At the time of death of Mr X, he held common and preferred shares of (and controlled) Holdco, which carried on an investing business and held a wholly-owned subsidiary carrying on a business (Opco). Mrs X held common shares and preferred shares of Holdco of a different class.
A testamentary trust created by Mr X will transfers the estate shares to a Canadian corporation (Newco) which is jointly owned by the trust and Mrs X and controlled by the trust in consideration for two promissory notes equal to the fair market value of such common and preferred shares at the death of Mr X, and for preferred shares having a redemption amount equal to any appreciation in the fair market value of the common shares subsequent to such death (and having a nominal paid-up capital so as not to engage s. 84.1). A s. 85(1) election is filed in due course. Mrs X effects a similar transfer of her Holdco shares to Newco.
After at least one year has elapsed since the transfer of the shares of the capital stock of Holdco to Newco, Holdco will be amalgamated with or wound-up into Newco. Pursuant to paragraph 88(1)(d) and within the limits of this provision, Newco will designate an amount to increase the ACB of the shares of the capital stock of Opco that will be distributed or acquired on the amalgamation/winding-up.
Subsequently to such amalgamation or winding-up, Newco may gradually begin to make payments on the notes owing by it to the testamentary trust in order to fund distributions to beneficiaries in accordance with the terms of the trust.
Ruling that s. 84(2) will not apply to deem Holdco to have paid a dividend to the testamentary trust.
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