2015 Ruling 2015-0605901R3 F - Présomption de gain en capital -- summary under Paragraph 55(3.01)(g)

Background. Opco, a CCPC, in addition to holding residential condos on upper floors, holds the “Vacant Premises” for the purpose of leasing them under long-term commercial leases, as well as storage lockers for use by the residential condos (the “Lockers”). The only issued and outstanding shares of Opco are Class A shares which are held by Holdco 1 (held by Holdco A, which is controlled by A and his mother), Holdco 2 (held by Holdco B, which is wholly–owned by B, and by Holdco C, which is wholly-owned by C), Holdco 3 and Opco 3 (each held by Holdco D, which is wholly-owned by D), and Holdco 4 (wholly-owned by Trust E, a discretionary personal trust for E and members of E’s family).

Proposed transactions.

1. Holdco 1, Holdco 2, Holdco 3, Opco 3 and Holdco 4 incorporate Holdco and (following the incorporation of Realtyco by Holdco) transfer their shares of Opco to Holdco on a rollover basis under s. 85(1) in consideration for Class A common shares of Holdco.
2. By articles of amendment, the Class A shares of Opco are exchanged for new Class A common shares, and for non-voting discretionary-dividend redeemable retractable Class B shares with a value equal to that of the Vacant Premises, Lockers and related parking spaces (and with paid-up capital allocated on a pro rata basis).
3. Holdco transfers its Class B shares of Opco to Realtyco on a s. 85(1) rollover basis in consideration for Class A common shares of Realtyco.
4. Opco redeems its Class B shares for a demand note (the “Note”) and makes an eligible dividend designation respecting the resulting deemed dividend. (Per para. 17, "the fiscal period of Realtyo will be fixed at a date which will permit the avoidance of Part IV tax circularity.")
5. Immediately following an early termination of the fiscal period end of Opco made pursuant to an advance [“préalable”] request to CRA, Opco transfers the Vacant Premises and related parking spots to Realtyco on a rollover basis under s. 85(1) in consideration for “Note 1”) and for Class C non-voting, non-participating non-cumulative redeemable retractable preferred shares of Realtyco (whose share provisions have a price adjustment clause).
6. Realtyco redeems the Class C shares held by Opco in consideration for Note 2.
7. Realtyco uses proceeds of a third-party secured borrowing to partly repay Note 1, with Opco using that amount to partly repay the Note.
8. A second amount received by Realtyco on signing a new lease is used to repay the balance of Note 1 due to Opco, with Opco using that amount to repay a further portion of the Note to Realtyco.
9. The balance of the Note and Note 2 are then set-off.

Purpose. The Opco shareholders wish to have the Vacant Premises and related assets held in a separate corporate vehicle to insulate them from operational risks of the Opco business.

Ruling: The proposed transactions will not by themselves be considered to result in a disposition or increase described in ss. 55(3)(a)(i) to (v), and will be deemed by s. 55(3.01)(g) to not be described in s. 55(3)(a)(ii).

Opinion. Re s. 55(2) not applying under the July 31, 2015 proposals to the deemed dividends arising in 4 and 6.