CRA rules on pipeline involving creation of high PUC common shares

CRA ruled on post-mortem pipeline transactions with somewhat unusual mechanics, i.e., the Newco will not issue notes or preferred shares to the company whose shares were stepped up on death (Holdco), and Newco and Holdco might amalgamate only after some of the earnings of Holdco have been stripped.

In particular:

  • S. 51 is used to convert the estate’s stepped-up shares of Holdco into high ACB (and low PUC?) preferred shares, with the estate then subscribing a (presumably nominal) amount for voting common shares of Holdco.
  • A portion of the Holdco shares are redeemed in order to distribute the capital dividend account of Holdco and generate a capital loss for effective carryback under s. 164(6).
  • The estate transfers its high ACB/lower PUC prefs of Holdco to Newco under s. 85(1) in consideration for high ACB/high PUC shares of Newco.
  • After a stipulated period (perhaps a year), Newco effects a PUC distribution on its Class A shares by distributing 8 non-interest bearing promissory notes to the estate with staggered maturity dates, with the first one occurring the next day (and the last one 2 years later?)
  • After a specified passage of time, Newco and Holdco will amalgamate.
  • At an appropriate juncture (which apparently could occur before the amalgamation), the estate will distribute to its beneficiaries the above promissory notes which had not yet been repaid, as well as the common shares of Newco or Amalco.

Neal Armstrong. Summary of 2019 Ruling 2019-0835131R3 F under s. 84(2).