) is satisfied? CRA responded (Tax Interpretations translation):
…"[A]rrangement"…has a broad meaning. An arrangement can encompass more than one transaction. Thus, if several transactions are effected in the context of a freeze in favour of persons contemplated by ITR subparagraph 6205(2)(a), the CRA could consider that the arrangement includes these transactions if it appears to it that they are planned together to achieve the targeted purpose, being the freeze. For example, the payment of a stock dividend of Class B Shares…in order to lower the value of the Class A Shares …followed by an exchange of all of such CLass A Shares in order to receive Class C Shares…being transactions effected so as to be followed by the issuance of new participating shares to the family trust, could form part of the same arrangement in the circumstances. In such a case, the Class B and C shares of Opco would be issued as part of the arrangement.
The question of whether the main purpose of the arrangement is to permit any increase in the value of property of a corporation to accrue to other shares that would, at the time of their issue, be prescribed shares, is a question of fact. An arrangement could have been put in place mainly for purposes other than those described in ITR subparagraph 6205(2)(a), such as realizing certain financial, structural or other objectives, or for obtaining certain tax advantages.
…[I]t would be necessary in the current situation to determine if the test provided in ITR subparagraph 6205(2)(a) is satisfied at the completion of the arrangement, being when the Class A shares…are issued (assuming that these were prescribed shares at the date of their issue) to the family trust.