CRA rules on a pipeline for an inter vivos trust

A Canadian inter vivos family trust (Trust1) which is coming up to its 21^st anniversary will distribute some of its assets to a Canadian-resident individual beneficiary under s. 107(2) shortly before that date. However, for some reason, it will not distribute its preferred shares of Opco1 (a CCPC whose assets are mainly rental properties and shares of subsidiaries including an operating subsidiary) and instead will realize a capital gain under s. 104(4)(b)(ii) on the 21^st anniversary and will include the resulting taxable capital gain in its income for the year. (Other beneficiaries might not be resident in Canada.)

Thereafter, Trust1 will engage in a pipeline transaction in which it will transfer its preferred shares of Opco1 to a new CCPC (Newco) in consideration for Newco preferred shares with full paid-up capital, at the same time as the other shareholders of Opco1 transfer their shares on a s. 85(1) rollover basis to Newco. The activities of Opco1 will be maintained over the years, and after one year Newco and Opco1 will amalgamate. Amalco will begin to progressively (over a period of XX months) redeem its Class C shares, with the redemption proceeds paid partly with the profits generated by Opco1 subsequently to the pipeline.

Neal Armstrong. Summary of 2018 Ruling 2018-0765411R3 F under s. 84(2).