CRA rules on pipeline transaction to fund the tax payable by a trust under GAAR regarding an avoidance of s. 104(5.8)

A family inter vivos trust for resident beneficiaries (Trust 1) had distributed its common shares of an investment holding company (Holdings) on an s. 107(2) rollover basis to a corporate beneficiary (Holdco) that was held by a newly-formed trust for family members (Trust 2). CRA was then approached, who determined that GAAR applied to the rollout of the Holdings shares to Holdco, so that s. 104(5.8) should be treated as applying to the capital property of Trust 2 upon the (now imminent) occurrence of the 21^st anniversary of the formation of Trust 1 so as to result in a deemed disposition of such property pursuant to s. 104(4)(b)(ii) – and the Directorate so ruled in this ruling letter.

The resulting tax to Trust 2 was to be elected under s. 159(6.1) staggered over 10 years. It was proposed that a family beneficiary of Trust 2 (Father) generate the funds to make contributions to Trust 2 to pay the initial instalments of such tax by engaging in a pipeline transaction in which Trust 2 would distribute some of its common shares of Holdco (with stepped up basis under s. 104(4)) to Father for sale by him to a Newco (owned by him and children) in consideration for common shares of Newco, with Newco using advances from Holdings to make the requisite note repayments to Father (both before and after the amalgamation of Newco and Amalco, to occur a year later).

The wording of the GAAR ruling implicitly seems to treat GAAR as something that the taxpayer can apply to itself (see Quinco Financial, where this view was adopted in the Tax Court, but not especially endorsed in the Court of Appeal).

Neal Armstrong. Summary of 2022 Ruling 2022-0937661R3 F under s. 84(2).