2007 Ruling 2007-0227521R3 - Bump - death of a shareholder

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.

Principal Issues: Bump on capital property owned by a corporation at the time of the shareholder's death.

Position: Favourable Ruling given.

Reasons: The law.

XXXXXXXXXX 								2007-022752

XXXXXXXXXX , 2007

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, and your other correspondence, in which you requested an advance income tax ruling on behalf of the taxpayers described in this letter. You have advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, none of the issues involved in this Ruling is:

(i) in an earlier return of any of the taxpayers or a related person;

(ii) being considered by a tax services office (TSO) or taxation centre (TC) in connection with a previously filed tax return of any of the taxpayers or a related person;

(iii) under objection by any of the taxpayers or a related person;

(iv) before the courts or if a judgment has been issued the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have also advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, that the proposed transactions will not result in any of the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this letter and unless otherwise expressly stated every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the Regulations;

(b) "adjusted cost base" has the meaning assigned by subsection 248(1);

(c) "agreed amount" has the meaning assigned by subsection 85(1);

(d) "arm's length" has the meaning assigned by subsection 251(1);

(e) "BCA" means the XXXXXXXXXX Business Corporations Act;

(f) "Beneficiary 1" means XXXXXXXXXX;

(g) "Beneficiary 2" means XXXXXXXXXX;

(h) "Beneficiary 3" means XXXXXXXXXX;

(i) "Beneficiary 4" means XXXXXXXXXX;

(j) "BN" means the business number issued to the particular entity by CRA;

(k) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(l) "cost amount" has the meaning assigned by subsection 248(1);

(m) "CRA" means the Canada Revenue Agency;

(n) "Deceased" means the late XXXXXXXXXX;

(o) "eligible property" has the meaning assigned by subsection 85(1.1);

(p) "Estate" means the estate of Deceased;

(q) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arms length (within the meaning assigned by subsection 251(1)) under no compulsion to act and contracting for a taxable purchase and sale;

(r) "Holdco" means XXXXXXXXXX;

(s) "ineligible property" has the meaning assigned by paragraph 88(1)(c);

(t) "money" means cash of any kind, including cash on hand, on deposit with a financial institution or on deposit in a broker account;

(u) "paid-up capital" has the meaning assigned by subsection 89(1);

(v) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(w) "predecessor corporation" has the meaning assigned by subsection 87(1);

(x) "principal amount" has the meaning assigned by subsection 248(1);

(y) "proceeds of disposition" has the meaning assigned by subsection 248(1);

(z) "Proposed Transactions" means the transactions described in Paragraphs 7 to 10;

(aa) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

(bb) "SIN" means Social Insurance Number;

(cc) "specified person" has the meaning assigned by paragraph 88(1)(c.2); and

(dd) "stated capital" and "stated capital account" have the meanings as provided by the BCA.

FACTS

1. Deceased was an individual who was resident of Canada until the time of his death on XXXXXXXXXX.

2. Holdco is a CCPC that was incorporated under the BCA on XXXXXXXXXX. Holdco's taxation year ends on XXXXXXXXXX. Holdco files its federal tax returns at the XXXXXXXXXX TC and the XXXXXXXXXX TSO administers its federal tax matters.

3. Holdco's authorized share capital consists of several different classes of shares, including an unlimited number of voting class A common shares ("Holdco Common Shares"). Currently, the only shares of Holdco that are issued and outstanding are XXXXXXXXXX Holdco Common Shares. The Holdco Common Shares have a stated capital and paid-up capital of $XXXXXXXXXX per share. The Estate has held the XXXXXXXXXX Holdco Common Shares as capital property without interruption since Deceased's death.

4. Pursuant to Deceased's last will and testament dated XXXXXXXXXX, the beneficiaries under of the Estate, and their respective entitlements are as follows:

• Beneficiary 1 is the adult grandchild of Deceased and is entitled to the residue of the Estate;
• Beneficiary 2 is the daughter of Deceased and the parent of Beneficiary 1. Beneficiary 2 is entitled to $XXXXXXXXXX per month during her lifetime, although the executor of the Estate has the sole discretion to terminate such payment at any time;
• Beneficiary 3 was the common law partner of Deceased. Beneficiary 3 is not related to Beneficiary 1, Beneficiary 2 or Beneficiary 3. Beneficiary 3 is infirm and is currently living in an institution. The Estate is required to pay all the costs of Beneficiary 3's institutional care and necessary medications during her lifetime; and
• Beneficiary 4 is the executor of the Estate and is not related to Beneficiary 1, Beneficiary 2 or Beneficiary 3. Beneficiary 4 is entitled to $XXXXXXXXXX as well as the use of a leased housing trailer (and contents) located in XXXXXXXXXX having an approximate fair market value of $XXXXXXXXXX.

Each of the beneficiaries is an individual who is resident in Canada. Based on the respective fair market value of each beneficiary's interest in the Estate, Beneficiary 1 would be considered to control the deemed corporation represented by the Estate pursuant to clause 88(1)(c.2)(ii)(B) at all times that she or Beneficiary 2 acquire property acquired by Amalco on the amalgamation referred to in Paragraph 9 or property acquired by any person in substitution therefor. The Estate does not currently have a BN as it has only recently filed its first T3 Trust Income Tax Return. The Estate has not made any subsection 164(6) election.

