2002 Ruling 2002-0127013 - Estate Planning

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 CCRA.

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

Principal Issues: Application of the bump denial rules and stop loss rules to property ultimately distributed to the beneficiary of the deceased's estate. Application of subsection 164(6) to the capital loss on the redemption of certain shares owned by the estate of the deceased.

Position: Favourable rulings given.

Reasons: In accordance with tax policy and law.

XXXXXXXXXX 						2002-012701

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letters of February 26, 2002, and April 9, 2002, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

You have advised that to your knowledge as well as that of your client:

a) none of the issues is in an earlier return of the taxpayer or related persons;

b) none of the issues is being considered by a tax services office in connection with any previously filed tax returns;

c) none of the issues is currently under objection;

d) none of the issues is currently before any court; and

e) none of the issues included is subject to a ruling request currently under consideration by the Directorate.

DEFINITIONS

In this letter, the following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"adjusted cost base" has the meaning assigned by section 54;

"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of that property;

"affiliated person" has the meaning assigned by subsection 251.1(1);

"arm's length" has the meaning assigned by section 251;

XXXXXXXXXX;

"capital property" has the meaning assigned by section 54;

"depreciable property" has the meaning assigned by subsection 13(21);

"ineligible property" has the meaning assigned by paragraph 88(1)(c);

"paid-up capital" has the meaning assigned by subsection 89(1);

"private corporation" has the meaning assigned by subsection 89(1);

"series of transactions or events" includes the related transactions or events described in subsection 248(10);

"specified person" has the meaning assigned by paragraph 88(1)(c.2);

"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

"substituted property" includes the meanings assigned by subsection 248(5) and paragraph 88(1)(c.3);

"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

"taxable dividend" has the meaning assigned by subsection 89(1).

NON-STATUTORY DEFINITIONS

XXXXXXXXXX, an individual who was resident in Canada until her death on XXXXXXXXXX;

"Estate" means the Estate of XXXXXXXXXX, which was created upon the death of XXXXXXXXXX;

"Holdings" means XXXXXXXXXX;

"Son" means XXXXXXXXXX, an adult son of XXXXXXXXXX who is the sole executor of the Estate;

"Spouse" means XXXXXXXXXX, an individual resident in Canada who is married to Son;

XXXXXXXXXX, an adult child of Son and Spouse who is resident in Canada;

XXXXXXXXXX, an adult child of Son and Spouse who is resident in Canada;

"Aco" means XXXXXXXXXX; and

"Trust" means the XXXXXXXXXX.

Our understanding of the relevant facts, purposes of the proposed transactions and proposed transactions is as follows:

FACTS

1. XXXXXXXXXX was a resident of Canada who died on XXXXXXXXXX. Pursuant to XXXXXXXXXX last will and testament (the "Will") all of the assets owned by XXXXXXXXXX at the time of her death, including XXXXXXXXXX Class A Preferred Shares of Holdings ("Holdings Class A shares") described below, were bequeathed to Son. At the time of XXXXXXXXXX death, the shares were held by XXXXXXXXXX as capital property. At the time of death, the adjusted cost base of her XXXXXXXXXX Holdings Class A shares was $XXXXXXXXXX. The fair market value of the XXXXXXXXXX Holdings Class A shares at the time of XXXXXXXXXX death was equal to the redemption amount of the shares which was $XXXXXXXXXX. The capital gain on the deemed disposition of XXXXXXXXXX shares at the time of death was $ XXXXXXXXXX and the adjusted cost base of the XXXXXXXXXX Holdings Class A shares to the Estate is $XXXXXXXXXX. No deduction, under section 110.6 was claimed in respect of the capital gain.

2. Son is a resident of Canada and is the sole executor and beneficiary of the Estate.

3. Holdings is a private corporation and a taxable Canadian corporation which was incorporated under the XXXXXXXXXX.

The authorized capital of Holdings consists of the following:

- XXXXXXXXXX Class A Preferred Shares which are voting, redeemable at a price of $XXXXXXXXXX per share;

- XXXXXXXXXX Class X Preferred Shares which are non-voting and redeemable at a price of $XXXXXXXXXX per share;

- XXXXXXXXXX Class Y Preferred Shares which are non-voting and redeemable at a price of $XXXXXXXXXX per share;

- XXXXXXXXXX Class B Common Shares which are voting;

- XXXXXXXXXX Class C Common Shares which are voting;

- XXXXXXXXXX Class D Common Shares which are non-voting; and

- XXXXXXXXXX Class E Common Shares which are non-voting.

