Joint Committee provides its submissions on draft ss. 84.1(2)(a.1) and 246.1
The expanded s. 84.1 rule produces a greater impediment to the transfer of family businesses from one member to another, whether from one generation to another or between siblings (and during lifetime or post‐mortem), with the result that the tax system would favour third‐party sales. In the case of a post-mortem transfer, this is because neither the estate nor the child can now use pipeline planning to avoid double tax on death, as for purposes of s. 84.1 the ACB to the estate or the child will be reduced by the capital gain deemed to be realized by the deceased, and because solving this is very difficult.
An inter vivos example is where Bob sells the shares of Opco (having a FMV of $6 million and nominal PUC and ACB) directly to his children, and receives a $6 million promissory note as consideration. The children subsequently transfer the Opco shares into a new holding company and repay the promissory note to Bob over time using cash flow and the debt capacity of Opco. Under proposed s. 84.1, on the transfer by the children of the Opco shares to the holding company, the children’s ACB for s. 84.1 purposes would be reduced from $6,000,000 to nil because of the capital gain realized by Bob, a non‐arm’s length party. As a result, they would be deemed to receive a taxable dividend on the $6,000,000 ultimately paid to them to fund payments under the promissory note.
A few comments on draft s. 246.1:
- It is unclear if, for example, there is receipt of, say, a promissory note, there is a deemed dividend on such receipt or only on subsequent distributions (principal payments).
- The Explanatory Notes indicate that the amount receivable by an individual subject to s. 246.1 could be received indirectly through a trust. In many (or perhaps most) cases, though, the rule could apply to the trust itself, i.e., there is an issue of potential double application.
- Under ss. 246.1(2)(c)(i) and (ii) (re dispositions of property and changes in paid‐up capital) it appears possible for arm’s length transactions to be the basis for the application of s. 246.1.
- One of the purposes of the transaction or series must be to effect a significant “reduction or disappearance” of assets. The language of the provision suggests that assets for this purpose are to be determined on some type of consolidated or look‐through approach but there is no guidance on the manner in which this is to be done.
The Joint Committee has also released its submissions on the 18 July 2017 passive income proposals, and on the split income proposals which we will partially summarize at another juncture.