In Foix c R, 2021 CCI 52, W4N sold its key business assets to EMC, an American corporation. Before and after the asset sale, the shareholders of W4N sold its shares (directly and indirectly) to a Canadian subsidiary of EMC (EMC Canada). The CRA applied section 84.1 or subsection 84(2) to the share sale. The Court held that subsection 84(2) applied. The sale of shares represented an appropriation of W4N’s property to the shareholders on a “winding-up, discontinuance or reorganization of its business”. In this case, W4N’s excess cash and cash equivalents “indirectly financed” the distribution to the sellers. The money used to pay the sellers was fungible with the money in W4N, and the evidence did not show that EMC Canada continued to operate W4N’s former business. It did not matter that EMC might have used W4N’s key business assets in a similar business because EMC had purchased assets and not shares. The question was whether subsection 84(2) applied to the sale of the shares of W4N to EMC Canada.
Hamelin “Hybrid Transaction Caught by Subsection 84(2)” 21:4 Tax for the Owner-Manager (October 2021)
Postscript 2021 11 03
Despite this decision, strong arguments remain that subsection 84(2) is not applicable to a hybrid transaction where the assets of the target corporation are not fungible assets (such as cash) and where the proceeds received by the shareholders of a target corporation cannot be traced to property that originally belonged to the target corporation—as in Geransky v. The Queen (2001 DTC 243 (2001 CanLII 480) (TCC)).
Lang and Houston “Subsection 84(2) Applied to Hybrid Share-Asset Transaction” 11:4 Canadian Tax Focus (Nov 2021)
