2008 Ruling 2008-0288221R3 - Post-Mortem Bump

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.

Principal Issues: 1. Application of s. 84.1 to share transfer. 2. Timing of acquisition of control of subsidiary. 3. Availability of s. 88(1)(d) bump.

Position: 1. Does not apply to deem receipt of dividend by transferor. 2. Acquisition of control considered to occur immediately after death of controlling shareholder for the purposes of s. 88(1)(c) and (d). 3. Not available under current legislation but Department of Finance has previously issued comfort letter to indicate it would recommend that Act be amended to ensure bump would be available.

Reasons: 1. Adjusted cost base of transferred shares determined under s. 84.1(2) will be equal to the fair market value of the non-share consideration taken back by transferor. 2. Paragraph 88(1)(d.2) is interpreted with reference to s. 88(1)(d.3), so the newly- incorporated corporation that acquired the shares of the subsidiary from the estate of the deceased will be considered to have acquired control from an arm's length person immediately after the death of the deceased for the purposes of s. 88(1)(c) and (d). 3. Grandchildren of deceased and trusts established for their benefit will acquire substituted property described in s. 88(1)(c.3) as part of the series of transactions or events described in s. 88(1)(c)(vi)(A) and (B) and are not specified persons under s. 88(1)(c.2)(i) as it currently reads.

XXXXXXXXXX 								2008-028822

XXXXXXXXXX , 2008

Dear Sir:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence dated XXXXXXXXXX and in the course of various telephone conversations. You have advised us that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayers or persons related to the taxpayers;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or persons related to the taxpayers;
(iii) under objection by the taxpayers or persons related to the taxpayers;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the "Act"). Unless otherwise noted, all references to currency are to Canadian dollars.

DEFINITIONS

(a) "Aco" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX ;

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

(c) "agreed amount" is the amount agreed in respect of a disposition of property pursuant to paragraph 85(1)(a);

(d) XXXXXXXXXX ;

(e) "Bco" means XXXXXXXXXX ., a corporation incorporated under the XXXXXXXXXX that carries on business under the name 'XXXXXXXXXX ';

(f) "Beneficiaries" means the residual beneficiaries of the Estate described in Paragraph 8;

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

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

(i) "Cco" means XXXXXXXXXX ., a corporation incorporated under the XXXXXXXXXX

(j) "Child 1" means XXXXXXXXXX of X;

(k) "Child 2" means XXXXXXXXXX of X;

(l) "Child 3" means XXXXXXXXXX of X;

(m) "Child Note" means a promissory note of Newco with a fair market value and face amount equal to XXXXXXXXXX of the adjusted cost base of the shares of Holdco to the Estate as determined under subsection 84.1(2) for the purposes of the transfer described in Paragraph 15.

(n) "CRA" means the Canada Revenue Agency;

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

(p) "Executors" means the executors and trustees of the Estate, namely XXXXXXXXXX ;

(q) "fair market value" means the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length;

(r) "G1 Trust" means XXXXXXXXXX , a trust to be settled by the Executors of the Estate as described in Paragraph 19;

(s) "G2 Trust" means XXXXXXXXXX , a trust to be settled by the Executors of the Estate as described in Paragraph 19;

(t) "Grandchild 1" XXXXXXXXXX , grandchild of X and XXXXXXXXXX of Child 3;

(u) "Grandchild 2" means XXXXXXXXXX , grandchild of X and XXXXXXXXXX of Child 3;

(v) "Grandchild Note" means a promissory note of Newco with a fair market value and face amount equal to XXXXXXXXXX of the adjusted cost base of the shares of Holdco to the Estate as determined under subsection 84.1(2) for the purposes of the transfer described in Paragraph 15.

(w) "Holdco" means XXXXXXXXXX ;

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

(y) "Newco" means a corporation to be incorporated under the provisions of the XXXXXXXXXX as described in Paragraph 14;

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

(aa) "Paragraph" means a numbered paragraph in this letter;

(bb) "private foundation" has the meaning assigned by subsection 149.1(1);

(cc) "Proposed Transactions" means the transactions described in Paragraphs 14 to 20;

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

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

(ff) "specified shareholder" has the meaning assigned by subsection 248(1), and, for the purposes of paragraph 88(1)(c.2) and subparagraph 88(1)(c)(vi), the meaning of this term is modified by paragraph 88(1)(c.2);

(gg) "Spouse" means XXXXXXXXXX the spouse of X;

(hh) "stated capital" has the meaning assigned by the XXXXXXXXXX ;

(ii) "substituted property" in relation to property distributed to a "parent" referred to in paragraph 88(1)(c) upon the winding-up of a corporation that is described in subsection 88(1) or an amalgamation described in subsection 87(11), means "any property acquired by any person in substitution therefore" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) and, for greater certainty, includes property that is described within paragraph 88(1)(c.3);

(jj) "taxable Canadian corporation" has the meaning assigned by subsection 251(2);

(kk) "V-Day" means December 31, 1971;

(ll) "Will" means the Last Will and Testament of X dated XXXXXXXXXX ;

(mm) "X" means the late XXXXXXXXXX ; and

(nn) "Xco" means XXXXXXXXXX

FACTS

1. X was a resident of Canada who died on XXXXXXXXXX .

2. X held all of the issued and outstanding shares of Holdco as capital property. Upon death, the shares of Holdco passed to the Estate and have been held by the Estate continuously to the present time.

3. The mailing address of the Estate is XXXXXXXXXX . The Estate has not filed its tax returns as they are not due at this time.

4. Holdco is a CCPC. Its mailing address is XXXXXXXXXX . Holdco files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

5. The issued share capital of Holdco consists of XXXXXXXXXX Class A shares and XXXXXXXXXX special shares. Spouse and X acquired those shares prior to V-Day and held those shares to the time the Spouse died in XXXXXXXXXX . X inherited the shares of Holdco held by Spouse as a consequence of the death of Spouse and became the sole shareholder of Holdco. X remained as the sole shareholder of Holdco until XXXXXXXXXX death.

6. The fair market value of the shares of Holdco exceeded their adjusted cost base to X immediately before the death of X.

7. In the return of income for the taxation year of X that includes the date of X's death, the Executors will report that X was deemed to realize a capital gain from the disposition of the shares of Holdco pursuant to subsection 70(5). No amount will be claimed as a deduction pursuant to section 110.6 in computing the taxable income of X in respect of the disposition of the shares of Holdco. The fair market value of the shares of Holdco noted in Paragraph 6 will represent the adjusted cost base to the Estate of those shares.

8. Pursuant to the Will, the residue of the Estate is bequeathed in equal shares per stirpes to XXXXXXXXXX surviving issue. Child 1 and Child 2 are residual beneficiaries of the Estate, each as to a XXXXXXXXXX share. Child 3 predeceased X. As a consequence, the children of Child 3, Grandchild 1 and Grandchild 2, who are both minors, each hold a XXXXXXXXXX share in the residue of the Estate.

9. Under the Will, the Executors can sell, call in and convert into money all or part of the assets of the Estate. The Executors are permitted to transfer the shares of Holdco to Xco, a corporation that is indirectly beneficially owned by the Beneficiaries, or to any corporation controlled by Xco or under common control with Xco. Furthermore, the Executors may postpone the sale or conversion of any part of the Estate or retain any asset of the Estate for such length of time as the Executors deem appropriate. The Executors are not permitted to sell the shares of Holdco to an arm's-length third party but instead must deal with them in one of the methods described above.

