2023 Ruling 2023-0969661R3 - 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(2) applies to the proposed transactions. 2) Whether subsection 245(2) applies to the proposed transactions.

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

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

XXXXXXXXXX									2023-096966

XXXXXXXXXX, 2023

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling –Post-mortem Pipeline (2023-096966)
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling (the “Ruling”) on behalf of the Estate of XXXXXXXXXX. The tax account numbers, Tax Services Offices, and Tax Centres of the taxpayers involved are as follows:

XXXXXXXXXX

We understand that to the best of your knowledge and that of the Taxpayers, none of the Proposed Transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that are:

a) in a previously filed tax return of the taxpayer or a related person and:

i. being considered by the CRA in connection with such return;

ii. under objection by the taxpayer or a related person; or

iii. the subject of a current or completed court process involving the taxpayer or a related person; or

b) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

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:

a) all references to a statute 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 that are defined in the Act (or in the Regulations) have the meaning given in the Act or the Regulations, as applicable;

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

d) 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” 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 28;

“BCA” means the 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);

“Child 1” means XXXXXXXXXX, a child of the Deceased;

“Child 2” means XXXXXXXXXX, a child of the Deceased and executrix of the Will;

“Child 3” means XXXXXXXXXX, a deceased child of the Deceased;

“Child 4” means XXXXXXXXXX, the former spouse of Child 3;

“Child 5” means XXXXXXXXXX, a child of the Deceased;

“Child 6” means XXXXXXXXXX, a child of the Deceased;

“Child 7” means XXXXXXXXXX, a child of the Deceased;

“Class F Redemption” means the redemption of the XXXXXXXXXX Opco Class F Special Shares held by Newco for their redemption amount as described in Paragraph 22 of this letter;

“Completed Transactions” means the transactions described in Paragraphs 13 to 21 of this letter;

“CRA” means the Canada Revenue Agency;

“Deceased” means the late XXXXXXXXXX, an individual who was a resident of XXXXXXXXXX at the time of his death on XXXXXXXXXX;

“Deceased Opco Shares” means the shares of Opco held by the Deceased at the time of his death;

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

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

“Estate” means the estate of the Deceased which is governed by the 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);

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

“Newco Note” means the promissory note issued by Newco to the Estate in consideration for the transfer of its XXXXXXXXXX Opco Class A Common Shares and XXXXXXXXXX Opco Class F Special Shares, as described in Paragraph 20 of this letter

“Opco” means XXXXXXXXXX a corporation incorporated under the BCA;

“Opco Class A Common Shares” means the Class A Common Shares in the capital of Opco (voting and participating);

“Opco Class X Common Shares” means the Class X Common Shares in the capital of Opco (voting and participating);

“Opco Class Y Common Shares” means the Class Y Common Shares in the capital of Opco (voting and participating);

“Opco Class E Special Shares” means the Class E Special Shares in the capital of Opco (non-voting, non-cumulative dividend not to exceed XXXXXXXXXX%, redeemable and retractable at $XXXXXXXXXX per share);

“Opco Class F Special Shares” means the Class F Special Shares in the capital of Opco (non-voting, non-cumulative dividend not to exceed XXXXXXXXXX%, redeemable and retractable at $XXXXXXXXXX per share);

“Opco Class Z Special Shares” means the Class Z Special Shares in the capital of Opco (voting, non-participating, redeemable and retractable at $XXXXXXXXXX per share);

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

“Opco Loan” means the interest bearing promissory note in the amount of $XXXXXXXXXX with interest at the prescribed rate issued by Opco to Newco as described in Paragraph 24 of this letter;

“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 22 to 28 of this letter;

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

“Redemption Notes” means the XXXXXXXXXX promissory notes issued by Opco to corporations controlled Child 2, Child 5, Child 6 and Child 7 (respectively, Child 2 Holdco, Child 5 Holdco, Child 6 Holdco and Child 7 Holdco) in consideration for the redemption of their Opco Class Y Common Shares as described in Paragraph 15 of this letter. Each of Child 2 Holdco, Child 5 Holdco, Child 6 Holdco and Child 7 Holdco received three notes. The terms of the notes are detailed in the table below. The third note received by each Holdco (referred to as Note 3 in the table below) is subject to adjustment based on a finalization of the calculation of the amount of the life insurance proceeds payable to each of the Holdcos.

	Payee					Principal amount	Interest	Due Date
	Child 2 Holdco		Note 1		XXXXX			XXXXX		XXXXX
	Child 2 Holdco		Note 2		XXXXX			XXXXX		XXXXX
	Child 2 Holdco		Note 3		XXXXX			XXXXX		XXXXX
	Child 5 Holdco		Note 1		XXXXX			XXXXX		XXXXX
	Child 5 Holdco		Note 2		XXXXX			XXXXX		XXXXX
	Child 5 Holdco		Note 3		XXXXX			XXXXX		XXXXX
	Child 6 Holdco		Note 1		XXXXX			XXXXX		XXXXX
	Child 6 Holdco		Note 2		XXXXX			XXXXX		XXXXX
	Child 6 Holdco		Note 3		XXXXX			XXXXX		XXXXX
	Child 7 Holdco		Note 1		XXXXX			XXXXX		XXXXX
	Child 7 Holdco		Note 2		XXXXX			XXXXX		XXXXX
	Child 7 Holdco		Note 3		XXXXX			XXXXX		XXXXX

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

“T3 Taxes” means the estimated taxes arising from the Estate’s first taxation year to be paid by the Estate, in the amount of $XXXXXXXXXX;

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

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

“Terminal Taxes” means the taxes arising from the Deceased’s terminal T1 and paid by the Estate, in the amount of $XXXXXXXXXX;

“UCC” means “undepreciated capital cost” as that term is defined in subsection 89(1);

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

“V Partnership” means XXXXXXXXXX, a general partnership under the laws of XXXXXXXXXX with partners Vco as to XXXXXXXXXX% and Opco as to XXXXXXXXXX%; 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 second codicil to each Will executed by the Deceased on XXXXXXXXXX

FACTS

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

1. Opco is a CCPC and a taxable Canadian corporation with a taxation year end of XXXXXXXXXX. Its significant activities relate to its ownership and management of XXXXXXXXXX.

2. As at the date of the Deceased’s death, Opco’s significant assets consisted of cash, real estate used in the Opco business, interests in various life insurance policies (totalling $XXXXXXXXXX), a small investment in a subsidiary that holds legal title for a portion of the land and a receivable from a related company which has limited activity.

3. As at the date of the Deceased’s death, Opco’s liabilities included the Opco Debt, bank operating loans, accounts payable, mortgages payable and other long-term liabilities.

4. Opco had a GRIP balance of $XXXXXXXXXX as at XXXXXXXXXX and a CDA balance of $XXXXXXXXXX immediately before XXXXXXXXXX.

5. Immediately prior to the Deceased’s death:

a. The Deceased, Child 1, Child 2, Child 5, Child 6 and Child 7 each held XXXXXXXXXX of the XXXXXXXXXX issued and outstanding Opco Class A Common shares.

b. The Deceased also held:

i. XXXXXXXXXX Opco Class Z Special shares (the Class Z shares are voting shares through which the Deceased maintained control of Opco);

ii. XXXXXXXXXX Opco Class E Special shares; and

iii. XXXXXXXXXX Opco Class F Special shares.

c. All of the Deceased Opco shares were held as capital property.

6. The tax attributes attached to the shares of Opco immediately before the Deceased’s death were as follows:

	Shareholder		Number & Class of			FMV		ACB		PUC
				Shares of Opco
	Deceased		XXXXX Opco Class A Common Shares	XXXXX		XXXXXX		XXXXX
	Deceased		XXXXX Opco Class E Special Shares	XXXXX		XXXXXX		XXXXX
	Deceased		XXXXX Opco Class F Special Shares	XXXXX		XXXXXX		XXXXX
	Deceased		XXXXX Opco Class Z Special Shares	XXXXX		XXXXXX		XXXXX
	Child 1		XXXXX Opco Class A Common Shares	XXXXX		XXXXXX		XXXXX
	Child 2		XXXXX Opco Class A Common Shares	XXXXX		XXXXXX		XXXXX
	Child 5		XXXXX Opco Class A Common Shares	XXXXX		XXXXXX		XXXXX
	Child 6		XXXXX Opco Class A Common Shares	XXXXX		XXXXXX		XXXXX
	Child 7		XXXXX Opco Class A Common Shares	XXXXX		XXXXXX		XXXXX

7. As a consequence of Deceased’s death, under subsection 70(5):

a. he was deemed to have disposed of the Deceased Opco Shares immediately before his death; and

b. the Estate was deemed to have acquired such shares, at the FMV of such shares.

8. The capital gains reported in the Deceased’s terminal income tax return for XXXXXXXXXX in respect of the deemed disposition of the Deceased Opco Shares are as follows:

a. $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class A Common Shares;

b. $XXXXXXXXXX capital gain for the XXXXXXXXXX Opco Class F Special Shares; and

c. There is no capital gain or capital loss on the Opco Class E Special Shares or the Opco Class Z Special Shares.

9. The Terminal Taxes were paid by the Estate with its available cash on hand.

10. The Estate is resident in Canada. The Estate will be designated as a GRE when the executor files the T3 Trust Income Tax and Information Return for the Estate’s first taxation year.

11. Under the terms of the Will:

a. There is a specific bequest of the Opco Class A Common Shares or any shares substituted therefor as part of the Proposed Transactions to Child 4;

b. There are a number of specific cash bequests to family members (including the Deceased’s children) totalling $XXXXXXXXXX;

c. There are shares of a private company that are not part of the Proposed Transactions that are bequeathed to specific family members; and

d. Child 1, Child 2, Child 4, Child 5, Child 6, Child 7, and three other family members are equal residual beneficiaries of the Estate.

12. The Will contains specific provisions related to the implementation of the Proposed Transactions.

COMPLETED TRANSACTIONS

13. On XXXXXXXXXX, Opco sold XXXXXXXXXX (including the XXXXXXXXXX) and appurtenant interests to V Partnership. Opco is the bare trustee and nominee for the V Partnership business. As nominee, Opco carries on all aspects of the business of XXXXXXXXXX. The sale transaction was completed on a partially tax-deferred basis pursuant to subsection 97(2) and, more specifically:

a. The land was disposed of at its ACB;

b. Depreciable properties other than the buildings were disposed of at their UCC;

c. The buildings were disposed of at an amount in excess of their UCC, but lower than their FMV (which resulted in recaptured depreciation and a capital gain); and

d. V Partnership assumed the existing debt on the property and Opco received an interest in the partnership.

14. A portion of the life insurance proceeds received by Opco on the death of the Deceased has been used by Opco to make contributions to V partnership. The proceeds of the contributions were used by V Partnership to repay previously existing indebtedness and make short term investments.

15. On XXXXXXXXXX:

a. Child 1 exchanged his XXXXXXXXXX Opco Class A Common Shares in consideration for XXXXXXXXXX Opco Class X Common Shares;

b. Each of Child 2, Child 5, Child 6 and Child 7 exchanged their XXXXXXXXXX Opco Class A Common Shares in consideration for XXXXXXXXXX Opco Class Y Common Shares;

c. Each of Child 2, Child 5, Child 6 and Child 7 transferred their XXXXXXXXXX Opco Class Y Common Shares to corporations controlled by Child 2, Child 5, Child 6 and Child 7 respectively in consideration for shares of these corporations. The Estate has no interest in any of these corporations;

i. A Section 85 election will be jointly filed by each of Child 2, Child 5, Child 6 and Child 7 and their respective corporations, in prescribed manner and within the prescribed time under subsection 85(6), to elect for the transferors’ proceeds of disposition and the transferees’ cost of the transferred property to be deemed to be their respective ACB to the transferees.

d. All of the Opco Class Y Common Shares owned by each of the children’s holding corporations were redeemed in consideration for the Redemption Notes; and

e. Child 2 released and transferred her interest in the Opco Class Z Special Shares to Child 1 resulting in Child 1 owning XXXXXXXXXX% of the Opco Class Z Special Shares.

16. On XXXXXXXXXX, Newco was incorporated by the Estate under the BCA.

17. On XXXXXXXXXX, the Opco Debt was repaid to the Estate by Opco from available cash or proceeds from the bank operating loan.

18. On XXXXXXXXXX, the directors of Opco passed a resolution to increase the stated capital of the Opco Class E Special Shares by $XXXXXXXXXX. The resulting deemed dividend was designated as a capital dividend.

19. On XXXXXXXXXX, Opco redeemed all of the XXXXXXXXXX Opco Class E Special Shares for their redemption amount of $XXXXXXXXXX. The Estate’s resulting deemed dividend will be designated as an eligible taxable dividend. The executor of the Estate will elect in prescribed manner, and within the prescribed time under subsection 164(6), to carry back the allowable portion of the Estate’s resulting capital loss to reduce the capital gain arising from the deemed disposition of the Deceased Opco Shares realized in the Deceased’s terminal year.

20. On XXXXXXXXXX, the Estate transferred its XXXXXXXXXX Opco Class A Common Shares and XXXXXXXXXX Opco Class F Special Shares to Newco in consideration for XXXXXXXXXX Class A Common Shares of Newco and the Newco Note (in the amount of $XXXXXXXXXX). The amount of $XXXXXXXXXX was added to the stated capital and PUC of the XXXXXXXXXX Class A Common Shares of Newco issued.

a. A section 85 election will be jointly filed by Newco and the Estate, in prescribed manner and within the prescribed time under subsection 85(6), to elect for the Estate’s proceeds of disposition and Newco’s cost of the transferred property to be deemed to be their respective ACB to Newco.

21. Opco will continue to carry on its bare trustee and nominee business as well as being a general partner in V Partnership until at least XXXXXXXXXX.

PROPOSED TRANSACTIONS

22. Opco will redeem the XXXXXXXXXX Opco Class F Special Shares held by Newco for their redemption amount of $XXXXXXXXXX.

23. The Class F Redemption will be satisfied with cash from Opco’s bank operating loan (and indirectly from the life insurance proceeds).

24. Opco will lend $XXXXXXXXXX to Newco (the Opco Loan).

25. Newco will use the proceeds of the Class F Redemption and the Opco Loan (an amount equal to the total amount of the Terminal Taxes and the T3 Taxes) to repay a portion of the Newco Note payable to the Estate.

26. The Estate will distribute the shares of Newco to Child 4 as a specific bequest in accordance with the Will. The Estate will distribute the balance of the Newco Note XXXXXXXXXX% to Child 1 and XXXXXXXXXX% to Child 4 as a specific bequest in accordance with the Will.

27. No earlier than XXXXXXXXXX, Opco (and, after the amalgamation described in Paragraph 28, Amalco) will begin to gradually pay out the balance of the Newco Note of $XXXXXXXXXX as cash flow from the business permits, provided that a maximum of $XXXXXXXXXX of the outstanding Newco Note will be paid out of Opco (or Amalco, as the case may be) on an annual basis.

28. On XXXXXXXXXX, Opco will amalgamate with Newco to form Amalco and, as a result of the amalgamation:

a. all of the property and all of the liabilities of Opco and Newco immediately before the amalgamation will become property and liabilities of Amalco;

b. Child 1 and Child 4 will receive shares of Amalco having a stated capital and rights and characteristics that are the same as the PUC and the rights and characteristics as the shares they owned in Newco or Opco (as the case may be);

c. The shares of Opco held by Newco and any intercompany debt (e.g. the Opco Loan) will be cancelled without any payment;

d. Amalco will continue to carry on the business formerly carried on by Opco.

ADDITIONAL INFORMATION

29. Neither the Deceased nor the Estate claimed a deduction under section 110.6 in respect of the Opco Class A Common Shares and Opco Class F Special shares or any other shares for which they were substituted, within the meaning of subsection 248(5).

30. For greater certainty, there is no V-day basis included in the ACB of any class of Opco shares.

31. The Proposed Transaction steps in Paragraphs 22 to 26 will be implemented within 6 months of the date of this letter.

PURPOSES OF THE COMPLETED TRANSACTIONS AND PROPOSED TRANSACTIONS

32. The overall purpose of the Completed Transactions and the Proposed Transactions is to:

a. implement the wishes of the Deceased as provided in the Will and to allow for the tax effective extraction of funds from Opco;

b. reduce the capital gain reported on the Deceased’s terminal tax return by an amount that is equal to the capital loss incurred by the Estate on the redemption of the Opco Class E Special Shares;

c. provide funds to the Estate in an amount equal to the Terminal Taxes and the T3 Taxes; and

d. put Opco in a position to return to the Estate and certain beneficiaries, an amount up to the FMV, as determined immediately before the Deceased’s death, of the Opco Class A Common Shares and Opco Class F Special Shares while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2) and 84(3).

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, completed transactions, proposed transactions, additional information, and purposes of the Completed and Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, and there are no other transactions which may be relevant, we confirm the following:

A. Subsection 84(2) of the Act will not apply as a result of the Proposed Transactions, in and by themselves, to deem any of Newco, Opco, or Amalco, as the case may be, to have paid, and any of the Estate, Child 1 or Child 4 to have received, a dividend on the Newco, Opco, or Amalco shares held by the Estate, Child 1 or Child 4 respectively.

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 ruling given above.

The above 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 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 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, including the shares of Opco, or the PUC in respect of any share referred to herein;

b) the balances of the GRIP, CDA or any other tax account for any corporation described herein;

c) the application or non-application of subsection 112(3.2) to any losses incurred by the Estate, including any loss created on the transaction described at Paragraph 19;

d) the executor’s ability to complete the Proposed Transactions under the terms of the Will;

e) whether the Estate is, at any particular time, a GRE under the Act;

f) whether any person described herein deals, or does not deal, with any other person at arm's length; or

g) 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 Transactions 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, updated to November 26, 2015.

Yours truly,

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