2002 Ruling 2002-0148283 - Wind-up Bump to Estate Property

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: 88(1)(d) wind-up bump for shares acquired by an estate

Position: Favorable Ruling Given

Reasons: In accordance with tax policy and the law

XXXXXXXXXX 2002-014828

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above noted taxpayer and others identified herein. We also acknowledge your letter of XXXXXXXXXX and the additional information provided during our various telephone conversations in connection with your requests.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of one of the taxpayers or a related person;

(ii) under objection by the above-noted taxpayer or others identified herein or a related person;

(iii) being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed of any one of the taxpayers or a related person;

(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

DEFINITIONS

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

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

(b) "adjusted cost base" and "ACB" have the meanings assigned by section 54 and subsection 248(1);

(c) "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;

(d) "Amalco-Y" means a company to be formed on the amalgamation of Target-Y and Parentco-Y under the BCA and is more particularly described at paragraph 20 hereof;

(e) "Amalco-Z" means a company to be formed on the amalgamation of Target-Z and Parentco-Z under the BCA and is more particularly described at paragraph 26 hereof;

(f) "arm's length" has the meaning assigned by subsection 251(1);

(g) "BCA" means the Business Corporations Act of XXXXXXXXXX;

(h) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(i) "capital property" has the meaning assigned by section 54;

(j) "CCRA" means the Canada Customs and Revenue Agency;

(k) "cost amount" has the meaning assigned by subsection 248(1);

(l) "Estate" means the Estate of XXXXXXXXXX, which was created upon the death of Mrs. W, and whose address is at XXXXXXXXXX;

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

(n) "Mrs. W" means the late XXXXXXXXXX, an individual who was resident in Canada until her death on XXXXXXXXXX;

(o) "Mrs. W Trust" means the "XXXXXXXXXX", being a trust settled on XXXXXXXXXX by Mrs. W, for the benefit of her children (Y and Z) and their issue. The trust is discretionary as to income and capital. The trustees of the trust were Mrs. W (until her death) and XXXXXXXXXX. The trustees now are XXXXXXXXXX, Y and Z. The address of the Mrs. W Trust is XXXXXXXXXX;

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

(q) "Parentco-Y" is a corporation more fully described in paragraph 18 hereof;

(r) "Parentco-Z" is a corporation more fully described in paragraph 24 hereof;

(s) "private corporation" has the meaning assigned by subsections 89(1) and 248(1);

(t) "proceeds of disposition" has the meaning assigned by section 54;

(u) "Securities Y" and "Securities Z" means the publicly-traded stock and the shares in the capital of the private corporation(s) owned by Target-Y and by Target-Z, respectively, as more particularly described in paragraphs 12 and 16 below;

(v) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

(x) "Stated Capital" has the meaning given that term for the purposes of the BCA;

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

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

(aa) "Target-Y" means "XXXXXXXXXX", a corporation more fully described in paragraphs 9 through 12 below, whose business address is XXXXXXXXXX;

(ab) "Target-Z" means "XXXXXXXXXX", a corporation more fully described in paragraphs 13 through 16 below, whose business address is XXXXXXXXXX;

(ac) "taxable Canadian corporation" has the meaning assigned by subsections 89(1) and 248(1);

(ad) "Y" means XXXXXXXXXX, an adult child of Mrs. W, whose addresss is XXXXXXXXXX;

(ae) "Y Trust" means "XXXXXXXXXX" which was settled on XXXXXXXXXX by Mrs. W. The trust is discretionary as to income and capital, and was established for the benefit of Y, Z, Z's wife, the children of Z and XXXXXXXXXX. The trustees are Y, XXXXXXXXXX, the latter two of whom deal at arm's length with Y. The address of the Y Trust is XXXXXXXXXX;

(af) "Z" means XXXXXXXXXX, an adult child of Mrs. W; and

(ag) "Z Trust" means "XXXXXXXXXX" which was settled on XXXXXXXXXX by Mrs. W. The trust is discretionary as to income and capital and was established for the benefit of Z, Z's wife, the children of Z, the issue of Z, XXXXXXXXXX. The trustees are Z, XXXXXXXXXX, the latter two of whom deal at arm's length with Z. The address of the Z Trust is XXXXXXXXXX;

Our understanding of the facts, the proposed transactions and purpose of the proposed transactions is as set forth below:

FACTS

1. Mrs. W died on XXXXXXXXXX and, at all times material hereto, was a resident of Canada.

2. Pursuant to her last will and testament (the "Will") all the assets (with the exception of specific monetary bequests and a real estate property) owned by Mrs. W at the time of her death, including her First and Second Preferred Shares of Target-Y and Target-Z, described below, were bequeathed equally to Y and Z.

