CRA rules that cash extracted from an estate subsidiary can be rendered substituted property for s. 118.1(5.1)(b) purposes by having such cash paid as redemption proceeds

S. 118.1(5.1)(b) requires that in order for a gift to be deemed to be one made by the deceased rather than the estate, it must be a gift of "property that was acquired by the estate on and as a consequence of the death" or "property that was substituted for that property." 2015-0578551C6 indicated that where an individual, on a post- 2015 death, held "Holdco" owning marketable securities, which Holdco sold and paid to the estate as a cash dividend so that the estate could make a cash donation to a qualified donee, such cash would not be considered to be substituted property (the estate still held its Holdco shares rather than those shares having been replaced by the cash).

CRA has now ruled on transactions which were intended as a workaround.

The estate held all the common shares of Aco which, as a result of quite a number of reorganization transactions, were replacements of shares which the deceased either held on death or was entitled at that time to receive from the spousal trust of the deceased’s mother. Aco then paid a stock dividend on its common shares consisting of newly created preferred shares, redeemed those shares for cash, and made a s. 83(2) election for the resulting deemed dividend to be treated as a capital dividend. The estate then donated the cash to a qualified donee.

CRA ruled that such cash satisfied the substituted property requirement under s. 118.1(5.1)(b). S. 248(5)(b) deems shares received as a stock dividend on shares to be substituted for those shares.

Neal Armstrong. Summary of 2023 Ruling 2020-0862441R3 under s. 118.1(5.1)(b).