A pipeline where there are non-resident beneficiaries might use high-PUC shares, not a note

A post-mortem pipeline is normally effected by the estate transferring its shares of Opco (whose adjusted cost base, but not their paid-up capital, was stepped-up on death) to a new a Holdco in consideration for a Holdco note (which then is gradually paid off following a subsequent amalgamation of Opco and Holdco). Under the expanded look-through rule in s. 212.1(6), this transaction would be quite problematic if, for example, a non-resident beneficiary was one of two equal heirs. Ss. 212.1(6)(b) and 212.1(1.1)(a) would deem Holdco to pay a pro rata (1/2) dividend to X, i.e., ½ of the excess of the note consideration over the Opco PUC. This dividend would not reduce the estate’s proceeds of disposition.

There is a generally better result if Holdco issues high-PUC shares to the estate rather than a note. S. 212.1(1.1)(b) grinds the PUC of the Holdco shares by ½ of of the increase in their PUC over that of the Opco shares. Significantly, the resulting deemed dividend when the Holdco shares are repurchased will be excluded from the estate’s “proceeds of disposition” (under para. (j) of the definition), thereby producing a capital loss to the estate that it could potentially carry back under s. 164(6). There also may be a CDA or RDTOH balance.

Neal Armstrong. Summary of Alexander Demner and Kyle B. Lamothe, "Section 212.1 Lookthrough Rules Create Issues for Trusts with Non-Resident Beneficiaries", Tax for the Owner-Manager, Vol. 19, No. 2, April 2019, p. 2 under s. 212.1(6).