5. Deceased acquired the XXXXXXXXXX Holdco Common Shares when Holdco was incorporated in XXXXXXXXXX and has held such shares as capital property without interruption until his death. The aggregate adjusted cost base of the Holdco Common Shares immediately before Deceased's death was $XXXXXXXXXX (based on the valuation day value under ITAR 26(7) less a subsection 83(1) qualifying dividend that was paid by Holdco to Deceased in XXXXXXXXXX ). The fair market value of the XXXXXXXXXX Holdco Common Shares immediately before Deceased's death was $XXXXXXXXXX . The capital gain in respect of the deemed disposition, under paragraph 70(5)(a), of Deceased's XXXXXXXXXX Holdco Common Shares was $XXXXXXXXXX . No capital gains deduction under section 110.6 was claimed by Deceased in respect of the deemed disposition of the XXXXXXXXXX Holdco Common Shares. Pursuant to paragraph 70(5)(b), the aggregate adjusted cost base of the XXXXXXXXXX Holdco Common Shares acquired by the Estate is $XXXXXXXXXX.

6. Holdco owns certain non-depreciable capital property, consisting of various farmlands and marketable securities. The farmlands had an aggregate adjusted cost base of $XXXXXXXXXX and an estimated aggregate fair market value of $XXXXXXXXXX at the time of Deceased's death. Holdco has owned such farmlands continuously and without interruption from the time of Deceased's death. The marketable securities held by Holdco include a number of publicly traded shares and trust units. Holdco is not a specified shareholder of any corporation or trust. Currently, all the marketable securities owned by Holdco have a fair market value in excess if their original cost, other than two marketable securities with a combined accrued and unrealized loss of approximately $XXXXXXXXXX. The marketable securities had an aggregate adjusted cost base of $XXXXXXXXXX and an aggregate fair market value at the time of Deceased's death of $XXXXXXXXXX. While Holdco sold a portion of these marketable securities during its XXXXXXXXXX taxation year, Holdco has owned the remaining marketable securities continuously and without interruption from the time of Deceased's death.

PROPOSED TRANSACTIONS

7. The Estate will incorporate a new corporation ("Newco") under the BCA. Newco will be a taxable Canadian corporation. The authorized capital stock of Newco will consist of the following classes of shares:

(i) Class A common voting participating shares with discretionary dividend rights;

(ii) Class B common non-voting participating shares with discretionary dividend rights;

(iii) Class C common non-voting participating shares with discretionary dividend rights;

(iv) Class D preferred non-voting shares redeemable and retractable at issue price with a fixed dividend rate;

(v) Class E preferred non-voting shares redeemable and retractable at issue price with a discretionary dividend rate;

(vi) Class F preferred voting shares redeemable and retractable at issue price with a fixed dividend rate; and

(vii) Class G preferred voting shares redeemable and retractable at issue price with no dividend rights.

No shares of Newco will be issued at the time Newco is incorporated.

8. The Estate will transfer its XXXXXXXXXX Holdco Common Shares to Newco. As consideration therefor, Newco will issue to the Estate a non-interest bearing demand promissory note ("Newco Demand Note"), having a fair market value and principal amount equal to the adjusted cost base of the XXXXXXXXXX Holdco Common Shares to the Estate immediately before the transfer less $XXXXXXXXXX, and XXXXXXXXXX Class A common shares of Newco ("Newco Class A Shares"). The XXXXXXXXXX Newco Class A Shares will have an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Holdco Common Shares less the fair market value and principal amount of the Newco Demand Note. It is expected that the principal amount and fair market value of the Newco Demand Note will be $XXXXXXXXXX.

The Estate and Newco will elect jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the XXXXXXXXXX Holdco Common Shares. The agreed amount in respect of each Holdco Common Share so transferred will be equal to the adjusted cost base of such Holdco Common Share to the Estate immediately before such transfer and, for greater certainty, such agreed amount will not be less than the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii). In addition, the aggregate of the agreed amounts in respect of the XXXXXXXXXX Holdco Common Shares so transferred will not be less than the aggregate amount permitted under paragraph 85(1)(b).

The aggregate amount to be added to the stated capital account maintained for the Newco Class A Shares under the BCA that are issued as consideration for the XXXXXXXXXX Holdco Common Shares will be $XXXXXXXXXX.

8.1 Immediately prior to the amalgamation of Newco and Holdco described in Paragraph 9, all money held by Holdco at that time will be used to pay down Holdco's operating line of credit with the XXXXXXXXXX, such that no money will be on hand in Holdco at the time of such amalgamation.

9. Newco and Holdco will amalgamate pursuant to a short-form vertical amalgamation under the BCA to form a new corporate entity ("Amalco") such that:

(a) all of the property of each predecessor corporation immediately before the amalgamation will become property of Amalco by virtue of the amalgamation (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation),

(b) all of the liabilities of each predecessor corporation immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation (except amounts payable to any predecessor corporation), and

(c) the Holdco Common Shares will be cancelled on the amalgamation and no shares of Amalco will be issued on the amalgamation such that the Newco Class A Shares owned by the Estate immediately prior to the amalgamation will remain outstanding as "Amalco Class A Shares".

Immediately following the amalgamation the Estate will own all the Amalco Class A Shares. The certificate of amalgamation will not indicate a specific time such that the last taxation year of Holdco and Newco will be deemed to have ended at the end of the day immediately before the day of the amalgamation. The first taxation year of Amalco will end on XXXXXXXXXX. For greater certainty, the obligation of Newco to the Estate under the Newco Demand Note will become an obligation of Amalco on the amalgamation.

10. In connection with the amalgamation of Newco and Holdco to form Amalco described in Paragraph 9, in the return of income under Part I for its first taxation year immediately following the amalgamation, Amalco will, pursuant to the provisions of subsection 87(11) and subsection 88(1), designate an amount, within the limits described in paragraph 88(1)(d), to increase the adjusted cost base of the farmland and of any marketable securities (having accrued but unrealized gains at the time Amalco last acquired control of Holdco) that Holdco has owned without interruption since the time the Estate acquired the shares of Holdco as described in Paragraph 3, and that Amalco has acquired on the amalgamation.

Subsequent Transaction

11. The Estate intends to hold the Amalco Class A Shares for a period of time, but ultimately, such shares will be distributed to Beneficiary 1. Amalco will use money earned on its investments, earned from its rental of farmland, drawn from its operating line of credit and generated from the sale, on an arm's-length basis, of certain of its marketable securities, to repay all or a portion of the Newco Demand Note issued to the Estate as described in Paragraph 8 or any other indebtedness that may be owing by Amalco to the Estate. The Estate will distribute any money it received on the repayment of the Newco Demand Note or on the repayment of such other indebtedness owed to the Estate to satisfy its cash obligation to Beneficiary 4, its monthly obligations in respect of Beneficiary 2 and Beneficiary 3 and to make payments to Beneficiary 1. For greater certainty, Beneficiary 3 and Beneficiary 4 will not receive any property other than cash and none of the sales of marketable securities, which take place as part of the series of transactions which includes the amalgamation of Holdco and Newco, will be to a particular person or persons described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) on the assumption that the "subsidiary" referred to in those provisions was Holdco.

ADDITIONAL INFORMATION

12. The Proposed Transactions will occur in the order presented unless otherwise indicated with the exception of filing the applicable election form described in Paragraph 8, which will be filed within the applicable due date following the completion of the Proposed Transactions.

13. The farmland and the marketable securities described in Paragraph 6 were not acquired by Holdco as part of a distribution described in subsection 55(1) and each such property was acquired by Holdco from an arm's-length person.

14. None of the Proposed Transactions or any similar bump transactions were contemplated at the time of the Deceased's death.

PURPOSE OF THE PROPOSED TRANSACTIONS

15. The purpose of the Proposed Transactions is to increase the adjusted cost base of the farmland and the marketable securities owned by Holdco that had accrued but unrealized gains at the time of Deceased's death, in accordance with paragraphs 88(1)(c) and (d), on the vertical amalgamation of Newco and Holdco.

16. The purpose of the Proposed Transaction described in Paragraph 11 is to provide money to the Estate to meet its required distribution obligations under the terms of the Deceased's will to the beneficiaries.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. Subject to subsection 69(11), provided the appropriate joint election is filed in the prescribed form and manner within the time limits specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer of the Holdco Common Shares to Newco by the Estate described in Paragraph 8, such that the agreed amount in respect of each such transfer will be deemed to be the Estate's proceeds of disposition and Newco's cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of this transfer of property.

B. The provisions of subsections 87(11) and 88(1) will apply to the amalgamation of Newco and Holdco described in Paragraph 9 such that, for purposes of the Act, the cost to Amalco of each property of Holdco that becomes property of Amalco on the amalgamation will be deemed to be the amount deemed by paragraph 88(1)(a) to be the proceeds of disposition of the property to Holdco, plus, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii), and provided that no such property acquired by Amalco on the amalgamation, or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Holdco and the "parent" is Newco) as part of the series of the transactions or events that includes the Proposed Transactions, and, on the assumption that such property is capital property, but not depreciable property, such portion of the amount, if any, by which:

(a) the adjusted cost base to Newco of the XXXXXXXXXX Holdco Common Shares immediately before the amalgamation

exceeds

(b) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1),

as is designated by Amalco under subsection 87(11) and paragraph 88(1)(d) in respect of the property in its return of income under Part I for its first taxation year immediately following the amalgamation.

C. As a result of the application of paragraphs 88(1)(d.2) and (d.3), for the purposes of Ruling B, Newco will be deemed to have "last acquired control" of Holdco at the time immediately after the death of Deceased from an arm's-length person.

D. Subsection 245(2) will not be applied, as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences described in the rulings given.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the cost amount, adjusted cost base or fair market value of any property referred to herein; or

(b) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
for Director
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch