2021 Ruling 2020-0875341R3 - post-mortem pipeline

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. Does paragraph 84.1(1)(b) deem a dividend in the Proposed Transactions? 2. Does subsection 84(2) apply to the Proposed Transactions? 3. Does the GAAR apply to the Proposed Transactions?

Position: Unable to rule, no proposed transaction, request withdrawn. No. No.

Reasons: The Proposed Transactions are in accordance with the Act, relevant jurisprudence, and consistent with our previous positions.

XXXXXXXXXX	 						2020-087534

XXXXXXXXXX, 2021

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request-Post-mortem Pipeline
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an Advance Income Tax Ruling on behalf of the above-named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the Ruling request:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a Ruling previously issued by the Directorate.

DEFINITIONS

Unless otherwise stated:

(a) all references herein to a part, section, subsection, paragraph or subparagraph are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);

(b) 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 definition;

(c) all references to monetary amounts are in Canadian dollars; and

(d) 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 will be referred to, as follows:

“ACB” means “adjusted cost base” as that term is defined in section 54;

“Amalco” means a corporation to be formed by way of an amalgamation of Opco and Newco as described in Paragraph 32;

“arm’s length” has the meaning assigned by subsection 251(1);

“BCA” means XXXXXXXXXX as amended to the date of this letter;

“capital dividend” has the meaning assigned by subsection 83(2);

“capital gain” has the meaning assigned by section 54;

“capital property” has the meaning assigned by section 54;

“CCPC” means “Canadian-controlled private corporation” as that term is defined in subsection 125(7);

“CDA” means “capital dividend account” as that term is defined in subsection 89(1);

“Child1” means XXXXXXXXXX, a child of the Deceased;

“Child2” means XXXXXXXXXX, a child of the Deceased;

“Completed Transactions” means the transactions described in Paragraphs 16 to 30 of this letter;

“CRA” means the Canada Revenue Agency;

“Deceased” means the late XXXXXXXXXX;

“Deceased Opco Shares” has the meaning set forth in Paragraph 5;

“disposition” has the meaning assigned by subsection 248(1);

“ERDTOH” means “eligible refundable dividend tax on hand” as that term is defined in subsection 129(4);

“eligible dividend” has the meaning assigned by subsection 89(1);

“Estate” means the estate of Deceased which is governed by the Deceased’s Will;

“FMV” means “fair market value,” which refers to 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 and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

“GRE” means “graduated rate estate” and has the meaning assigned by subsection 248(1);

“GRIP” means “general rate income pool” as that term is defined by subsection 89(1);

“Holdco” means XXXXXXXXXX The shareholders of Holdco are the Estate, with XXXXXXXXXX common and XXXXXXXXXX Class B preferred shares, Child1 with XXXXXXXXXX common shares, and Child2 with XXXXXXXXXX common shares;

“Marriage Agreement Debt” means a non-interest bearing obligation in the amount of $XXXXXXXXXX owing by the Estate to XXXXXXXXXX, being the spouse of the Deceased, pursuant to the terms of the cohabitation agreement between the Deceased and XXXXXXXXXX dated XXXXXXXXXX, as amended by an amending agreement dated XXXXXXXXXX;

“NERDTOH” means “non-eligible refundable dividend tax on hand” as that term is defined in subsection 129(4);

“Newco” means XXXXXXXXXX, a corporation incorporated under the BCA;

“Opco” means XXXXXXXXXX, a corporation amalgamated under the BCA;

“Opco Class A Preference Shares” means the Class A Preference Shares in the capital of Opco;

“Opco Class A Special Shares” means the Class A Special Shares in the capital of Opco;

“Opco Class B Preference Shares” means the Class B Preference Shares in the capital of Opco;

“Opco Class B Special Shares” means the Class B Special Shares in the capital of Opco;

“Opco Class C Preference Shares” means the Class C Preference Shares in the capital of Opco;

“Opco Class D Preference Shares” means the Class D Preference Shares in the capital of Opco;

“Opco Class E Preference Shares” means the Class E Preference Shares in the capital of Opco;

“Opco Class F Preference Shares” means the Class F Preference Shares in the capital of Opco;

