Planning for potential estates with FAs and NR beneficiaries should consider the FAD rules
Suppose that the deceased wholly owned a Canadian corporation (Opco), with nominal capitalization, which has more recently capitalized a US subsidiary (US FA) with debt and equity totalling $100,000. The deceased’s will provided discretion to the executor as to the distribution of the estate property in something other than equal shares to his four children, one of whom is a non-resident (NR son).
Leaving aside potential outs, the normal tax arising from the deemed disposition on death is supplemented by a deemed dividend from Opco to NR son of $100,000 (the FMV of property transferred by Opco to US FA). This occurs at the dividend time (per s. 212.3(4)), which is one year after Opco capitalized US FA.
Potential “outs” include:
- The purpose test in s. 212.3(26)(c)(iii) may not be satisfied if the discretionary power was not granted to the executor to avoid the s. 212.3 rules, so that NR son may not, in fact, be deemed to own 100% of the voting shares of Opco and, thus, may not be deemed to control Opco on the death of the deceased.
- The three events (the capitalization of US FA, the inclusion of a non-resident in the will, and the death) could be separated by a long period of time and not linked by any grand strategy and, therefore, might not form a series.
- Opco’s investment (if a loan) in US FA might be elected to be a pertinent loan or indebtedness.
- The “more closely connected business activity” exception in s. 212.3(16) is another possibility.
Neal Armstrong. Summary of Henry Shew, “Foreign Affiliate Dumping and Estates with Non-Resident Beneficiaries,” Canadian Tax Focus, Vol. 10, No. 1, February 2020, p.9 under s. 212.3(26).