2024 Ruling 2022-0957421R3 - 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) Whether subsection 84.1(1) applies to the proposed transactions. 2) Whether subsection 84(2) applies to the proposed transactions. 3) Whether subsection 245(2) applies to the proposed transactions.

Position: 1) No. Favourable ruling given. 2) No. Favourable ruling given. 3) No. Favourable ruling given.

Reasons: Based on the provisions of the Act, jurisprudence and CRA publications.

XXXXXXXXXX 2022-095742

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer (the “Taxpayer”). We also acknowledge the information provided in subsequent correspondence.

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

i. in a previously filed tax return of the Taxpayer or a related person and:

A. being considered by the CRA in connection with any such tax return;

B. under objection by the Taxpayer or a related person; or

C. the subject of a current or completed court process involving the Taxpayer or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the Taxpayer or a related person.

The tax account number, address, Tax Services Office and the Tax Centre of the Taxpayer are as follows:

XXXXXXXXXX

This letter is based solely on the facts and proposed transactions described below. The documentation submitted with the request does not form part of the facts and proposed transactions, and any references thereto are provided solely for the convenience of the reader.

Definitions

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 (5th Supp.) c. 1, as amended, (the “Act”);

ii. all terms and conditions used herein 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.

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” and has the meaning assigned by section 54;

“ACo” means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX and governed by the Act1;

“ACo Debt” means the amount of $XXXXXXXXXX owing by ACo to Trust No. 1 at the time of Mrs. A’s death;

“ACo Receivable” means the non-interest bearing demand promissory note issued by Trust No. 1 to ACo, as described in Paragraph 24;

“Act1” means the Business Corporations Act XXXXXXXXXX, as amended;

“adjusted cost basis” in respect of a life insurance policy has the meaning assigned by subsection 148(9);

“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);

“alter ego trust” has the meaning assigned by subsection 248(1);

“Amalco” means the corporation to be formed on the amalgamation of ACo and Newco, as described in Paragraph 34;

“Business” means XXXXXXXXXX as described in further detail in Paragraphs 16 and 36;

“Completed Transactions” means the transactions described in Paragraphs 21 to 27;

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

“CCPC” means “Canadian-controlled private corporation” and has the meaning assigned by subsection 125(7);

“CDA” means “capital dividend account” and has the meaning assigned by subsection 89(1);

“CRA” means the Canada Revenue Agency;

“CSV” means “cash surrender value” and has the meaning assigned by 148(9);

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

“FMV” or “fair market value” 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;

“GRIP” means “general rate income pool” and has the meaning assigned by subsection 89(1);

“Insurance Policies” means the life insurance policies on the life of Mrs. A, owned by ACo, as further described in Paragraph 16;

XXXXXXXXXX;

“Mrs. A” means the late XXXXXXXXXX;

“Mrs. A’s Children” means the adult children of Mrs. A, who are XXXXXXXXXX;

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

“Newco Class A Voting Shares” means the Class A voting shares of the capital stock of Newco of which Newco will be authorized to issue an unlimited number, as described in Paragraph 30 a.;

“Newco Class B Common Shares” means the Class B common shares of the capital stock of Newco of which Newco will be authorized to issue an unlimited number, as described in Paragraph 30 b.;

“Newco Class E Preferred Shares” means the Class E preferred shares of the capital stock of Newco of which Newco will be authorized to issue an unlimited number, as described in Paragraph 30 c.;

“Newco Note” means the non-interest bearing demand promissory note to be issued by Newco to Trust No. 1, as described in Paragraph 32 a.;

“Paragraph” refers to a numbered or lettered paragraph in this letter;

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

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

“Proposed Transactions” means the transactions described in Paragraphs 28 to 35;

“PUC” means “paid-up capital” and has the meaning assigned by subsection 89(1);

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

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

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

“TCC” means “taxable Canadian corporation” and has the meaning assigned by subsection 89(1);

“Trust No. 1” means the XXXXXXXXXX Trust No. 1, as described in Paragraph 3;

“Trust No. 1 Deed” means the trust settlement document dated XXXXXXXXXX between the settlor, Mrs. A, and the trustees, Mrs. A and XXXXXXXXXX;

“Trust No. 1 Shares” means collectively all the Class B Common, the Class F Preference, Class I Preference, Class J Preference, Class K Preference, and Class L Preference shares of the capital stock of ACo owned by Trust No. 1 at the time of Mrs. A’s death, as described in further detail in Paragraph 4;

“Trust No. 2” means the XXXXXXXXXX Trust No. 2, as described in Paragraph 10;

“Trust No. 2 Deed” means the trust settlement document dated XXXXXXXXXX between the settlor, XXXXXXXXXX, and the trustee, Mrs. A;

“Trust No. 2 Shares” means the 10 Class D Common shares of the capital stock of ACo owned by Trust No. 2, as described in further detail in Paragraph 12; and

“V-Day basis” means the amount, if any, described in subparagraph 84.1(2)(a.1)(i) for purposes of element “B” of paragraph 84.1(1)(a) and element “E” of paragraph 84.1(1)(b).

Facts

A complete description of all the relevant facts is as follows:

Mrs. A

1. Mrs. A died on XXXXXXXXXX (referred to as the date of death). Before the date of death, and at all relevant times, Mrs. A was a resident of Canada.

2. Immediately before the date of death, Mrs. A was the primary beneficiary of Trust No. 1.

Trust No. 1

3. Trust No. 1 was settled on XXXXXXXXXX by Mrs. A. Trust No. 1 is an alter ego trust and a personal trust.

4. Immediately before the date of death of Mrs. A, Trust No. 1 held, inter alia, the Trust No. 1 Shares, which had the following attributes:

	Number and Class		PUC($)		ACB($)		Redemption 	FMV($)
	Class								Amount($)
	XXXXX B Common			XXXXX		XXXXX		XXXXX		XXXXX
	XXXXX F Preference		XXXXX		XXXXX		XXXXX		XXXXX
	XXXXX I Preference		XXXXX		XXXXX		XXXXX		XXXXX
	XXXXX J Preference		XXXXX		XXXXX		XXXXX		XXXXX
	XXXXX K Preference		XXXXX		XXXXX		XXXXX		XXXXX
	XXXXX L Preference		XXXXX		XXXXX		XXXXX		XXXXX
					XXXXX		XXXXX		XXXXX		XXXXX

5. Neither Mrs. A nor any non-arm’s length person to Mrs. A previously claimed any capital gains deduction under section 110.6 in respect of Trust No. 1 Shares or any shares for which they were substituted, within the meaning of subsection 248(5) except in respect of the Class I Preference shares of the capital stock of ACo.

6. Trust No. 1 has at all relevant time held the Trust No. 1 Shares as capital property.

7. As a consequence of the death of Mrs. A and pursuant to paragraph 104(4)(a), Trust No. 1 was deemed to have disposed of, among other capital property, the Trust No. 1 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. In addition, Trust No. 1 was deemed to have acquired the Trust No. 1 Shares for an amount equal to their previously stated FMV immediately after that day. The following table details the proceeds of disposition and capital gain reported in Trust No. 1’s Trust Income Tax and Information Return for its taxation year ending XXXXXXXXXX:

	Number and Class	Proceeds of 		ACB($)		Capital Gain/
				Disposition($)				(Loss)($)
	XXXXX B Common		XXXXX			XXXXX		XXXXX
	XXXXX F Preference	XXXXX			XXXXX		XXXXX
	XXXXX I Preference	XXXXX			XXXXX		XXXXX
	XXXXX J Preference	XXXXX			XXXXX		XXXXX
	XXXXX K Preference	XXXXX			XXXXX		XXXXX
	XXXXX L Preference	XXXXX			XXXXX		XXXXX
				XXXXX			XXXXX		XXXXX

8. The terms of the Trust No. 1 Deed require that, upon the death of Mrs. A:

a. the sum of $XXXXXXXXXX (or such greater or lesser sum as Mrs. A may have provided by deed executed during her lifetime) be set aside for such charitable purposes as the trustees shall in their absolute discretion think fit; and

b. subject to Paragraph a. above, the trust fund be divided into equal shares for Mrs. A’s Children, and which equal portion shall be transferred in trust to each of Mrs. A’s Children as trustee of their own trusts.

9. Trust No. 1 is and will be a resident of Canada at all relevant times.

Trust No. 2

10. Trust No. 2 was settled on XXXXXXXXXX, by XXXXXXXXXX. Trust No. 2 is a discretionary inter vivos personal trust.

11. The terms of the Trust No. 2 Deed require that, upon the death of Mrs. A, its remaining properties be divided into equal shares for Mrs. A’s Children, and which equal portion shall be transferred in trust to each of Mrs. A’s Children as trustee of their own trusts.

12. Trust No. 2 owns the Trust No. 2 Shares, having a nominal PUC and ACB, for Trust No. 2.

ACo

13. ACo is and will be, at all relevant times, a TCC and a CCPC. ACo has a XXXXXXXXXX taxation year end.

14. The Trust No. 1 Shares and Trust No. 2 Shares represent all of the issued and outstanding shares of the capital stock of ACo.

15. The Class B Common Shares of the capital stock of ACo are the only class of voting shares of the capital stock of ACo.

16. ACo operates the Business. At the time of Mrs. A’s death, ACo’s assets primarily consisted of XXXXXXXXXX with a FMV of $XXXXXXXXXX and the following life insurance policies payable on the death of Mrs. A with an aggregate CSV/FMV of $XXXXXXXXXX and XXXXXXXXXX adjusted cost basis (the “Insurance Policies”) :

       	Insurance Policies	Insurance Policies Proceeds($)
	XXXXX			XXXXX

17. At the time of Mrs. A’s death, ACo’s liabilities primarily consisted of the ACo Debt.

18. Immediately before the date of death of Mrs. A, ACo had the following tax account balances:

a. NERDTOH: $XXXXXXXXXX;

b. ERDTOH: $XXXXXXXXXX;

c. GRIP: $XXXXXXXXXX; and

d. CDA: $XXXXXXXXXX

19. As a consequence of Mrs. A’s death, ACo received the Insurance Policies proceeds of XXXXXXXXXX.

Other

20. Mrs. A’s Children are and will be residents of Canada at all relevant times.

Completed Transactions

21. ACo invested all or substantially all of the proceeds from the Insurance Policies described in Paragraph 19 in XXXXXXXXXX.

22. In XXXXXXXXXX, ACo paid an amount of XXXXXXXXXX to Trust No. 1 as partial repayment of the ACo Debt. The outstanding balance of the ACo Debt at that time was of $XXXXXXXXXX.

23. In XXXXXXXXXX, ACo repaid the remaining balance of $XXXXXXXXXX outstanding in respect of the ACo Debt to Trust No. 1.

24. Trust No. 1 borrowed an amount of $XXXXXXXXXX from ACo (the “ACo Receivable”) to satisfy the tax liability that arose as a result of the application of paragraph 104(4)(a) for its taxation year ending XXXXXXXXXX.

25. In XXXXXXXXXX, Trust No. 1 repaid the ACo Receivable.

26. ACo invested the proceeds from the repayment of the ACo Receivable in XXXXXXXXXX.

27. Since Mrs. A’s death, ACo has paid the following dividends:

a. On XXXXXXXXXX, ACo declared and paid a dividend of $XXXXXXXXXX on the Class D Common shares of its capital stock held by Trust No. 2. ACo made an election pursuant to subsection 83(2) in respect of the full amount of the dividend.

b. On XXXXXXXXXX, ACo declared and subsequently paid a taxable dividend of $XXXXXXXXXX on the Class D Common shares of its capital stock held by Trust No. 2.

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, unless otherwise indicated, following the completion of the Proposed Transactions.

28. ACo will amend its articles of incorporation to provide that any reduction in the PUC of the Class J Preference shares will reduce the redemption amount of such shares by an equivalent amount per share.

29. ACo will reduce the PUC of its Class J Preference shares held by Trust No. 1 by an amount of $XXXXXXXXXX payable by way of a distribution of $XXXXXXXXXX.

To the maximum extent possible, the distribution will be made out of ACo’s cash or short-term deposits.

30. Newco will be incorporated under the provisions of the Act1. Newco will be authorized to issue an unlimited number of Newco Class A Voting Shares, Newco Class B Common Shares and Newco Class E Preferred Shares with the following terms and conditions:

a. The Newco Class A Voting Shares will be voting and non-participating.

b. The Newco Class B Common Shares will be non-voting and participating.

c. The Newco Class E Preferred Shares will be non-voting and non-participating. The Newco Class E Preferred Shares will be redeemable and retractable at a price equal to the amount by which the aggregate FMV of all property acquired by Newco in respect of the issuance of Newco Class E Preferred Shares exceeds the aggregate FMV of the non-share consideration for such property plus any accrued but unpaid dividends (the “redemption amount”). The terms and conditions will also entitle the holder to preferential non-cumulative dividends, if, as and when declared by the board, and at a rate expressed as a percentage of their redemption amount but not to exceed XXXXXXXXXX% per annum.

31. Trust No. 1 will subscribe for XXXXXXXXXX Newco Class A Voting Shares for $XXXXXXXXXX and XXXXXXXXXX Newco Class B Common Shares for $XXXXXXXXXX.

32. Trust No. 1 will transfer the Trust No. 1 Shares to Newco and, in exchange, Trust No. 1 will receive the following consideration from Newco:

a. the Newco Note, which will have a principal amount and FMV equal to the lesser of:

(i) the aggregate “adjusted ACB” of the Trust No. 1 Shares at the date of the transfer determined in accordance with paragraph 84.1(2)(a.1) less the ACB of the Class I Preferred shares of the capital stock of ACo immediately prior to Mrs. A’s death; and

(ii) the aggregate FMV of the Trust No. 1 Shares at the date of the transfer;

b. Newco Class E Preferred Shares having an aggregate FMV and redemption amount equal to the amount, if any, by which the aggregate FMV of the Trust No. 1 Shares at the date of the transfer exceeds the FMV of the Newco Note.

The terms of the share transfer agreement will include a price adjustment clause.

Trust No. 1 and Newco will jointly elect, in the prescribed form and manner and within the time specified in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Trust No. 1 Shares held by Trust No. 1 to Newco.

For greater certainty, 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).

Newco will add a nominal amount to the legal stated capital account of the Newco Class E Preferred Shares. For greater certainty, the amount added to the PUC in respect of the Newco Class E Preferred Shares will not exceed the maximum amount permitted to be added to the PUC of these shares without resulting in an adjustment in computing the PUC of such shares having regard to paragraph 84.1(1)(a).

For greater certainty, the sum of the principal amount of the Newco Note and the PUC of the Newco Class E Preferred Shares will not exceed the FMV of the Trust No. 1 Shares immediately before the date of Mrs. A’s death.

33. ACo will continue to carry on the Business for at least XXXXXXXXXX following the transfer of the Trust No. 1 Shares to Newco described in Paragraph 32.

34. After a period of at least XXXXXXXXXX has elapsed from the time of the share transfers described in Paragraph 32, ACo and Newco will be amalgamated to form Amalco.

In accordance with subsection 87(1), all of the property and all of the liabilities of Newco and ACo immediately before the amalgamation will become property and liabilities of Amalco. The shares of the capital stock of ACo held by Newco and any intercompany debt will be cancelled without any payment.

The PUC and ACB of each class of shares that Trust No. 1 will hold in the capital stock of Amalco after the amalgamation will be equal to the PUC and ACB of the corresponding classes of issued and outstanding shares that the Trust No. 1 held in the capital stock of Newco immediately prior to the amalgamation.

35. Following the amalgamation of Newco and ACo described in Paragraph 34, the Newco Note will be gradually repaid over a period of at least XXXXXXXXXX.

Amalco will continue to carry on the Business in the foreseeable future; however, Amalco may sell XXXXXXXXXX in order to make payments to settle the Newco Note.

Additional information

36. XXXXXXXXXX.

37. For greater certainty, there is no V-day basis included in the ACB of any of the Trust No. 1 Shares or any shares for which they were substituted, within the meaning of subsection 248(5).

38. During the XXXXXXXXXX period following the share transfers described in Paragraph 32, and consistent with its history of paying annual dividends to its shareholders, ACo may pay dividends to Newco. Such dividends, if any, will be funded by the earnings from the business operations of ACo and not from the sale of XXXXXXXXXX.

Purposes of the Proposed Transactions

39. The purpose of each of the Proposed Transactions is to return to Trust No. 1 an amount up to the FMV of the Trust No. 1 Shares immediately before Mrs. A’s death, while minimizing the inherent double tax exposure that can result from the application of subsections 104(4)(a), 84(2), 84(3) and section 84.1.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, additional information, completed and 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 Trust No. 1 to have received a dividend from Newco on the disposition of the Trust No. 1 Shares to Newco, as described in Paragraph 32.

B. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem ACo to have paid, and Trust No. 1 or its beneficiaries to have received, a dividend on the issuance or subsequent repayment of the Newco Note, as described in Paragraphs 32 and 35.

C. 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 confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA, provided that the Proposed Transactions described in Paragraphs 28 to 32 are completed no later than six (6) months after the date of this letter and the remaining Proposed Transactions are completed within the timeline specified in this letter.

The above rulings are based on the law as it reads at the date of this letter 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 herein.

Opinion

Provided that (i) the preceding statements constitute a complete and accurate disclosure of all relevant facts, additional information, completed and proposed transactions and purpose of the proposed transactions; (ii) the Proposed Transactions are completed in the manner described above; and (iii) the Act is amended in accordance with the Notice of Ways and Means Motion tabled on November 28, 2023, and which received first reading in the House of Commons on November 30, 2023, (Bill C-59), 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 confirmed in the rulings given above.

The foregoing opinion is not a ruling and, as noted in paragraph 19(f) of Information Circular 70-6R7, is not binding on the CRA.

Comments

Unless otherwise expressly confirmed, nothing in this letter 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 or ACB of any property referred to herein, or the PUC in respect of any share referred to herein;

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

c. whether Trust No. 1 is, at any particular time, an alter ego trust;

d. whether the Proposed Transactions may be implemented by the trustees of Trust No. 1 under the terms of the Trust No. 1 Deed;

e. whether any person described herein deals, or does not deal, with any other person at arm’s length; or

any other tax consequence (including provincial tax consequences) relating to the facts, completed transactions, proposed transactions or any transaction or event taking place either prior to the Completed or Proposed Transactions or subsequent to the Completed Transactions or Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Completed Transactions or 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 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 or 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
for the Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch