2023 Ruling 2023-0989821R3 - Post mortem planning - 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 section 84.1 will apply to reduce the PUC of the Newco shares received by the Spousal Trust in consideration for the disposition of its Investco shares to Newco upon the Transfer; (2) Whether subsection 84(2) will apply to the Proposed Transactions; (3) Whether the Capital Loss to be realized by the Spousal Trust upon the Redemption will be denied pursuant to subsection 40(3.6); (4) Whether the Capital Loss that may be realized by the Spousal Trust upon the Transfer will be denied pursuant to subsections 40(3.3) and (3.4).

Position: (1) No; (2) No (3) No; (4) No.

Reasons: (1) Although the statutory requirements found in section 84.1 are satisfied, the increase in the PUC of the Newco shares will not exceed the greater of the PUC and the Hard ACB of the Investco shares immediately before the Transfer; (2) The Proposed Transactions comply with CRA views applicable to similar pipeline transactions; (3) The Spousal Trust will not be affiliated with Investco immediately after the Redemption; (4) Neither the Spousal Trust nor a person that is affiliated with the Spousal Trust will acquire the Disposed Property or a Substituted Property within the Prescribed Period, and will own the Disposed Property or a Substituted Property at the end of the Prescribed Period.

XXXXXXXXXX									2023-098982

XXXXXXXXXX, 2023

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX, in which you requested an Advance Income Tax Ruling (“Ruling”) on behalf of the above mentioned taxpayers (“Taxpayers”). We also acknowledge the information provided in subsequent correspondence.

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:

(i) in a previously filed tax return of the Taxpayers or a related person and:

(a) being considered by the CRA in connection with such tax return;

(b) under objection by the Taxpayers or a related person; or

(c) the subject of a current or completed court process involving the Taxpayers or a related person; or

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

The Taxpayers have also confirmed that the Proposed Transactions described herein will not result in the Taxpayers or any person related to the Taxpayers being unable to pay any of their existing liabilities.

This letter is based solely on the Facts and Proposed Transactions described below. The documentation submitted with, and in support of the Ruling request does not form part of the Facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated:

(i) 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, (“Act”); and

(ii) all references to monetary amounts are in Canadian dollars.

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:

“A” means the late XXXXXXXXXX, the late spouse of B and the late father of Beneficiary 1 and Beneficiary 2;

“B” means the late XXXXXXXXXX, the late mother of Beneficiary 1 and Beneficiary 2 who was entitled to receive all the income of the Spousal Trust, and any of the capital of the Spousal Trust before her death in accordance with the terms of the Will of A;

“ACB” means adjusted cost base, which has the meaning assigned by section 54;

“Agreed Amount” means the amount to be respectively agreed by the Spousal Trust, Beneficiary 1 and Beneficiary 2 with Newco in a joint election filed pursuant to subsection 85(1) and within the time provided in subsection 85(6) in respect of the transfer of the shares that they will hold in the capital stock of Investco immediately before the Transfer;

“Amalco” means the new corporation formed on the Amalgamation as described in Paragraph 62;

“Amalgamation” means the amalgamation of Newco and Investco pursuant to subsection 87(1) to form Amalco as described in Paragraph 62;

“Arm’s Length” has the meaning assigned in subsection 251(1);

“Beneficiary 1” means XXXXXXXXXX, who is a resident of Canada, a child of the late A and B, and a sibling of Beneficiary 2;

“Beneficiary 2” means XXXXXXXXXX, who is a resident of Canada, a child of the late A and B, and a sibling of Beneficiary 1;

“CCPC” means Canadian-controlled private corporation, which has the meaning assigned in subsection 125(7);

“CDA” means capital dividend account, which has the meaning assigned in subsection 89(1);

“Capital Dividend” means the dividend in the amount of $XXXXXXXXXX that Investco declared and paid to the Spousal Trust on XXXXXXXXXX in respect of which it filed an election in prescribed form and manner under subsection 83(2) as described in Paragraph 33;

“Capital Gain” has the meaning assigned in paragraph 39(1)(a);

“Capital Loss” has the meaning assigned in paragraph 39(1)(b);

“Capital Property” has the meaning assigned in section 54;

“Class A Preferred Shares” means the Class A preferred shares in the capital stock of Investco that will be issued to the Spousal Trust in exchange for the Investco Common Shares in the course of the Freeze as described in Paragraph 36;

“Class B Preferred Shares” means the Class B preferred shares in the capital stock of Investco that will be issued to the Spousal Trust in exchange for the Investco Common Shares in the course of the Freeze as described in Paragraph 36;

“CRA” means the Canada Revenue Agency;

“Deficit” means amount by which the aggregate value of the Gifts exceed the value of B’s personal assets at the time of her death as described in Paragraph 9;

“Dividend” means the Taxable Dividend in the amount of $XXXXXXXXXX that Investco will pay to the Spousal Trust as described in Paragraph 34;

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

“Eligible Dividend” has the meaning assigned in subsection 89(1);

“Executors” means the executors of B’s estate responsible to execute the terms of her last 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 money;

“Freeze” means the series of transaction to be undertaken by the Spousal Trust, Beneficiary 1 and Beneficiary 2 prior to the Transfer that include the Reorganization of Capital, the Share Exchange and the subscription of an equal number of New Common Shares by each of Beneficiary 1 and Beneficiary 2 prior to the Redemption as described in Paragraphs 35 to 42;

“Gifts” means the gifts that the Executors have to make to various individuals and charitable organizations in accordance with the terms of B’s last will;

“GRIP” means general rate income pool, which has the meaning assigned in subsection 89(1);

“Holding Period” means the period of time of at least one year that starts immediately after the date of the Transfer and ends immediately after the date of the Amalgamation;

“Investco” means XXXXXXXXXX, a body corporate formed on XXXXXXXXXX pursuant to the Business Corporations Act XXXXXXXXXX;

“Investco Common Shares” means the XXXXXXXXXX voting and participating shares that A held in the capital stock of Investco prior to his death, which were vested indefeasibly to the Spousal Trust as a consequence of the death of A;

“Investment Manager” means the senior portfolio manager with XXXXXXXXXX who is responsible for managing the Marketable Securities in accordance with the Investment Policy;

“Investment Policy” means the investment guidelines governing the management of the Marketable Securities held by Investco;

“Marketable Securities” means the diversified portfolio of investment property held by Investco that includes cash and cash equivalents, bonds, and equity to be managed according to the Investment Policy;

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

“Newco” means the corporation to be formed by Beneficiary 1 and Beneficiary 2 under the Business Corporations Act XXXXXXXXXX as described in Paragraph 50;

“Newco Loan” means the loan of approximately $XXXXXXXXXX that Investco will make to Newco as described in Paragraph 61;

“New Common Shares” means the new voting and participating shares in the capital stock of Investco that will be equally subscribed for by Beneficiary 1 and Beneficiary 2 in the course of the Freeze as described in Paragraph 41;

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

“Paragraph” refers to a paragraph of this letter;

“Predecessor Corporation” means Investco and Newco, which will amalgamate to create Amalco;

“Proceeds of disposition” has the meaning assigned in section 54;

“Promissory Note 1” means the demand non-interest bearing promissory note having a principal amount of $XXXXXXXXXX that Investco issued to the Spousal Trust as full payment and in satisfaction of the Capital Dividend as described in Paragraph 33;

“Promissory Note 2” means the demand non-interest bearing promissory note having a principal amount of $XXXXXXXXXX that Investco will issue to the Spousal Trust in satisfaction of the redemption value of the Class B Preferred Shares, which will be redeemed in the course of the Redemption as described in Paragraph 43;

“Proposed Transactions” means the transactions described in Paragraphs 34 to 72;

“Qualified Small Business Corporation” has the meaning assigned by subsection 110.6(1);

“Redeemed Shares” means the XXXXXXXXXX Class B Preferred Shares to be redeemed by Investco upon the Redemption as described in Paragraph 43;

“Redemption” means Investco’s redemption of the XXXXXXXXXX Class B Preferred Shares that the Spousal Trust will hold in the capital stock of Investco after the Freeze as described in Paragraph 43;

“Redemption Dividend” means the dividend deemed to have been paid by Investco to the Spousal Trust as a result of the Redemption as described in Paragraph 44;

“Reorganization of Capital” means the amendment of Investco’s share capital pursuant to which Investco will be authorized to create and issue the Class A Preferred Shares, the Class B Preferred Shares and the New Common Shares as described in Paragraph 35;

“Share Exchange” means the transaction pursuant to which the Spousal Trust will dispose of XXXXXXXXXX Investco Common Shares in the capital stock of Investco in exchange for XXXXXXXXXX Class A Preferred Shares and XXXXXXXXXX Class B Preferred Shares in the capital stock of Investco as described in Paragraph 36;

