The new look-through rule in ss. 212.1(5) and (6) may defeat the purpose of a pipeline transaction

Estates commonly use “pipeline” transactions (to take advantage of the step-up to them, under s. 70(5), of the cost of the shares of Opco) under which they sell their Opco shares to Newco for Newco notes. However, under the new look-through rule in ss. 212.1(5) and (6), a non-resident residuary beneficiary will be deemed to have sold a pro-rata portion of the Opco shares to Newco for s. 212.1 purposes. Given that the non-resident (by virtue of being an estate beneficiary) will also be deemed by ss. 212.1(3)(b) and (a) to not be dealing at arm’s length with Newco, a deemed dividend generally will arise to the non-resident beneficiary under s. 212.1, thereby defeating the purpose of the pipeline.

Neal Armstrong. Summary of Henry Shew, “Post-Mortem Pipeline Fails for Non-Resident Beneficiaries,” Canadian Tax Focus, Vol. 9, No. 1, February 2019, p. 1 under s. 212.1(6).