CRA rules on a double pipeline with flexible note repayments between the two pipelines

The death of the survivor of mother and father holding Class C common shares of a Canadian-controlled private corporation ("Investmentco") holding marketable securities triggered the disposition by her of those shares at their fair market value under s. 70(5) and a disposition at FMV under s. 104(4)(a) of preferred shares of Investmentco held by an inter vivos trust that had been settled for the benefit of her and her husband during their lifetimes, with their children as the residuary beneficiaries.

CRA has ruled that s. 84(2) will not apply to "pipeline" transactions in which the stepped up shares are sold by the estate and the trust to a Newco for promissory notes of Newco ("PN" and "PN1") (as well as debt already owing by Investmentco to the trust being sold by the trust to Newco for a third promissory note), Newco and Investmentco amalgamate a year later, and PN and PN1 are paid off out of the proceeds of the marketable securities at a maximum rate of xx% (likely 25% - see 2014-0559481R3) per quarter thereafter.

CRA did not care how the repayment proceeds are allocated between PN and PN1.  The ruling letter specifies that up to XX% of the third promissory note can be repaid before the amalgamation out of corresponding repayment proceeds of the debt owing by the trust to Newco.

Neal Armstrong.  Summary of 2015 Ruling 2014-0548621R3 under s. 84(2).