2024 Ruling 2023-0993651R3 - Post-mortem pipeline

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1) Whether subsection 84.1(1) applies to the proposed transactions. 2) Whether subsection 84(2) applies to the proposed transactions. 3) Whether subsection 245(2) applies to the proposed transactions.

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

Reasons: In accordance with the provisions of the Act and our previous positions.

XXXXXXXXXX						2023-099365

XXXXXXXXXX, 2024

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling

XXXXXXXXXX.

We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “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 any 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 Ruling Directorate in relation to the Taxpayers or a related person.

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

XXXXXXXXXX

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

DEFINITIONS

Unless otherwise stated:

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

ii. all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

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

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

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Completed Transaction and Proposed Transactions (as defined below) will be referred to as follows:

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

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

“Amalco” means the corporation to be formed on the amalgamation of Holdco and Newco, as described in Paragraph 27;

“Beneficiaries” means collectively XXXXXXXXXX, the spouse and the XXXXXXXXXX children of the Deceased, who are the equal residual beneficiaries under the Deceased’s Will;

“capital gain” has the meaning assigned in paragraph 39(1)(a);

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

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

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

“Completed Transaction” means the transaction described in Paragraph 18 of this letter;

“CRA” means Canada Revenue Agency;

“Deceased” means the late XXXXXXXXXX;

“Deceased’s Amended Final Return” means the amended final T1 General Income Tax and Benefit Return of the Deceased for the Taxation year XXXXXXXXXX filed on XXXXXXXXXX;

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

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

“Estate” means the estate of the Deceased governed by the terms of the Will, which will be designated as a GRE when the Executors file the tax return of the Estate for its first Taxation year ending XXXXXXXXXX;

“Executors” means the executors of the Estate as appointed by the Deceased in his Will, specifically, XXXXXXXXXX;

“FMV” or “fair market value” means the highest price expressed in terms of money or money’s worth available in an open and unrestricted market between informed, prudent parties, acting at arm’s length and under no compulsion to act;

“GRE” means “graduated rate estate” and has the meaning assigned in subsection 248(1);

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

“Holdco” means XXXXXXXXXX, a corporation incorporated under the Act1;

“Holdco Common Shares” means the Voting Common Shares of the capital stock of Holdco as described in Paragraph 2;

“Holdco Preferred Shares” means the Class A Voting Redeemable Preferred Shares of the capital stock of Holdco as described in Paragraph 2;

“Holdco Shares” means collectively the XXXXXXXXXX Holdco Common Shares and the XXXXXXXXXX Holdco Preferred Shares.

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

“Newco” means a corporation to be incorporated under the Act1;

“Newco Class A Common Shares” means the Class A common shares of the capital stock of Newco as described in Paragraph 19;

“Newco Note” means the non-interest-bearing, demand promissory note to be issued by Newco to the Estate, as described in Paragraph 21;

“Opco” means XXXXXXXXXX, a corporation incorporated under the Act1;

“Opco Common Shares” means the Voting Common Shares of the capital stock of Opco as described in Paragraph 7;

“Opco Preferred Shares” means the Non-Voting Redeemable Preferred Shares of the capital stock of Opco as described in Paragraph 7;

“Paragraph” means a numbered or lettered paragraph of this letter;

“price adjustment clause” means an agreement between two parties to provide for the adjustment to the transaction price in the event that a third party such as the CRA or a court of law determines that the FMV of the transferred property is greater or less than the amount otherwise determined by the parties, with the agreement having the features set out in paragraph 1.5 of the Income Tax Folio S4-F3-C1;

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

“Proposed Transactions” means the transactions described in Paragraphs 19 to 28 of this letter;

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

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

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

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

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

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

FACTS

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

Holdco

1. Holdco is a TCC and a CCPC with a Taxation year end of XXXXXXXXXX. Holdco is primarily in the business of owning and managing Opco. Holdco also holds XXXXXXXXXX that generate revenue from the XXXXXXXXXX.

2. Holdco’s authorized share capital is comprised of the following classes of shares :

i. Holdco Common Shares which are voting and participating.

ii. Holdco Preferred Shares which are non-voting, non-participating and redeemable at $XXXXXXXXXX per share.

3. Immediately prior to the Deceased’s death, the Deceased owned all of the issued and outstanding shares of the capital stock of Holdco as follows:

• XXXXXXXXXX Holdco Common Shares with an aggregate FMV of $XXXXXXXXXX, and an aggregate ACB and PUC of $XXXXXXXXXX; and
• XXXXXXXXXX Holdco Preferred Shares with an aggregate FMV, ACB and PUC of $XXXXXXXXXX.

4. As of XXXXXXXXXX, the assets of Holdco consisted principally of the Opco Common Shares with a FMV of $XXXXXXXXXX, note receivable and due from related parties of approximately $XXXXXXXXXX, cash in the amount of approximately $XXXXXXXXXX and XXXXXXXXXX with a net book value of approximately $XXXXXXXXXX.

