Techniques for Minimizing Tax on the Sale of Forco Shares
In many cases, Forco will not be saleable by Canco as a stand-alone entity. Its value is strictly tied in to functions it performs for Canco’s corporate group.
However, there may be cases where Forco has value, and is saleable, on its own. This might particularly be the case if it owns valuable IP.
This article will discuss three techniques that may be used to eliminate or minimize the tax that would otherwise be payable by Canco on any gain resulting from the sale of Forco shares.
Subsection 93(1) Election to Treat Proceeds as Dividends
Under subsection 93(1), Canco can elect to treat all or any portion of the proceeds from the sale of the Forco shares as a dividend for tax purposes, as opposed to proceeds of sale.
This would reduce the tax payable in cases where there is available exempt surplus , or taxable surplus  which has a high rate of underlying foreign tax.
In order to make this election, Canco must file form T2107 with the CRA.
Holding Via a Foreign Holding Company
If the shares of Forco are held via another non-resident corporation owned by Canco, the gain from the sale of the Forco shares will not be taxable in Canco’s hands as long as such shares are “excluded property” (“EP”) at the time of sale.
In general, the shares will be EP as long as “all or substantially all” of Forco’s assets are used in an active business .
If the shares of Forco are not currently in a foreign holding company, it is possible to transfer them on a tax-free rollover basis for shares of a foreign holding company . However, if that transfer is viewed as being part of the same series of transactions as the ultimate sale of the Forco shares, the tax-free rollover may be denied in certain cases .
Tax-Free Share for Share Exchange for Public Company Shares
If Canco wishes to sell its interest in Forco by exchanging it for shares of a public company, it should generally be possible to achieve this on a tax-free rollover basis.
This should be the case whether the acquiring public company is a Canadian corporation  or a foreign one .
In the next, and final, article in this series, I will discuss Canada Revenue Agency reporting requirements for Canco in relation to the ownership and operation of Forco.
 Paragraph 113(1)(a)
 Paragraph 113(1)(b)
 If the Forco shares are not EP, the taxable portion of the gain will be FAPI
 Subsection 85.1(3)
 Subsection 85.1
 Subsection 85(1), assuming that the acquiring corporation agrees to file a joint election (form T2057).
 Subsection 85.1 (5), assuming acquiring corporation is dealing at arm’s length with Canco and Canco does not acquire control of the acquiring company.
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