CRA opines that s. 129(1.2) denies a dividend refund on the wind-up of a private company bequeathed (but not gifted) to a private foundation

The estate of B gifts her shares of a portfolio holding company (“Holdco”) to a private foundation, with Holdco thereafter using its liquid assets to redeem the common shares held by the private foundation. CRA ruled that, notwithstanding the status of the gifted shares as non-qualifying securities, the gift will be recognized under s. 118.1(13)(c) once the gifted shares are disposed of by virtue of their redemption - and that such gift will be deemed under s. 118.1(15) to have been made by B in her terminal year (so that her s. 70(5) gain on the shares can be sheltered). It also ruled that s. 129(1.2) would not deny a dividend refund to Holdco on the deemed dividend arising on the redemption. In giving the latter ruling, it was influenced by the fact that B's death occurred before 2016, so that the gift was not deemed by s. 118.1(5) to be made by B's estate. So far, these effectively are rulings that the transactions are more tax-efficient than if Holdco instead had been wound-up under s. 88(2) first, before the underlying assets were gifted to the Foundation.

The balance of the Holdco shares were held before B’s death in a spousal trust, whose terms in the wills of B’s deceased husband (A) provided that the residue (including such shares) was to be transferred to the Foundation on B’s death. CRA opined that this transfer to the Foundation was not a gift by the spousal trust (i.e., the Foundation received the residue qua beneficiary). More oddly, it also opined that s. 129(1.2) would apply to deny a dividend refund to Holdco on its redemption of the former-residue shares. In other words, notwithstanding the charitable intent of A when he crafted his wills and the obligation of his trustees to carry out his instructions, “one of the main purposes” of the transactions was generating a dividend refund.

Neal Armstrong. Summaries of 2017 Ruling 2016-0628181R3 under s. 118.1(13)(c), s. 129(1.2) and s. 118.1(1) - total charitable gifts.