2002 Ruling 2002-0154603 - Subsection 40(3.6) - Multiple Executors

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: Whether Estate will be affiliated with Opco in particular fact situation for the purposes of subsection 40(3.6)

Position: No

Reasons: The law

XXXXXXXXXX 2002-015460

XXXXXXXXXX , 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Rulings

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above named taxpayer. We acknowledge your letter of XXXXXXXXXX and the information provided during our various telephone conversations in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(ii) is under objection by the taxpayer or a related person;

(iv) is before the courts; or

(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.

DEFINITIONS

In this letter:

(a) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended, and, unless otherwise stated, every reference herein to legislation is a reference to the Act;

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

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

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

(e) "BCA" means the Business Corporations Act (XXXXXXXXXX);

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

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

(h) "disposition" has the meaning assigned by subsection 248(1);

(i) "Estate" means the estate of Mr. A;

(j) "Executors" means the two sons of Mr. A, XXXXXXXXXX, and Mr. A's solicitor, XXXXXXXXXX, appointed as executors and trustees of the Estate pursuant to XXXXXXXXXX the Will;

(k) "Mr. A" means XXXXXXXXXX;

(l) "Mrs. A" means XXXXXXXXXX, who was married to Mr. A and who survives Mr. A;

(m) "Opco" means XXXXXXXXXX;

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

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

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

(q) "refundable dividend tax on hand" has the meaning assigned by subsection 129(3);

(r) "stated capital" means stated capital as that expression is used in the BCA;

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

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

(u) "testamentary trust" has the meaning assigned by subsection 108(1);

(v) "Trust" means the trust established for the benefit of Mrs. A pursuant to XXXXXXXXXX the Will;

(w) "Trustees" means the Executors, in their capacity as trustees of the Trust; and

(x) "Will" means the last will and testament of Mr. A, XXXXXXXXXX.

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

FACTS

1. Mr. A was a resident of Canada until his death on XXXXXXXXXX. Mr. A's social insurance number was XXXXXXXXXX.

2. The Estate is a testamentary trust that is a resident of Canada for the purposes of the Act. The Estate's address is XXXXXXXXXX. The Estate has not filed the tax return for its first taxation year and therefore has not yet been assigned a trust account number by the CCRA.

3. Opco was incorporated under the provisions of the BCA. Opco is an investment corporation with an extensive amount of refundable dividend tax on hand. The authorized share capital of Opco includes Class A common shares, entitling the holder to 1 vote per share, and special shares, with the following provisions attaching thereto:

(a) the special shares rank, with respect to both dividends and returns of capital, in priority to all other shares of Opco but confer no further right to participate in the profits or assets of Opco;

(b) the holders of the special shares in each fiscal year of Opco, in the discretion of the directors, but always in preference and priority to any payment of dividends on any other shares of Opco for such year, are entitled to receive non-cumulative dividends in such amounts as may be determined by the directors from time to time;

(c) the special shares are redeemable at the option of Opco and are also redeemable at the option of the holder of the shares by the payment for each share of the redemption amount, equal to $XXXXXXXXXX per share, plus declared and unpaid non-cumulative dividends, (the "Redemption Amount") by cheque or by a demand promissory note; and

(d) each special share carries XXXXXXXXXX votes per share.

4. Pursuant to a reorganization of share capital of Opco in accordance with section 86, on XXXXXXXXXX, Mr. A exchanged his XXXXXXXXXX common shares in the capital of Opco for XXXXXXXXXX special shares in the capital of Opco. Mr. A then held the special shares of Opco as capital property until the time of his death.

5. During the period between XXXXXXXXXX and the death of Mr. A, Opco redeemed XXXXXXXXXX special shares held by Mr. A. Accordingly, at the time of Mr. A's death, Mr. A owned XXXXXXXXXX special shares of Opco with an adjusted cost base of $XXXXXXXXXX per share. The stated capital and paid-up capital of the XXXXXXXXXX special shares is $XXXXXXXXXX.

6. Pursuant to the provisions of the opening words of XXXXXXXXXX the Will (standard to most wills), giving all property of Mr. A to the Executors on the trusts described in the Will, the Executors became registered on the books of Opco as the owners of the XXXXXXXXXX special shares subsequent to Mr. A's death. No dividends have or will be paid by Opco on the XXXXXXXXXX special shares between the time of Mr. A's death and the time of the proposed transactions.

7. A trust established for the benefit of the issue of Mr. A owns XXXXXXXXXX issued and outstanding Class A common shares of the capital of Opco. The trustees of this trust are the four children of Mr. A.

8. The relevant provisions of the Will are as follows:

(a) XXXXXXXXXX the Will provides that in the event of any difference of opinion among the Executors in relation to any matter, the opinion of the majority of the Executors will prevail, notwithstanding that any one or more of the Executors may be personally interested or concerned in a matter in dispute, provided that at least one member of the majority is an Executor other than one of the two sons of Mr. A;

(b) The Executors are responsible for all aspects of the administration of the Estate, save and except for the administration of the Trust, as described below;

(c) XXXXXXXXXX the Will provides for the establishment of the Trust, by directing the Executors to set aside in a trust sufficient assets from the Estate, which in their judgment, will yield to Mrs. A a net after-tax annual income of approximately, but not less than, $XXXXXXXXXX; all of the income of the Trust arising before the death of Mrs. A is to be paid to Mrs. A and the Trustees have the power to pay or expend on behalf of Mrs. A such amounts out of the capital of the Trust as the Trustees consider necessary or desirable to so provide;

(d) XXXXXXXXXX the Will states that in determining the assets which are to form part of the trust property of the Trust, the Executors should consider the transfer of all or a portion of Mr. A's shares of Opco constituting control of that corporation;

(e) XXXXXXXXXX the Will provides for the disposition of any remaining assets of the Trust upon the death of Mrs. A, including a legacy and specified charitable donations, with any remaining capital to be transferred to the residue of the Estate; and

(f) XXXXXXXXXX the Will provides that the residue of the Estate is to be divided equally among the four children of Mr. A.

9. The Executors have been considering the number of special shares in the capital of Opco that should be transferred to the Trustees of the Trust in accordance with the provisions of XXXXXXXXXX the Will. Owing to such deliberations, the Executors did not file the terminal tax return for Mr. A with the CCRA, which was due on XXXXXXXXXX pursuant to the provisions of paragraph 150(1)(b). However, on XXXXXXXXXX, the Executors paid a significant amount in favour of the Receiver General by the delivery of a bank draft on such date to the CCRA in respect of Mr. A's tax liability for the period ending at the time of his death.

10. Opco was not indebted to Mr. A at the time of Mr. A's death. Accordingly, the Estate is not, and will not be, a creditor of Opco at the present time or at the time of the proposed transactions.

PROPOSED TRANSACTIONS

11. The Executors will transfer XXXXXXXXXX of the XXXXXXXXXX special shares of Opco to the Trustees. The Trustees, in their capacity as trustees of the Trust, will be registered on the books of Opco as the owners of the XXXXXXXXXX special shares of Opco. The XXXXXXXXXX special shares so transferred to the Trustees will give the Trust voting control of Opco. The Trust will be a resident of Canada for the purposes of the Act and will be a trust described in paragraph 70(6)(b).

12. Following the transfer of the XXXXXXXXXX special shares of Opco to the Trustees as described in paragraph 11 above, and with respect to the remaining XXXXXXXXXX special shares of Opco, the Executors will distribute a portion of these shares to the residuary beneficiaries who are identified in XXXXXXXXXX the Will, being the four children of Mr. A. The exact number of shares to be distributed will depend on the capital gain(s) incurred by each residuary beneficiary during their XXXXXXXXXX taxation years. The income tax position of a particular residuary beneficiary may be such that the Executors will determine not to distribute any special shares to such residuary beneficiary but rather to distribute cash in lieu thereof.