3. At the time of Mrs. W's death, the Target-Y First and Second Preferred Shares and the Target-Z First and Second Preferred Shares were held by her as capital property.

4. Immediately before Mrs. W's death, the ACB, aggregate paid-up capital, fair market value and aggregate redemption amount of the Target-Y First Preferred Shares was $XXXXXXXXXX. As a result, the capital gain deemed to have been realized by Mrs. W on the deemed disposition of those shares immediately before her death was nil and the ACB of the Target-Y First Preferred Shares to the Estate became $XXXXXXXXXX.

5. Immediately before Mrs. W's death, the ACB of the Target-Y Second Preferred Shares was $XXXXXXXXXX and their fair market value and aggregate redemption amount was $XXXXXXXXXX. As a result, the capital gain deemed to have been realized by Mrs. W on the deemed disposition of those shares immediately before her death was $XXXXXXXXXX and the ACB of the Target-Y Second Preferred Shares to the Estate became $XXXXXXXXXX.

6. Immediately before Mrs. W's death, the ACB, aggregate paid-up capital, fair market value and aggregate redemption amount of the Target-Y First Preferred Shares was $XXXXXXXXXX. As a result, the capital gain deemed to have been realized by Mrs. W on the deemed disposition of those shares immediately before her death was nil and the ACB of the Target-Y First Preferred Shares to the Estate became $XXXXXXXXXX.

7. Immediately before Mrs. W's death, the ACB of the Target-Y Second Preferred Shares was $XXXXXXXXXX and their fair market value and aggregate redemption amount was $XXXXXXXXXX. As a result, the capital gain deemed to have been realized by Mrs. W on the deemed disposition of those shares immediately before her death was $XXXXXXXXXX and the ACB of the Target-Y Second Preferred Shares to the Estate became $XXXXXXXXXX.

8. Y and Z are residents of Canada and are the sole executors and beneficiaries of the Estate (subject to the bequests referred to above in paragraph 2).

9. Target-Y is a private corporation and a taxable Canadian corporation which was incorporated under the BCA.

10. The authorized capital of Target-Y consists of the following:

(a) First Preferred Shares - an unlimited number, all of which are voting, redeemable and retractable;

(b) Second Preferred Shares - an unlimited number, all of which are voting, redeemable and retractable;

(c) Third Preferred Shares - an unlimited number, all of which are non-voting, redeemable and retractable;

(d) Fourth Preferred Shares - an unlimited number, all of which are non-voting, redeemable and retractable;

(e) Common Shares - an unlimited number, all of which are voting, participating, without nominal or par value.

The voting shares have one vote each.

The issued share capital of Target-Y is held as follows:

Shareholder	Number	Class			paid-up capital		ACB	

Estate		XXXXXXX 	First Preferred		$XXXXXXX 	    $XXXXXXX
Estate		XXXXXXX 	Second Preferred	$XXXXXXX 	    $XXXXXXX
Mrs. W Trust	XXXXXXX 	Fourth Preferred	$XXXXXXX 	    $XXXXXXX
Y Trust  	XXXXXXX 	Common		$XXXXXXX 	    $XXXXXXX 

11. The Estate holds the majority of the issued voting shares of Target-Y.

12. Target-Y is a holding company that owns non-depreciable capital property consisting of the Securities Y. The aggregate ACB to Target-Y of the Securities Y at the time of Mrs. W's death was $XXXXXXXXXX and their estimated fair market value at that time was $XXXXXXXXXX. All of the Securities Y have been owned continuously by Target-Y since that time.

13. Target-Z is a private corporation and a taxable Canadian corporation which was incorporated under the BCA.

14. The authorized capital of Target-Z consists of the following:

(a) First Preferred Shares - an unlimited number, all of which are voting, redeemable and retractable;

(b) Second Preferred Shares - an unlimited number, all of which are voting, redeemable and retractable;

(c) Third Preferred Shares - an unlimited number, all of which are non-voting, redeemable and retractable;

(d) Fourth Preferred Shares - an unlimited number, all of which are non-voting, redeemable and retractable;

(e) Common Shares - an unlimited number, all of which are voting, participating, without nominal or par value.

The voting shares have one vote each.

The issued share capital of Target-Z is held as follows:

Shareholder	Number	Class		paid-up capital  	ACB	

Estate		XXXXXXX 	First Preferred	$XXXXXXXX 	$ XXXXXX
Estate		XXXXXXX 	Second Preferred $ XXXXXXX 	$ XXXXXX
Mrs. W Trust	XXXXXXX 	Fourth Preferred $ XXXXXXX 	$ XXXXXX
Z Trust	  	XXXXXXX 	Common	$  XXXXXXXX 	$ XXXXXX 

15. The Estate holds the majority of the issued voting shares of Target-Z.

16. Target-Z is a holding company and owns non-depreciable capital property consisting of the Securities Z. The aggregate ACB to Target-Z of the Securities Z at the time of Mrs. W's death was $XXXXXXXXXX and their estimated fair market value at that time was $XXXXXXXXXX. All of the Securities Z have been owned continuously by Target-Z since that time.

17. Each of the shares in the share capital of Target-Y and Target-Z is a capital property of the holder thereof.

PROPOSED TRANSACTIONS

Estate And Target-Y

18. Prior to XXXXXXXXXX, a new corporation ("Parentco-Y") will be incorporated under the BCA. Parentco-Y will have authorized share capital that bears the same name and class type as described in paragraph 10 above and containing terms and conditions that are the same as those of the shares of Target-Y.

No shares of Parentco-Y will be issued at the time that Parentco-Y is incorporated.

19. On XXXXXXXXXX, the following transfers will occur:

(a) the Y Trust will transfer its XXXXXXXXXX Common Shares of Target-Y to Parentco-Y in consideration for XXXXXXXXXX Common Shares of Parentco-Y ("Parentco-Y Common Shares");

(b) the Mrs. W Trust will transfer its XXXXXXXXXX Fourth Preferred Shares of Target-Y to Parentco-Y for XXXXXXXXXX Fourth Preferred Shares of Parentco-Y ("Parentco-Y Fourth Preferred Shares") having an aggregate redemption amount equal to the aggregate redemption amount of the shares so transferred; and

(c) the Estate will transfer all of its First and Second Preferred Shares of Target-Y to Parentco-Y in consideration, respectively, for First and Second Preferred Shares in Parentco-Y (respectively, "Parentco-Y First Preferred Shares" and "Parentco-Y Second Preferred Shares"), with the shares of each class so received having an aggregate redemption amount equal to the redemption amount of the class of shares transferred.

With respect to each of the transfers described above, each transferor will file a joint election with Parentco-Y, in prescribed form and within the time 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. As a result of these transfers, Target-Y will be a subsidiary wholly-owned corporation of Parentco-Y.

The amounts to be added to the respective Stated Capital accounts maintained for the Parentco-Y Common Shares, the Parentco-Y First Preferred Shares, the Parentco-Y Second Preferred Shares and the Parentco-Y Fourth Preferred Shares will be equal to the paid-up capital amounts of the shares for which they are exchanged.

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

21. In connection with the above amalgamation, a designation will be made by Amalco-Y 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 Target-Y immediately before the amalgamation. In particular, Amalco-Y will seek to increase the cost of the Securities Y to the extent permitted by paragraph 88(1)(d).

22. The First Preferred Shares and Second Preferred Shares of Amalco-Y will be transferred by the Estate to Y as her entitlement under Mrs. W's Will.

23. Subsequent to XXXXXXXXXX, Amalco-Y may sell some of its Securities Y.

Estate And Target-Z

24. Prior to XXXXXXXXXX, a new corporation ("Parentco-Z") will be incorporated under the BCA. Parentco-Z will have authorized share capital that bears the same name and class type as described in paragraph 14 above and containing terms and conditions that are the same as those of the shares of Target-Z.

No shares of Parentco-Z will be issued at the time that Parentco-Z is incorporated.

25. On XXXXXXXXXX, the following transfers will occur:

(a) the Z Trust will transfer its XXXXXXXXXX Common Shares of Target-Z to Parentco-Z in consideration for XXXXXXXXXX Common Shares of Parentco-Z ("Parentco-Z Common Shares");

(b) the Mrs. W Trust will transfer its XXXXXXXXXX Fourth Preferred Shares of Target-Z to Parentco-Z for XXXXXXXXXX Fourth Preferred Shares of Parentco-Z ("Parentco-Z Fourth Preferred Shares") having an aggregate redemption amount equal to the aggregate redemption amount of the shares so transferred; and

(c) the Estate will transfer all of its First and Second Preferred Shares of Target-Z to Parentco-Z in consideration, respectively, for First and Second Preferred Shares in Parentco-Z (respectively, "Parentco-Z First Preferred Shares" and "Parentco-Z Second Preferred Shares"), with the shares of each class so received having an aggregate redemption amount equal to the redemption amount of the class of shares transferred.

With respect to each of the transfers described above, each transferor will file a joint election with Parentco-Z, in prescribed form and within the time 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. As a result of these transfers, Target-Z will be a subsidiary wholly-owned corporation of Parentco-Z.

The amounts to be added to the respective Stated Capital accounts maintained for the Parentco-Z Common Shares, the Parentco-Z First Preferred Shares, the Parentco-Z Second Preferred Shares and the Parentco-Z Fourth Preferred Shares will be equal to the paid-up capital amounts of the shares for which they are exchanged.

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

27. In connection with the above amalgamation, a designation will be made by Amalco-Z under the provisions of subsection 87(11) and paragraph 88(1)(d) to increase, within the limits described in paragraph 88(1)(d), the ACB of certain capital property (other than ineligible property) owned by Target-Z immediately before the amalgamation. In particular, Amalco-Z will seek to increase the cost of the Securities Z to the extent permitted by paragraph 88(1)(d).

28. The First Preferred Shares and Second Preferred Shares of Amalco-Z will be transferred by the Estate to Z as his entitlement under Mrs. W's Will.

29. Subsequent to XXXXXXXXXX, Amalco-Z may sell some of its Securities Z.

PURPOSE OF PROPOSED TRANSACTIONS

30. The purpose of the proposed transactions is to obtain an increase in the ACB of non-depreciable capital properties owned by each of Target-Y and Target-Z at the time of Mrs. W's death in accordance with paragraphs 88(1)(c) and (d), on the amalgamation of Parentco-Y and Target-Y and on the amalgamation of Parentco-Z and Target-Z.

RULINGS

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:

A. On the vertical amalgamation of Target-Y and Parentco-Y to form Amalco-Y, as described in paragraph 20 above, provided that no property acquired by Amalco-Y 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 Target-Y and the "parent" is Parentco-Y or Amalco-Y, as the context requires) as part of the series of transactions or events that includes the proposed transactions described herein, the cost to Amalco-Y of each property owned by Target-Y at the time Parentco-Y acquired control of Target-Y and that becomes property of Amalco-Y 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-Y under paragraph 88(1)(d) in respect of the property as described in paragraph 21 above.

For greater certainty, the acquisition by Y of properties described in paragraph 22 will not, in and of itself, cause such property to be ineligible property.

For greater certainty, the acquisition by the Y Trust of properties described in paragraph 19(a) will not, in and of itself, cause such property to be ineligible property.

For greater certainty, the acquisition by the Mrs. W Trust of properties described in paragraph 19(b) will not, in and of itself, cause such property to be ineligible property.

B. As a result of the application of paragraph 88(1)(d.2) and paragraph 88(1)(d.3), for the purposes of Ruling A, Parentco-Y will be deemed to have last acquired control of Target-Y at the time immediately after the death of Mrs. W from an arm's-length person.

C. On the vertical amalgamation of Target-Z and Parentco-Z to form Amalco-Z, as described in paragraph 26 above, provided that no property acquired by Amalco-Z 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 Target-Z and the "parent" is Parentco-Z or Amalco-Z, as the context requires) as part of the series of transactions or events that includes the proposed transactions described herein, the cost to Amalco-Z of each property owned by Target-Z at the time Parentco-Z acquired control of Target-Z and that becomes property of Amalco-Z 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-Z under paragraph 88(1)(d) in respect of the property as described in paragraph 27 above.

For greater certainty, the acquisition by Z of properties described in paragraph 28 will not, in and of itself, cause such property to be ineligible property.

For greater certainty, the acquisition by the Z Trust of properties described in paragraph 25(a) will not, in and of itself, cause such property to be ineligible property.

For greater certainty, the acquisition by the Mrs. W Trust of properties described in paragraph 25(b) will not, in and of itself, cause such property to be ineligible property.

D. As a result of the application of paragraph 88(1)(d.2) and paragraph 88(1)(d.3), for the purposes of Ruling C, Parentco-Z will be deemed to have last acquired control of Target-Z at the time immediately after the death of Mrs. W from an arm's-length person.

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

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could affect the rulings provided herein.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

COMMENTS

Nothing in this ruling should be construed as implying that the CCRA has reviewed or is making a determination in respect of:

(a) the fair market value or adjusted cost base of any particular asset or the paid-up capital of any share or class of shares referred to herein;

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

(c) any tax consequences relating to a subsequent disposition of any shares or property by any person referred to herein, and nothing in this ruling should be construed as implying that any subsequent transaction will not be considered to be part of the series of transactions or events described herein.

Yours truly,

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