CRA confirms that a refreeze does not reduce the quantum of any imputed interest under s. 74.4(2)

CRA confirmed that where an individual exchanges preferred shares received in the course of a previous estate freeze for newly-issued preferred shares with a redemption amount equal to the current (lower) equity value of the underlying corporation:

• If s. 74.4(2) applied to the original estate freeze (e.g., the distribution restriction in s. 74.4(4) was not complied with), the preferred shares received on the refreeze will be excluded consideration that do not reduce the “outstanding amount” (as determined under s. 74.4(3)) on which the deemed interest benefit is computed under s. 74.4(2).
• If the refrozen preferred shares are redeemed for cash consideration, that consideration will reduce the outstanding amount, but only to the extent of the fair market value of those shares. However, the corporate attribution rules would cease to apply, for example, when the children were no longer minors.

Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.10 under s. 74.4(3). See also Demner and McIsaac.