Post-mortem tax planning should address the narrow scope of the comfort letter on s. 212.1(6)

A pipeline typically entails the estate selling its shares of Canco (whose ACB was stepped up on death) to a new Holdco for a Holdco note which, on its subsequent repayment, effectively extracts the corporate surplus of Canco. Although the new look-through rule in s. 212.1(6)(b) would otherwise generally generate a deemed dividend to the non-resident beneficiaries of the estate based on their proportionate share of the excess of the note over the paid-up capital of the transferred Canco shares, Finance has provided a comfort letter in which it disclosed a recommendation that the Act be amended to exclude, from the application of s. 212.1(6)(b), dispositions of shares by a Canadian resident graduated rate estate of an individual who was resident in Canada immediately before the individual's death, provided that those shares were acquired by the estate on and as a consequence of the individual's death.

As this proposal only applies to shares acquired on death:

If the Opco shares are exchanged (for example, for fixed-value preferred shares) after death and before the pipeline, relief may be lost.

More fundamentally, the comfort letter does not apply to life interest trusts (LITs)—such as alter ego, spousal, and joint partner trusts— even though LITs are in a materially identical position to GREs, so that the proposal does not address the same double taxation issue faced by them.

A suggestion:

Assume that the LIT transfers its shares of Opco for Holdco shares alone (that is, without receiving any non-share consideration). Paragraph 212.1(1.1)(b) suppresses the PUC of the Holdco shares, but no deemed dividend arises. On a subsequent repurchase or redemption of those shares, the LIT will realize a deemed dividend under subsection 84(2) or (3), but, critically, its POD will be reduced (see paragraph (j) of the POD definition in section 54). The result is a capital loss. Subject to the applicability of any stop-loss rules and the general three-year loss carryback period, the LIT can use that loss to offset its capital gain on death. Thus, only one layer of tax subsists.

Neal Armstrong. Summary of Kyle B. Lamothe and Alexander Demner, “Section 212.1 Post Mortem Pipeline Comfort Letter” Tax for the Owner-Manager, Vol. 20, No. 2, April 2020, p. 8 under s. 2261.