2015 Ruling 2014-0532201R3 - Corporate reorganization -- summary under Paragraph 38(a.1)

Background

This reorganization concerns a Canadian corporate group for which five named individuals (B to F), a spousal trust for D and four personal trusts, are named as the ultimate shareholders. Only transactions bearing on the gift rulings are summarized. The Foundation, which is a registered charity formed by A (the spouse of D), holds shares of Corporation 17, a public corporation. The XX Trust owns all the shares of Corporation 25, a CCPC. Trust 2 owns common shares of Corporation 18, a CCPC, and the balance of the shares of Corporation 18 are owned by Corporation 25. Corporation 18 owns two classes of shares of Corporation 17, as well as common shares of Corporation 15 which, in turn, owns common shares of Corporation 20.

Proposed transactions

Transactions proposed to occur on Day 1 of an internal reorganization stretching over seven days include the following:

1. Corporation 15 will transfer its shares of Corporation 17 and some of its intercorporate shareholdings to a newly-incorporated subsidiary (Newco Corporation 15) for non-share consideration equal to the fair market value of the transferred assets and in consideration for common shares of Newco Corporation 15, with a joint s. 85(1) election being made.
2. After forming Holdco 3, Corporation 18 will transfer Class XX shares of Corporation 17 (the “Donated Shares”) to Holdco 3 in exchange for redeemable retractable preference shares of Holdco, with a joint s. 85(1) election being made.
3. Holdco 3 will donate the Donated Shares to the Foundation pursuant to a deed of gift.
4. The Foundation will dispose of the Donated Shares to Corporation 20 for cash proceeds of disposition equal to their FMV.
5. Newco Corporation 15 will transfer its shares of Corporation 17 (the “Transferred Shares”) to Holdco 3 for non-share consideration equal to the ACB of the Transferred Shares and for redeemable retractable preference shares of Holdco 3, with a joint s. 85(1) election being made.
6. Holdco 3 will transfer the Transferred Shares to Corporation 20 for non-share consideration equal to their fair market value. Holdco 3 will report a taxable capital gain in respect of this disposition, and claim a deduction for charitable gifts in respect of the donation in computing its taxable income.

Rulings

• Provided that the s. 248(30) conditions and the s. 110.1 receipt requirements are satisfied, the share donation in 5 will be considered a gift for purposes of s. 110.1(1)(a) and the eligible amount of the gift under s. 248(31) will be the FMV of the Donated Shares at the time the gift is made less the amount of any advantage as defined in s. 248(32).
• Provided that the Donated Shares are capital property to Holdco 3, no portion of the capital gain arising from the disposition of the Donated Shares, if any, resulting from the making of the gift of the Donated Shares to the Foundation will be included in computing Holdco 3’s Taxable Capital Gain pursuant to paragraph 38(a.1).
• The full amount of the capital gain arising from the disposition of the Donated Shares on the donation will be added to the CDA of Holdco 3.