8 May 2001 External T.I. 2001-0072705 - Romkey - Estate Freeze

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Assessing practice in aftermath of Romkey decision.

Position: No change.

Reasons: Decision does not affect "typical" estate freeze.

CALU - Conference for Advanced Life Underwriting (2001)

Question 1

Estate Freezing After Romkey

A conventional 'estate freeze' typically involves a series of transactions whereby the owner of common shares of a company exchanges those shares for fixed value preferred shares. New common shares are then issued to the shareholder's children or perhaps to a trust established for the benefit of the children. The preferred shares would normally be redeemable at the option of the holder for a price equal to the fair market value of the common shares for which they were exchanged. The new common shares would typically be issued for a relatively nominal consideration. The purpose of the transaction would be to fix or 'freeze' the value of the shareholder's equity interest in the company at its current fair market value so that any future increase in the value of the company would accrue for the benefit of the shareholder's children.

It is our understanding that, provided certain criteria are satisfied generally with regard to the rights and restrictions attached to the preferred 'freeze' shares, the Agency will agree that the fair market value of the preferred shares will be equal to their stipulated redemption price. Furthermore, the Agency will also generally agree that the shareholder will not be considered to have transferred property to or otherwise conferred a benefit on the children (or their trust) who subscribe for the new common shares.

In the case of Barry Romkey and Brian Romkey v. Her Majesty the Queen (2000 DTC 6047) the Federal Court of Appeal considered a situation where shares in a family-owned company were issued to trusts for children. (The Supreme Court has since denied leave to appeal.) While the Romkey decision dealt with the application of the income attribution rules, it may also have implications for estate freezing arrangements. In concluding that the income attribution rules were applicable in the Romkeys' situation, the Court stated that by causing shares to be issued to trusts for the children, "the appellants had already effected a transfer of property to their respective children, i.e. divesting themselves of the right to receive a measure of future dividends."

Will the Agency make any changes to its current assessing practices with regard to estate freezes in light of the decision of the Federal Court of Appeal in the Romkey case?

Agency's Response

We do not plan to make any changes to our current assessing practices with respect to estate freezes. More specifically, some practitioners have expressed concern that as a result of the Romkey decision, subsection 74.1(2) might be applied to an estate freeze transaction. It is our view that subsection 74.1(2) will generally not apply to attribute, to a freezor, dividends paid on shares held by a trust for minor children as part of a typical estate freeze, provided that the shares held by the trust are issued for an amount equal to their fair market value and are paid for with funds that are not obtained from the freezor.