Pipeline ruling for an alter ego trust includes a preliminary deletion of a non-resident beneficiary

Around when he was placed in a long-term care facility, the “Deceased” transferred his shares of two companies with investing businesses (Aco and Bco) on a s. 73(1) rollover basis to a newly-formed alter ego trust (“AE Trust”) of which a child (“Child 1”) was the trustee, and Child 1, Child 1’s spouse and their three adult children were beneficiaries with entitlements to income and capital as determined in the discretion of the trustee (except that he could not distribute capital to himself). On the death of the Deceased, there was a deemed disposition of the Aco and Bco shares for their FMV pursuant to s. 104(4)(a).

As a preliminary transaction, it was proposed that the trustee pursuant to a provision of the Trust Deed execute an irrevocable deed to amend the Trust Deed to thereupon remove one of the grandchildren (who was a non-resident) as a beneficiary of AE Trust. The stated purpose was "to preclude the potential application of the provisions of section 212.1 that may otherwise result, to the extent that Grandchild 1 would be a non-resident beneficiary of AE Trust at any relevant time.” (Note that in 2019-0824561C6, CRA adverted to the 2 December 2019 Finance comfort letter, but noted that it did not extend to non-GRE trusts, e.g., a life interest trust, such as AE Trust.)

It was then proposed that a conventional pipeline be implemented under which AE Trust transferred its common shares of Aco and Bco on a s. 85(1) rollover basis to a “Newco” in consideration for two notes of Newco and nominal-value preferred shares with a price adjustment clause and, after the passage of (presumably) one year, Newco would be amalgamated with Aco and Bco, and the notes would then be gradually repaid.

The rulings included the application of s. 88(1)(d.3) to the amalgamation, so that securities of Aco and Bco held before the death could be bumped.

Neal Armstrong. Summary of 2021 Ruling 2019-0800431R3 under s. 84(2).