{"id":23342,"date":"2024-12-12T10:35:00","date_gmt":"2024-12-12T15:35:00","guid":{"rendered":"https:\/\/www.millerthomson.com\/?p=23342"},"modified":"2025-05-09T14:10:22","modified_gmt":"2025-05-09T18:10:22","slug":"asset-drop-down-transactions-what-happens-when-a-third-party-sale-falls-through","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/corporate-tax\/asset-drop-down-transactions-what-happens-when-a-third-party-sale-falls-through\/","title":{"rendered":"Asset Drop-Down transactions: What happens when a third-party sale falls through?"},"content":{"rendered":"\n

The 2024 Federal Budget, introduced on April 16, 2024, brought significant changes to Canada\u2019s tax landscape, particularly for business owners and investors. Among the most impactful was the proposed increase in the capital gains inclusion rate<\/strong>, effective June 25, 2024. For corporations, the inclusion rate rose from 50% to 66.67%, and for individuals, capital gains exceeding $250,000 now face the same increase.<\/p>\n\n\n\n

This change created a rush of tax planning activity, with the Asset Drop-Down transaction<\/strong> emerging as a preferred strategy. However, not all plans proceeded smoothly, leaving many taxpayers asking: What should we do if the anticipated sale doesn\u2019t go through?<\/em><\/p>\n\n\n\n

This article explores the practical implications of an Asset Drop-Down transaction, the reasons some taxpayers used it ahead of the capital gains changes, and the key steps to take if your third-party sale is delayed or abandoned.<\/p>\n\n\n\n

Why the Asset Drop-Down transaction was a popular solution<\/h2>\n\n\n\n

The new inclusion rate caused concern because it significantly increased the tax burden on capital gains realized after the June 25, 2024, effective ate. Tax practitioners recommended the Asset Drop-Down strategy as a way to provide flexibility:<\/p>\n\n\n\n

What is an Asset Drop-Down?<\/h3>\n\n\n\n

This strategy involves transferring assets from one company (the “AssetCo<\/strong>“) to a subsidiary (the “NewCo<\/strong>“) under subsection 85(1) of the Income Tax Act (Canada)<\/em> (the “ITA<\/strong>“). This transfer can occur either at cost (avoiding immediate tax) or at fair market value (triggering a taxable gain at the lower, pre-June 25 inclusion rate).<\/p>\n\n\n\n

Who benefited most?<\/h3>\n\n\n\n

While the government\u2019s changes incentivized triggering capital gains before June 25, most taxpayers avoided doing so unless they had an imminent third-party sale. The logic was simple: why pay tax now without realizing cash from a sale?<\/p>\n\n\n\n

For those with planned sales, the Asset Drop-Down allowed them to structure their transactions to minimize tax exposure. However, in cases where the sale was delayed or fell through, taxpayers were left with questions about their next steps.<\/p>\n\n\n\n

When a third-party sale falls through: Key considerations<\/h2>\n\n\n\n

If you completed an Asset Drop-Down transaction in anticipation of a third-party sale, only to have that sale fall through or be delayed, it\u2019s essential to address the following issues:<\/p>\n\n\n\n

1. Timing of the election<\/h4>\n\n\n\n

The ITA specifies timelines for making an election:<\/p>\n\n\n\n