8 March 2011 External T.I. 2011-0391821E5 - Paragraphs 88(1)(d.2) and (d.3) - Interaction

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: Clarification requested in respect of the interaction of paragraphs 88(1)(d.2) and (d.3) in the context of a post-mortem bump planning strategy.

Position: Clarification provided.

Reasons: In accordance with the Act and our previous positions.

XXXXXXXXXX 							2011-039182
								S. Snell
								(613) 946-3261
March 8, 2011

Dear XXXXXXXXXX :

RE: Interaction of Paragraphs 88(1)(d.2) and (d.3) in the Context of Post-Mortem Bump Planning

We are writing in response to your query whereby you have requested our comments in respect of the interaction of paragraphs 88(1)(d.2) and (d.3) of the Income Tax Act ("Act") in the context of a hypothetical post-mortem bump planning scenario.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Act.

1) Facts and Assumptions

Our understanding of the facts and assumptions is as follows:

1. At the time of death of an individual taxpayer ("Taxpayer"), the Taxpayer would own all the shares of the capital stock of a Canadian-controlled private corporation ("Subsidiary") as defined in subsection 125(7).

2. Subsidiary would own commercial real property and Subsidiary would receive rental income from the properties.

3. The Taxpayer would be deemed to have disposed of, immediately before the death of the Taxpayer, each capital property for proceeds of disposition equal to the fair market value ("FMV") of the property immediately before death, pursuant to the deemed disposition provisions in subsection 70(5).

4. The estate of the Taxpayer (the "Estate") would be deemed to have acquired the
shares of the capital stock of Subsidiary at an adjusted cost base ("ACB") equal to the FMV of the shares on the date of death, pursuant to subsection 70(5).

5. The Estate would incorporate a new corporation ("Parent"). The authorized share capital of Parent would consist of an unlimited number of common shares. Following incorporation, the Estate would subscribe for one common share of the capital stock of Parent.

6. The Estate would transfer all of the shares of the capital stock of Subsidiary to Parent in exchange for more common shares of the capital stock of Parent. The Estate would be the sole shareholder of Parent.

7. In connection with the transfer described in Step 6, the Estate and Parent would jointly elect, in prescribed form and within the time limits described in subsection 85(6), to have the rules in subsection 85(1) apply in respect of the transfer, allowing the transfer to Parent of the shares of the capital stock of Subsidiary to occur at an elected amount equal to the ACB.

8. Subsidiary and Parent would resolve to wind up Subsidiary into Parent pursuant to subsection 88(1). Pursuant to paragraph 88(1)(d), Parent would designate in its return of income for its first taxation year following the winding-up, to increase the ACB of non-depreciable capital property held ("bump"), within the limits described in paragraph 88(1)(d).

2) Your Views

You state that the paragraph 88(1)(d) bump provisions can be utilized in a post-mortem context to increase the ACB of non-depreciable capital property owned by a corporation when capital gains are realized in respect of shares of the capital stock of the particular corporation, upon the death of a controlling shareholder of the corporation. The steps generally involve the transfer of the shares of the capital stock of the old corporation, Subsidiary, that were owned by the deceased to a new corporation, Parent, winding up Subsidiary into Parent, and making designations under paragraph 88(1)(d) in respect of some or all of the "eligible property" of Subsidiary. These steps would be implemented by the Estate or by the beneficiaries to whom the shares are distributed by the estate. Your views and analysis are based on the following provisions:

Paragraph 88(1)(c) limits the availability of the bump amount to property that was capital property (other than ineligible property) of the subsidiary at the time that the parent last acquired control of the subsidiary and was owned by the subsidiary thereafter without interruption until such time as it was distributed to the parent on the winding-up.

Subparagraph 88(1)(d)(ii) limits the available bump amount in respect of the capital property of a subsidiary to the amount, if any, by which the FMV of the property at the time the parent last acquired control of the subsidiary exceeds the cost amount to the subsidiary of the property immediately before the winding-up.

Paragraph 88(1)(d.2) determines, for the purposes of this paragraph and paragraphs 88(1)(c) and (d), the time at which a person or group of persons (in this paragraph and paragraph (d.3) referred to as the "acquirer") last acquired control of the subsidiary, where control of the subsidiary was acquired from another person or group of persons (in this paragraph referred to as the "vendor") with whom the acquirer was not (otherwise than solely because of a right referred to in paragraph 251(5)(b)) dealing at arm's length. In these circumstances, the acquirer is deemed to have last acquired control of the subsidiary at the earlier of two specific times as outlined in subparagraphs 88(d.2)(i) and (ii).

Paragraph 88(1)(d.3), which applies for the purposes of paragraphs 88(1)(c), (d) and (d.2), provides that where control of a corporation is last acquired by an acquirer because of an acquisition of shares of the capital stock of the corporation as a consequence of the death of an individual, the acquirer is deemed to have last acquired control of the corporation immediately after the death from a person who dealt at arm's length with the acquirer.

You contend, however, that it is unclear in certain situations, whether paragraphs 88(1)(d.2) and (d.3) would deem the Parent to have last acquired control of the Subsidiary on the death of the shareholder of the Subsidiary, as described in the hypothetical scenario.

You have determined that Parent would not acquire the shares of the capital stock of Subsidiary in accordance with paragraph 88(1)(d.3) as Parent's acquisition of the shares of the capital stock of Subsidiary would not take place as a consequence of the death of Taxpayer in this situation. Additionally, in your view, the parties would be considered not to deal at arm's length by virtue of the provisions in section 251, and therefore, pursuant to paragraph 88(1)(d.2), Parent would be deemed to have last acquired control of Subsidiary at the earlier of

(i) the time at which the vendor, being the Estate, last acquired control (within the meaning that would be assigned by subsection 186(2) if the reference in that subsection to "another corporation" were read as "a person" and the references in that subsection to "the other corporation" were read as "the person") of Subsidiary, and

(ii) the time at which the Estate was deemed for the purpose of paragraph 88(1)(d.2) to have last acquired control of Subsidiary.

Finally, it is your position that the Estate and the Taxpayer would also be non-arm's length entities. In such a case, you suggest that the bump would only be available with respect to property owned by Subsidiary at the time the Taxpayer last acquired control pursuant to paragraph 88(1)(d.2), and only to the extent of the FMV of those assets at that time, not at the time of death of the Taxpayer.

You have requested our comments, in the context of the hypothetical situation described above, with respect to the time that Parent would be deemed to have last acquired control of Subsidiary for the purposes of applying the paragraph 88(1)(d) bump provisions, in light of paragraphs 88(1)(d.2) and (d.3) which, among other things, generally determine when a non-arm's length acquirer is deemed to have last acquired control of a subsidiary.

3) Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. Accordingly, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments.

Where paragraph 88(1)(d.3) does not apply, and the conditions of paragraph 88(1)(d.2) have been met, the application of paragraph 88(1)(d.2) would result in an acquirer, who would not be at arm's length with the vendor, being deemed to have last acquired control of the subsidiary at the earlier of the time that the vendor last acquired control (within the meaning that would be assigned by subsection 186(2)) or the time at which the vendor was deemed for the purpose of paragraph 88(1)(d.2) to have last acquired control of the subsidiary, as described in subparagraphs 88(1)(d.2)(i) and (ii).

However, as we have previously commented in response to Question 8 of the 2006 Conference for Advanced Life Underwriting ("CALU") Roundtable, Document No. 2006-0174021C6, it is our understanding that the current tax policy of paragraphs 88(1)(d.2) and (d.3) is to treat an acquisition of control of a subsidiary corporation that arises because of an acquisition of shares of the capital stock of the corporation as a consequence of the death of an individual, in a similar manner to that of an acquisition of control of a corporation that arises on a true arm's length takeover of the corporation for the purposes of paragraphs 88(1)(c) and (d).

Consequently, provided that paragraph 88(1)(d.3) would apply in the particular facts and circumstances to the acquisition of the shares of the capital stock of Subsidiary by the Estate from the Taxpayer, it is our view that the Estate would be deemed to have last acquired control of Subsidiary immediately after the death of the Taxpayer from a person who dealt at arm's length with the acquirer, for the purpose of paragraph 88(1)(d.2). As a result, Parent would be deemed to have last acquired control of Subsidiary immediately after the death of the Taxpayer, in accordance with paragraph 88(1)(d.2) and with our understanding of the current tax policy underlying the relevant provisions as previously described.

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch