Here are 2 examples of the operation of the s. 85.1(4) exclusions

Two illuminating examples are provided on the operation of the proposed expansion (contained in the August 15, 2025 draft legislation) of the exclusion in s. 85.1(4) for rollover treatment under s. 85.1(3).

Example 1

A non-resident corporation (“Foreign Parent”) wholly owns Canco, which in turn wholly owns two controlled foreign affiliates, FA1 and FA2.

Canco disposes of the shares of FA1, which have an accrued gain, to FA2 in exchange for shares of FA2. Subsequently, Canco disposes of all or a portion of its shares of FA2 to Foreign Parent in a transaction that is fully taxable for ITA purposes.

If it is determined that the initial and subsequent dispositions are part of the same series of transactions, the subsequent disposition of the FA2 shares by Canco to Foreign Parent should be considered a “relevant disposition” under proposed s. 85.1(4)(a)(i)(C) on the basis that the shares of FA2 would, at the time of disposition by Canco, derive a portion of their fair market value (FMV) from the shares of FA1.

Furthermore, Foreign Parent would be an acquirer described in proposed s. 85.1(4)(a)(ii)(B) because, during the testing period commencing with the disposition of the FA1 shares and ending immediately after the series of transactions, Foreign Parent is a non-resident person not dealing at arm's length with Canco and that is not a controlled foreign affiliate (CFA) of Canco described in s.17 (a “s. 17 CFA”).

Accordingly, the s. 85.1(3) rollover would be inapplicable to Canco’s disposition of its FA1 shares.

Example 2

Canco owns all the shares of FA1 (a CFA) and 50% of the only class of shares of a non-controlled foreign affiliate, FA2. The remaining 50% is owned by a non-resident of Canada who deals at arm's length with Canco.

Canco disposes of the shares of FA1, on which it has an accrued gain, to FA2 solely in exchange for additional shares of the same class of FA2.

Draft s. 85.1(4) denies the s. 85.1(3) rollover:

• First, because the disposition of the shares of FA1 would be considered a “relevant” disposition under proposed s. 85.1(4)(a)(i)(A) (whose definition includes a disposition of the rolled FA shares themselves).
• Second, that relevant disposition is made to an acquirer described in proposed s. 85.1(4)(a)(ii)(B) because: (i) FA2 is a non-resident person with whom Canco does not deal at arm's length at the time immediately after the disposition of the shares of FA1 to FA2; and (ii) FA2 is not a s.17 CFA of Canco at the time of the disposition of the FA1 shares (and instead, only became a s. 17 CFA of Canco immediately after that disposition).

Neal Armstrong. Summary of Bryan Leslie, “Proposed Amendments to Subsection 85.1(4),” International Tax Highlights, Vol. 4, No. 4, November 2025, p. 5 under s. 85.1(4).