It is expected that approximately XXXXXXXXXX special shares of Opco will be distributed by the Executors to individuals who are the residuary beneficiaries no later than XXXXXXXXXX.

13. Of the XXXXXXXXXX special shares of Opco not distributed to the residuary beneficiaries as described in paragraph 12 above, the Executors will exercise the retraction feature of the special shares during the first taxation year of the Estate and receive from Opco an amount equal to the aggregate Redemption Amount per share for the special shares so retracted. Opco will satisfy the aggregate Redemption Amount by issuing a cheque payable to the Estate. The retraction by Opco of these special shares may occur both prior to and subsequent to the distributions of the special shares, as described in paragraph 12 above.

For greater certainty, in respect of any deemed dividends arising under subsection 84(3) on the retraction of the special shares, as described in this paragraph, no election will be filed under subsection 83(2) and the Estate will not designate an amount under subsections 104(19) or (20) in respect of a beneficiary that was a corporate, partnership or trust.

14. It is anticipated that all residuary beneficiaries who receive special shares from the Executors, as described in paragraph 12 above, will exercise the retraction feature of the special shares during XXXXXXXXXX.

15. The Executors will make up the accounts of the Estate for purposes of assessment under the Act on the basis that the first taxation year of the Estate will end on either XXXXXXXXXX or XXXXXXXXXX, the latter date being the first anniversary of the date of death of Mr. A. In the course of administering the Estate in the first year after the death of Mr. A, the Executors will make an election, in the prescribed manner and within the prescribed time, pursuant to paragraph 164(6)(c) to deem the full amount of the loss, arising on the retraction of the special shares described in paragraph 13 above, to be a capital loss of Mr. A from the disposition of the special shares of Opco in the taxation year in which Mr. A died and not a capital loss of the Estate from the disposition of such property.

16. For greater certainty, the Executors will file the terminal tax return for Mr. A with the CCRA, referred to in paragraph 9 above, prior to the time referred to in paragraph 164(6)(e) so that an amended terminal tax return for Mr. A may be filed in accordance with paragraph 164(6)(e).

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to permit a portion of the special shares of Opco currently owned by the Estate to be redeemed so as to create a capital loss that can then be the subject of an election under subsection 164(6).

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. On the redemption by Opco of the special shares owned by the Estate, as described in paragraph 13 above, by virtue of subsection 84(3), Opco will be deemed to have paid, and the Estate will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the aggregate amount paid in respect of the redemption of the special shares exceeds the aggregate paid-up capital of those shares immediately before the redemption. For greater certainty, the taxable dividends deemed to be received by the Estate will be excluded from the proceeds of disposition of the special shares so redeemed by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54.

B. In respect of each special share owned by the Estate and redeemed by Opco, as described in paragraph 13 above, the Estate will incur a capital loss in an amount equal to the amount by which the aggregate adjusted cost base of the special shares to the Executors exceeds the aggregate proceeds of disposition of the special shares, plus any costs of disposition.

C. Subsection 40(3.6) will not apply to deem any capital loss arising on the disposition of the special shares of Opco by the Estate, as described in Ruling B above, to be nil.

D. To the extent that a capital loss is realized by the Estate on the disposition of the special shares of Opco, as described in Rulings B and C above, within the first taxation year of the Estate, such capital loss, or portion thereof, will be deemed to be, except for the purposes of subsection 112(3) and paragraph 164(6)(c), a capital loss of Mr. A from the disposition of the special shares of Opco in his last taxation year and not a capital loss of the Estate from the disposition of such property, provided that the Executors elect in prescribed manner and within the time prescribed pursuant to paragraph 164(6)(c).

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CCRA provided that the proposed transactions described herein are completed before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that the CCRA has reviewed, accepted or otherwise agreed to:

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

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

Yours truly,

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