2023 Ruling 2022-0948091R3 - 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: Post-mortem pipeline ruling.

Position: Favourable rulings issued.

Reasons: In accordance with the Act and our published positions.

XXXXXXXXXX                                            2022-094809

XXXXXXXXXX, 2023

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (collectively referred to as the “Taxpayers”)

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the Taxpayers.

This letter is based solely on the facts, proposed transactions, additional information and purposes of the proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts, proposed transactions or additional information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of each of the Taxpayers involved, none of the proposed transactions and/or issues involved in this ruling are the same as, or substantially similar to, transactions and/or issues that are:

a. in a previously filed tax return of the Taxpayers or person related to the Taxpayers;

b. being considered by the CRA in connection with a previously filed tax return of the Taxpayers or a person related to the Taxpayers;

c. under objection by the Taxpayers or a person related to the Taxpayers;

d. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

e. the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate of the CRA in connection with the Taxpayers or a person related to the Taxpayers.

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX.

The above-referenced Taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their outstanding tax liabilities. Unless otherwise stated:

i. All references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) (the “Act”), as amended to the date of this letter;

ii. All terms and conditions used in this letter that are defined in the Act have the meaning given in such definition;

iii. All references to monetary amounts are in Canadian dollars; and

iv. The singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

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:

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

“Act 1” means the XXXXXXXXXX, as amended;

“Act 2” means the Canada Business Corporations Act;

“agreed amount” means the amount agreed on by the transferor and transferee in respect of a transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

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

“Beneficiaries” means collectively, Beneficiary 1, Beneficiary 2 and Beneficiary 3;

“Beneficiary 1” means XXXXXXXXXX, the daughter of the late XXXXXXXXXX;

“Beneficiary 2” means XXXXXXXXXX, the daughter of the late XXXXXXXXXX;

“Beneficiary 3” means XXXXXXXXXX, the son of the late XXXXXXXXXX;

“BN” means “business number” as that term is defined in subsection 248(1);

“Business” has the meaning ascribed thereto in Paragraph 1;

“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);

“CRA” means the Canada Revenue Agency;

“Deceased” means the late XXXXXXXXXX;

“eligible property” has the meaning assigned by subsection 85(1.1);

“ERDTOH” means “eligible refundable dividend tax on hand” which has the meaning assigned by subsection 129(4);

“Estate” means the estate of the late XXXXXXXXXX which is governed by the Deceased’s last will and testament. The Estate is and will be resident in Canada at all relevant times and its first taxation year-end will be XXXXXXXXXX;

“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);

“Liquidators of the Estate” means Beneficiary 1, XXXXXXXXXX, the Deceased’s accountant and XXXXXXXXXX, the Deceased’s long time friend;

“NERDTOH” means “non-eligible refundable dividend tax on hand” which has the meaning assigned by subsection 129(4);

“Newco” means a corporation to be incorporated under Act 2;

“Note” means the demand non-interest bearing promissory note described in Paragraph 14;

“Opco” means XXXXXXXXXX, a corporation incorporated under Act 2 described in Paragraph 1;

“Paragraph” refers to a numbered paragraph of this letter;

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

“Proposed Transactions” means the transactions described in Paragraphs 14 to 17 of this letter;

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

“RDTOH” means “refundable dividend tax on hand” as that term is defined in former subsection 129(3);

“resident in Canada” means resident in 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);

“V-Day basis” has the meaning determined under paragraph 84.1(2)(a.1) for the purposes of element “B” in paragraph 84.1(1)(a); and

“Will” means the last will and testament of the Deceased.

FACTS

1. Opco is a taxable Canadian corporation and a CCPC with a taxation year end of XXXXXXXXXX. Opco carries on a business, the primary purpose of which is to derive income from investments (the “Business”). Opco was incorporated on XXXXXXXXXX and has carried on its business for a number of years prior to the death of the Deceased.

2. By the end of XXXXXXXXXX, the Deceased had converted a substantial part of its investments into cash and cash equivalents based on an evaluation of the material economic risks at that time. Consistent with the investment strategy, and due to changing market conditions, Opco began to be redeploy cash into publicly traded equities and other income earning assets during the third quarter of XXXXXXXXXX. This redeployment has continued with the result that more than XXXXXXXXXX% of the FMV of Opco’s assets will be attributable to publicly-traded equities and other income earning assets at the time of the share transfers described in Paragraph 14.

3. Opco’s authorized share capital includes the following classes of shares:

a. An unlimited number of Opco Class A common shares

i. entitling the holder to one vote per share;

ii. entitling the holder to receive dividends; and

iii. entitling the holder to participate in the remaining assets of Opco in the event of a wind-up, liquidation or dissolution of Opco.

b. An unlimited number of Opco Class B common shares

i. that do not entitle the holder to vote;

ii. entitling the holder to receive dividends; and

iii. entitling the holder to participate in the remaining assets of Opco in the event of a wind-up, liquidation or dissolution of Opco.

c. An unlimited number of Opco Class C preferred shares

i. entitling the holder to one vote per share;

ii. are redeemable but not retractable, at a price equal to a fixed amount per share, as determined by the board of directors prior to the issuance of such preferred shares; and

iv. entitling the holder to receive a fixed non-cumulative dividend and the holders of the shares rank ahead of the Class A and B common shares as to dividends.

Currently, there are XXXXXXXXXX Opco Class A common shares and 1 Opco Class C preferred share issued and outstanding.

4. The Deceased passed away on XXXXXXXXXX. Immediately prior to the Deceased’s death, the Deceased was resident in Canada.

5. Immediately prior to the time of the Deceased’s death the Deceased owned the XXXXXXXXXX Opco Class A common shares having an aggregate FMV of $XXXXXXXXXX and an aggregate ACB and PUC of $XXXXXXXXXX, and the XXXXXXXXXX Opco Class C preferred share having a FMV, ACB and PUC of $XXXXXXXXXX.

6. As a consequence of the Deceased’s death, the Deceased was deemed to have disposed of the XXXXXXXXXX Opco Class A common shares and the XXXXXXXXXX Opco Class C preferred share immediately before the Deceased’s death, and to have received proceeds of disposition equal to their FMV at that time. The Estate was deemed to have acquired the XXXXXXXXXX Opco Class A common shares and the XXXXXXXXXX Opco Class C preferred share at a cost equal to the proceeds of disposition to the Deceased.

7. The Estate is resident in Canada and all the beneficiaries of the Estate are resident in Canada. The Estate holds the XXXXXXXXXX Opco Class A common shares and the XXXXXXXXXX Opco Class C preferred share as capital property.

8. The Will provides that the Beneficiaries share in equal proportions, the assets of the Estate. The Estate will be designated as a GRE when the Liquidators of the Estate file the T3 Trust Income Tax and Information Return for the Estate’s first taxation year.

9. Subsequent to the passing of the Deceased, Beneficiary 1 became the sole director of Opco.

10. Opco’s significant assets consist primarily of publicly-traded equities and other income producing assets.

11. Opco’s liabilities include accounts payable, accrued liabilities and income taxes payable.

12. As of XXXXXXXXXX, Opco had the following tax account balances:

a. NERDTOH - $XXXXXXXXXX

b. ERDTOH - XXXXXXXXXX

c. GRIP - $XXXXXXXXXX

d. CDA - $XXXXXXXXXX

13. On or before the implementation of the Proposed Transactions, the Estate will incorporate Newco under Act 2 and subscribe for 1 Class C preferred share of Newco for a nominal amount. Newco will be a taxable Canadian corporation and a CCPC. Newco’s authorized share capital will be comprised of an unlimited number of the following classes of shares:

a. Class A common shares that are fully participating and carry one vote per share;

b. Class B common shares that are fully participating and do not carry any votes per share;

c. Class C preferred shares that carry one vote per share, are redeemable but not retractable and have a redemption amount equal to the FMV of the consideration received;

d. Class D preferred shares that do not carry voting rights, are redeemable but not retractable and have a redemption amount equal to the FMV of the consideration received;

e. Class E preferred shares that carry one vote per share, are redeemable and retractable and have a redemption amount equal to the FMV of the consideration received; and

f. Class F and G preferred shares that do not carry voting rights, are redeemable and retractable and have a redemption amount equal to the FMV of the consideration received.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

14. The Estate will transfer its XXXXXXXXXX Opco Class A common shares and XXXXXXXXXX Opco Class C preferred share to Newco in exchange for consideration consisting of:

a. a demand non-interest bearing promissory note (the “Note”) having a principal amount and FMV equal to the amount by which:

i. the lesser of the ACB and FMV of the XXXXXXXXXX Opco Class A common shares immediately before the transfer, plus XXXXXXXXXX dollar in respect of the XXXXXXXXXX Opco Class C preferred share
exceeds

ii. $XXXXXXXXXX, and

b. XXXXXXXXXX Newco Class A common shares.

The amount added to the PUC in respect of the XXXXXXXXXX Newco Class A common shares will not exceed the maximum amount permitted to be added to the PUC of such shares without resulting in an adjustment in computing the PUC of those shares, having regard to paragraph 84.1(1)(a).

The Estate and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Opco Class A common shares and the XXXXXXXXXX Opco Class C preferred share, held by the Estate to Newco. The agreed amount, in respect of each class of shares, will not be more than the amount described in paragraph 85(1)(c), will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1) and will not be less than the amount described in paragraph 85(1)(b).

15. Opco will continue to carry on its business for at least one year following the share transfers described in Paragraph 14. During the one-year period, Opco will not discontinue or reorganize the Business nor purchase for cancellation any Opco Class A common shares. During this period, Newco will not repay any portion of the Note or purchase for cancellation any of the Newco common shares.

16. After a period of at least one year has elapsed from the time of the share transfers described in Paragraph 14, Newco will resolve to wind-up and dissolve Opco in accordance with the provisions of Act 2. In furtherance of the winding-up, a general conveyance of assets of Opco and assumption of liabilities of Opco will be executed between Opco and Newco. Opco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

17. The Note will be gradually repaid over a period of at least one year after the wind-up of Opco into Newco, as described in Paragraph 16. For greater certainty, Newco will pay down no more than 25% of the principal amount of the Note by 3 months following the winding-up, no more than 50% of the principal amount of the Note by 6 months following the winding-up, and no more than 75% of the principal amount of the Note by 9 months following the winding-up.

ADDITIONAL INFORMATION

18. Opco engages professional investment advisors to manage and advise on the deployment of its assets. Prior to his death, the Deceased actively managed Opco’s portfolio. Following the Deceased’s death, the advisors worked with the Liquidators of the Estate. Throughout the years and on a going forward basis, the investment strategy for Opco has consisted of, and will continue to consist of, the preservation of capital and reasonable growth within a moderate risk context.

19. The Deceased did not claim a deduction under section 110.6 in respect of any of the shares of Opco and no person not dealing at arm’s length with the Deceased, and with the Estate previously claimed a deduction under section 110.6 in respect of any of the shares of Opco or any shares which they were substituted for, within the meaning of subsection 248(5).

20. For greater certainty, there is no V-day basis included in the ACB of any class of the shares of Opco or any shares for which they were substituted, within the meaning of subsection 248(5).

21. Opco may pay dividends to Newco from time to time following the transfers described in Paragraph 14, however, prior to the winding-up of Opco, described in Paragraph 16, such dividends will be funded by the earnings of Opco and not from the sale of any of its investments.

22. Subsection 88(1) will apply to the wind-up of Opco into Newco, described in Paragraph 16, such that paragraph 88(1)(b) will apply to deem Newco to dispose of its shares of Opco for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii).

PURPOSES OF THE PROPOSED TRANSACTIONS

23. The purpose of the Proposed Transactions is to create a “pipeline” 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 the death of the Deceased, in a manner which satisfies the administrative requirements established by the CRA.

RULINGS GIVEN

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

A. Section 84.1 will not apply to deem the Estate to have received a dividend from Newco, on the disposition of the XXXXXXXXXX Opco Class A common shares and the XXXXXXXXXX Opco Class C preferred share to Newco, as described in Paragraph 14.

B. Subsection 84(2) will not apply, as a result of the Proposed Transactions, in and by themselves, to deem Opco to have paid, and the Estate or its Beneficiaries to have received, a dividend on the issuance or subsequent repayment of the Note, as described in Paragraphs 14 and 17.

C. 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 stated in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022 and are binding on the CRA provided that the Proposed Transactions are completed in the manner described above and that the share transfers described in Paragraph 14 are completed on or before XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided therein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

a. the PUC of any class of shares or the ACB or FMV of any share or property referred to herein;

b. the balance of the NERDTOH, ERDTOH, CDA, GRIP, or any other tax account for any corporation described herein;

c. the capacity of the Liquidators of the Estate to complete the Proposed Transactions under the terms of the Will; and

d. any other tax consequence relating to the facts, additional information, 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.

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, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer. In addition, 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. 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
Manager, Reorganizations Section II
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch