At the commencement of a series of transactions that will be carried out to divide the assets of a particular corporation pursuant to paragraph 55(3)(b), 50% of the shares of the particular corporation are owned by A and 50% are owned by B, an individual with whom A deals at arm’s length. The corporation carries on two businesses/properties.
Step 1, the shares of the particular corporation owned by B are transferred to Bco, B’s wholly-owned corporation.
Step 2, Bco incorporates a subsidiary, Subco.
Step 3, the particular corporation transfers all the property of one business to Subco, and the particular corporation and the Subco elect under subsection 85(1) in respect of the properties transferred to defer the recognition of the gain that would otherwise be realized on the transfer.
Subco assumes liabilities of the particular corporation and issues to the particular corporation retractable preferred shares having a paid-up capital equal to the elected amount and a redemption amount equal to the amount by which the fair market value of the property transferred exceeds the non-share consideration.
Step 4, Subco redeems the preferred shares.
Step 5, the particular corporation purchases the common shares owned by Bco.
Step 6, Subco winds up into Bco.
At the conclusion of the series of transactions Bco has received assets of the particular corporation in exchange for its shares of the particular corporation.
CRA’s Interpretation
- If each transaction in the series of transactions is consistent with the object and spirit of paragraph 55(3)(b), then subsection 245(2) would not apply.
- On the other hand, if a transaction in the series of transactions results in a distribution of property that fails to comply with the object and spirit of paragraph 55(3)(b), then the particular corporation and Bco would be taxed in accordance with the provisions of subsection 55(2). This might occur, for example, if a transferee does not receive its proportionate share of each type of property of the particular corporation.
- However, subsection 245(2) would be applied to a transaction that is part of a series of transactions that has been structured to avoid the effects of the application of subsection 55(2).