5. As of XXXXXXXXXX, Holdco had the following tax account balances:

	NERDTOH:	XXXXXXXXXX
	ERDTOH: 	XXXXXXXXXX
	GRIP : 		$XXXXXXXXXX
	CDA : 		XXXXXXXXXX

Opco

6. Opco is a TCC and a CCPC with a Taxation year end of XXXXXXXXXX. Opco operates an XXXXXXXXXX. Opco also holds shares in a number of subsidiary corporations, each of which is a TCC and a CCPC.

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

i. Opco Common Shares which are voting and participating.

ii. Opco Preferred Shares which are non-voting, non-participating and redeemable at $XXXXXXXXXX per share.

8. Immediately prior to the Deceased’s death, all of the issued and outstanding shares of Opco were held as follows:

• The Deceased owned XXXXXXXXXX Opco Preferred Shares with an aggregate FMV of $XXXXXXXXXX, and an aggregate ACB and PUC of $XXXXXXXXXX; and
• Holdco owned XXXXXXXXXX Opco Common Shares.

9. As of XXXXXXXXXX, the assets of Opco consisted principally of the XXXXXXXXXX, cash and short-term investments in the amount of approximately $XXXXXXXXXX and investments in subsidiary corporations.

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

	NERDTOH: 	XXXXXXXXXX
	ERDTOH: 	XXXXXXXXXX
	GRIP: 		$XXXXXXXXXX
	CDA: 		$XXXXXXXXXX

The Deceased/Estate

11. The Deceased passed away on XXXXXXXXXX. Deceased was a resident of Canada at all relevant times, including at the time of his death.

12. The Holdco Common Shares, Holdco Preferred Shares and Opco Preferred Shares were capital property to the Deceased during his lifetime and at the time of his death.

13. Pursuant to paragraph 70(5)(a), the Deceased was deemed to have disposed of the XXXXXXXXXX Holdco Common Shares, the XXXXXXXXXX Holdco Preferred Shares and the XXXXXXXXXX Opco Preferred Shares immediately before his death and to have received proceeds of disposition equal to the FMV of such shares at that time. Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired those shares at a cost equal to the proceeds of disposition of the Deceased.

14. The capital gains reported in the Deceased’s Amended Final Return in respect of the deemed disposition described above are as follows:

• $XXXXXXXXXX of capital gain on the XXXXXXXXXX Holdco Common Shares;
• No capital gain on the XXXXXXXXXX Holdco Preferred Shares; and
• $XXXXXXXXXX of capital gain on the XXXXXXXXXX Opco Preferred Shares.

15. A capital gains deduction of $XXXXXXXXXX under XXXXXXXXXX in respect of the XXXXXXXXXX Holdco Common Shares was claimed in the Deceased’s Amended Final Return.

16. The Estate and each of the Beneficiaries of the Estate are residents of Canada at all relevant times.

17. The Estate holds the Holdco Common Shares, Holdco Preferred Shares and Opco Preferred Shares as capital property.

COMPLETED TRANSACTION

18. On XXXXXXXXXX, Opco redeemed the XXXXXXXXXX Opco Preferred Shares held by the Estate for their redemption amount of $XXXXXXXXXX.

As a result of the redemption, Opco was deemed to have paid, and the Estate to have received, a dividend equal to the amount by which the amount paid by Opco exceeds the PUC in respect of those shares. The Estate also incurred a capital loss on the disposition of the Opco Preferred Shares.

The Executors will elect in prescribed manner, and within the prescribed time under subsection 164(6) to carry back the capital loss of the Estate to reduce the capital gain arising from the deemed disposition of the Opco Preferred Shares as reported in the Deceased’s Amended Final Return.

PROPOSED TRANSACTIONS

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

19. The Estate will incorporate Newco under the Act1. Newco will be a TCC and a CCPC. Newco’s authorized share capital will include the Newco Class A Common Shares which will be voting and participating.

20. The Estate will subscribe for one Newco Class A Common Shares for a nominal amount.

21. The Estate will transfer the Holdco Shares to Newco and, in exchange, the Estate will receive the following consideration from Newco:

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

(i) the aggregate “adjusted ACB” of the Holdco Shares determined in accordance with paragraph 84.1(2)(a.1), less $XXXXXXXXXX; and

(ii) the aggregate FMV of the Holdco Shares at the date of the transfer, less $XXXXXXXXXX;

b. XXXXXXXXXX Newco Class A Common Shares having an aggregate FMV equal to the amount, if any, by which the aggregate FMV of the Holdco Shares at the date of the transfer exceeds the FMV of the Newco Note.

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

The Estate and Newco will jointly elect, in prescribed form and within the time specified in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Holdco Shares held by the Estate to Newco.

