Words and Phrases - "by reason of death"

The Taxpayer, age 65, retired in the summer of 2021 and thereupon sold and transferred (the “First Disposition”) all the shares (the “Subject Shares”) of his company (“Opco”), which shares were qualified small business corporation shares (having an ACB and PUC of $100,000) to a newly-incorporated wholly-owned corporation (“Purchaser Corporation”) of his adult daughter, Joan (who has been actively engaged in Opco’s business) for their appraised fair market value (FMV) of $2 million.

In the following Scenarios, is the Purchaser Corporation considered to have disposed of the Subject Shares “otherwise than by reason of death,” so that the exception in s. 84.1(2.3)(a) does not apply?

Q.3.1 Taxpayer dies in March 2025 and Joan subsequently causes Purchaser Corporation to sell the Subject Shares to an arm’s length purchaser (ALP) for proceeds of $3 million (ALP Disposition).

Q.3.2 Joan dies in March 2025 and the Taxpayer reacquires the Subject Shares personally from Purchaser Corporation for a cash payment equal to the difference between their $2.5 million appraised FMV and the outstanding promissory note owed by Purchaser Corporation to Taxpayer (Taxpayer Disposition).

CRA indicated that in applying the quoted phrase, it:

would look for a causal link between the death and the subsequent disposition of the shares by the purchaser corporation. For example, the death of an individual may make it impractical or difficult to continue under the current ownership and may precipitate the subsequent sale of the subject shares.

Whether there was such a link for Q.3.1 would require a detailed review. Regarding Q.3.2, CRA stated that it “would be willing to accept that the Taxpayer Disposition was by reason of death with the result that, although Purchaser Corporation disposed of the Subject Shares within 60 months of their purchase, the Taxpayer Disposition will not impact the application of paragraph 84.1(2)(e) of the Act to the First Disposition.”

Regarding both the Q.3.1 and Q.3.2 scenarios, what would be the impact on the tax positions of Taxpayer and Purchaser Corporation in 2021 and 2025 if 84.1(2.3)(a) applied?

Regarding Q.3.1, CRA stated:

Taxpayer and Purchaser Corporation would not be deemed by paragraph 84.1(2)(e) … to be dealing at arm’s length. However, Taxpayer would be deemed, for the purposes of section 84.1 of the Act, to have disposed of the Subject Shares to the person who acquired them from Purchaser Corporation (i.e. ALP). Although the purpose and scope of subparagraph 84.1(2.3)(a)(ii) of the Act is not entirely clear, we are prepared to apply this provision such that, if Taxpayer had disposed of the Subject Shares directly to the subsequent purchaser and section 84.1 of the Act would not have applied to that disposition, the First Disposition will not be subject to section 84.1.

Regarding Q.3.2, CRA stated:

Taxpayer and Purchaser Corporation would not be deemed by paragraph 84.1(2)(e) … to be dealing at arm’s length. However, Taxpayer would be deemed, for the purposes of section 84.1 …, to have disposed of the Subject Shares to the person who acquired them from Purchaser Corporation (himself). … [W]e are prepared to apply this provision such that, if Taxpayer had disposed of the Subject Shares directly to the subsequent purchaser and section 84.1 … would not have applied to that disposition, the First Disposition will not be subject to section 84.1 … . In this case, Taxpayer would be deemed to have disposed of the Subject Shares to himself and, therefore, section 84.1 of the Act would not apply.