27 November 2011 CTF Roundtable Q. 23, 2011-0426371C6 - 2011 CTF - Q.23 - Post-Mortem Planning and 84(2)

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) Whether the Canada Revenue Agency ("CRA") would comment on the anti-avoidance provisions of the Income Tax Act ("Act") which could apply in the context of a particular series of transactions designed to implement a post-mortem estate planning pipeline strategy? 2) Whether the CRA would comment on any expected amendments to the Act in respect of the implementation of pipeline strategies?

Position: 1) Comments provided. 2) Amendments to the Act are not within the discretion of the CRA. Matters involving a change to the law and / or tax policy are within the responsibility of the Department of Finance.

Reasons: In accordance with the provisions of the Act and our previous positions.

Canadian Tax Foundation 2011 Canada Revenue Agency ("CRA") Roundtable
November 27 - 29, 2011

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Income Tax Act ("Act").

Question 23 Post-Mortem Estate Planning - Pipeline Transactions

"CRA has issued favourable rulings, but added timing conditions.

a) Where in the ITA do the rules and conditions come from?
b) Taxpayers are entitled to transparency and a level of certainty in the application of the ITA. Are amendments to the ITA to be expected?"

Response

A pipeline strategy is a post-mortem planning technique that is used to mitigate a form of double taxation exposure that can result at the shareholder level when a person owns shares of the capital stock of a private corporation with an accrued gain at the time of his/her death. When correctly implemented, the result of the pipeline strategy is that the extraction of the corporation's surplus is subject to taxation as a capital gain resulting from the application of the deemed disposition rules on death.

In the course of undertaking a pipeline strategy, we would note that the anti-avoidance provisions of section 84.1 and subsection 84(2) must be examined. It is our view that these provisions, which have different requirements for application, target certain transactions that result in the extraction of corporate surplus otherwise than by way of a dividend treatment (traditionally known as "surplus stripping"). Furthermore, we believe that section 84.1 and subsection 84(2) are not in conflict and that the potential application of both provisions must be considered in the context of pipeline transactions.

Subsection 84(2) would apply where funds or property of a corporation resident in Canada have at any time after March 31, 1977 been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders of any class of shares in its capital stock, on the winding-up, discontinuance or reorganization of its business. The result of the application of subsection 84(2) is that the particular corporation shall be deemed to have paid at that time a dividend on the shares of that class equal to the amount described in the remainder of the provision.

Consequently, in the context of a series of transactions designed to implement a post-mortem pipeline strategy, some of the additional facts and circumstances that in our view could lead to the application of subsection 84(2) and warrant dividend treatment could include the following:

• The funds or property of the original corporation would be distributed to the estate in a short time frame following the death of the testator.
• The nature of the underlying assets of the original corporation would be cash and the original corporation would have no activities or business ("cash corporation").

Where such circumstances exist and where subsection 84(2) would apply resulting in dividend treatment on the distribution to the estate, we believe that double taxation at the shareholder level could still be mitigated with the implementation of the subsection 164(6) capital loss carryback strategy, provided the conditions of that provision would apply in the particular facts and circumstances.

The CRA has issued several favourable rulings wherein we have concluded that subsection 84(2) would not apply to the proposed full or partial pipeline strategies. (footnote 1) These situations, in contrast to the examples noted above, did not involve cash corporations. Furthermore, in each case the taxpayers' proposed transactions contemplated, amongst other things, the continuation of the original corporation's business for a period of at least one year following the implementation of the pipeline structure, followed by a progressive distribution of the corporation's assets over an additional period of time. Consequently, one or more of the conditions of subsection 84(2) were not met in each case and the pipeline strategy was effectively implemented. As stated in technical interpretation 2006-0170641E5 (F) and reiterated in our response to question 1 at the 2009 APFF conference on financial strategies and instruments, the foregoing elements have been, and continue to be, part of the proposed transactions submitted by the taxpayer involved and as such, cannot be considered to be conditions required by our Directorate.

Our Directorate continues to rule on the potential application of subsection 84(2) on a case-by-case basis, after a review of all the facts and circumstances surrounding each specific situation. We note that the CRA has neither the discretion nor the right to change the Act. Matters involving a change to the law and / or tax policy are the responsibility of the Department of Finance.

S. Snell
November 27, 2011
2011-042637

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See, for example, Documents F 2002-0154223, F 2005-0142111R3, F 2007-0237511R3, F 2009-0346351R3, F 2010-0377601R3, F 2010-0388591R3 and E 2011-0403031R3 (publication pending).