The issued share capital is held as follows:

Shareholder	Number and Class of Shares	Paid-up capital	   ACB

Estate XXXXXXXXXX Class A Shares XXXXXXXXXX XXXXXXXX

Son XXXXXXXXXX Class B Shares XXXXXXXXXX XXXXXXXXXX

Spouse XXXXXXXXXX Class C Shares XXXXXXXXXX XXXXXXXXXX

XXXXXXX XXXXXXXX Class D Shares XXXXXXXXXX XXXXXXXXXX

XXXXXX XXXXXXXX Class E Shares XXXXXXXXXX XXXXXXXXXX

Aco XXXXXXXXXX Class X Shares XXXXXXXXXX XXXXXXXXXX

Trust XXXXXXXXXX Class Y Shares XXXXXXXXXX XXXXXXXXXX

The Estate controls Holdings for purposes of the Act.

4. Holdings carries on an investment business and owns certain non-depreciable capital property, consisting of XXXXXXXXXX land and certain market securities. The land had an aggregate cost base of $XXXXXXXXXX and an estimated fair market value of $XXXXXXXXXX at the time of XXXXXXXXXX death and has been owned continuously by Holdings since that time. The marketable securities had an aggregate cost base of $XXXXXXXXXX and an estimated fair market value of $XXXXXXXXXX at the time of XXXXXXXXXX death and has been owned continuously by Holdings since that time.

5. Aco is a CCPC and a taxable Canadian corporation which was incorporated under the XXXXXXXXXX.

6. The Trust was settled by XXXXXXXXXX (the deceased spouse of XXXXXXXXXX) in XXXXXXXXXX. The Trustees are XXXXXXXXXX and Son. The income beneficiary until her death of death was XXXXXXXXXX and the capital beneficiary is Son.

7. Son, Spouse, XXXXXXXXXX Aco and Trust are related persons for purposes of the Act. Furthermore, each shareholder of Holdings owns the shares as capital property.

PROPOSED TRANSACTIONS

8. Prior to XXXXXXXXXX, a new corporation ("Newco") will be formed under the XXXXXXXXXX. The year-end of Newco will be XXXXXXXXXX, so that the first year will end on XXXXXXXXXX. Newco will have the following authorized share capital:

-XXXXXXXXXX Class A Preferred Shares, which are voting and redeemable and retractable at a price of $XXXXXXXXXX per share;

-XXXXXXXXXX Class B Common Shares which are non-voting; and

-XXXXXXXXXX Class Z Common Shares which are voting.

On initial incorporation, one Class Z common share will be issued to the Estate for $XXXXXXXXXX having a total paid-up capital of $XXXXXXXXXX.

9. Prior to XXXXXXXXXX, a new corporation ("Holdco") will be incorporated under the XXXXXXXXXX. Holdco will have the following authorized share capital:

-XXXXXXXXXX Class A Preferred Shares, which are voting, retractable and redeemable at a price of $XXXXXXXXXX per share;

-XXXXXXXXXX Class B Common Shares, which are voting;

-XXXXXXXXXX Class C Common Shares, which are voting;

-XXXXXXXXXX Class D Common Shares, which are non-voting;

-XXXXXXXXXX Class E Common Shares, which are non-voting;

-XXXXXXXXXX Class X Preferred Shares, which are non-voting, retractable and redeemable at a price of $XXXXXXXXXX per share;

-XXXXXXXXXX Class Y Preferred Shares , which are non-voting, retractable and redeemable at a price of $XXXXXXXXXX per share; and

-XXXXXXXXXX Class Z Common shares, which are voting.

On initial incorporation, one Class Z common share (the "Holdco Class Z share") will be issued to the Estate for $XXXXXXXXXX having a total paid-up capital of $XXXXXXXXXX.

