2023 Ruling 2023-0980101R3 - 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: Whether section 84.1 or subsection 84(2) apply to the proposed post-mortem pipeline.

Position: No.

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

XXXXXXXXXX 2023-098010

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:

“Taxpayer A” means the late XXXXXXXXXX, the late spouse of the Deceased;

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

“Act 1” 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 and Beneficiary 2;

“Beneficiary 1” means XXXXXXXXXX, the XXXXXXXXXX of the late XXXXXXXXXX. Beneficiary 1 is resident in Canada;

“Beneficiary 2” means XXXXXXXXXX, the XXXXXXXXXX of the late XXXXXXXXXX. Beneficiary 2 is resident in Canada;

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

“Business” has the meaning ascribed thereto in Paragraph 6;

“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);

“Corporation A” means XXXXXXXXXX, a corporation incorporated under Act 1;

“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);

“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 money;

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

“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 1;

“Note” means the demand non-interest bearing promissory note described in Paragraph 23;

“Opco” means XXXXXXXXXX, a corporation incorporated under Act 1, as described in Paragraph 6;

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

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

“Proposed Transactions” means the transactions described in Paragraphs 22 to 27 of this letter;

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

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

“Spousal Trust” refers to the testamentary trust created under the last Will and Testament of the late XXXXXXXXXX for the exclusive benefit of the Deceased and that is a trust described in paragraph 70(6)(b);

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

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

“Trustees” means the trustees of Spousal Trust, being Beneficiary 1, Beneficiary 2 and XXXXXXXXXX, an arm’s length individual with respect to the Deceased, Beneficiary 1 and Beneficiary 2; and

“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).

FACTS

1. Prior to their death, Taxpayer A held all of the issued and outstanding shares of the capital stock of Corporation A and, accordingly, exercised de jure control of Corporation A.

2. Taxpayer A passed away on XXXXXXXXXX. Under the last will and testament of Taxpayer A, executed on XXXXXXXXXX, the residue of Taxpayer A’s estate, which included Taxpayer A’s shares of the capital stock of Corporation A, referred to in Paragraph 1, was to be held by the Spousal Trust.

3. Taxpayer A was deemed, pursuant to paragraph 70(6)(d), to have disposed of the Corporation A shares immediately before their death and to have received proceeds of disposition equal to the ACB of such shares.

4. The Spousal Trust was deemed, pursuant to paragraph 70(6)(d) to have acquired the Corporation A shares for an amount equal to the proceeds of disposition stated in Paragraph 3.

5. Spousal Trust’s year-end is XXXXXXXXXX. The Deceased was the life beneficiary of the Spousal Trust such that during the Deceased’s lifetime the Deceased was entitled to receive all of the income of the Spousal Trust that arose before their death and no person except the Deceased could, before their death, receive or otherwise obtain the use of any of the income or capital of the Spousal Trust.

6. Opco is a taxable Canadian corporation and a CCPC with a taxation year end of XXXXXXXXXX. Opco carries on XXXXXXXXXX (the “Business”). Opco was incorporated on XXXXXXXXXX, with the Spousal Trust holding XXXXXXXXXX Class A Opco common shares, representing all of the issued and outstanding shares of the capital stock of Opco. Opco has carried on the Business for a number of years prior to the death of the Deceased.

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

a. An unlimited number of Opco Class A and B common shares

i. entitling the holder to one vote per share at any meetings of the shareholders of Opco;

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 C common shares

i. the holder is not entitled to vote at any meetings of the shareholders of Opco;
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 D, E and F preferred shares

i. the holder is not entitled to vote at any meetings of the shareholders of Opco;

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 with no preference or priority as to the declaration or receipt of dividends.

8. On XXXXXXXXXX, Opco and the Spousal Trust jointly elected with Opco under the provisions of subsection 85(1) in respect of the transfer by the Spousal Trust of XXXXXXXXXX Class G preferred shares of Corporation A and XXXXXXXXXX Class A common shares of Corporation A to Opco. No gain or loss was realized by the Spousal Trust on the transfer. As consideration for the shares of Corporation A, Opco issued XXXXXXXXXX Opco Class E preferred shares and XXXXXXXXXX Opco Class D preferred shares to the Spousal Trust.

9. On XXXXXXXXXX, Opco redeemed XXXXXXXXXX Opco Class E preferred shares held by the Spousal Trust.

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

11. Following the Deceased’s death, Beneficiary 1 and Beneficiary 2 became the capital beneficiaries of the Spousal Trust.

12. Immediately prior to the time of the Deceased’s death, the Spousal Trust owned the following issued and outstanding shares of the capital stock of Opco as follows:

	Class of shares		Number of shares held	ACB	PUC	Redemption amount
	Class D preferred	      XXXXX			      XXXXX	XXXXX	XXXXX
	Class A common		XXXXX			      XXXXX	XXXXX	XXXXX

13. As a consequence of the Deceased’s death, the Spousal Trust was deemed to have disposed of the XXXXXXXXXX Opco Class D preferred shares, the XXXXXXXXXX Opco Class E preferred shares and the XXXXXXXXXX Opco Class A common shares immediately before the Deceased’s death, and to have received proceeds of disposition equal to their FMV at that time, pursuant to paragraph 104(4)(a). The Spousal Trust was deemed to have acquired the XXXXXXXXXX Opco Class D preferred shares, the XXXXXXXXXX Opco Class E preferred shares and the XXXXXXXXXX Opco Class A common shares at a cost equal to the proceeds of disposition to the Spousal Trust, pursuant to paragraph 104(4)(a). The Spousal Trust holds its shares in the capital stock of Opco as capital property.

14. On XXXXXXXXXX, the XXXXXXXXXX Opco Class A common shares were distributed equally to Beneficiary 1 and Beneficiary 2 pursuant to subsection 107(2).

15. On XXXXXXXXXX, Opco redeemed XXXXXXXXXX Opco Class D preferred shares. As a result of this redemption, Opco was deemed to have paid a dividend to the Spousal Trust pursuant to subsection 84(3). The Spousal Trust reported the receipt of a dividend of $XXXXXXXXXX which was equal to the amount by which the amount paid by Opco on the redemption of the XXXXXXXXXX Opco Class D preferred shares exceeded the PUC of such shares. Opco designated, to the extent of its GRIP balance of $XXXXXXXXXX, a portion of such deemed dividend to be an “eligible dividend” pursuant to subsection 89(14). The remaining portion of such dividend was treated as a “non-eligible dividend.” For greater certainty, no amount of the deemed dividend paid to the Spousal Trust was elected to be treated as a capital dividend pursuant to subsection 83(2). As full payment and in satisfaction of the redemption price of the XXXXXXXXXX Opco Class D preferred shares, Opco issued a non-interest bearing demand promissory note to the Spousal Trust.

16. As a result of the disposition of the XXXXXXXXXX Opco Class D preferred shares described in Paragraph 15, the Spousal Trust reported a capital loss of $XXXXXXXXXX which was equal to the difference between the proceeds of disposition and the ACB of the shares redeemed. The trustees of the Spousal Trust applied the capital loss realized in the Spousal Trust’s XXXXXXXXXX taxation year end against its capital gains for the taxation year ended XXXXXXXXXX.

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

a. NERDTOH - $XXXXXXXXXX

b. ERDTOH - $XXXXXXXXXX

c. GRIP - $XXXXXXXXXX

d. CDA - $XXXXXXXXXX

18. As of the date hereof, Opco’s significant assets consist primarily of interest-bearing loans receivable, interest receivable and investments in private corporations.

19. As of the date hereof, Opco’s liabilities consist primarily of loans payable to affiliated companies and shareholders and income taxes payable.

20. As of the date hereof, the issued and outstanding shares of the capital stock of Opco are as follows:

	Shareholder 	Class of shares		Number of shares held	ACB	PUC
	Spousal Trust	Class D preferred	      XXXXX			      XXXXX	XXXXX
	Spousal Trust	Class E preferred	      XXXXX			      XXXXX	XXXXX
	Beneficiary 1	Class A common		XXXXX			      XXXXX	XXXXX
	Beneficiary 2	Class A common		XXXXX			      XXXXX	XXXXX

The redemption amount of the Class D and E preferred shares and the FMV of the Class A common shares are as follows:

	Shareholder 	Class of shares		Redemption amount	FMV
	Spousal Trust	Class D preferred	      XXXXX			XXXXX
	Spousal Trust	Class E preferred	      XXXXX			XXXXX
	Beneficiary 1	Class A common		XXXXX			XXXXX
	Beneficiary 2	Class A common		XXXXX			XXXXX

21. For legal purposes, the Spousal Trust will continue to exist for the period required to carry out the Proposed Transactions described herein.