“Opco Class G Preference Shares” means the Class G Preference Shares in the capital of Opco;

“Opco Common Shares” means the Class A Common Shares in the capital of Opco;

“Opco Debt” means a non-interest bearing obligation payable on demand owing from Opco to the Deceased, with the amount owing of approximately $XXXXXXXXXX as at the date of the Deceased’s death;

“Paragraph” means a numbered or lettered paragraph of this letter;

“private corporation” has the meaning assigned by subsection 89(1);

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in Paragraphs 31 to 35 of this letter;

“PUC” means “paid-up capital” as that term is defined in subsection 89(1);

“Remaining Opco Shares” has the meaning set forth in Paragraph 26;

“resident of Canada” means resident of Canada for purposes of the Act;

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

“taxation year” has the meaning assigned by subsection 249(1); and

“Will” means the last will and testament with respect to public assets and the last will and testament with respect to private assets, both executed by the Deceased on XXXXXXXXXX, along with a first codicil and a second codicil both executed by the Deceased on XXXXXXXXXX.

FACTS

Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

1. Opco is a CCPC and a taxable Canadian corporation with a taxation year end of XXXXXXXXXX. Opco carries on XXXXXXXXXX.

2. Opco is authorized to issue an unlimited number of shares of various classes.

3. The Deceased passed away on XXXXXXXXXX. The Deceased was a resident of the Province of XXXXXXXXXX, Canada.

4. Immediately prior to the time of the Deceased’s death, there were XXXXXXXXXX Opco Common Shares, XXXXXXXXXX Opco Class A Preference Shares, XXXXXXXXXX Opco Class B Preference Shares, XXXXXXXXXX Opco Class C Preference Shares, XXXXXXXXXX Opco Class D Preference Shares, XXXXXXXXXX Opco Class E Preference Shares, XXXXXXXXXX Opco Class F Preference Shares, XXXXXXXXXX Opco Class G Preference Shares, XXXXXXXXXX Opco Class A Special Shares and XXXXXXXXXX Opco Class B Special Shares, issued and outstanding, which were owned, and which had a FMV, ACB and PUC, as set forth below:

Shareholder		Number & Class		FMV		ACB		PUC
			of Shares of Opco

Deceased		XXXXX Opco Common	      XXXXX		XXXXX		XXXXX
			Shares

Deceased		XXXXX Opco Class A	XXXXX		XXXXX		XXXXX
			Preference Shares

Deceased		XXXXX Opco Class B	XXXXX		XXXXX		XXXXX
			Preference Shares

Deceased		XXXXX Opco Class C	XXXXX		XXXXX		XXXXX
			Preference Shares

Deceased		XXXXX Opco Class D	XXXXX		XXXXX		XXXXX
			Preference Shares

Deceased		XXXXX Opco Class F	XXXXX		XXXXX		XXXXX
			Preference Shares

Deceased		XXXXX Opco Class G	XXXXX		XXXXX		XXXXX
			Preference Shares

Deceased		XXXXX Opco Class A	XXXXX		XXXXX		XXXXX
			Special Shares

Deceased		XXXXX Opco Class B	XXXXX		XXXXX		XXXXX
			Special Shares

Child 1 		XXXXX Opco Class B	XXXXX		XXXXX		XXXXX
			Preference Shares

Child 1			XXXXX Opco Class G	XXXXX		XXXXX		XXXXX
			Preference Shares

Child 1			XXXXX Opco Class B	XXXXX		XXXXX		XXXXX
			Special Shares

Child 2			XXXXX Opco Class B	XXXXX		XXXXX		XXXXX
			Preference Shares

Child 2			XXXXX Opco Class G	XXXXX		XXXXX		XXXXX
			Preference Shares

Child 2			XXXXX Opco Class B	XXXXX		XXXXX		XXXXX
			Special Shares

Holdco			XXXXX Opco Class E	XXXXX		XXXXX		XXXXX
			Preference Shares

On XXXXXXXXXX, Child2 transferred all of XXXXXXXXXX shares of Opco to a corporation controlled by Child2, in which the Estate has no interest. On XXXXXXXXXX, all of the shares of Opco owned by that corporation were redeemed.

5. The Opco Common Shares, Opco Class A Preference Shares, Opco Class B Preference Shares, Opco Class C Preference Shares, Opco Class D Preference Shares, Opco Class F Preference Shares, Opco Class G Preference Shares, Opco Class A Special Shares and Opco Class B Special Shares owned by the Deceased (collectively, the “Deceased Opco Shares”) were held by the Deceased as capital property. The Opco Common Shares gave the Deceased voting control of Opco.

6. As a consequence, under subsection 70(5) of the Act, immediately before his death the Deceased was deemed to have disposed of the shares of Opco owned by him, and the Estate was deemed to have acquired such shares, at the FMV of such shares as set forth below:

	Number & Class of Shares of Opco		FMV Immediately
	owned by the Deceased				Before the Deceased
							Death

	XXXXX Opco Common Shares			      XXXXX
	XXXXX Opco Class A Preference Shares		XXXXX
	XXXXX Opco Class B Preference Shares		XXXXX
      XXXXX Opco Class C Preference Shares		XXXXX
      XXXXX Opco Class D Preference Shares		XXXXX
      XXXXX Opco Class F Preference Shares		XXXXX
      XXXXX Opco Class G Preference Shares		XXXXX
      XXXXX Opco Class A Special Shares		      XXXXX
      XXXXX Opco Class B Special Shares		      XXXXX

7. The capital gains and capital losses to be reported in the Deceased’s terminal income tax return for XXXXXXXXXX in respect of the deemed disposition of the Opco shares are as follows:

(a) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Common Shares;

(b) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class A Preference Shares;

(c) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class B Preference Shares;

(d) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class C Preference Shares;

(e) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class D Preference Shares;

(f) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class F Preference Shares;

(g) $XXXXXXXXXX capital loss for the XXXXXXXXXX Opco Class G Preference Shares;

(h) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class A Special Shares; and

(i) $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class B Special Shares.

The tax liability in respect of the above deemed capital gains will be $XXXXXXXXXX. The total tax liability is expected to be approximately $XXXXXXXXXX. The total net taxes owing by the deceased after the carry-back of the capital losses arising from the transactions described in Paragraphs 18, 21, 22, and 23 below is expected to be approximately $XXXXXXXXXX.

8. Under the Will, the executors of the Estate are XXXXXXXXXX and XXXXXXXXXX, who are residents of Canada. The Estate is a resident of Canada. The Estate will be designated as a GRE when the executors file the T3 Trust Income Tax and Information Return for the Estate’s first taxation year.

9. The Deceased’s Opco Shares constitute part of the residue of the Estate.

10. Child1, who is a resident of Canada, is the sole residual beneficiary of the Estate.

11. Subsequent to the passing of the Deceased, Child1 is the sole director of Opco.

12. As at the date of the Deceased’s death, Opco’s significant assets consisted of cash, representing less than XXXXXXXXXX% of the total FMV of Opco’s assets, investments, and other assets.

13. As at the date of the Deceased’s death, Opco’s liabilities included the Opco Debt.

14. Opco had the following tax attributes as at XXXXXXXXXX:

ERDTOH of $XXXXXXXXXX
NERDTOH of $XXXXXXXXXX
GRIP of $XXXXXXXXXX

and Opco’s CDA immediately before the Completed Transactions was $XXXXXXXXXX.

15. Under the terms of the Will, the beneficiaries of the Estate, other than Child1, are entitled to receive, in the aggregate, a fixed amount equal to $XXXXXXXXXX, summarized as follows:

	Distribution			Amount

	XXXXXXXXXX			XXXXXXXXXX

COMPLETED TRANSACTIONS

16. On XXXXXXXXXX, $XXXXXXXXXX of the Opco Debt was repaid to the Estate.

17. On XXXXXXXXXX, the director of Opco passed a resolution to increase the stated capital of the Opco Class C Preference Shares by $XXXXXXXXXX. Opco elected in prescribed manner, in respect of the full amount of the deemed dividend arising under subsection 84(1) of $XXXXXXXXXX, for it to be deemed to be a capital dividend as provided in subsection 83(2). For greater certainty, the amount of the increase in stated capital of the Opco Class C Preference Shares did not exceed the CDA of Opco at the time immediately before such increase. As a result, the aggregate PUC of the XXXXXXXXXX Opco Class C Preference Shares increased from $XXXXXXXXXX to $XXXXXXXXXX, and the aggregate ACB of such shares increased from $XXXXXXXXXX to $XXXXXXXXXX.

18. On XXXXXXXXXX, Opco redeemed all of the XXXXXXXXXX Opco Class C Preference Shares for their redemption amount and FMV of $XXXXXXXXXX. Opco designated the deemed dividend of $XXXXXXXXXX arising under subsection 84(3) to be an eligible dividend pursuant to subsection 89(14). The Estate will report an eligible taxable dividend equal to $XXXXXXXXXX, and a capital loss equal to $XXXXXXXXXX, less any adjustments under subsection 112(3.2) (XXXXXXXXXX), on its T3 Trust Income Tax Information Return for its first taxation year ending XXXXXXXXXX. The executors of the Estate will elect in prescribed manner, and within the prescribed time under subsection 164(6), to carry back the Estate’s capital loss to reduce the capital gain arising from the deemed disposition of the Opco shares realized in the Deceased’s terminal year, as described in Paragraph 7. Subsection 40(3.6) will not apply to the Estate to reduce the capital loss by reason of the application of subsection 40(3.61).

19. XXXXXXXXXX, the Estate converted XXXXXXXXXX of its Opco Class D Preference Shares into XXXXXXXXXX Opco Class A Preference Shares. The XXXXXXXXXX Opco Class A Preference Shares have an aggregate redemption value, FMV and ACB of $XXXXXXXXXX, and an aggregate PUC of $XXXXXXXXXX.

20. On XXXXXXXXXX, the director of Opco passed a resolution to increase the stated capital of the Opco Class A Preference Shares by $XXXXXXXXXX. Opco elected in respect of the full amount of the deemed dividend arising under subsection 84(1) of $XXXXXXXXXX, as a capital dividend pursuant to the prescribed manner and prescribed form provided in subsection 83(2). For greater certainty, the amount of the increase in stated capital of the Opco Class A Preference Shares did not exceed the CDA of Opco at the time immediately before such increase. As a result, the aggregate PUC of the Opco Class A Preference Shares increased from $XXXXXXXXXX to $XXXXXXXXXX, and the aggregate ACB of such shares increased from $XXXXXXXXXX to $XXXXXXXXXX.

21. On XXXXXXXXXX, Opco redeemed all of the XXXXXXXXXX Opco Class A Preference Shares for their redemption amount and FMV of $XXXXXXXXXX. Opco designated the deemed dividend of $XXXXXXXXXX arising under subsection 84(3) to be an eligible dividend pursuant to subsection 89(14). The Estate will report an eligible taxable dividend equal to $XXXXXXXXXX, and a capital loss equal to $XXXXXXXXXX, less any adjustments under subsection 112(3.2) (XXXXXXXXXX), on its T3 Trust Income Tax Information Return for its first taxation year. The executors of the Estate will elect in prescribed manner, and within the prescribed time under subsection 164(6), to carry back the Estate’s capital loss to reduce the capital gain arising from the deemed disposition of the Opco shares realized in the Deceased’s terminal year, as described in Paragraph 7. Subsection 40(3.6) will not apply to the Estate to reduce the capital loss by reason of the application of subsection 40(3.61).

22. On XXXXXXXXXX, Opco redeemed XXXXXXXXXX of its Opco Class G Preference Shares for their redemption amount and FMV of $XXXXXXXXXX. The Estate will report an ineligible taxable dividend equal to $XXXXXXXXXX, and a capital loss equal to $XXXXXXXXXX on its T3 Trust Income Tax Information Return for its first taxation year. The executors of the Estate will elect in prescribed manner, and within the prescribed time under subsection 164(6), to carry back the Estate’s capital loss to reduce the capital gain arising from the deemed disposition of the Opco shares realized in the Deceased’s terminal year, as described in Paragraph 7. Subsection 40(3.6) will not apply to the Estate to reduce the capital loss by reason of the application of subsection 40(3.61).

23. On XXXXXXXXXX, Opco redeemed its remaining XXXXXXXXXX Opco Class G Preference Shares for their redemption amount and FMV of $XXXXXXXXXX. Opco designated the deemed dividend of $XXXXXXXXXX arising under subsection 84(3) to be an eligible dividend pursuant to subsection 89(14). The Estate will report an eligible taxable dividend equal to $XXXXXXXXXX, and a capital loss equal to $XXXXXXXXXX on its T3 Trust Income Tax Information Return for its first taxation year. The executors of the Estate will elect in prescribed manner, and within the prescribed time under subsection 164(6), to carry back the Estate’s capital loss to reduce the capital gain arising from the deemed disposition of the Opco shares realized in the Deceased’s terminal year, as described in Paragraph 7. Subsection 40(3.6) will not apply to the Estate to reduce the capital loss by reason of the application of subsection 40(3.61).

24. On XXXXXXXXXX, Newco was incorporated by the Estate under the BCA. Newco is a CCPC and a taxable Canadian corporation. Newco’s authorized share capital includes an unlimited number of Voting Common Shares and an unlimited number of Non-voting Common Shares.

25. On XXXXXXXXXX, the Estate subscribed for XXXXXXXXXX Voting Common Share of Newco for $XXXXXXXXXX.

26. On XXXXXXXXXX, the Estate sold to Newco all of its Opco shares being: XXXXXXXXXX Opco Common Shares, XXXXXXXXXX Opco Class B Preference Shares, XXXXXXXXXX Opco Class D Preference Shares, XXXXXXXXXXOpco Class F Preference Shares, XXXXXXXXXX Opco Class A Special Shares and XXXXXXXXXX Opco Class B Special Shares (collectively, the “Remaining Opco Shares”) in exchange for XXXXXXXXXX Non-voting Common Shares of Newco. $XXXXXXXXXX was added to the stated capital and PUC of the XXXXXXXXXX Non-voting Newco Common Shares issued. The PUC had been reduced by section 84.1 as a result of previous claims of the lifetime capital gains exemption totalling $XXXXXXXXXX in respect of some of the Remaining Opco Shares. Section 85 election forms will be filed by Newco and the Estate to elect to transfer each class of the Remaining Opco Shares at the ACB of such class of shares.

27. Opco will continue to carry on its XXXXXXXXXX business for at least one year following the sale of the Remaining Opco Shares to Newco as described in Paragraph 26.

28. The Estate has obtained financing from XXXXXXXXXX in the amount of $XXXXXXXXXX, which is by way of a credit line that is payable on demand and bears interest at the XXXXXXXXXX prime rate in effect from time to time. The loan to the Estate has been guaranteed by Opco.

29. In addition to the $XXXXXXXXXX in financing described in Paragraph 28, the Estate has $XXXXXXXXXX, which were the personal funds of the Deceased, plus funds in the amount of $XXXXXXXXXX from the transactions described in Paragraphs 16 to 23.

30. The Estate will use the funds described in Paragraph 28 and 29 to pay the income tax liability on the deemed capital gains referred to in Paragraph 7 to be reported in the Deceased’s terminal tax return, the Estate’s expenses, the Estate’s income tax liability on the dividends referred to in Paragraphs 18, 21, 22 and 23, the Marriage Agreement Debt and the distributions to the beneficiaries of the Estate summarized in Paragraph 15.

PROPOSED TRANSACTIONS

The Proposed Transactions are as follows and will occur in the following sequence.

31. Newco will borrow $XXXXXXXXXX from Opco being an amount equal to the external financing referenced in Paragraph 28. The amount borrowed by Newco from Opco will be payable on demand and bear interest at the CRA’s prescribed rate from time to time under paragraph 4301(c) of the Regulations. Opco will obtain the funds required for the loan to the Estate by using some of its cash and liquidating some of its investments. Newco, on receipt of the borrowed funds, will pay the funds in full to the Estate as a reduction of the PUC of the XXXXXXXXXX Non-voting Common Shares owned by the Estate. The Estate in turn will use the funds to repay or replace the external financing.

32. Opco will amalgamate with Newco to form Amalco after a period of at least XXXXXXXXXX has elapsed from the time of the sale described in Paragraph 26. In accordance with subsection 87(1), all of the property and all of the liabilities of Opco and Newco immediately before the amalgamation, will become property and liabilities of Amalco.

33. On the amalgamation, the Estate, Child1 and Holdco will receive shares of Amalco with the same PUC and the same share rights as the shares they owned in Newco or Opco (as the case may be). The shares of Opco held by Newco will be cancelled without any payment.

34. Amalco will continue to carry on the business of Opco.

35. Subsequent to the amalgamation, Amalco will begin to gradually pay out the remaining PUC of the shares of Amalco. A maximum of $XXXXXXXXXX per year over at least XXXXXXXXXX will be paid out of Amalco.

PURPOSE OF THE COMPLETED TRANSACTIONS

36. The overall purpose of the Completed Transactions was: i) to reduce the capital gain reported on the Deceased’s terminal tax return, and ii) to put Opco in a position to return to the Estate an amount up to the FMV, immediately before the Deceased’s death, of the Remaining Opco Shares while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2) and 84(3).

37. The purpose of the Completed Transactions described in Paragraphs 17 to 23 was to trigger deemed dividends in order to integrate the tax on the economic value of the underlying assets owned by Opco and the Opco Common Shares, Opco Class A Preference Shares, Opco Class B Preference Shares, Opco Class C Preference Shares, Opco Class D Preference Shares, Opco Class F Preference Shares, Opco Class G Preference Shares, Opco Class A Special Shares and Opco Class B Special Shares owned by the Deceased at the time of his death through mechanisms of CDA, ERDTOH, and NERDTOH and to trigger a capital loss on the Opco Class A Preference Shares, Opco Class C Preference Shares and Opco Class G Preference Shares which will reduce the tax payable by the Estate on the death of the Deceased, pursuant to subsection 164(6).

37.1 The purpose of the conversion of shares in Paragraph 19 was to isolate shares with value equal to twice the amount of remaining CDA in Opco. Increasing the stated capital of the converted shares with a deemed dividend out of the CDA as described in Paragraph 20 and then redeeming the shares as described in Paragraph 21, created a loss to which subsection 164(6) applied. This avoided the stop-loss rule in subsection 112(3.2). That stop-loss rule would otherwise reduce by 50% the amount of the loss that can be utilized under subsection 164(6) to offset capital gains realized at death where a capital dividend has been paid or deemed paid to the estate on the shares redeemed.

38. The purpose of the Completed Transactions described in Paragraphs 24 to 30 was to create a “pipeline” in order to allow for the distribution of funds from Opco to the Estate, without triggering additional taxes on the value of the Estate’s interest in Opco for which the taxes were already paid or payable as a result of death of the Deceased.

PURPOSE OF THE PROPOSED TRANSACTIONS

39. The purpose of the Proposed Transactions described in Paragraphs 31 to 35 is to repay or replace the Estate’s external financing as soon as possible and following the XXXXXXXXXX period referenced in Paragraph 32, to implement the pipeline so that the Estate and/or Child1 has access to the PUC of the shares of Amalco.

ADDITIONAL INFORMATION

40. XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, transactions, additional information and the purposes of the Proposed Transactions, and the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Newco, Opco, or Amalco, as the case may be, to have paid, and the Estate to have received, a dividend on the Newco, Opco, or Amalco Shares held by the Estate.

B. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences stated in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R10 dated September 29, 2020. They are binding on the CRA, provided that the Proposed Transactions are completed within the time frame described in this letter.

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

Unless otherwise expressively confirmed, nothing in this ruling should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

(a) the FMV, ACB of any property referred to herein or the PUC in respect of any share referred to herein;

(b) the balance of the CDA, GRIP, ERDTOH, NERDTOH, or any other tax account of any corporation referred to herein;

(c) the Executor’s ability to complete the Proposed Transactions under the terms of the Will;

(d) whether any person described herein deals, or does not deal, with any other person at arm’s length; or

(e) any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and 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, dated November 26, 2015.

Yours truly,

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

UNCLASSIFIED