8 October 2010 Roundtable, 2010-0373291C6 F - Tuck-Under Transactions - Safe Income Extractions

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84(2)

2010-0370551E5 F has different facts but essentially the same response

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: Whether the CRA maintains its long standing position that subsection 84(2) should not apply to "tuck under" transactions carried out in the context of "safe income extraction" scenarios.

Position: Yes.

Reasons: Wording of the Act and previous positions.

FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011

Question 17

Impact of the Tremblay decision on "Tuck Under" transactions

In Tremblay et al. v. The Queen (footnote 1), the Minister attempted to apply subsection 84(2) in a "tuck under" transaction. The Tax Court of Canada concluded that subsection 84(2) did not apply. The Federal Court of Appeal upheld the decision in a judgment rendered on May 17, 2010. A "tuck under" transaction generally allows a shareholder who holds the shares of a target through a holding corporation to directly hold the shares of the target. The transaction aims to transfer the holding corporation under the target to achieve the targeted result.

Consider the following situation:

Target Corporation is the object of an offer to purchase all of its shares. Some minority shareholders wish to enter into a series of transactions in order to benefit from the safe income on hand attributable to the shares of Target.

Here is the structure of one of the shareholders before planning:

Holdco 1 incorporates a new corporation (Holdco 2) and transfers the Target shares to it on a rollover basis.
The directors of Holdco 2 proceed with an increase in the paid-up-capital in the amount of the safe income.
Holdco 1 transfers the Holdco 2 shares to Target in exchange for Target shares.
Holdco 2 is wound-up into Target.
Holdco 1 can now sell Target shares and benefit from the increase in ACB.

We understand that the long-standing position of the CRA is that subsection 84(2) should not apply with respect to the transaction described above.

Question to the CRA

Is this still the position of the CRA?

CRA Response

It should first be noted that the decision of the Federal Court of Appeal in the Tremblay case included a dissent by Blais CJ, who found that subsection 84(2) applied on the basis in particular of Smythe v. M.N.R., [1970] S.C.R. 64 of the Supreme Court of Canada.

It should also be noted that section 245 was not raised in the Tremblay case.

Consequently, and despite the Tremblay decision, the CRA intends to continue to challenge surplus stripping situations that are considered abusive, including those in the form of "tuck under" transactions, in particular by reviewing the potential application of subsections 84(2) and 245(2) in the particular situations.

That being said, it is possible that, under appropriate circumstances, "tuck under" transactions may be performed without triggering the application of subsections 84(2) and 245(2). For example, the CRA maintains its long-standing position that subsections 84(2) and 245(2) should not apply to a "tuck under" transaction to extract the safe income on hand relating to the interest of a corporate taxpayer in a target corporation, of the type described in this question. However, and on the basis of the foregoing, the CRA is of the view that the Tremblay decision cannot be interpreted as having the effect of automatically validating all other types of "tuck under" transactions.

Stéphane Prud'Homme

(613) 957-8975
October 8, 2010
2010-037329

FOOTNOTES

Due to our system requirements, footnotes contained in the original document are reproduced below:

1 Tremblay et al. v. The Queen, 2009 TCC 6 and The Queen v. Vaillancourt-Tremblay et al., 2010 FCA 119

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Text of Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principales Questions: Whether the CRA maintains its long standing position that subsection 84(2) should not apply to "tuck under" transactions carried out in the context of "safe income extraction" scenarios.

Position Adoptée: Yes.

Raisons: Wording of the Act and previous positions.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE
APFF - CONGRÈS 2010

Question 17

Incidence de la décision Tremblay sur les opérations de type " Tuck Under "

Dans l'arrêt Tremblay et coll. c. La Reine (note de bas de page 1) , le ministre a tenté d'invoquer le paragraphe 84(2) L.I.R. dans une opération de type " tuck under ". La Cour canadienne de l'impôt a conclu que le paragraphe 84(2) L.I.R. ne s'appliquait pas. La Cour d'appel fédérale a confirmé la décision dans un jugement rendu le 17 mai 2010. Une opération de type " tuck under " permet généralement à un actionnaire qui détient les actions d'une cible par l'entremise d'une société de gestion de détenir directement les actions de la cible. L'opération vise à transférer la société de gestion sous la cible pour arriver au résultat escompté.

Considérons la situation suivante :

La société Cible fait l'objet d'une offre d'achat visant la totalité de ses actions. Certains actionnaires minoritaires désirent conclure une série d'opérations afin de bénéficier du revenu protégé en main attribuable aux actions de Cible.

Voici la structure d'un des actionnaires avant la planification :

Holdco 1 constitue une nouvelle société Holdco 2 et lui transfère en franchise d'impôt les actions de Cible.

Les administrateurs de Holdco 2 procèdent à une augmentation de capital versé jusqu'à concurrence du revenu protégé.

Holdco 1 transfère les actions de Holdco 2 à Cible en échange d'actions de Cible.

Holdco 2 est liquidée dans Cible.

Holdco 1 peut maintenant vendre les actions de Cible et bénéficier de l'augmentation de PBR.

Nous comprenons que la position de longue date de l'ARC est que le paragraphe 84(2) L.I.R. ne devrait pas s'appliquer à l'égard de l'opération décrite ci-dessus.

Question à l'ARC

Est-ce toujours la position de l'ARC?

Réponse de l'ARC

Il faut d'abord souligner que la décision rendue par la Cour d'appel fédérale dans l'affaire Tremblay comporte une dissidence du juge en chef Blais, laquelle conclut à l'application du paragraphe 84(2) L.I.R. sur la base notamment de l'arrêt Smythe c. M.R.N., [1970] S.C.R. 64 de la Cour suprême du Canada.

Il faut également souligner que l'article 245 L.I.R. n'a pas été invoqué dans l'affaire Tremblay.

En conséquence et malgré la décision Tremblay, l'ARC entend continuer de contester les situations de dépouillement de surplus jugées abusives, y compris celles revêtant la forme d'opérations de type " tuck under ", en examinant notamment l'application potentielle des paragraphes 84(2) et 245(2) L.I.R. dans les situations données.

Ceci étant dit, il est possible que, dans des circonstances appropriées, des opérations de type " tuck under " puissent être effectuées sans qu'elles n'entraînent l'application des paragraphes 84(2) et 245(2) L.I.R. À titre d'exemple, l'ARC maintient sa position de longue date à l'effet que les paragraphes 84(2) et 245(2) L.I.R. ne devraient pas s'appliquer à une opération " tuck under " effectuée afin d'extraire le revenu protégé en main relatif à la participation d'un contribuable corporatif dans une société cible, du type de celle décrite dans l'énoncé de la présente question. Toutefois et sur la base de ce qui précède, l'ARC est d'avis que la décision Tremblay ne saurait être interprétée comme ayant pour effet d'automatiquement valider tous les autres types d'opérations " tuck under ".

Stéphane Prud'Homme
(613) 957-8975
Le 8 octobre 2010
2010-037329

NOTES DE BAS DE PAGE

En raison des exigences de nos systèmes, les notes de bas de page contenues
dans le document original sont reproduites ci-dessous :

1 Tremblay et coll. c. La Reine, 2009 CCI 6 et La Reine c. Vaillancourt-Tremblay et coll., 2010 FCA 119

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)

Vaillancourt-Tremblay did not validate all tuck-under transactions

Despite the decision in Vaillancourt-Tremblay (which addressed only s. 84(2), and not s. 245(2)), CRA will continue to challenge abusive surplus stripping arrangements, including those taking the form of "tuck under" transactions. CRA stated:

[T]he CRA intends to continue to challenge surplus stripping situations that are considered abusive, including those in the form of "tuck under" transactions, in particular by reviewing the potential application of subsections 84(2) and 245(2) in the particular situations.

... [T]he Tremblay decision cannot be interpreted as having the effect of automatically validating all other types of "tuck under" transactions.

Summary Under

Tax Topics - Income Tax Act - Section 84 - Subsection 84(2)

CRA accepts use of tuck-under transactions to extract safe income

Given the acceptance of a tuck-under transaction in Vaillancourt-Tremblay, does CRA still consider that s. 84(2) should not apply to such a transaction? After noting that this decision contained a dissent and did not address s. 245(2), CRA stated:

[T]he CRA intends to continue to challenge surplus stripping situations that are considered abusive, including those in the form of "tuck under" transactions, in particular by reviewing the potential application of subsections 84(2) and 245(2) in the particular situations.

That being said, it is possible that, under appropriate circumstances, "tuck under" transactions may be performed without triggering the application of subsections 84(2) and 245(2). For example, the CRA maintains its long-standing position that subsections 84(2) and 245(2) should not apply to a "tuck under" transaction to extract the safe income on hand relating to the interest of a corporate taxpayer in a target corporation, of the type described in this question. However, and on the basis of the foregoing, the CRA is of the view that the Tremblay decision cannot be interpreted as having the effect of automatically validating all other types of "tuck under" transactions.

Summary Under

Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c)

safe income can be extracted using tuck-under

In the course of indicating that, in some instances, it would consider applying ss. 84(2) and 245(2) to tuck-under transactions, CRA stated:

T]he CRA maintains its long-standing position that subsections 84(2) and 245(2) should not apply to a "tuck under" transaction to extract the safe income on hand relating to the interest of a corporate taxpayer in a target corporation … .

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8 October 2010 Roundtable, 2010-0373291C6 F - Tuck-Under Transactions - Safe Income Extractions

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