10. The Will contemplates that the Executors will hold the assets of the Estate in trust for beneficiaries who are minors or mentally incapable of managing property. Furthermore, the Will contains special provisions regarding bequests to G1 and G2. Specifically, prior to the age of XXXXXXXXXX , the Executors shall invest and reinvest the shares of G1 and G2 in the residue of the Estate and pay for their maintenance, support and education from the annual income earned from the investments. When a grandchild attains the age of XXXXXXXXXX , the Executors will transfer XXXXXXXXXX of that grandchild's share of the capital to that grandchild, another XXXXXXXXXX of the capital upon attaining age XXXXXXXXXX and the balance of the capital at age XXXXXXXXXX . A separate trust or trusts may be settled for G1 and G2 to hold their respective shares of the residue of the Estate. The trustee of such a trust may include the surviving parent of G1 and G2. The terms of the trust are to be determined by the Executors after consultation with that parent.

11. The principal assets of Holdco which were owned by Holdco at the date of X's death and which will be owned continuously by Holdco until the time of the Proposed Transactions described below are:

(a) all of the issued and outstanding shares in the capital stock of Aco;

(b) all of the issued and outstanding shares in the capital stock of Bco;

(c) XXXXXXXXXX of the issued and outstanding shares in the capital of Cco; and

(d) real property situated in XXXXXXXXXX :

(i) XXXXXXXXXX ;

(ii) XXXXXXXXXX ; and

(iii) XXXXXXXXXX .

It is believed that the fair market value of each property described in (a) to (d) above exceeded its adjusted cost base at the time of X's death.

12. Aco holds XXXXXXXXXX equipment situated in XXXXXXXXXX and holds real property that is situated in XXXXXXXXXX . Bco is in the XXXXXXXXXX business and does not hold any real property. Cco holds real property situated in XXXXXXXXXX .

13. The shares of Aco, Bco and Cco and each parcel of land referred to in Paragraph 11(d) are held as capital property by Holdco.

PROPOSED TRANSACTIONS

14. The Estate will incorporate Newco. The authorized share capital of Newco will consist of an unlimited number of common shares. Following incorporation, the Estate will subscribe for one common share of Newco for $XXXXXXXXXX and Newco will issue that share to the Estate.

15. The Estate will transfer all of the shares of Holdco to Newco in exchange for the issuance of common shares of Newco and the issuance of two Child Notes and two Grandchild Notes in favour of the Estate, which shares and notes will have an aggregate fair market value equal to the shares of Holdco at the time of the transfer. The aggregate fair market value of the Child Notes and the Grandchild Notes to be issued to the Estate on the transfer of the shares of Holdco, determined immediately after the transfer, will not exceed the greater of (i) the paid-up capital of the shares of Holdco determined immediately before the transfer and (ii) the adjusted cost base of the shares of Holdco as determined immediately before the transfer pursuant to subsection 84.1(2) for the purposes of subsection 84.1(1).

16. In connection with the transfer described in Paragraph 15, the Estate and Newco will jointly elect, in prescribed form and with the time limits described in subsection 85(6), to have the rules in subsection 85(1) apply in respect of the transfer. With respect to this election, the agreed amount in respect of each property transferred to Newco will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The fair market value of the common shares of Newco issued to the Estate on the transfer will be equal to the fair market value of the shares of Holdco less the aggregate face value of the Child Notes and Grandchild Notes, determined at the time of the transfer.

17. Newco will add a nominal amount to the stated capital account maintained in respect of the common shares of Newco as a consequence of the issuance of common shares to the Estate on the transfer described in Paragraph 15.

18. Newco and Holdco will amalgamate to form Amalco. As a consequence of the amalgamation, all of the assets and liabilities of Newco and Holdco (other than the shares of Holdco) will become assets and liabilities of Amalco. The issued and outstanding common shares of Newco will become the issued and outstanding shares of Amalco, while the shares of Holdco will be cancelled on the amalgamation. In connection with the amalgamation, Amalco will designate, in its return of income for its first taxation year, an amount under the provisions of subsection 87(11) and paragraph 88(1)(d) to increase, in the following order, within the limits described in paragraph 88(1)(d), the adjusted cost base of: the parcels of land described in Paragraph 11(d) (excluding, for greater certainty, any depreciable property), the shares of Aco, the shares of Cco and the shares of Bco.

19. The Executors will cause the G1 Trust and the G2 Trust to be settled. The G1 Trust will be established for the benefit of G1 and the G2 Trust will be established for the benefit of G2. The terms of each trust will include restrictions on distributions of capital that will be identical to the restrictions that apply to restrict distributions of a minor's share in the residue of the Estate. If G1, in the case of the G1 Trust, or G2, in the case of the G2 Trust, dies before reaching the age of XXXXXXXXXX , any undistributed capital of the trust would pass to the surviving children of the grandchild. If there are no such children, the undistributed capital would be distributed to the other trust. If both G1 and G2 die before reaching the age of XXXXXXXXXX without leaving issue, any undistributed capital would pass to Child 1 or Child 2 or the issue of Child 1 and Child 2.

20. The Executors will distribute the common shares and notes of Amalco as follows:

(a) XXXXXXXXXX of the common shares of Amalco and a Child Note to Child 1;

(b) XXXXXXXXXX of the common shares of Amalco and a Child Note to Child 2;

(c) XXXXXXXXXX of the common shares of Amalco and a Grandchild Note to the G1 Trust; and

(d) XXXXXXXXXX of the common shares of Amalco and a Grandchild Note to the G2 Trust.

ADDITIONAL INFORMATION

21. For the purposes of paragraph 84.1(2)(a.1), the "actual cost" of the shares of Holdco, within the meaning of subsection 26(13) of the Income Tax Application Rules, is equal to the fair market value of those shares on V-Day.

22. The Proposed Transactions were not contemplated at any time before the death of X and are not provided for in the Will. The Proposed Transactions were identified by the Executors after the death of X as an appropriate means of preventing double taxation, and were proposed by the Executors on or about XXXXXXXXXX for consideration by the Beneficiaries. The decision to implement the Proposed Transactions, subject to the receipt of a satisfactory advance income tax ruling, was made at a meeting of the Executors, the Beneficiaries and their professional advisors that occurred on XXXXXXXXXX .

23. The Beneficiaries do not currently intend to cause the disposition of any of the assets that will become assets of Amalco, including the real property holdings described in Paragraph 11(d).

24. It is not contemplated that Amalco will purchase its common shares for cancellation to create a capital loss that could potentially be the subject of an election under subsection 164(6). The Will requires a substantial charitable donation to be made out of unrelated assets to a private foundation called "XXXXXXXXXX ." It is expected that this donation will offset or partially offset the tax liability arising from the capital gain that will be reported in X's return of income from the disposition of the shares of Holdco that is deemed to occur immediately before the death of X.

25. The Will contains a number of specific lump sum bequests. Such bequests will be distributed in full prior to the settlement of the G1 Trust and the G2 Trust and any distribution of property out of the residue of the Estate. The Will also provides that a monthly annuity of approximately $XXXXXXXXXX be paid to a person who was not related to X.

26. Prior to completion of the Proposed Transactions, there will be no unanimous shareholders agreements in force that (i) restrict, in whole or in part, the powers of the directors of Newco or Amalco to manage the corporation's business and affairs or (ii) affect the power of any shareholder of Newco or Amalco to control the election of the board of directors of the corporation.

PURPOSES OF THE PROPOSED TRANSACTIONS

27. The principal purpose of the Proposed Transactions is to create a corporate structure that will avoid potential double tax by obtaining an increase in the adjusted cost base of the Property described in Paragraph 11 (other than depreciable property that may be described in Paragraph 11(d)) in accordance with subsection 87(11) and paragraphs 88(1)(c) and (d).

28. The purpose of the formation of the of the G1 Trust and the G2 Trust is to allow the surviving parent of G1 and G2 to act as trustee of their shares of the residue of the Estate within a legal structure that protects the integrity of the assets until the grandchildren reach adulthood.

29. The purpose of the distribution of the shares and notes of Amalco to the G1 Trust and the G2 Trust is to allow the Estate to be wound-up within a reasonable time and to provide a means for the eventual distribution of the shares of Amalco to G1 and G2 upon reaching adulthood.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. Paragraph 84.1(1)(b) will not apply to deem Newco to pay a dividend to the Estate, or deem the Estate to receive a dividend from Newco, as a consequence of the transaction described in Paragraph 15.

B. As a result of the application of paragraphs 88(1)(d.2) and (d.3), for the purposes of paragraphs 88(1)(c) and (d), Newco will be deemed to have last acquired control of Holdco from an arm's length person at the time immediately after the death of X.

C. On the amalgamation of Holdco and Newco to form Amalco as described in Paragraph 18, and without considering the transactions described in Paragraphs 19, 20(c) and 20(d), provided that no property acquired by Amalco on such amalgamation or "any property acquired by any person in substitution therefore" (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 Holdco and the "parent" is Newco) as part of the series of transactions or events that includes the Proposed Transactions, the cost to Amalco of each capital property owned by Holdco at the time Newco acquired control of Holdco and that became property of Amalco pursuant to the amalgamation (the "Bumped Assets") will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, provided that such property is not depreciable property, the amount designated by Amalco under paragraph 88(1)(d) in respect of the property as described in Paragraph 11.

The transactions described in Paragraphs 14, 15, 17, 18, 20(a) and 20(b) will not, in and of themselves, cause the Bumped Assets to be ineligible property.

Each of the transactions described in Paragraphs 19, 20(c) and 20(d) will cause the Bumped Assets to be ineligible property.

These 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 CRA provided that the Proposed Transactions are completed on or before XXXXXXXXXX .

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

COMMENTS

It is our view that G1 and G2 will acquire substituted property and be persons described in subclause 88(1)(c)(vi)(B)(I), upon acquiring interests in the G1 Trust and the G2 Trust as described in Paragraph 19. It is also our view that the G1 Trust and the G2 Trust will acquire substituted property and be persons described in subclause 88(1)(c)(vi)(B)(III) when the G1 Trust and G2 Trust acquire common shares of Amalco and Grandchild Notes as described in Paragraphs 20(c) and 20(d). Based on the current wording of subparagraph 88(1)(c.2)(i), G1, G2, the G1 Trust the G2 Trust will not be specified persons pursuant to paragraph 88(1)(c.2)(i). Consequently, the foregoing acquisitions of substituted property by G1, G2, the G1 Trust and the G2 Trust would cause the property of Holdco that became property of Amalco on the amalgamation of Holdco and Newco described in Paragraph 18 to be ineligible property.

However, the Tax Legislation Division of the Department of Finance issued a comfort letter to our Directorate dated March 4, 2005 (the "Comfort Letter"). The Comfort Letter indicated that an acquisition of substituted property by trusts maintained for the benefit of grandchildren of a deceased person from the Estate of the deceased should not result in the application of subparagraph 88(1)(c)(vi) to deny an increase in the adjusted cost base of property of a corporation that was controlled by the deceased prior to death pursuant to paragraph 88(1)(d). The Comfort Letter further stated that the Tax Legislation Division of the Department of Finance was prepared to recommend to the Minister of Finance that the Act be amended so that the grandchildren of the deceased in that scenario will be considered to be specified persons and that the amendment would apply to windings-up that begin after 2004.

If the recommended amendment in the Comfort Letter is enacted and is effective for the period in which the transactions described in Paragraphs 19, 20(c) and 20(d) take place, we are of the opinion that the acquisitions of property by G1, G2, the G1 Trust and the G2 Trust described in Paragraphs 19, 20(c) and 20(d) would not, in and of themselves, cause the Bumped Assets to be ineligible property.

Finally, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein; and
(b) any tax consequences relating to the facts and Proposed Transactions described herein other than those described in the rulings given above.

Yours truly,

for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch