CRA rules on pipeline implemented by the beneficiaries, not the estate

CRA has ruled on pipeline transactions that were to be implemented by the beneficiaries of the deceased rather than his estate. The shares of an investment portfolio company (Holdco) were held by the deceased and his two resident brothers, who were the legatees of his shares. The estate distributed the shares of the deceased to his two brothers shortly after his death.

The two brothers then formed a Newco, whose common shares were held equally by them, and transferred all their shares of Holdco to Newco on a s. 85(1) rollover basis in consideration for notes equal to their shares’ ACB and for preferred shares of Newco. Following a specified period of time (presumably a year), Holdco and Newco were to amalgamate, with the notes then being paid off by Amalco on a specified schedule.

The effect of these transactions is that the two brothers can extract all the ACB of their shares of Holdco (including for the shares previously held by them), not just the stepped up ACB that occurred on the death of their deceased brother. This is unstartling if their historical shares had the same ACB as their paid-up capital.

Neal Armstrong. Summary of 2020 Ruling 2020-0838951R3 F under s. 84(2).