10. On XXXXXXXXXX the following transfers will occur:

(a) Son will transfer his XXXXXXXXXX Class B shares of Holdings to Holdco, in consideration for XXXXXXXXXX Class B common shares of Holdco ("Holdco Class B shares");

(b) Spouse will transfer her XXXXXXXXXX Class C shares of Holdings to Holdco for XXXXXXXXXX Class C shares of Holdco ("Holdco Class C shares");

(c) XXXXXXXXXX will transfer his XXXXXXXXXX Class D shares of Holdings to Holdco for XXXXXXXXXX Class D shares of Holdco ("Holdco Class D shares");

(d) XXXXXXXXXX will transfer her XXXXXXXXXX Class E shares of Holdings to Holdco for XXXXXXXXXX Class E shares of Holdco ("Holdco Class E shares");

(e) The Trust will transfer its XXXXXXXXXX Class Y shares of Holdings to Holdco for XXXXXXXXXX Class Y shares of Holdco ("Holdco Class Y shares") having a redemption value equal to the redemption value of the shares so transferred; and

(f) Aco will transfer its XXXXXXXXXX Class X preferred shares of Holdings to Holdco for XXXXXXXXXX Class X preferred shares of Holdco ("Holdco Class X preferred shares") having a redemption value equal to the redemption value of the shares so transferred.

In regard to each of the transfers described above, each transferee will file a joint election with Holdco, in prescribed form and within the limits described in subsection 85(6), to have the rules in subsection 85(1) apply in respect of the transfers. The agreed amount in each election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). In respect of each transfer, the fair market value of the shares transferred will be equal to the fair market value of the shares received.

The amount to be added to the respective paid-up capital maintained for the Holdco Class B, Holdco Class C shares, the Holdco Class D shares, the Holdco Class E shares, the Holdco Class X shares and the Holdco Class Y shares, will be equal to an amount equal to the paid-up capital of the shares for which they are issued. For greater certainty, this amount will not be greater than amount "B" in the formula set out in paragraph 84.1(1)(a).

11. Concurrent with the above transfers, the Estate will transfer its XXXXXXXXXX Class A preferred shares of Holdings to Holdco in consideration for XXXXXXXXXX Class A preferred shares in Holdco ("Holdco Class A shares"), with a redemption value equal to the redemption value of the shares so transferred. The Estate and Holdco will elect jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer. The agreed amount in such election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The Holdco Class A shares will have a fair market value equal to the fair market value of the Holdings shares for which they are exchanged. As a result of these transfers, Holdings will be a subsidiary wholly-owned corporation of Holdco.

The amount to be added to the paid-up capital maintained for the Holdco Class A shares will be equal to the paid-up capital of the Class A preferred shares of Holdings and, for greater certainty, such amount will not be greater than amount "B" in the formula set out in paragraph 84.1(1)(a).

12. On XXXXXXXXXX, the Estate will transfer its Holdco Class Z share and its XXXXXXXXXX Holdco Class A shares, with a total redemption value of $XXXXXXXXXX, to Newco in consideration for XXXXXXXXXX Class A preferred shares (the "Newco Class A shares") of Newco.

The Estate and Newco will jointly elect in prescribed form within the limits described in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer. The fair market value of the Newco Class A shares will be equal to the fair market value of the shares exchanged. The agreed amount in such election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1) and (ii).

The amount to be added to the paid-up capital maintained for the Newco Class A shares will be equal to aggregate of the paid-up capital of the Holdco Class Z share and the Holdco Class A shares, and for greater certainty, such amount will not be greater than amount "B" in the formula set out in paragraph 84.1(1)(a).

13. The first taxation year of Holdco will end on XXXXXXXXXX. On XXXXXXXXXX, Holdco and Holdings will amalgamate to form "Amalco". Pursuant to the amalgamation agreement, all of the assets and liabilities of Holdco and Holdings will become assets and liabilities of Amalco and all the shares of Holdings will be cancelled. No shares of Amalco will be issued such that the issued and outstanding shares of Holdco will become the shares of Amalco. The first taxation year of Amalco will end on XXXXXXXXXX.

In connection with the above amalgamation, a designation will be made by Amalco under the provisions of subsection 87(11) and paragraph 88(1)(d) to increase, within the limits described in paragraph 88(1)(d), the adjusted cost base of certain capital property (other than ineligible property) owned by Holdings immediately before the amalgamation.

14. On XXXXXXXXXX, Amalco will redeem its XXXXXXXXXX Class A shares held by Newco for an amount equal to the redemption value of $XXXXXXXXXX. The aggregate amount of funds required for such redemption will be paid by Amalco in cash, using funds borrowed by Amalco from an arm's length third party.

Contemporaneously, Amalco will redeem its XXXXXXXXXX Class Z share held by Newco for a total redemption value of $XXXXXXXXXX.

15. On XXXXXXXXXX, Newco will enter into a winding-up agreement with the Estate whereby Newco will be wound-up and will distribute all of its assets, including any cash it will receive from Amalco on the redemption of the Class A shares and the Class Z share, to its only shareholder, the Estate. No election will be made under subsection 83(2) in respect of the dividend that will be deemed by subsection 84(2) to have been paid by Newco to the Estate on the winding-up of Newco.

16. It is anticipated that the capital loss to the Estate on the disposition of the Newco Class A shares on the winding-up will be $XXXXXXXXXX. The executor, Son, in the course of the administration of the Estate in the first year after the death of XXXXXXXXXX, will make an election in prescribed manner and within the prescribed time pursuant to paragraph 164(6)(c) to deem the full amount of the loss to be a capital loss of XXXXXXXXXX from the disposition of the shares of Newco in the taxation year in which she died and not a capital loss of the Estate from the disposition of such property.

17. The Estate and Amalco will enter into a loan agreement, whereby the Estate will loan to Amalco, the full amount it will receive from Newco on the winding-up in exchange for a non-interest-bearing note from Amalco (the "Note") with a principal amount and fair market value equal to the amount so loaned.

The Estate will distribute the Note to the sole beneficiary, Son, in accordance with the terms of XXXXXXXXXX will.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to obtain an increase in the adjusted cost base of non-depreciable assets owned by Holdings at the time of XXXXXXXXXX death in accordance with paragraphs 88(1)(c) and (d). Further, the purpose is to utilize subsection 164(6) in order to offset any capital gain realized by XXXXXXXXXX in the year of death against any capital losses realized by the Estate in its first taxation year.

RULINGS

Provided that the above statements are accurate and constitute a complete disclosure of all of the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:

A. On the vertical amalgamation of Holdings and Holdco to form Amalco, as described in paragraph 13 above, provided that no property acquired by Amalco on such amalgamation or "any other property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III), on the assumption that the "subsidiary" referred to in those subclauses is Holdings and the "parent" is Holdco or Amalco, as the context requires) as part of the series of transactions or events that includes the proposed transactions described herein, the cost to Amalco of each property owned by Holdings at the time Holdco acquired control of Holdings and that becomes property of Amalco pursuant to the amalgamation will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, on the assumption that such property is capital property, but not depreciable property, the amount designated by Amalco under paragraph 88(1)(d) in respect of the property as described in paragraph 13 above.

B. Subsection 69(5) will be applicable to the winding-up of Newco, as described in paragraph 15 above.

C. Subsection 40(3.6) will not apply to deem any capital loss arising of the Newco shares by the Estate, on the winding-up of Newco, as described in paragraph 15 above, to be nil.

D. To the extent that a capital loss is realized by the Estate on the disposition of the Newco shares, as described in Ruling C, within the first taxation year of the Estate, such capital loss, or portion thereof, will be deemed, except for the purposes of subsection 112(3) and paragraph 164(6)(c), to be a capital loss of XXXXXXXXXX from the disposition of the shares of Newco in her last taxation year and not to be a capital loss of the Estate from the disposition of such property provided that the legal representative of the Estate elects in prescribed manner and within the prescribed time pursuant to paragraph 164(6)(c).

E. Subsection 245(2) will not be applied, as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences described in the rulings given.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 issued on January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions described herein are completed before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any amendments thereto which if enacted could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the adjusted cost base, the paid-up capital or the fair market value of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions other than those specifically described in the rulings given.

Yours truly,

XXXXXXXXXX
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch