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 section 84.1 applies to deem the alter ego trust to have received a dividend on the disposition of shares to the new corporation or to reduce the PUC of the shares of the new corporation received as consideration for the disposition of the shares. 2) Whether subsection 84(2) applies to the proposed transactions. 3) Whether paragraph 88(1)(d.3) applies for purposes of the paragraph 88(1)(d) bump provisions and the determination of the timing of any acquisition of control. 4) Whether subsection 245(2) applies to the proposed transactions.
Position: 1) No. 2) No. 3) Yes. 4) No.
Reasons: Based on the provisions of the Act, jurisprudence and CRA publications.
XXXXXXXXXX 2019-080043
XXXXXXXXXX
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request –Post Mortem Pipeline and Bump Transaction
XXXXXXXXXX
We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling (Ruling request) on behalf of the above-named taxpayer. We also acknowledge your request dated XXXXXXXXXX to amend the proposed transactions, as well as the additional information provided to us in subsequent letters and emails, and during our various telephone conversations. The documents submitted as part of your request are part of this document only to the extent described herein.
CONFIRMATION
To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:
i. in a previously filed return of the taxpayers or a related person and:
A. being considered by the CRA in connection with such return;
B. under objection by the taxpayers or a related person; or
C. the subject of a current or completed court process involving the taxpayers or a related person; or
ii. the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.
The tax account numbers, Tax Services Offices and the Tax Centres and head office address of the taxpayers involved are as follows:
XXXXXXXXXX
DEFINITIONS
Unless otherwise stated:
i. all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c-1 as amended, (the Act) or, where appropriate, the Income Tax Regulations, C.R.C., c-945, as amended (the Regulations);
ii. all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definitions;
iii. all references to monetary amounts are in Canadian dollars unless specifically indicated otherwise; and
iv. the singular should be read as plural and vice versa where the circumstances so require.
The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:
“adjusted cost base” or “ACB” has the meaning assigned to the term in section 54;
“Aco” means XXXXXXXXXX, a corporation incorporated under the BCA as more particularly described in Paragraphs 12 to 15;
“Aco Common Shares” means the XXXXXXXXXX issued and outstanding common shares in the capital stock of Aco as described in Paragraph 5;
“Aco Note” means the amount owing by Aco to Bco;
“Aco Shareholder Note” means the amount owing by Aco to its shareholder, AE Trust;
“AE Trust” means the XXXXXXXXXX AE Trust, an inter vivos trust that is an alter ego trust formed under the laws of the Province of XXXXXXXXXX as more fully described in Paragraphs 2 to 4;
“AE Trust Deed” means the trust settlement document dated XXXXXXXXXX between the settlor, XXXXXXXXXX, and the trustee, XXXXXXXXXX;
“agreed amount” means the amount agreed on by the transferor and the transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);
“alter ego trust” has the meaning assigned to that term in subsection 248(1);
“Amalco” means the corporation to be formed on the amalgamation of Newco, Bco and Aco, as described in Paragraph 38;
“Amalco Class C Preferred Shares” means the XXXXXXXXXX Newco Class C Preferred Shares originally issued by Newco to the AE Trust as described in Paragraph 30, which will become the issued and outstanding shares of Amalco on the amalgamation as described in Paragraph 40;
“Amalco Class D Preferred Shares” means the XXXXXXXXXX Newco Class D Preferred Shares originally issued by Newco to the AE Trust as described in Paragraph 28, which will become the issued and outstanding shares of Amalco on the amalgamation as described in Paragraph 40;
“appointed beneficiary” refers to Child 2, an individual appointed as an income beneficiary of AE Trust on XXXXXXXXXX by the Trustee, in accordance with the power granted to the Trustee in paragraph 2.8 of the AE Trust Deed;
“BCA” means the XXXXXXXXXX;
“Bco” means XXXXXXXXXX, a corporation incorporated under the BCA as more particularly described in Paragraphs 16 to 20;
“Bco Common Shares” means the XXXXXXXXXX issued and outstanding common shares in the capital stock of Bco as described in Paragraph 5;
“Bco’s Investments” means XXXXXXXXXX Mutual Fund units, which is an XXXXXXXXXX XXXXXXXXXX similar to a cash savings account, and other investments from XXXXXXXXXX;
“Bco Shareholder Note” means the amount owing by Bco to its shareholder, AE Trust;
“Canadian-controlled private corporation” or “CCPC” has the meaning assigned to that term in subsection 125(7);
“capital dividend account” or “CDA” has the meaning assigned to that term in subsection 89(1);
“capital gain” has the meaning assigned in paragraph 39(1)(a);
“capital property” has the meaning assigned to that term in section 54;
“Child 1” means XXXXXXXXXX, a resident of Canada who has attained the age of XXXXXXXXXX years and is a child of the Deceased and a sibling of Child 2;
“Child 1 Spouse” means XXXXXXXXXX, a resident of Canada who has attained the age of XXXXXXXXXX and is the spouse of Child 1;
“Child 2” means XXXXXXXXXX, a resident of Canada who has attained the age of XXXXXXXXXX years and is a child of the Deceased and a sibling of Child 1;
“XXXXXXXXXX” means the XXXXXXXXXX, comprised of land and building, located at XXXXXXXXXX, that are XXXXXXXXXX;
“CRA” means the Canada Revenue Agency;
“date of death” means the date that the Deceased died as described in Paragraph 1;
“Deceased” means the late XXXXXXXXXX;
“disposition” has the meaning assigned by subsection 248(1);
“eligible dividend” has the meaning assigned by subsection 89(1);
“eligible property” has the meaning assigned by subsection 85(1.1);
“ERDTOH” means “eligible refundable dividend tax on hand” and has the meaning assigned to that term in subsection 129(4);
“fair market value” or “FMV” means the highest price expressed in terms of money or money’s worth available in an open and unrestricted market between informed, prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash;
“Grandchild 1” (also referred to as Grandchild or collectively as the Grandchildren) means XXXXXXXXXX, a resident of XXXXXXXXXX and an adult grandchild of the Deceased and child of Child 1 and Child 1 Spouse, who attained the age of XXXXXXXXXX years before the death of the Deceased;
“Grandchild 2” (also referred to as Grandchild or collectively as the Grandchildren) means XXXXXXXXXX, a resident of Canada and an adult grandchild of the Deceased and child of Child 1 and Child 1 Spouse, who attained the age of XXXXXXXXXX years before the death of the Deceased;
“Grandchild 3” (also referred to as Grandchild or collectively as the Grandchildren) means XXXXXXXXXX, a resident of Canada and an adult grandchild of the Deceased and child of Child 1 and Child 1 Spouse, who attained the age of XXXXXXXXXX years before the death of the Deceased and the age of XXXXXXXXXX in XXXXXXXXXX;
“ineligible property” has the meaning assigned by subparagraphs 88(1)(c)(iii) to (vi);
“Marketable Securities” means a diversified portfolio of investment property that includes cash and cash equivalents, government and corporate bonds, and shares of public corporations;
“NERDTOH” means “non-eligible refundable dividend tax on hand” and has the meaning assigned to that term in subsection 129(4);
“Newco” means a corporation to be incorporated under the provisions of the BCA as described in Paragraphs 24 to 27 of the Proposed Transactions;
“Newco Class C Preferred Shares” means the XXXXXXXXXX Class C preferred shares of the capital stock of Newco that will be issued by Newco to the AE Trust as partial consideration for the transfer of the Bco Common Shares to Newco, as described in Paragraph 30;
“Newco Class D Preferred Shares” means the XXXXXXXXXX Class D preferred shares of the capital stock of Newco that will be issued by Newco to the AE Trust as partial consideration for the transfer of the Aco Common Shares to Newco, as described in Paragraph 28;
“Newco Note A” means a non-interest bearing promissory note payable on demand and issued by Newco to the AE Trust as partial consideration for the transfer of the Aco Common Shares as described in Paragraph 28;
“Newco Note B” means a non-interest bearing promissory note payable on demand and issued by Newco to the AE Trust as partial consideration for the transfer of the Bco Common Shares as described in Paragraph 30;
“paid-up capital” or “PUC” has the meaning assigned to that term in subsection 89(1);
“Paragraph” means a numbered or lettered paragraph of this letter;
“price adjustment clause” means an agreement between two parties to provide for the adjustment to the transaction price in the event that a third party such as the CRA or a court of law determines that the fair market value of the transferred property is greater or less than the amount otherwise determined by the parties, with the agreement having the features set out in paragraph 1.5 of the Income Tax Folio S4-F3-C1;
“primary beneficiary” refers to XXXXXXXXXX, the Deceased, who had sole entitlement to receive the income and capital of AE Trust before his death, in accordance with the terms of the AE Trust Deed;
“proceeds of disposition” has the meaning assigned in section 54;
“Proposed Transactions” means the proposed transactions which are described in Paragraphs 23 to 44 under the heading Proposed Transactions;
“safe-income determination time” has the meaning assigned by subsection 55(1);
“safe income on hand” means income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for a transaction, event or series of transactions or events;
“secondary beneficiary” (collectively the secondary beneficiaries) refers to Child 1, Child 1 Spouse and the Grandchildren, each of whom is entitled, after the death of the Deceased and before the time of distribution as defined in the AE Trust Deed, to receive the income and capital of AE Trust as determined by the Trustee, apart from Child 1 who is only entitled to receive income from AE Trust while he is the sole trustee of AE Trust;
“share transfer” refers to either the transfer by AE Trust of the Aco Common Shares and the Bco Common Shares to Newco as described in Paragraphs 28 and 30, respectively, and “share transfers” refers collectively to the foregoing transfers;
“specified investment business” has the meaning assigned to that term by subsection 125(7);
“taxable Canadian corporation” has the meaning assigned to that term in subsection 89(1);
“Trustee” means Child 1 in his capacity as trustee of the AE Trust; and
“V-Day basis” means the amount, if any, described in paragraph 84.1(2)(a.1) for purposes of “B” of paragraph 84.1(1)(a).
FACTS
The relevant facts are as follows:
1. The Deceased died on XXXXXXXXXX (referred to as the date of death). Before the date of death, and at all relevant times, the Deceased was a resident of Canada.
2. Immediately before the date of death, the Deceased was the primary beneficiary of AE Trust, a Canadian-resident alter ego trust.
3. AE Trust was settled on XXXXXXXXXX by the Deceased. Child 1 is the Trustee of AE Trust. AE Trust’s taxation year-end is XXXXXXXXXX. On the creation of AE Trust, property was transferred to it by the Deceased on a rollover basis under subsections 73(1) and 73(1.01), such that no gains were realized on the disposition of such property by the Deceased and the reacquisition of such property by AE Trust.
4. Child 1, Child 1 Spouse and the children of Child 1 are all secondary beneficiaries and each of the beneficiaries of AE Trust is a resident of Canada, apart from Grandchild 1 who is a resident of XXXXXXXXXX.
5. Immediately before the date of death of the Deceased, AE Trust held, inter alia, the following shares:
a. XXXXXXXXXX Aco Common Shares, having an aggregate ACB and aggregate PUC of $XXXXXXXXXX and representing all of the issued and outstanding shares of the capital stock of Aco; and
b. XXXXXXXXXX Bco Common Shares, having an aggregate ACB and aggregate PUC of $XXXXXXXXXX and representing all of the issued and outstanding shares of the capital stock of Bco.
6. The terms and conditions of the Aco Common Shares and the Bco Common Shares, respectively, are generally as follows: the shares are without par value and entitle the holder to one vote per share, and allow the holder to participate in the remaining assets of either Aco or Bco, as the case may be, in the event of a wind-up, dissolution or liquidation of the particular corporation.
7. AE Trust has at all relevant time held the Aco Common Shares and Bco Common Shares as capital property.
8. Prior to the settlement of AE Trust, the Deceased owned the shares of the capital stock of each of Aco and Bco as follows:
a. on the incorporation of Aco, XXXXXXXXXX Aco Common Shares were acquired from treasury and XXXXXXXXXX Aco Common Shares were acquired from an arm’s length business partner of the Deceased; and
b. in the year of incorporation of Bco, XXXXXXXXXX Bco Common Shares were acquired from the incorporator of Bco, an arm’s length person to the Deceased, and on XXXXXXXXXX, XXXXXXXXXX Bco Common Shares were acquired from the Deceased’s business partner, described above.
AE Trust Date Of Death Return
9. As a consequence of the death of the Deceased and pursuant to paragraph 104(4)(a), AE Trust was deemed to have disposed of, among other capital property, the Aco Common Shares and Bco Common Shares held by it at the end of the day on the date of death for proceeds of disposition equal to their aggregate FMV at that time, being $XXXXXXXXXX and $XXXXXXXXXX, respectively. In addition, AE Trust was deemed to have acquired the XXXXXXXXXX Aco Common Shares and the XXXXXXXXXX Bco Common Shares for an amount equal to their previously stated FMV immediately after that day.
10. In AE Trust’s T3 Trust Income Tax and Information Return for the period from XXXXXXXXXX to XXXXXXXXXX, AE Trust reported these deemed dispositions, which included an accrued gain in respect of the Aco Common Shares of $XXXXXXXXXX ($XXXXXXXXXX - $XXXXXXXXXX) and an accrued gain in respect of the Bco Common Shares of $XXXXXXXXXX ($XXXXXXXXXX - $XXXXXXXXXX).
11. Under the terms of the AE Trust Deed, on the death of the Deceased and as a consequence thereof, the Trustee is directed to immediately implement the following transactions, without any right to exercise his discretion to the contrary:
a. incorporate a new corporation (Newco) with the Trustee of AE Trust as the sole shareholder of Newco; and
b. transfer to Newco all of the shares of the capital stock in any private corporation that forms part of AE Trust property, where such shares carry an entitlement to vote for the appointment of any directors in the private corporation and AE Trust holds over XXXXXXXXXX% of such voting shares of that private corporation. For greater certainty, the shares of the capital stock of Aco and Bco meet the foregoing requirements.
Aco
12. Aco is and will be, at all relevant times, a taxable Canadian corporation and a CCPC. Aco was incorporated on XXXXXXXXXX under the BCA. Aco has a XXXXXXXXXX taxation year end.
13. Aco is XXXXXXXXXX. At the date of death of the Deceased, Aco’s assets primarily consisted of cash, term deposits and Marketable Securities, and its liabilities primarily consisted of an amount due to Bco (the Aco Note), and an amount due to AE Trust (the Aco Shareholder Note). More specifically, the FMV and ACB of Aco’s primary assets and the face value of its liabilities were as follows:
ACB FMV
Cash $ XXXXXX $ XXXXXX
Marketable Securities $ XXXXXX $ XXXXXX
Term deposit $ XXXXXX $ XXXXXX
$ XXXXXX
Aco Note $ XXXXXX
Aco Shareholders Loan $ XXXXXX
$ XXXXXX
Aco’s Assets Subsequent To Date Of Death
14. Currently, the nature of Aco’s assets and their FMV is substantially the same as described above, apart from the changes arising from the following transactions occurring in Aco’s XXXXXXXXXX taxation year: Aco transferred certain Marketable Securities valued at $XXXXXXXXXX to AE Trust, which exceeded that of the Aco Shareholder Note resulting in the elimination of this debt and the creation of a receivable from AE Trust (the AE Trust Receivable) equal to the excess; Aco transferred the AE Trust Receivable to Bco which was offset by a reduction in the Aco Note; and Aco used its cash balance (reducing it to nil) to increase its Marketable Securities account to an amount that exceeded its balance before the transfer of the securities to AE Trust. These transactions were undertaken as part of an overall objective of reducing the number and value of the related shareholder loan accounts and intercorporate debt existing at that time.
15. As at XXXXXXXXXX, the tax account balances of Aco were approximately:
a. NERTOH - $XXXXXXXXXX;
b. GRIP - $XXXXXXXXXX; and
c. CDA - $XXXXXXXXXX.
Bco
16. Bco is and will be, at all relevant times a taxable Canadian corporation and a CCPC. Bco was incorporated on XXXXXXXXXX under the BCA. Bco has a XXXXXXXXXX taxation year end.
17. Bco operates as XXXXXXXXXX. At the most recent renewal date, XXXXXXXXXX were renewed for terms of XXXXXXXXXX and XXXXXXXXXX, respectively.
18. At the date of death, Bco’s assets primarily consisted of cash and Marketable Securities (together representing less than XXXXXXXXXX% of the FMV of the assets), XXXXXXXXXX (which comprised XXXXXXXXXX% of the FMV Bco’s assets) and an amount due from Aco, being the Aco Note. Bco’s liabilities primarily consisted of an amount due to in respect of corporate taxes, XXXXXXXXXX and the Bco Shareholder Note. More specifically, FMV and ACB of Bco’s primary assets and the face value of its liabilities were as follows:
ACB FMV
Cash $ XXXXXX $ XXXXXX
Marketable Securities $ XXXXXX $ XXXXXX
XXXXXXXXXX $ XXXXXX $ XXXXXX
Aco Note $ XXXXXX $ XXXXXX
$ XXXXXX
Corporate taxes payable $ XXXXXX
XXXXXXXXXX $ XXXXXX
Bco Shareholder Note $ XXXXXX
$ XXXXXX
Bco’s Assets Subsequent To Date Of Death
19. Currently, the nature of Bco’s assets and their FMV is substantially the same as described above, apart from the changes arising from the following transactions occurring in Bco’s XXXXXXXXXX taxation year: Bco transferred the Bco Investments valued at $XXXXXXXXXX to AE Trust in partial payment of the Bco Shareholder Note; Bco received the AE Trust Receivable from Aco which was offset by a reduction in the outstanding Aco Note; and the AE Trust Receivable was offset by a further reduction in the Bco Shareholder Note. The transfer of the Marketable Securities was undertaken as part of Bco’s long-term investment strategy to focus on its XXXXXXXXXX.
20. As at XXXXXXXXXX, Bco’s ERDTOH/NERDTOH, GRIP and CDA tax account balances were XXXXXXXXXX.
AE Trust’s Assets Subsequent To Date Of Death
21. In addition to the shares of the capital stock of Aco and Bco, AE Trust held Marketable Securities at the date of death. At the present time, the assets of AE Trust and their FMV are substantially the same, except that AE Trust has used some of its Marketable Securities to pay income taxes and to make distributions to the beneficiaries of AE Trust. Furthermore, the Aco Shareholder Note and Bco Shareholder Note have been reduced as previously stated.
22. Each of Aco and Bco have declared and paid dividends to AE Trust in the last five taxation years pursuant to a well-established policy of paying regular dividends in order access the dividend refund under the provisions in section 129.
PROPOSED TRANSACTIONS
Amendment of the AE Trust Deed
23. Prior to the incorporation of Newco, the Trustee will exercise his power pursuant to paragraph 5.2 of the AE Trust Deed to execute an irrevocable deed to amend the AE Trust Deed and remove Grandchild 1 as a beneficiary of AE Trust as of the date of the irrevocable deed. For greater certainty, following the date of execution of the irrevocable deed and in accordance with its terms, Grandchild 1 will be precluded from receiving directly or indirectly the income or capital of AE Trust or from being re-instated as a beneficiary of AE Trust, at any time that Grandchild 1 is a non-resident of Canada for purposes of the Act.
Incorporation of Newco
24. Consistent with the terms of the AE Trust Deed, Child 1, in his capacity as Trustee, will incorporate Newco under the BCA. Newco will, at all relevant times be a taxable Canadian corporation and a CCPC. The authorized share capital of Newco on incorporation will consist of an unlimited amount of the following common and preferred classes of shares:
i. XXXXXXXXXX Class A common shares (Newco Class A Common Shares), without par value;
ii. XXXXXXXXXX Class B common shares (Newco Class B Common Shares), without par value;
iii. XXXXXXXXXX Class C preference shares (Newco Class C Preferred Shares), without par value and subject to a price adjustment clause;
iv. XXXXXXXXXX Class D preference shares (Newco Class D Preferred Shares), without par value and subject to a price adjustment clause;
v. XXXXXXXXXX Class E preference shares (Newco Class E Preferred Shares) , with par value equal to $XXXXXXXXXX per share; and
vi. XXXXXXXXXX Class F preference shares (Newco Class F Preferred Shares), with par value equal to $XXXXXXXXXX per share.
25. The special rights and restrictions attaching to the authorized share capital of
Newco will be as follows:
Class Dividend Entitlement Voting Rights Liquidation Entitlement Redeemable Retractable Redemption Amount
A Participating Non-voting 4th No No N/A
B Non-participating Voting 3rd No No N/A
C & D Participating (Conditionally) Non-voting 1st Yes Yes Set by directors
E Non-participating Non-Voting 2nd Yes Yes $XXXXXX per share
F Non-participating Non-voting 2nd Yes No $XXXXXX per share
26. At the time of incorporation, Child 1, in his capacity as Trustee, will subscribe for XXXXXXXXXX Newco Class A Common Shares and XXXXXXXXXX Newco Class B Common Shares for $XXXXXXXXXX per share. As a result, AE Trust will control Newco.
27. Child 1 will be the only director of Newco and its only officer (President and Secretary).
Transfer of Aco Common Shares to Newco
28. AE Trust will transfer its XXXXXXXXXX Aco Common Shares to Newco and in exchange AE Trust will receive as consideration:
(a) Newco Note A, having a principal amount and FMV equal to the lesser of:
i. the aggregate FMV of the Aco Common Shares at the date death; and
ii. the aggregate FMV of the Aco Common Shares at the date of their transfer by the AE Trust to Newco;
less a nominal amount ($XXXXXXXXXX), and
(b) XXXXXXXXXX Newco Class D Preferred Shares, having a FMV and a redemption amount equal to a nominal amount ($XXXXXXXXXX) plus the excess, if any, between the FMV of the Aco Common Shares on the date of transfer and the FMV of those shares on the date of death.
In addition, and for greater certainty, the aggregate amount of the FMV represented by the Newco Note A and the Newco Class D Preferred Shares issued on such transfer will not exceed the aggregate FMV of the Aco Common Shares at the time of such transfer. AE Trust will accept Newco Note A and the Newco Class D Preferred Shares, as an absolute and full payment for the transfer of the Aco Common Shares.
29. AE Trust and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Aco Common Shares held by AE Trust to Newco. The agreed amount in respect of the transfer will be equal to the lesser of the ACB and the FMV of the Aco Common Shares at the time of transfer. For greater certainty, the agreed amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), will not exceed the FMV of such shares transferred by AE Trust to Newco nor will it be less than the amount permitted under paragraph 85(1)(b).
Newco will add to the stated capital of the Newco Class D Preferred Shares a nominal amount which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of such shares resulting in an adjustment in computing the PUC, having regard to paragraph 84.1(1)(a).
Transfer of Bco Common Shares To Newco
30. AE Trust will transfer its XXXXXXXXXX Bco Common Shares to Newco and in exchange AE Trust will receive consideration consisting of:
(a) Newco Note B, having a principal amount and FMV equal to the lesser of:
i. the aggregate FMV of the Bco Common Shares at the date death; and
ii. the aggregate FMV of the Bco Common Shares at the date of their transfer by AE Trust to Newco;
less a nominal amount ($XXXXXXXXXX), and
(b) XXXXXXXXXX Newco Class C Preferred Shares, having a FMV and a redemption amount equal to a nominal amount ($XXXXXXXXXX) plus the excess, if any, between the FMV of the Bco Common Shares on the date of transfer and the FMV of those shares on the date of death.
In addition, and for greater certainty, the aggregate amount of the FMV represented by the Newco Note B and the Newco Class C Preferred Shares issued on such transfer will not exceed the aggregate FMV of the Bco Common Shares at the time of such transfer. AE Trust will accept Newco Note B and the Newco Class C Preferred Shares, as an absolute and full payment for the transfer of the Bco Common Shares.
31. AE Trust and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Bco Common Shares held by AE Trust to Newco. The agreed amount in respect of the transfer will be equal to the lesser of the ACB and the FMV of the Bco Common Shares at the time of transfer. For greater certainty, the agreed amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), will not exceed the FMV of such shares transferred by AE Trust to Newco nor will it be less than the amount permitted under paragraph 85(1)(b).
Newco will add to the stated capital of the Newco Class C Preferred Shares a nominal amount which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of such shares resulting in an adjustment in computing the PUC, having regard to paragraph 84.1(1)(a).
32. After the share transfers, each of Aco and Bco will be connected to Newco within the meaning of subsections 186(4) and 186(2).
XXXXXXXXXX Period After the Share Transfers
33. Aco will remain a separate and distinct legal entity for a period of at least XXXXXXXXXX following the date that the share transfer described in Paragraph 28 is completed. For greater certainty, and during this period of time, Aco will not discontinue or reorganize its business, nor will Aco be amalgamated with, or wound-up into, Newco or any other corporation. In addition, Aco will continue to operate the business that it operated before the share transfer, under the same policies and guidelines in effect at that time in respect of the investment activities of Aco and the asset allocation of the Marketable Securities.
34. Bco will remain a separate and distinct legal entity for a period of at least XXXXXXXXXX following the date that the share transfer described in Paragraph 30 is completed. For greater certainty, and during this period of time, Bco will not discontinue or reorganize its business, nor will Bco be amalgamated with, or wound-up into, Newco or any other corporation. In addition, Bco will continue to operate the business that it operated before the share transfer, and, in particular, Bco will continue to own and XXXXXXXXXX for the purpose of XXXXXXXXXX.
35. Consistent with its history of paying annual dividends to its shareholder, each of Aco and Bco, as the case may be, will only pay dividends to Newco in the XXXXXXXXXX period following the share transfers, sufficient for Aco or Bco, as the case may be, to receive a refund of its ERDTOH and/or NERDTOH pursuant to subsection 129(1). For greater certainty, any such dividend will be paid from after-tax net income of Aco or Bco, as the case may be, and will not be funded through a disposition of corporate assets or investments. Moreover, the amount of each such dividend paid will not exceed the safe income on hand immediately before the safe-income determination time, that is attributable to shares of the particular corporation on which the dividend is paid.
36. Newco will only pay dividends to AE Trust, or redeem Newco Class C Preferred Shares or Newco Class D Preferred Shares held by AE Trust, sufficient for Newco to receive a refund of ERDTOH and/or NERDTOH pursuant to subsection 129(1), and in an amount approximately equal to the dividends it will receive from Aco and Bco. This is the case provided that there are not reasonable grounds for believing that the payment of such a dividend or deemed dividend would render Newco insolvent contrary to subsection 70(2) of the BCA.
37. Newco will not repay any amount to AE Trust owing in respect of Newco Note A or Newco Note B.
Amalgamation of Newco, Aco and Bco
38. After at least XXXXXXXXXX has elapsed from the date of the share transfers as described in Paragraphs 28 and 30 respectively, Aco and Bco will amalgamate with Newco pursuant to the BCA to form Amalco.
39. As consequence of the amalgamation, and in accordance with subsection 87(1), all of the property and the liabilities of Aco, Bco and Newco immediately before the amalgamation (other than any amount receivable from Aco or Bco, or the shares of the capital stock of Aco and Bco) will become property and liabilities of Amalco.
40. In addition, AE Trust, as the sole shareholder of all of the issued and outstanding shares of the capital stock of Newco before the amalgamation, will receive shares in Amalco. The issued and outstanding common shares of Newco will become the issued and outstanding shares of Amalco, such that the authorized share capital of Amalco will be the same as Newco’s authorized share capital at the time of the amalgamation. Moreover, the tax attributes of each class of shares that AE Trust will hold in Amalco after the amalgamation, will be identical to the tax attributes of the corresponding class of issued and outstanding shares that AE Trust held in Newco prior to the amalgamation. The shares of the capital stock of Aco and Bco will be cancelled on the amalgamation.
41. In connection with the amalgamation, Amalco will designate, in its return of income for its XXXXXXXXXX taxation year, an amount under the provisions of subsection 87(11) and paragraphs 88(1)(c) and (d) and within the limits thereto, to increase the ACB of the capital property, other than ineligible property, previously owned by Aco and Bco. For greater certainty, XXXXXXXXXX (excluding, any XXXXXXXXXX) and the securities component of the Marketable Securities, which has been owned continuously by either Aco or Bco, from a time that is before the date of death until immediately prior to the amalgamation.
Repayment of Newco Note A and Newco Note B
42. Beginning no earlier than XXXXXXXXXX after the completion of the amalgamation described in Paragraph 38, Newco Note A and Newco Note B will be progressively repaid over a period of time of not less than XXXXXXXXXX calendar quarters. The amount of any such repayment in a given calendar quarter will not exceed XXXXXXXXXX% of the total initial principal amount of Newco Note A and Newco Note B, as the case may be. Amalco will liquidate assets for cash, or it will transfer its assets in specie to AE Trust, in order to make scheduled payments on Newco Note A and Newco Note B.
43. Amalco will only pay dividends to AE Trust, or redeem Amalco Class C Preferred Shares or Amalco Class D Preferred Shares held by AE Trust, sufficient for Amalco to receive a refund of ERDTOH and/or NERDTOH pursuant to subsection 129(1). This is the case provided that there are not reasonable grounds for believing that the payment of such a dividend or deemed dividend would render Amalco insolvent contrary to subsection 70(2) of the BCA.
Assets Owned By Amalco After Amalgamation
44. For at least XXXXXXXXXX after the completion of the amalgamation described in Paragraph 38, and thereafter while Amalco is repaying Newco Note A and Newco Note B as discussed above in Paragraph 42, Amalco will continue to carry on the respective businesses of Aco and Bco. For greater certainty, Amalco will continue to XXXXXXXXXX previously held by Bco, the cash generated by Bco’s XXXXXXXXXX, and the Marketable Securities previously held by Aco (except to the extent that such assets need to be liquidated or transferred to make a repayment for the quarter or that has accrued unpaid for prior quarters). During this period the XXXXXXXXXX, the asset allocation of the Marketable Securities, and the investment activities carried on by Amalco with respect to the Marketable Securities will be governed by the same guidelines as before the amalgamation.
45. The Proposed Transactions will be implemented in the order presented, unless otherwise stated.
46. The ACB of the Aco Common Shares and the ACB of the Bco Common Shares, or any other shares for which such shares were substituted within the meaning of subsection 248(5), does not include any amount that would be adjusted under paragraph 84.1(2)(a.1)(ii).
47. The ACB of the Aco Common Shares and the ACB of the Bco Common Shares, or any shares for which they were substituted within the meaning of subsection 248(5), does not include V-day basis.
48. None of the Aco Common Shares or the Bco Common Shares have been otherwise purchased for cancellation in order to create a capital loss that could be the subject of an election under subsection 164(6).
49. The terms of the AE Trust Deed, as summarized in Paragraph 11, reflect the Deceased’s intention on settlement of the AE Trust that the share capital of any private corporation that would form part of the property of AE Trust on the date of death of the Deceased, be transferred thereafter by the Trustee to a newly incorporated corporation, upon and as consequence of the death of the Deceased in accordance with section 88.
50. For more than XXXXXXXXXX, Aco has operated as XXXXXXXXXX, with its primary assets being cash and XXXXXXXXXX. Prior to the settlement of AE Trust, the Deceased was actively involved with the investment decisions and strategic management Aco, with advice from Aco’s accountant and its financial institution investment advisors.
51. Since its incorporation, Bco has operated as XXXXXXXXXX, which includes certain Marketable Securities prior to the date of death. At that time, the management of the assets of Bco was carried out by the Deceased and included such activities as: negotiating lease agreements and managing tenants; participating in the XXXXXXXXXX by Bco; meeting with legal counsel and the accountants in regards to various lease and compliance reporting matters; meeting with financial advisors regarding the Marketable Securities; and investigating and reviewing other XXXXXXXXXX purchase opportunities.
52. In XXXXXXXXXX, the Deceased stepped away from the management of Aco and Bco due to his failing health and placement in a long-term care facility. At that time, AE Trust was settled as described in Paragraph 3. In addition, Child 1 became a Director of each of Aco and Bco and assumed the Deceased’s management role and activities in respect of both corporations. Subsequent to the date of death of the Deceased, and as of the date of this letter, Child 1 has actively managed Aco and Bco with the assistance and advice of various corporate advisors. Furthermore, Child 1 continues to implement the business and investment strategy for each corporation in keeping with the strategy that was originally developed by the Deceased. There will not be any material change to the business strategies of Aco and Bco during the course of the implementation of the Proposed Transactions.
53. On XXXXXXXXXX and XXXXXXXXXX, AE Trust made certain distributions to its beneficiaries including ordinary and eligible dividends, interest and other income, foreign non-business income and capital gains. These distributions were funded, in part, by dividends arising from the ordinary operation of Aco and Bco. More specifically, the property of Aco and Bco was not disposed of in order to fund such distributions.
54. It is expected that any AE Trust distributions made during the implementation of the Proposed Transactions will be funded in a similar manner, without recourse to the property of Aco and Bco.
55. For greater certainty, and to the best of the knowledge of the Trustee, there is no expected date for Grandchild 1 to return to Canada to become a resident again, and the Trustee does not have an intention to reinstate Grandchild 1 as a beneficiary of AE Trust.
PURPOSES OF THE PROPOSED TRANSACTIONS
56. The principal purpose of the Proposed Transactions is to gradually return to AE Trust and its beneficiaries an amount equal to the FMV of the Aco Common Shares and Bco Common Shares determined immediately before the Deceased’s death, thereby minimizing the inherent double tax that can result from the application of paragraph 104(4)(a) to AE Trust, and the eventual application of subsection 84(2) or 84(3).
57. The purpose of the designation by Amalco as described in Paragraph 41, is to avoid potential double tax resulting from the cancellation of the Aco Common Shares and Bco Common Shares on the amalgamation of Newco, Aco and Bco, by obtaining an increase in the ACB of the capital property of each of Aco and Bco, in accordance with subsection 87(11) and paragraphs 88(1)(c) and (d).
58. The purpose of the execution of an irrevocable deed to remove Grandchild 1 as a beneficiary of AE Trust prior to implementation of the Proposed Transactions is to preclude the potential application of the provisions of section 212.1 that may otherwise result, to the extent that Grandchild 1 would be a non-resident beneficiary of AE Trust at any relevant time.
RULINGS
Provided that the preceding statements are accurate and constitute a complete disclosure of all the relevant facts, proposed transactions, additional information and purposes of the Proposed Transactions, and that the Proposed Transactions will be completed in the manner described above and there are no other transactions which may be relevant, we confirm the following:
A. Section 84.1 will not apply to deem Newco to have paid, and AE Trust to have received, a dividend on the disposition of the Aco Common Shares by AE Trust to Newco as described in Paragraph 28, provided that the principal amount and FMV of Newco Note A issued as partial consideration, is equal to or less than the ACB of the Aco Common Shares to AE Trust immediately before the disposition, as modified by subsection 84.1(2) for purposes of paragraph 84.1(1)(b).
B. Section 84.1 will not apply to deem Newco to have paid, and AE Trust to have received, a dividend on the disposition of the Bco Common Shares by AE Trust to Newco as described in Paragraph 30, provided that the principal amount and FMV of Newco Note B issued as partial consideration, is equal to or less than the ACB of the Bco Common Shares to AE Trust immediately before the disposition, as modified by subsection 84.1(2) for purposes of paragraph 84.1(1)(b).
C. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Aco to have paid, and AE Trust to have received, a dividend on the Aco Common Shares held by AE Trust.
D. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Bco to have paid, and AE Trust to have received, a dividend on the Bco Common Shares held by AE Trust.
E. Paragraphs 88(1)(d.2) and (d.3) will apply, for purposes of paragraphs 88(1)(c) and (d), to deem Newco to have last acquired control of Aco immediately after the death of the Deceased from a person who dealt at arm’s length with Newco, to the extent that the terms of the AE Trust Deed require without condition that AE Trust transfer the Aco Common Shares to Newco on the death of the Deceased and as a consequence thereof.
F. Paragraphs 88(1)(d.2) and (d.3) will apply, for purposes of paragraphs 88(1)(c) and (d), to deem Newco to have last acquired control of Bco immediately after the death of the Deceased from a person who dealt at arm’s length with Newco, to the extent that the terms of the AE Trust Deed require without condition that AE Trust transfer the Bco Common Shares to Newco on the death of the Deceased and as a consequence thereof.
G. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences of the rulings given in this letter.
The Rulings are given subject to the limitations and qualifications set out Information Circular, IC70-6R10 dated September 29, 2020, and are binding on the CRA provided that the Proposed Transactions are completed within XXXXXXXXXX of the date of this letter, except where specified otherwise.
The 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, or any court decisions rendered after the date of this letter.
Unless otherwise expressly confirmed in the above Rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination of or accepted any method for the determination of:
(a) the FMV or ACB of any property or the PUC of any share;
(b) the outstanding balance of various tax accounts such as NERDTOH, ERDTOH, GRIP, non-capital losses or CDA, if any, for any of the corporate entities;
(c) whether AE Trust is, at any particular time, an alter ego trust;
(d) whether the AE Trust Deed is legally effective such that the irrevocable deed described in Paragraph 23, and the Proposed Transactions, may be implemented by the Trustee in accordance with same;
(e) whether Grandchild 1 is a resident of Canada for purposes of the Act;
(f) any tax consequences relating to the transaction described in Paragraph 23;
(g) the FMV of the capital interest in AE Trust of any beneficiary; or
(h) any provincial tax consequences of the Proposed Transactions or any other income tax consequence relating to the facts, additional information or Proposed Transactions, or any transaction or event taking place either prior or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the Rulings given above.
Notwithstanding Ruling E and Ruling F above, the deeming rule in subparagraph 120.4(1.1)(b)(ii) will not apply for the purposes of the application of “excluded business” exception under subsection 120.4(1) as a consequence of the transfer by AE Trust of the Aco Common Shares and Bco Common Shares to Newco pursuant to the terms of the AE Trust Deed.
Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the Rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the Rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
Reorganizations Section II
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
UNCLASSIFIED
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