8 December 2015 External T.I. 2015-0613401E5 F - Attribution Rules -- summary under Subsection 74.4(2)

1^st Situation. Mr. and Ms.X are the sole shareholders of Opco and Holdco, respectively. Opco uses excess liquidity to subscribe for preferred shares of Holdco, which has never been a small business corporation (“SBC”). How would s. 74.4(2) apply? CRA responded (TaxInterpretations translation):

[S]ubsection 74.4(2) does not generally apply when it is a corporation, rather than an individual, who transfers or lends property to a corporation. This legislative provision could however apply if it is demonstrated that an individual indirectly, by means of a trust or otherwise, transferred or lent property to a corporation or if subsection 74.5(6) applies.

…[T]he consideration paid by Opco to Holdco for the acquisition of preferred shares in the capital of Holdco would never accrue personally to Mr. X. Consequently, Mr. X would not be considered, for purposes of subsection 74.4(2), to have transferred, directly or indirectly, property to Holdco. …[W]e refer you to…2002-0147325… .

2^nd Situation. Same as 1^st situation except that, rather than subscribing for preferred shares of Holdco, Opco declares a dividend on its common shares (held by Mr. X), which is satisfied by issuing preferred shares whose redemption amount is equal to its liquid assets and whose paid-up capital is nominal. The preferred shares are transferred by Mr. X under s. 85(1) to Holdco in consideration for Holdco preferred shares, and Opco redeems its preferred shares in the same amounts as the 1^st situation. CRA stated:

[T]he transfer by Mr. X of the preferred shares in the capital of Opco to Holdco would represent…a transfer by an individual of property to a corporation other than an SBC. Furthermore, Ms. X would be…a designated person in respect of Mr. X. Consequently, the provisions of subsection 74.4(2) could apply respecting the transfer, to the extent that the other conditions of its application were satisfied.

3^rd situation. Mr. X holds all the shares, having a fair market value of $1M, of Opco, which is not an SBC. Opco declares and pays a dividend on the shares held by Mr. X by issuing preferred shares with a redemption amount of $1M and a nominal paid-up capital. Mr. X’s spouse then subscribes for common shares. CRA stated:

As indicated in [2014-0538041C6 F]…technically subsection 74.4(2) does not apply to the issuance of shares as stock dividends.

Furthermore, the CRA does not generally comment on the application of secton 245 in the context of a request for a technical interpretation… .