CRA effectively confirms that a pipeline transaction where there are non-resident beneficiaries currently generates Pt XIII tax

In a post-mortem pipeline transaction, the estate typically sells its shares of a Canadian private corporation (Canco) having full ACB but a lower paid-up capital to a non-arm’s length newco (Holdco) for a note of Holdco, which on its subsequent repayment effectively extracts the corporate surplus of Canco. CRA indicated that under the new look-through rule in s. 212.1(6)(b), the non-resident beneficiaries of the estate generally will be subject to a deemed dividend based on their proportionate share of the excess of the note over the paid-up capital of the transferred Canco shares.

CRA adverted to the recent Finance comfort letter, but noted that it did not extend to non-GRE trusts (which would include life interest trusts, such as alter ego or spousal trusts).

Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.5 under s. 212.1(6)(b).