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.

22. Beneficiary 1 and Beneficiary 2 will incorporate Newco under Act 1. 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; and

b. Class A and B preferred shares that do not carry voting rights, entitled to a non-cumulative dividend in an amount determined by the board of directors, but may not exceed XXXXXXXXXX% of the redemption price per annum and are redeemable and retractable with a redemption amount equal to the redemption price, which is equal to the FMV of the consideration received.

Beneficiary 1 and Beneficiary 2 will each subscribe for XXXXXXXXXX Class A common shares of Newco for $XXXXXXXXXX.

23. The Spousal Trust will transfer its XXXXXXXXXX Opco Class D preferred shares and XXXXXXXXXX Opco Class E preferred shares to Newco in exchange for consideration consisting of a demand non-interest bearing promissory note (the “Note”) and XXXXXXXXXX Newco Class A preferred shares. The principal amount and FMV of the Note will not exceed, the total of all amounts, each of which is, in respect of each class of the shares transferred, an amount equal to the lesser of the ACB and the FMV of such class of shares at the time of the transfer.

The amount added to the PUC in respect of the XXXXXXXXXX Newco Class A preferred 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 Spousal Trust 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 D preferred shares and XXXXXXXXXX Opco Class E preferred shares, held by the Spousal Trust 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).

24. Beneficiary 1 and Beneficiary 2 will each transfer their XXXXXXXXXX Opco Class A common shares to Newco in exchange for consideration consisting of XXXXXXXXXX Newco Class B preferred shares having a redemption amount and FMV equal to $XXXXXXXXXX per share, the estimated FMV of the XXXXXXXXXX Class A common shares of the Corporation at the date of the transfer.

The amount added to the PUC in respect of the XXXXXXXXXX Newco Class B preferred 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).

Beneficiary 1 and Beneficiary 2 will each elect jointly with Newco, 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 50 Opco Class A common shares held by each of Beneficiary 1 and Beneficiary 2 to Newco. The agreed amount 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).

25. Opco will continue to carry on the Business for at least one year following the share transfers described in Paragraph 23. During the one-year period, Opco will not discontinue or reorganize the Business nor purchase for cancellation any Opco Class D or Class E preferred shares. During this period, Newco will not repay any portion of the Note or purchase for cancellation any of the Newco Class A preferred shares.

26. After a period of at least one year has elapsed from the time of the share transfers described in Paragraph 23, Newco will resolve to wind-up and dissolve Opco in accordance with the provisions of Act 1. 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. Newco will continue to carry on the Business in the same manner that it was carried on by Opco prior to the implementation of the Proposed Transactions.

27. The Note will be gradually repaid over a period of at least two years after the wind-up of Opco into Newco, as described in Paragraph 26. 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

28. 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 Spousal Trust 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).

29. 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).

30. Opco may pay dividends to Newco from time to time following the transfers described in Paragraph 23, however, prior to the winding-up of Opco, described in Paragraph 26, such dividends will be funded by the earnings of Opco and not from the sale of any of its investments.

PURPOSES OF THE PROPOSED TRANSACTIONS

31. The purpose of the Proposed Transactions is to create a “pipeline” to allow for the distribution of funds from Opco to the Spousal Trust, without triggering additional taxes on the value of the Spousal Trust’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 Spousal Trust to have received a dividend from Newco, on the disposition of the XXXXXXXXXX Opco Class D preferred shares and the XXXXXXXXXX Opco Class E preferred shares to Newco, as described in Paragraph 23.

B. Subsection 84(2) will not apply, as a result of the Proposed Transactions, in an by themselves, to deem Opco to have paid, and the Spousal Trust or its Beneficiaries to have received, a dividend on the issuance or subsequent repayment of the Note, as described in Paragraphs 23 and 27.

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 23 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 trustees of the Spousal Trust to complete the Proposed Transactions under the terms of the Spousal Trust; 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. Furthermore, the operation of a price adjustment clause may invalidate one or more of the rulings provided. 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