28 November 2010 CTF Roundtable Q. 6, 2010-0386001C6 - 2010 CTF - Q. 6 - 84(2) and Pipeline Transactions

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: Whether the Canada Revenue Agency ("CRA") would confirm that subsection 84(2) would not apply in the context of a particular transaction to deem the Estate to have received a dividend from the "original corporation"?

Position: No, in light of the limited facts provided in the scenario, we are not able to confirm that subsection 84(2) would not apply in the context of the series of transactions described. In our view, in the course of examining the potential application of subsection 84(2) in the context of the series of transactions described, the focus should rather be on determining whether the funds or property of the original corporation have been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders, on the winding-up, discontinuance or reorganization of the business of the original corporation, not the pipeline corporation. Furthermore, subsection 84(2) applies to a particular corporation "on the winding-up, discontinuance or reorganization of its business". Accordingly, the business that a corporation conducts may be wound up, amongst other actions, pursuant to subsection 84(2) without affecting the corporation's existence, contrary to the winding-up of a corporation which brings to an end both the existence of the corporation and that of its business. Consequently, circumstances falling short of the dissolution of a corporation may still result in the application of subsection 84(2).

Reasons: In accordance with the provisions of the ITA.

Canadian Tax Foundation 2010 CRA Roundtable
November 28, 2010

Subsection 84(2) and Pipeline Transactions

Question 6

In prior interpretations dealing with post-mortem planning, (note 1) the CRA found that subsection 84(2) would not apply in a typical "pipeline" transaction where the corporations remained separate and distinct legal entities for a period of at least one year and the first corporation continued to carry on its business in the same manner as before. However, the CRA's response to question 1 at the 2009 APFF conference on financial strategies and instruments cast some doubt on the effectiveness of the pipeline. (note 2) Specifically, the CRA indicated that subsection 84(2) could apply in a typical pipeline transaction where the corporation was not carrying on a business and all of its assets were liquid.

For subsection 84(2) to apply, there must be an appropriation or distribution of property of a corporation to or for the benefit of shareholders. Furthermore, the appropriation or distribution must be made on the winding up, discontinuance, or reorganization of the corporation's business. If the newly incorporated CCPC (the pipeline corporation) has simply acquired the shares of the original corporation from the estate for consideration of a promissory note and has never commenced to carry on a business prior to distributing its property to the estate, the distribution of property to the estate could not have occurred on the discontinuance or reorganization of its business. Furthermore, at the time of the distribution to the estate, the estate, as the sole shareholder of the pipeline corporation, has not resolved to distribute the assets and to wind up and dissolve the pipeline corporation, which is generally interpreted as the event required to commence the winding up process.

Can the CRA confirm that subsection 84(2) would not apply to deem the estate, or the beneficiaries of the estate, to have received a dividend as a result of the sale of the shares of the capital stock of the original corporation to the pipeline corporation for a promissory note?

Response 6

We note that the question says that the pipeline corporation never commenced to carry on a business prior to distributing its property to the estate, and thus the distribution of property to the estate could not have occurred on the discontinuance or reorganization of the pipeline corporation's business. In our view, in the course of examining the potential application of subsection 84(2) in the context of the series of transactions described in the question, the focus should be on determining whether the funds or property of the original corporation have been distributed or otherwise appropriated in any manner whatever to or for the benefit of its shareholders (the estate) on the winding-up, discontinuance, or reorganization of the business of the original corporation, not the pipeline corporation. If this is the case, the original corporation would be deemed to have paid a dividend on its shares, and a dividend would be deemed to have been received by the estate.

Furthermore, with respect to the absence of the winding-up and dissolution of the pipeline corporation, subsection 84(2) applies to a particular corporation "on the winding-up, discontinuance or reorganization of its business" (emphasis added). Accordingly, the business that a corporation conducts may be wound up, among other actions, pursuant to subsection 84(2) without affecting the corporation's existence, contrary to the winding-up of a corporation, which brings to an end both the existence of the corporation and that of its business. Consequently, circumstances falling short of the dissolution of a corporation may still result in the application of subsection 84(2).

Notes:

1. CRA document no. 2002-0154223, XXXXXXXXXX, 2002, and CRA document no. 2005-0142111R3, XXXXXXXXXX, 2005.
2. CRA document no. 2009-0326961C6, October 9, 2009.

Sandra Snell
2010-038600