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

“Spousal Trust Eligible Dividend” means the portion of the Redemption Dividend to be received by the Spousal Trust that will be an Eligible Dividend as described in Paragraph 45;

“Spousal Trust Non Eligible Dividend” means the portion of the Redemption Dividend to be received by the Spousal Trust that will be a Taxable Dividend other than an Eligible Dividend as described in Paragraph 46;

“Taxable Canadian Corporation” has the meaning assigned by subsection 89(1);

“Taxable Dividend” has the meaning assigned by subsection 89(1);

“Transfer” means the transfer of the XXXXXXXXXX Class A Preferred Shares that the Spousal Trust will hold in the capital stock of Investco, and the transfer of the XXXXXXXXXX New Common Shares that each of Beneficiary 1 and Beneficiary 2 will hold in the capital stock of Investco to Newco as described in Paragraph 53 to 55;

“Trustees” means the trustees appointed under the Will to manage the assets vested indefeasibly to the Spousal Trust, which originally included the late B, Beneficiary 1 and Beneficiary 2;

“Will” means the Specific Assets Will for A dated XXXXXXXXXX.

FACTS:

The death of A

1. A died on XXXXXXXXXX.

2. Prior to his death, A held the XXXXXXXXXX Investco Common Shares as a Capital Property.

3. According to the Will, the XXXXXXXXXX Investco Common Shares were vested indefeasibly to the Spousal Trust as a consequence of A’s death.

4. In accordance to paragraph 70(6)(d), A was deemed to have, immediately before his death, disposed of the XXXXXXXXXX Investco Common Shares, and to have received Proceeds of Disposition equal to the ACB of the XXXXXXXXXX Investco Common Shares immediately before his death.

5. A never claimed an amount under section 110.6 in respect of a prior disposition of the XXXXXXXXXX Investco Common Shares before the date of his death.

The death of B

6. B was the surviving spouse of A.

7. B died on XXXXXXXXXX.

8. According to B’s will, she instructed the Executors to make the Gifts.

9. The aggregate value of the Gifts exceeded the value of B’s personal assets at the time of her death by an amount approximately equal to $XXXXXXXXXX.

The Spousal Trust

10. According to the Will, B was entitled to receive all of the income derived from the property that was vested indefeasibly to the Spousal Trust, which included the Investco Common Shares, before her death. In addition, the Will states that no person except B may receive or otherwise obtain the use of any of the income or capital of the Spousal Trust before B’s death.

11. In accordance with paragraph 70(6)(d), the Spousal Trust was deemed to have acquired the XXXXXXXXXX Investco Common Shares at the time of A’s death at a cost equal to the ACB of the XXXXXXXXXX Investco Common Shares for A immediately before his death as described in Paragraph 4.

12. Immediately before B’s death, the Spousal Trust held the XXXXXXXXXX Investco Common Shares, which had an aggregate ACB and PUC of $XXXXXXXXXX, and an aggregate FMV of $XXXXXXXXXX.

13. In accordance with subsection 104(4), the Spousal Trust was deemed to have disposed of each of its property that was Capital Property, which included the XXXXXXXXXX Investco Common Shares, for proceeds equal to the FMV of such capital property on the day of B’s death.

14. The Spousal Trust realized a Capital Gain of $XXXXXXXXXX on the day of B’s death.

15. In accordance with subsection 104(4), the Spousal Trust was deemed to have reacquired each of its property that was Capital Property, which included the XXXXXXXXXX Investco Common Shares, at a cost equal to the FMV of that property immediately after the day of B’s death.

16. Immediately after the day of B’s death, the Spousal Trust held the XXXXXXXXXX Investco Common Shares, which had an aggregate ACB of $XXXXXXXXXX, an aggregate PUC of $XXXXXXXXXX and an aggregate FMV of $XXXXXXXXXX.

17. The Spousal Trust never claimed an amount under section 110.6 in respect of a prior disposition of the Investco Common Shares before B’s death.

18. Besides various personal items that A owned prior to his death that were distributed to the Spousal Trust in accordance to the terms of the Will, the Spousal Trust only owned the Investco Common Shares that were held as Capital Property.

19. The taxation year-end for the Spousal Trust is XXXXXXXXXX.

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

Investco

Authorized share capital

21. The authorized share capital of Investo consists of:

a) XXXXXXXXXX redeemable and retractable non-voting class A shares that entitle their holder to receive, in priority to all other shares of the corporation, a fixed and non-cumulative dividend of XXXXXXXXXX% of their redemption amount per share, and the redemption amount per share together with all declared and unpaid non-cumulative cash dividends thereon in the event of the liquidation, dissolution or wind-up of Investco, and

b) XXXXXXXXXX voting and participating common shares.

Shareholding

22. The Spousal Trust owns the XXXXXXXXXX Investco Common Shares, which represent all the issued and outstanding share capital in Investco.

Investment business carried on by Investco

23. Investco is a Taxable Canadian Corporation and CCPC that does not qualify as a Qualified Small Business Corporation. Investco’s taxation year-end is XXXXXXXXXX.

24. Investco carries on an investment business consisting in the acquisition of shares, bonds, debentures and other types of indebtedness issued by any corporation or public entity, domestic or foreign, in order to receive interest, dividends and other income from any of the shares, bonds, debentures and other types of indebtedness that will be held by Investco.

25. Investco’s most significant asset includes the Marketable Securities, which are managed by the Investment Manager in accordance with the Investment Policy. Besides the Promissory Note 1 and income tax payable, Investco’s liabilities are nominal.

26. The terms of the Investment Policy can be described as follows:

a) The Marketable Securities are managed with the objectives of generating growth of capital and income over a period of XXXXXXXXXX years through the holding of a diversified assets portfolio;

b) The assets allocation targets for the Marketable Securities are:

i. Cash and cash equivalents: XXXXXXXXXX% (not exceeding, at any time, XXXXXXXXXX%)

ii. Fixed income: XXXXXXXXXX% (not exceeding, at any time, XXXXXXXXXX%)

iii. Equity: XXXXXXXXXX% (not exceeding, at any time, XXXXXXXXXX%);

c) The majority of the fixed income and cash portfolio will be invested in investment grade securities whereas the majority of the equity will be invested in mid to large companies as measured by market capitalization; and

d) Although the portion of cash and cash equivalents should be limited to XXXXXXXXXX% of the overall value of the Marketable Securities in the absence of immediate liquidity needs, it is recognized that it may vary in response to unanticipated demands.

27. As of XXXXXXXXXX, Investco held the following Marketable Securities:

a) Cash and cash equivalents: $XXXXXXXXXX

b) Fixed income: $XXXXXXXXXX

c) Equity: $XXXXXXXXXX

28. As of XXXXXXXXXX, the estimated value of the Investco Common Shares was approximately equal to $XXXXXXXXXX. This estimated value takes into account the amount of the Dividend to be paid, as described in Paragraph 34.

29. As of XXXXXXXXXX, Investco had the following tax account balances:

a) GRIP: $XXXXXXXXXX

b) ERDTOH: $XXXXXXXXXX

c) NERDTOH: $XXXXXXXXXX

30. As of XXXXXXXXXX, the outstanding balance of Investco’s CDA was equal to $XXXXXXXXXX.

COMPLETED TRANSACTIONS:

The disposition of Marketable Securities prior to the Proposed Transactions

31. For the period ended XXXXXXXXXX, the Investment Manager has disposed of Marketable Securities in the amount of $XXXXXXXXXX, which increased the outstanding balance of its cash and cash equivalents in anticipation of upcoming income tax liability pertaining to B’s death and the execution of B’s will.

32. The overall composition of Investco’s assets portfolio has not changed after the disposition of a portion of its Marketable Securities amounting to $XXXXXXXXXX in the period that included the time of B’s death. Therefore, the scope of the management activities to be performed and the nature of the investment business to be carried on by the Investment Manager in respect of the Marketable Securities was not and will not be significantly changed.

The issuance of the Promissory Note 1 in satisfaction of Investco’s obligation to pay the Capital Dividend

33. On XXXXXXXXXX, Investco declared and paid the Capital Dividend to the Spousal Trust. Investco issued the Promissory Note 1 to the Spousal Trust in satisfaction of its legal obligation to pay the Capital Dividend.

PROPOSED TRANSACTIONS:

The proposed transactions will occur in the order presented unless otherwise indicated with the exception of filing the applicable forms within the applicable due dates following the completion of the Proposed Transactions.

The Dividend payment

34. Prior to XXXXXXXXXX, Investco will declare and pay the Dividend to the Spousal Trust to fund the Deficit. The Spousal Trust will then distribute the Dividend proceeds to charitable organizations referred to in B’s will.

The Freeze

The Reorganization of Capital

35. Investco will file articles of amendment under the Business Corporations Act XXXXXXXXXX to reorganize its share capital in order to create and authorize the issuance of an unlimited number of:

a) Class A preferred shares, which are non-voting, non-participating, redeemable and retractable shares having a redemption amount equal to the FMV of the consideration received for such shares, that entitle their holder to receive non-cumulative dividends, if, as and when declared by the directors of Investco, in such amounts and payable in such manner and at such time as the directors of Investco may, from time to time, determine;

b) Class B preferred shares, which are non-voting, non-participating, redeemable and retractable shares having a redemption value of $XXXXXXXXXX per share that entitle their holder to receive non-cumulative dividends, if, as and when declared by the directors of Investco, in such amounts and payable in such manner and at such time as the directors of Investco may, from time to time, determine; and

c) New Common Shares, which are voting, participating and entitle their holder to receive non-cumulative dividends, if, as and when declared by the directors of Investco, in such amounts and payable in such manner and at such time as the directors of Investco may, from time to time, determine and, in the event of the dissolution, liquidation or winding-up of Investco, entitle their holder to participate in the remaining assets of Investco.

The Share Exchange

36. Immediately after the Reorganization of Capital, the Spousal Trust will enter into an exchange agreement to undertake the exchange of XXXXXXXXXX Investco Common Shares, which represent all the Investco Common Shares that it will hold in the capital stock of Investco at that time, for XXXXXXXXXX Class A Preferred Shares and XXXXXXXXXX Class B Preferred Shares.

The aggregate FMV of the XXXXXXXXXX Investco Common Shares that were held by the Spousal Trust immediately before the Share Exchange will be equal to the aggregate FMV of the XXXXXXXXXX Class A Preferred Shares and the XXXXXXXXXX Class B Preferred Shares that will be held by the Spousal Trust immediately after the Share Exchange.

A price adjustment clause will be added to the exchange agreement to prevent the adverse tax consequences that may result in the event of a disagreement with the CRA regarding the FMV of the Investco Common Shares immediately before the Share Exchange. The FMV of the Investco Common Shares will be determined on the basis of a fair and reasonable method reflecting the intention of the Spousal Trust and Investco to transfer the Investco Common shares at their FMV in the course of the Share Exchange.

37. The amount of PUC that will be allocated to the Class A Preferred Shares will be equal to the proportion of the PUC of the Investco Common Shares immediately before the Share Exchange that the FMV of the Class A Preferred Shares immediately after the Share Exchange is of the aggregate FMV of the Class A Preferred Shares and the Class B Preferred Shares immediately after the Share Exchange.

The amount of PUC that will be allocated to the Class B Preferred Shares will be equal to the proportion of the PUC of the Investco Common Shares immediately before the Share Exchange that the FMV of the Class B Preferred Shares immediately after the Share Exchange is of the aggregate FMV of the Class A Preferred Shares and the Class B Preferred Shares immediately after the Share Exchange.

For greater certainty, the aggregate amount of PUC that will be added by Investco to the PUC of the Class A Preferred Shares and the Class B Preferred Shares will be equal to the aggregate PUC of the Investco Common Shares that were held by Investco immediately before the Share Exchange.

38. In accordance with paragraph 86(1)(b), the ACB of the Class A Preferred Shares will be equal to the proportion of the ACB of the Investco Common Shares immediately before the Share Exchange that the FMV of the Class A Preferred Shares immediately after the Share Exchange is of the aggregate FMV of the Class A Preferred Shares and the Class B Preferred Shares immediately after the Share Exchange.

The ACB of the Class B Preferred Shares will be equal to the proportion of the ACB of the Investco Common Shares immediately before the Share Exchange that the FMV of the Class B Preferred Shares immediately after the Share Exchange is of the aggregate FMV of the Class A Preferred Shares and the Class B Preferred Shares immediately after the Share Exchange.

39. The Spousal Trust and Investco will not make a joint election under the provisions of section 85 in respect of the Share Exchange.

40. The XXXXXXXXXX Investco Common Shares that were exchanged by the Spousal Trust will be cancelled immediately after the Share Exchange.

41. Immediately after the Share Exchange, each of Beneficiary 1 and Beneficiary 2 will subscribe for XXXXXXXXXX New Common Shares in consideration for a cash consideration of $XXXXXXXXXX.

42. Immediately after the Share Exchange and before the Redemption, the Spousal Trust will own XXXXXXXXXX Class A Preferred Shares, and XXXXXXXXXX Class B Preferred Shares in the capital stock of Investco whereas Beneficiary 1 and Beneficiary 2 will own XXXXXXXXXX New Common Shares in the capital stock of Investco. The Spousal Trust, Beneficiary 1 and Beneficiary 2 will hold their shares in the capital stock of Investco as Capital Property.

The Redemption

43. After the Freeze, Investco will redeem the XXXXXXXXXX Class B Preferred Shares that the Spousal Trust will hold in the capital stock of Investco in consideration for the Promissory Note 2, which will be received by the Spousal Trust in full satisfaction of the redemption value of the Redeemed Shares.

44. In accordance with subsection 84(3), Investco will be deemed to have paid, and the Spousal Trust will be deemed to have received a dividend equal to the amount by which the redemption value of the Redeemed Shares exceeds the aggregate PUC of the Redeemed Shares.

45. To the extent that Investco has a positive GRIP balance and in accordance with subsection 89(14), Investco will designate a portion of Redemption Dividend to be an Eligible Dividend. The amount of the Redemption Dividend so designated by Investco will not exceed the outstanding balance of Investco’s GRIP.

46. The amount of the Redemption Dividend that exceeds the amount of the Spousal Trust Eligible Dividend will be a Taxable Dividend other than an Eligible Dividend.

47. In accordance with subsection 129(1), Investco will be entitled to claim a dividend refund based on the outstanding balance of Investco’s ERDTOH and NERDTOH in respect of the amount of the Spousal Trust Eligible Dividend, and the amount of the Spousal Trust Non Eligible Dividend that will be received by the Spousal Trust.

48. Subject to the application of subsection 112(3.2), the Spousal Trust will realize a Capital Loss the amount of which will be equal to the difference between the Proceeds of Disposition (determined in accordance with paragraph (j) of the definition thereof in section 54) and the ACB of the Class A Preferred Shares to the Spousal Trust at the time of the Redemption.

49. The amount of the Capital Loss that will be realized by the Spousal Trust upon the Redemption will not be subject to subsection 40(3.6).

The Pipeline

Newco’s incorporation

50. Beneficiary 1 and Beneficiary 2 will incorporate Newco after the Redemption. No share will be issued to Beneficiary 1 and Beneficiary 2 upon Newco’s incorporation.

51. Newco will be a CCPC and a Taxable Canadian Corporation having a December 31 taxation year-end at all relevant times. Beneficiary 1 and Beneficiary 2 will be the directors of Newco.

52. The authorized share capital for Newco will consist of an unlimited number of:

a) Class A preferred shares, which are non-voting, non-participating, redeemable and retractable shares having a redemption value equal to the FMV of the consideration received for such shares, that entitle their holder to receive non-cumulative dividends, if, as and when declared by the directors of Newco, in such amounts and payable in such manner and at such time as the directors of Newco may, from time to time, determine; and

b) Common shares, which are voting, participating and entitle their holder to receive non-cumulative dividends, if, as and when declared by the directors of Newco, in such amounts and payable in such manner and at such time as the directors of Newco may, from time to time, determine and, in the event of the dissolution, liquidation or winding-up of Newco, entitle their holder to participate in the remaining assets of Newco.

The Transfer

53. The Spousal Trust will transfer the XXXXXXXXXX Class A Preferred Shares that it will hold in the capital stock of Investco to Newco in consideration for XXXXXXXXXX Class A Preferred Shares in the capital stock of Newco.

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. The Agreed Amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

A Capital Loss will be realized if the ACB of the XXXXXXXXXX Class A Preferred Shares in the capital stock of Investco is greater than the FMV of the XXXXXXXXXX Class A Preferred Shares at the time of the Transfer. Subsection 112(3.2) may apply to reduce the amount of the Capital Loss, if any, that is realized by the Spousal Trust.

Newco will add to the stated capital of the XXXXXXXXXX Class A Preferred Shares in the capital stock of Newco an amount equal to the lesser of the FMV and the ACB of the XXXXXXXXXX Class A Preferred Shares that the Spousal Trust will hold in the capital stock of Investco at the time of the Transfer. For greater certainty, the amount added to the stated capital of the Class A Preferred Shares of the stock capital of Newco 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).

54. Simultaneously to the transfers described in Paragraphs 53 and 55, Beneficiary 1 will transfer the XXXXXXXXXX New Common Shares that he will hold in the capital stock of Investco to Newco in consideration for XXXXXXXXXX common shares in the capital stock of Newco.

Beneficiary 1 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. The Agreed Amount will be equal to the ACB to Beneficiary 1 of the New Common Shares that it will hold in the capital stock of Investco immediately before the Transfer, which will not be more than the amount described in paragraph 85(1)(c), and will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1).

Newco will add to the stated capital of the common shares an amount equal to the lesser of the FMV and the ACB of the XXXXXXXXXX New Common Shares that Beneficiary 1 will hold in the capital stock of Investco at the time of the Transfer, which will be approximately equal to $XXXXXXXXXX. For greater certainty, the amount added to the stated capital of the common shares of the stock capital of Newco 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).

55. Simultaneously to the transfers described in Paragraphs 53 and 54, Beneficiary 2 will transfer the XXXXXXXXXX New Common Shares that he will hold in the capital stock of Investco to Newco in consideration for XXXXXXXXXX common shares in the capital stock of Newco.

Beneficiary 2 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. The Agreed Amount will be equal to the ACB to Beneficiary 2 of the New Common Shares that it will hold in the capital stock of Investco immediately before the Transfer, which will not be more than the amount described in paragraph 85(1)(c), and will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1).

Newco will add to the stated capital of the common shares an amount equal to the lesser of the FMV and the ACB of the XXXXXXXXXX New Common Shares that Beneficiary 2 will hold in the capital stock of Investco at the time of the Transfer, which will be approximately equal to $XXXXXXXXXX. For greater certainty, the amount added to the stated capital of the common shares of the stock capital of Newco 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).

56. The Spousal Trust and Newco will not be dealing at Arm’s Length at the time of the Transfer. Immediately after the Transfer, Newco and Investco will be connected within the meaning assigned by subsection 186(4).

57. Immediately after the Transfer, the Spousal Trust will own XXXXXXXXXX Class A Preferred in the capital stock of Newco whereas Beneficiary 1 and Beneficiary 2 will each own XXXXXXXXXX Common Shares in the capital stock of Newco. The Spousal Trust, Beneficiary 1 and Beneficiary 2 will hold their shares in the capital stock of Newco as Capital Property.

The management of the Marketable Securities during the Holding Period

58. Investco will continue to carry on its investment business for at least one year after the Transfer.

59. During the Holding Period, the composition of Investco’s assets portfolio as well as the extent of the management activities that will be carried on by the Investment Manager in respect of the Marketable Securities will not change.

60. The Marketable Securities will be subject to the same Investment Policy during the Holding Period.

The repayment of the Promissory Notes and the issuance of the Newco Loan

61. After the Transfer and at some time before the end of the Holding Period:

a) Investco will repay the Promissory Note 1 to the Spousal Trust;

b) Investco will repay the Promissory Note 2 to the Spousal Trust, which will use the repayment proceeds to fund the payment of the income tax liability that resulted from B’s death; and

c) Investco will make the Newco Loan to Newco, which will use the loan proceeds to distribute an amount of $XXXXXXXXXX to the Spousal Trust by way of a PUC reduction in respect of the XXXXXXXXXX Class A Preferred Shares that the Spousal Trust will hold in the capital stock of Newco. The Spousal Trust will use the proceeds of Newco’s PUC reduction to fund the payment of the income tax liability that resulted from B’s death.

The Amalgamation

62. After the Holding Period, Investco and Newco will amalgamate within the meaning of subsection 87(1) to form Amalco in such a manner that:

a) all of the property (except any amounts receivable from any Predecessor Corporation) of Newco and Investco immediately before the Amalgamation will become property of Amalco by virtue of the Amalgamation;

b) all of the liabilities (except any amounts payable to any Predecessor Corporation) of Newco and Investco immediately before the Amalgamation, will become liabilities of Amalco by virtue of the Amalgamation; and

c) all the shareholders (except any Predecessor Corporation) who owned shares of the capital stock of Newco and Investco immediately before the Amalgamation, will receive shares of the capital stock of Amalco because of the Amalgamation.

63. The authorized share capital of Amalco will consist of an unlimited number of:

a) Class A Preferred Shares, which are non-voting, non-participating, redeemable and retractable shares having a redemption value equal to the FMV of the consideration received for such shares that entitle their holder to receive non-cumulative dividends, if, as and when declared by the directors of Amalco, in such amounts and payable in such manner and at such time as the directors of Amalco may, from time to time, determine; and

b) Common Shares, which are voting, participating and entitle their holder to receive non-cumulative dividends, if, as and when declared by the directors of Amalco, in such amounts and payable in such manner and at such time as the directors of Amalco may, from time to time, determine and, in the event of the dissolution, liquidation or winding-up of Newco, entitle their holder to participate in the remaining assets of Amalco.

64. As a result of the Amalgamation, the Spousal Trust will receive the same number of Class A Preferred Shares in the capital stock of Amalco as the number of common shares that it held in the capital stock of Newco immediately before the Amalgamation. Moreover, the aggregate PUC and ACB of the Class A Preferred Shares that the Spousal Trust will hold in the capital stock of Amalco will be the same as the aggregate PUC and ACB of the Class A Preferred Shares that it held in the capital stock of Newco immediately before the Amalgamation.

65. As a result of the Amalgamation, each of Beneficiary 1 and Beneficiary 2 will receive the same number of common shares in the capital stock of Amalco as the number of common shares that they respectively held in the capital stock of Newco immediately before the Amalgamation. Moreover, the aggregate PUC and ACB of the common shares each of Beneficiary 1 and Beneficiary 2 will hold in the capital stock of Amalco will be the same as the aggregate PUC and ACB of the common shares that they respectively held in the capital stock of Newco immediately before the Amalgamation.

66. Immediately after the Amalgamation, the Spousal Trust will own XXXXXXXXXX Class A Preferred Share in the capital stock of Amalco whereas Beneficiary 1 and Beneficiary 2 will each own XXXXXXXXXX Common Shares in the capital stock of Amalco.e

67. Beneficiary 1 and Beneficiary 2 will be the directors of Amalco.

68. The Newco Loan will be legally extinguished as a result of the Amalgamation.

The gradual return of the PUC on the Class A Preferred Shares in the capital stock of Amalco

69. Over the twelve months following the Amalgamation, the directors of Amalco will resolve to reduce the PUC of the XXXXXXXXXX Class A Preferred Shares that the Spousal Trust will hold in the capital stock of Amalco on a quarterly basis by an amount not exceeding XXXXXXXXXX% of the aggregate PUC of the Class A Preferred Shares immediately after the Amalgamation.

70. While Amalco may sell Marketable Securities to fund the PUC distributions to the Spousal Trust, it will continue to carry on the investment business formerly carried on by Investco in accordance with the Investment Policy.

71. Once all the debts and liabilities of the Spousal Trust have been ascertained and settled, the Trustees will equally distribute the funds or properties that will be held by the Spousal Trust to Beneficiary 1 and Beneficiary 2 in accordance with the terms of the Will.

72. Thereafter, the directors of Amalco will resolve to liquidate Amalco.

PURPOSES OF THE PROPOSED TRANSACTIONS:

The purpose of the Proposed Transactions is to enable the Spousal Trust to best utilize the outstanding balance of Investco’s tax attributes prior to undertaking the Proposed Transactions, and to gradually and equally distribute to Beneficiary 1 and Beneficiary 2 property not exceeding the FMV of the Investco shares, immediately before the death of B, which will be equal to the ACB of the common shares that the Spousal Trust is deemed to have acquired as a result of B’s death pursuant to paragraph 104(4)(a).

RULINGS GIVEN:

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, completed and proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Section 84.1 will not apply to reduce the aggregate PUC of the XXXXXXXXXX Class A Preferred Shares in the capital stock of Newco issued to the Spousal Trust as described in Paragraph 53 provided that the aggregate PUC of the XXXXXXXXXX Class A Preferred Shares in the capital stock of Newco, immediately after the Transfer, is equal to or less than the aggregate ACB of the XXXXXXXXXX Class A Preferred Shares that the Spousal trust will hold in the capital stock of Investco immediately before the Transfer;

B. Subsection 84(2) will not apply, as a result of the Proposed Transactions, in an by themselves, to deem Investco to have paid, and the Spousal Trust to have received, a dividend on the XXXXXXXXXX Class A Preferred Shares that the Spousal Trust will hold in the capital stock of Investco;

C. Subsection 40(3.6) will not apply to deem the Capital Loss resulting from the Redemption as described in Paragraph 43 to be XXXXXXXXXX;

D. 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 53 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.

OPINION:

Provided that (i) the preceding statements constitute a complete and accurate disclosure of all relevant facts, completed and proposed transactions and purposes 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 XXXXXXXXXX, and which received first reading in the House of Commons on XXXXXXXXXX, 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.

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 legal capacity of the Trustees to complete any or all of the Proposed Transactions under the terms of the Will;

d) the tax consequences resulting from the Donations; and

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