CRA indicates that an alter ego trust, with planning, can use s. 88(1)(d.3) for post-mortem bumps

2009-0350491R3 ruled on the usebyf an alter ego trust of the s. 88(1)(d) bump following the death of its settlor and life beneficiary (Mr. X). At the time of his death, the trust held a holding company (Xco) with a number of subsidiaries. In the absence of some advance planning, the trust would not have been able to take advantage of the step-up in the ACB of the shares of Xco on the death of Mr. X by transferring its Xco shares to a Newco formed by it, and causing Xco to be wound-up with a view to having the tax basis of the subsidiaries’ shares bumped under s. 88(1)(d). The reason: ss. 88(1)(d.2) and 88(1)(d)(ii)(A) would generally (assuming typical circumstances) deem the ACB of the Xco shares to instead equal their historical cost.

The planning solution: the trust deed for the alter ego trust directed that such sale to Newco followed by Xco’s winding-up would occur following Mr. X’s death. On this basis, the parent (Newco) acquired the subsidiary (Xco) as a consequence of Mr. X’s death, so that s. 88(1)(d.3) relieved from the above provisions and permitted the bump rules to use the stepped-up ACB of the Xco shares. The CRA ruling summary stated:

Shares of subsidiary are acquired as a consequence of death pursuant to the directions of the settlor in the terms governing the alter ego trust, trustees of the alter ego trust under equitable obligation to transfer shares of subsidiary to parent on the death of the settlor.

CRA now confirmed that it “has not modified its views on the application of s. 88(1)(d.3) in the circumstances described in that document.”

It also indicated that the deemed reacquisition, pursuant to s. 104(4), of the Xco shares on the death of the settlor of the alter ego trust (Mr. X) would not have resulted in an acquisition of control of the corporation by the alter ego trust as “a consequence of the death of [the] individual,” stating that such deemed re-acquisition would not detract from the shares continuing to be legally owned by the trust, so there would be no transfer of the legal ownership of those shares that would result in an acquisition of control.

Neal Armstrong. Summaries of 15 June 2022 STEP Roundtable, Q.7 under s. 88(1)(d.3) and s. 104(4)(a.4).