For greater certainty, the agreed amount, in respect of each class of shares, will not be more than the amount described in paragraph 85(1)(c), will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1) and will not be less than the amount described in paragraph 85(1)(b).

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

For greater certainty, the sum of the principal amount of the Newco Note and the PUC of the XXXXXXXXXX Newco Class A Common Shares will not exceed the FMV of the Holdco Shares immediately before the date of the Deceased’s death.

22. Opco will use the funds from its available cash and short-term investments to make an interest-bearing loan in the amount of $XXXXXXXXXX to Holdco.

23. Holdco will use the proceeds of the loan from Opco to make an interest-bearing loan in the amount of $XXXXXXXXXX to Newco.

24. Newco will use the proceeds of the loan from Holdco to repay a portion of $XXXXXXXXXX of the principal amount of the Newco Note to the Estate.

25. The Estate will exclusively use the proceeds received on the partial repayment of the Newco Note to pay the income taxes liability with respect to the Deceased’s Amended Final Return.

26. Holdco and Opco will continue to carry on their respective business for at least one year following the share transfers described in Paragraph 21. During that period, neither Holdco nor Opco will discontinue or reorganize its business, and Newco will not repay any additional portion of the remaining principal amount of the Newco Note.

27. After a period of at least one year has elapsed since the time of the share transfers described in Paragraph 21, Newco and Holdco will be amalgamated to form Amalco.

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

The authorized share capital of Amalco will be the same as Newco’s authorized share capital. Moreover, the PUC and ACB of each class of shares that the Estate will hold in the capital stock of Amalco after the amalgamation will be equal to the PUC and ACB of the corresponding classes of issued and outstanding shares that the Estate held in the capital stock of Newco immediately prior to the amalgamation.

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

28. Following the amalgamation of Newco and Holdco described in Paragraph 27, the remaining principal amount of the Newco Note will be gradually repaid over a period of at least one year. For greater certainty, the amount paid by Newco in any given quarter of that year will not exceed XXXXXXXXXX% of the remaining principal amount of the Newco Note after the repayment described at Paragraph 25.

ADDITIONAL INFORMATION

29. During the one-year period following the share transfers described in Paragraph 21, and consistent with its history of paying annual dividends to its shareholder, Opco may pay dividends to Holdco and Holdco may pay dividends to Newco. Such dividends, if any, will be funded by the earnings from the business operations of Opco and not from the sale of any of its corporate assets or investments.

30. Except for the capital gains deduction claimed under XXXXXXXXXX as described in Paragraph 15, the Deceased did not claim any other deduction under XXXXXXXXXX in respect of the Holdco Common Shares and Holdco Preferred Shares or any shares for which they were substituted, within the meaning of subsection 248(5). Moreover, there was no person not dealing at arm’s length with the Deceased, or with the Estate, that previously claimed a deduction under section 110.6 in respect of the Holdco Common Shares and Holdco Preferred Shares or any shares for which they were substituted, within the meaning of subsection 248(5).

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

PURPOSE OF THE PROPOSED TRANSACTIONS

32. The purpose of the Proposed Transactions is : (a) to return to the Estate, an amount up to the FMV of the Holdco Shares immediately before the Deceased’s death, while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2), 84(3) and 84.1; and (b) to fund the income taxes liabilities of the Estate resulting from the application of subsection 70(5).

RULINGS

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

A. Section 84.1 will not apply to deem the Estate to have received a dividend from Newco on the disposition of the Holdco Shares to Newco as described in Paragraph 21,

B. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Holdco to have paid, and the Estate or the Beneficiaries to have received, a dividend on the issuance or subsequent repayment of the Newco Note, as described in Paragraphs 21, 24 and 28.

C. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA, provided that the Proposed Transactions in Paragraphs 19 to 25 are completed no later than six (6) months after the date of this letter and the remaining Proposed Transactions are completed within the timeline specified in this letter.

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

OPINION

Provided that (i) the preceding statements constitute a complete and accurate disclosure of all relevant facts, additional information, completed and proposed transactions and purpose of the proposed transactions; (ii) the Proposed Transactions are completed in the manner described above; and (iii) the Act is amended in accordance with the Notice of Ways and Means Motion tabled on XXXXXXXXXX, and which received first reading in the House of Commons on November 30, 2023, (Bill C-59), the provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

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

COMMENTS

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

(a) the FMV or ACB of any property referred to herein, or the PUC in respect of any share referred to herein;

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

(c) 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 18;whether the Proposed Transactions may be implemented by the Executors under the terms of the Will;

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

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

(f) any other tax consequence (including provincial tax consequences) relating to the facts, completed and 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, other than those specifically described in the rulings given above, including, but not limited to the tax consequences associated with the distribution of any assets of the Estate, other than those specifically described in the rulings given above; and, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for the Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch