2024 Ruling 2023-0999251R3 - 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. Does paragraph 84.1(1) apply to reduce the PUC in the Proposed Transactions? 2. Does subsection 84(2) apply to the Proposed Transactions? 3. Does the GAAR apply to the Proposed Transactions?

Position: Positive rulings provided on the non-application of section 84.1 and subsection 84(2) and GAAR.

Reasons: The Proposed Transactions are in accordance with the Act, relevant jurisprudence and are consistent with our previous positions.

XXXXXXXXXX									2023-099925

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX, as amended on XXXXXXXXXX for an advance income tax ruling on behalf of the taxpayers described below (Taxpayers). We also acknowledge the additional information provided in your various email correspondence (XXXXXXXXXX).

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

a. in a previously filed return of the Taxpayers or a related person and;

i. being considered by the Canada Revenue Agency in connection with such return;
ii. under objection by the Taxpayers or a related person; or
iii. the subject of a current or completed court process involving the Taxpayers or a related person; or

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

The tax account numbers, Tax Services Offices, Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX

Unless otherwise stated:

i. a reference 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.), as amended (the “Act”);

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

Unless otherwise specified, the following terms have the meanings specified below:

“ACB” means “adjusted cost base” as that expression is defined in section 54 and subsection 248(1);

“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);

“Amalco” means XXXXXXXXXX, a taxable Canadian corporation and private corporation to be formed under, and governed by, the laws of Province 2, on the amalgamation of Opco-B and Newco-B, as described in Paragraph 60;

“Amalgamation” means the amalgamation of Opco-B and Newco-B, as described in Paragraph 60;

“arm’s length” has the meaning assigned by subsection 251(1);

“Beneficiaries” means the beneficiaries of the Estate;

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

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

“CCPC” means “Canadian-controlled private corporation” as defined in subsection?125(7);

“CDA” means “capital dividend account” as defined in subsection 89(1);

“Completed Transactions” means the transactions described in Paragraphs 33 to 42;

“CRA” means the Canada Revenue Agency;

“ERDTOH” means “eligible refundable dividend tax on hand” as defined in subsection 129(4);

“Estate” means the estate of Individual X which is governed by Individual X’s Wills;

“Executors” means the executors of the Estate, who were appointed pursuant to the terms of the Wills;

“Fair market value” or “FMV” means 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;

“Foundation” means the XXXXXXXXXX, a public foundation;

“Gift 1” means a gift to XXXXXXXXXX;

“Gift 1 Beneficiary” means the class of discretionary beneficiaries that may receive Gift 1;

“GRE” means a “graduated rate estate” of an individual as defined in subsection 248(1);

“GRIP” means “general rate income pool” as defined in subsection 89(1);

“Individual X” means the late XXXXXXXXXX;

“Legacy Beneficiaries” means the Beneficiaries, other than the Gift 1 Beneficiary and the Residual Beneficiaries.

“Newco-A” means XXXXXXXXXX formed under the laws of Province 2 as described in Paragraph 39;

“Newco-B” means XXXXXXXXXX formed under the laws of Province 2 as described in Paragraph 40;

“Opco-A” means XXXXXXXXXX, a taxable Canadian corporation and a private corporation formed under, and governed by, the laws of Province 1;

“Opco-A Business” has the meaning ascribed thereto in Paragraph 12;

“Opco-A Debt” has the meaning ascribed thereto in Paragraph 32;

“Opco-A Shares” means the shares of Opco-A held by Individual X immediately before their death, the Estate immediately thereafter, and by Newco-A following the transaction described in Paragraph 41;

“Opco-B” means XXXXXXXXXX, a private corporation and taxable Canadian corporation formed under, and governed by, the laws of Province 1;

“Opco-B Business” has the meaning ascribed thereto in Paragraph 22;

“Opco-B Debt” has the meaning ascribed thereto in Paragraph 32;

“Opco-B Shares” means all shares of Opco-B held by Individual X at the time of their death, the Estate immediately thereafter, Newco-B following the transactions described in Paragraph 42;

“Paragraph” means a numbered paragraph in this letter;

“private corporation” has the meaning assigned by subsection 89(1);

“private foundation” has the meaning assigned by subsection 149.1(1);

“Proposed Transactions” means the transactions described in Paragraphs 43 to 62;

“Province 1” means XXXXXXXXXX;

“Province 2” means XXXXXXXXXX;

“public foundation” has the meaning assigned by subsection 149.1(1);

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

“related” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2);

“Residual Beneficiaries” means XXXXXXXXXX;

“short-term preferred share” has the meaning assigned by subsection 248(1);

“Spouse” means XXXXXXXXXX, the surviving spouse of Individual X;

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

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

“taxable preferred shares” has the meaning assigned by subsection 248(1);

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

“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); and

“Wills” means the last will and testament with respect to public assets “Will 1” and the last will and testament with respect to private assets “Will 2”, both executed by Individual X on XXXXXXXXXX, along with a first codicils for each, both executed by Individual X on XXXXXXXXXX.

FACTS

1. Except as otherwise stated, the Estate and all corporations referred to in this letter are resident in Canada for purposes of the Act.

2. Individual X died on XXXXXXXXXX. Immediately prior to death, Individual X was resident in Canada.

3. Spouse is resident in Canada XXXXXXXXXX.

Facts related to the Estate

4. Pursuant to the terms of the Wills, a majority of the Executors of the Estate must reside in Canada with all management decisions to be made in Canada.

5. The Estate was designated as a GRE when the Executors filed the T3 Trust Income Tax and Information Return for the Estate’s first taxation year (which ended on XXXXXXXXXX).

6. Under the terms of Will 1:

i. the Legacy Beneficiaries are entitled to receive, in the aggregate, a total fixed amount of approximately $XXXXXXXXXX, and

ii. the Gift 1 Beneficiary is entitled to receive, in the aggregate, a total fixed amount of $XXXXXXXXXX.

7. Under the terms of the Wills, the Residual Beneficiaries are to receive the remaining assets of the Estate.

8. The Legacy Beneficiaries include persons who are resident and not resident in Canada.

9. The Gift 1 Beneficiary will be selected by the Executors from a class of beneficiaries. The class includes a large number of potential beneficiaries. Until the Executors exercise their discretion, none of the members of the class have a fixed interest in the Estate.

10. [Reserved]

Facts related to Opco-A

11. Opco-A is a corporation incorporated on XXXXXXXXXX and governed by the laws of Province 1. Opco-A is a CCPC and a taxable Canadian corporation. The taxation year end of Opco-A is XXXXXXXXXX.

12. Opco-A is in the business of XXXXXXXXXX (Opco-A Business). Opco-A carries on its business directly or indirectly through XXXXXXXXXX. Among other things, Opco-A through its subsidiaries provides XXXXXXXXXX. The underlying assets of Opco-A consist primarily of XXXXXXXXXX.

13. The authorized share capital of Opco-A consists of an unlimited number of Common Shares, Class A Common Shares, Class A Shares, Preference Shares, Class B Preference Shares, Class C Preference Shares, and Class H Special Shares.

14. Immediately before the death of Individual X, the issued and outstanding share capital of Opco-A consisted of XXXXXXXXXX Class A Common Shares, XXXXXXXXXX Preference Shares, XXXXXXXXXX Class B Preference Shares, XXXXXXXXXX Class C Preference Shares and XXXXXXXXXX Class H Special Shares. The principal rights, privileges, conditions, and restrictions of Opco-A’s authorized shares are as follows:

i. Common Shares: ordinary common shares holding XXXXXXXXXX vote per share;

ii. Class A Common Shares: ordinary common shares holding XXXXXXXXXX votes per share;

iii. Preference Shares: non-voting, fixed annual preferential cumulative dividend of XXXXXXXXXX%, calculated on the redemption value of said shares adjusted for any cumulative dividend not yet paid, redeemable and retractable for an amount equal to the stated capital account in respect of the Preference Shares divided by the number of Preference Shares outstanding, with priority with respect to the reimbursement of the redemption value;

iv. Class A Shares: the voting rights, participation rights, dividend rights, redemption or retraction rights, redemption price, and priority rights are to be determined by the directors of Opco-A;

v. Class B Preference Shares: non-voting, fixed annual non-cumulative dividend of up to XXXXXXXXXX%, calculated on the redemption value of said shares, redeemable and retractable for $XXXXXXXXXX per share, with priority with respect to the reimbursement of the redemption value, plus declared and unpaid dividends, if any, on such shares, but after such payment to the holders of the Preference Shares and Class A Shares;

vi. Class C Preference Shares: non-voting, fixed annual non-cumulative dividend of up to XXXXXXXXXX%, calculated on the redemption value of said shares, redeemable and retractable for $XXXXXXXXXX per share, with priority with respect to the reimbursement of the redemption value, plus declared and unpaid dividends, if any, on such shares, but after such payment to the holders of the Preference Shares, Class A Shares, and Class B Preference Shares; and

vii. Class H Special Shares: XXXXXXXXXX votes per share, non-participating, redeemable, and retractable for $XXXXXXXXXX, with priority with respect to the reimbursement of the amount paid into the stated capital account in the event of a liquidation, wind-up or dissolution, but after such payment to the holders of the Preference Shares, Class A Shares, Class B Preference Shares and Class C Preference Shares.

15. The Preference Shares of Opco-A, Class B Preference Shares of Opco-A, Class C Preference Shares of Opco-A, and Class H Special Shares of Opco-A are taxable preferred shares and short-term preferred shares.

16. [Reserved]

17. Immediately before Individual X’s death, Individual X together with the Foundation owned all the issued and outstanding shares of Opco-A. The Opco-A Shares constituted capital property to Individual X. By virtue of Individual X’s holding of all the Class H Special Shares of Opco-A, X held de jure control of Opco-A.

18. At the time of Individual X’s death, the Foundation held XXXXXXXXXX Preference Shares of Opco-A with a PUC and ACB of $XXXXXXXXXX.

19. The Opco-A Business was not impacted by, and continues to operate after, the death of Individual X.

20. [Reserved]

Facts related to Opco-B

21. Opco-B is a corporation incorporated on XXXXXXXXXX and governed by the laws of Province 1. Opco-B is a CCPC and a taxable Canadian corporation. The taxation year end of Opco-B is XXXXXXXXXX.

22. Opco-B is XXXXXXXXXX (Opco-B Business). Opco-B carries on its business directly and indirectly through XXXXXXXXXX. Among other things, Opco-B either directly or through its subsidiaries XXXXXXXXXX. The underlying assets of Opco-B consist primarily of XXXXXXXXXX.

23. The authorized share capital of Opco-B consists of an unlimited number of Common Shares, Class A Common Shares, Class D Preference Shares, Class E Preference Shares, and Class H Special Shares.

24. Immediately before the death of Individual X, the issued and outstanding share capital of Opco-B consisted of XXXXXXXXXX Class A Common Shares, XXXXXXXXXX Class D Preference Shares, XXXXXXXXXX Class E Preference Shares and XXXXXXXXXX Class H Special Shares. The principal rights, privileges, conditions, and restrictions of Opco-B’s authorized shares are as follows:

i. Common Shares: ordinary common shares holding XXXXXXXXXX vote per share and ranking pari passu with the Class A Common Shares;

ii. Class A Common Shares: ordinary common shares holding XXXXXXXXXX votes per share and ranking pari passu with the Common Shares;

iii. Class D Preference Shares: non-voting, fixed annual non-cumulative dividend of up to XXXXXXXXXX%, calculated on the redemption value of said shares, redeemable and retractable for $XXXXXXXXXX per share, with priority with respect to the reimbursement of the redemption value, plus declared and unpaid dividends, if any, on such shares;

iv. Class E Preference Shares: non-voting, fixed annual non-cumulative dividend of up to XXXXXXXXXX%, calculated on the redemption value of said shares, redeemable and retractable for $XXXXXXXXXX per share, with priority with respect to the reimbursement of the redemption value, plus declared and unpaid dividends, if any, on such shares, but after such payment to the holders of the Class D Preference Shares; and

v. Class H Special Shares: XXXXXXXXXX votes per share, redeemable, and retractable for $XXXXXXXXXX, with priority with respect to the reimbursement of the amount paid into the stated capital account in the event of a liquidation, wind-up or dissolution, but after such payment to the holders of the Class D Preference Shares and Class E Preference Shares.

25. The Class D Preference Shares of Opco-B, Class E Preference shares of Opco-B and Class H Special shares of Opco-B are taxable preferred shares and short-term preferred shares.

26. At the time of X’s death, Individual X owned all the issued and outstanding shares of Opco-B.

27. The Opco-B Business was not impacted by, and continues to operate after, the death of Individual X.

28. [Reserved]

Facts related to the death of Individual X

29. Pursuant to paragraph 70(5)(a), Individual X was deemed to have disposed of the Opco-A Shares and Opco-B Shares for proceeds of disposition equal to their FMV immediately before Individual X’s death. The aggregate capital gain to Individual X of the Opco-A Shares and Opco-B Shares resulting from the application of paragraph 70(5)(a) was $XXXXXXXXXX.

30. On XXXXXXXXXX, the Executors made an election under subsection 159(5) to defer payment of the tax payable resulting from the application of subsection 70(5). XXXXXXXXXX.

31. Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired the Opco-A Shares and Opco-B Shares formerly owned by Individual X at an ACB equal to their FMV immediately before Individual X’s death. The Opco-A Shares and Opco-B Shares acquired because of Individual X’s death constitute capital property to the Estate. The tax attributes of the Opco-A Shares and Opco-B Shares held by the Estate immediately after Individual X’s death were as follows:

	Number	Class				ACB ($)	PUC ($)	FMV($)

	XXXXX		Class A Common 		XXXXX		XXXXX		XXXXX
			Shares of Opco-A
	XXXXX		Class B Preference	XXXXX		XXXXX		XXXXX
			Shares of Opco-A
	XXXXX		Class C Preference	XXXXX		XXXXX		XXXXX
			Shares of Opco-A
	XXXXX		Class H Special		XXXXX		XXXXX		XXXXX
			Shares of Opco-A
	XXXXX		Class A Common 		XXXXX		XXXXX		XXXXX
			Shares of Opco-B
	XXXXX		Class D Preference	XXXXX		XXXXX		XXXXX
			Shares of Opco-B
	XXXXX		Class E Preference	XXXXX		XXXXX		XXXXX
			Shares of Opco-B
	XXXXX		Class H Special 		XXXXX		XXXXX		XXXXX
			Shares of Opco-B 

32. At the time of Individual X’s death, Individual X held non-interest-bearing obligations payable on demand from each of Opco-A and Opco-B, for an amount of $XXXXXXXXXX (the “Opco-A Debt”) and $XXXXXXXXXX (the “Opco-B Debt”) respectively. The Estate acquired the Opco-A Debt and Opco-B Debt as a consequence of the death of Individual X.

COMPLETED TRANSACTIONS

33. From the time of Individual X’s death to XXXXXXXXXX, Opco-A repaid part of the Opco-A Debt, reducing the principal amount outstanding to $XXXXXXXXXX. Throughout the same period, Opco-B fully repaid the Opco-B Debt. The reduction of the Opco-A Debt and Opco-B Debt was to allow the Estate to satisfy payments required for taxes due in relation to the terminal taxation year of Individual X, make cash available for distributions from the Estate and to pay professional fees.

34. In XXXXXXXXXX, Opco-A redeemed Preference Shares of Opco-A, held by the Foundation, in two tranches for $XXXXXXXXXX per share: XXXXXXXXXX on XXXXXXXXXX, and XXXXXXXXXX on XXXXXXXXXX. Following these redemptions, the Foundation held XXXXXXXXXX Preference Shares of Opco-A.

35. On XXXXXXXXXX, the Estate donated XXXXXXXXXX Class B Preference Shares of Opco-A to the Foundation, for which a donation receipt of $XXXXXXXXXX was issued and a credit was claimed on Individual X’s terminal tax return.

36. XXXXXXXXXX.

37. In XXXXXXXXXX, the Estate began to make distributions to the Legacy Beneficiaries.

Final distributions to Legacy Beneficiaries of the Estate

38. On XXXXXXXXXX, the Estate made the final distributions to the Legacy Beneficiaries.

Incorporation of Newco-A

39. On XXXXXXXXXX, the Estate incorporated Newco-A XXXXXXXXXX under the laws of Province 2.

Newco-A is a CCPC and a taxable Canadian corporation. The taxation year end of Newco-A is XXXXXXXXXX. Newco-A is authorized to issue an unlimited number of participating Common Shares holding 1 vote per share. On incorporation, Newco-A issued XXXXXXXXXX Common Share of Newco-A to the Estate for the subscription price of $XXXXXXXXXX.

Incorporation of Newco-B

40. On XXXXXXXXXX, the Estate incorporated Newco-B XXXXXXXXXX under the laws of Province 2.

Newco-B is a CCPC and a taxable Canadian corporation. The taxation year end of Newco-B is XXXXXXXXXX. Newco-B is authorized to issue an unlimited number of Common Shares holding 1 vote per share and participating. On incorporation, Newco-B issued XXXXXXXXXX Common Share of Newco-B to the Estate for the subscription price of $XXXXXXXXXX.

Sale of Opco-A Shares to Newco-A

41. On XXXXXXXXXX, the Estate transferred all the shares it holds in Opco-A to Newco-A. In return, Newco-A issued to the Estate XXXXXXXXXX Common Shares of Newco-A, having a FMV equal to the aggregate of the FMV at the time of transfer of the

i. XXXXXXXXXX Class B Preference Shares of Opco-A,

ii. XXXXXXXXXX Class C Preference Shares of Opco-A,

iii. XXXXXXXXXX Class H Special Shares of Opco-A, and

iv. XXXXXXXXXX Class A Common Shares of Opco-A.

The Estate accepted the XXXXXXXXXX Common Shares of Newco-A as absolute and full payment for the purchase of the Opco-A Shares.

The Estate and Newco-A made the election under subsection 85(1) in the prescribed form and manner set out in subsection 85(6), with respect to the Opco-A Shares. For greater certainty, the agreed amount by the Estate and Newco-A for each class of the Opco-A Shares transferred was not less than the lesser of the amounts specified in paragraph 85(1)(c.1). In addition, the agreed amount for the Opco-A Shares did not exceed their FMV at the time of the transfer.

The PUC of the XXXXXXXXXX Common Shares of the capital stock of Newco-A was not greater than the ACB, for the Estate, of the aggregate amount of the XXXXXXXXXX Class B Preference Shares of Opco-A, XXXXXXXXXX Class C Preference Shares of Opco-A, XXXXXXXXXX Class H Special Shares of Opco-A and XXXXXXXXXX Class A Common Shares of Opco-A at the time of transfer.

Sale of Opco-B Shares to Newco-B

42. On XXXXXXXXXX, the Estate transferred all the shares it holds in Opco-B’s share capital to Newco-B. In return, Newco-B issued to the Estate XXXXXXXXXX Common Shares of Newco-B, having a FMV equal to the aggregate FMV at the time of transfer of the

i. XXXXXXXXXX Class D Preference Shares of Opco-B,

ii. XXXXXXXXXX Class E Preference Shares of Opco-B,

iii. XXXXXXXXXX Class H Special Shares of Opco-B, and

iv. XXXXXXXXXX Class A Common shares of Opco-B.

The Estate accepted the XXXXXXXXXX Common Shares of Newco-B as absolute and full payment for the purchase of the Opco-B Shares.

The Estate and Newco-B made the election under subsection 85(1) in the prescribed form and manner set out in subsection 85(6), with respect to the Opco-B Shares. For greater certainty, the agreed amount by the Estate and Newco-B for each class of the Opco-B Shares transferred was not less than the lesser of the two amounts specified in paragraph 85(1)(c.1). In addition, the agreed amount for the Opco-B Shares did not exceed their FMV at the time of the transfer.

The PUC of the XXXXXXXXXX Common Shares of the capital stock of Newco-B was not greater than the ACB, to the Estate, of the aggregate amount of the XXXXXXXXXX Class D Preference Shares of Opco-B, XXXXXXXXXX Class E Preference Shares of Opco-B, XXXXXXXXXX Class H Special Shares of Opco-B and XXXXXXXXXX Class A Common Shares of Opco-B at the time of transfer.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the following order, unless otherwise indicated.

Continuation of Opco-A Business

43. Opco-A will not discontinue or reorganize the Opco-A Business for at least one year following the transaction described in Paragraph 41.

44. Further, during the one-year period described in Paragraph 43, there will be no redemptions or purchases for cancellation of any Newco-A Common Shares, or Opco-A Shares, except for the transactions described in this Paragraph. If Opco-A has cash available which is not required for use in its business, then no earlier than three months after the transaction described in Paragraph 41:

i. Opco-A will purchase for cancellation the quantity of Opco-A Shares required to distribute excess cash to Newco-A;

ii. Newco-A will reduce the stated capital of the Common Shares of its capital stock for payment of cash to the Estate equal to the amount received from Opco-A; and

iii. The Estate will use the proceeds of the stated capital reduction to make a payment on account of the outstanding income tax liability of the Estate.

Any amount distributed, as described in this Paragraph, will not impact the ongoing business operations of Opco-A or result in the winding-up, discontinuance, or reorganization of the Opco-A Business.

45. During the one year period described in Paragraph 43, there will be no reduction of the stated capital of the Newco-A Common Shares, except as described in Paragraph 44.

46. During the one-year period described in Paragraph 43, Opco-A will pay the dividends due on the Preference Shares held by the Foundation.

47. During the one-year period described in Paragraph 43, Opco-A will pay a dividend of up to XXXXXXXXXX% on the Class B Preference Shares held by the Foundation and Newco-A. If Newco-A receives a dividend because of a payment described in this Paragraph, it will not be distributed to the Estate during the one-year period described in Paragraph 43.

48. During the one-year period described in Paragraph 43, consistent with Opco-A’s history of paying dividends to its shareholders, Opco-A may pay dividends on the Class A Common Shares of Opco-A up to an amount not in excess of its undistributed after-tax net income, less the amount of the dividends paid on the Preference Shares and Class B Preference Shares as described in Paragraphs 46 and 47. Newco-A will use the amount received as a dividend to pay a dividend to the Estate.

49. The transactions described in Paragraphs 44, 46, 47 and 48 will not occur if there are reasonable grounds for believing that one or more of such transactions would render Opco-A or Newco-A insolvent under the corporate law of Province 1 or Province 2 or otherwise unable to meet their legal obligations.

Continuation of Opco-B Business

50. Opco-B will not discontinue or reorganize the Opco-B Business for at least one year following the transaction described in Paragraph 42.

51. During the one-year period described in Paragraph 50, there will be no redemption or purchase for cancellation of any Newco-B Common Shares or Opco-B Shares, except as described in this Paragraph. If Opco-B has cash which is not required for use in its business, then no earlier than three months after the transaction described in Paragraph 42:

i. Opco-B will redeem such number of Opco-B Shares as required to distribute the excess cash to Newco-B;

ii. Newco-B will reduce the stated capital of the Common Shares of its capital stock for payment of cash to the Estate equal to the amount received from Opco-B; and

iii. The Estate will use the proceeds of the stated capital reduction to pay a portion of the outstanding income tax liability of the Estate.

Any amount distributed, as described in this Paragraph, will not impact the ongoing business operations of Opco-B or result in the winding-up, discontinuance, or reorganization of the Opco-B Business.

52. During the one-year period described in Paragraph 50, there will be no reduction of the stated capital of the Newco-B Common Shares, except as described in Paragraph 51.

53. During the one-year period described in Paragraph 50, consistent with Opco-B’s history of paying dividends to its shareholders, Opco-B may pay dividends on the Class A Common Shares of Opco-B to Newco-B up to an amount approximately equal to its after-tax net income. Newco-B will use the amount received as a dividend to pay a dividend to the Estate.

54. The transactions described in Paragraphs 51 and 53 will not occur if there are reasonable grounds for believing that one or more of such transactions would render Opco-B or Newco-B insolvent under the corporate law of Province 1 and Province 2 or otherwise unable to meet their legal obligations.

Redemption of certain Opco-A Shares, dividends on Class A Common Shares of Opco-A, and PUC reductions on Common Shares of Newco-A

55. Subsequent to the end of the one-year period described in Paragraph 43, Opco-A will gradually redeem the Opco-A Shares, except the Class A Common Shares of Opco-A and Class H Special Shares of Opco-A.

56. Opco-A from time to time will pay dividends on the Class A Common Shares held by Newco-A.

57. Newco-A will use the assets received from Opco-A to gradually reduce the stated capital of the Common Shares of its capital stock held by the Estate. The stated capital reductions will not exceed in aggregate:

i. 25% of the stated capital of the Newco-A Shares immediately before the time of the first redemption of Opco-A shares, by the end of the XXXXXXXXXX period following such redemption,

ii. 50% of the stated capital of the Newco-A Shares immediately before the time of the first redemption of Opco-A shares, by the end of the XXXXXXXXXX period following the first redemption of the Opco-A Shares,

iii. 75% of the stated capital of the Newco-A Shares immediately before the time of the first redemption of Opco-A shares, by the end of the XXXXXXXXXX period following the first redemption of the Opco-A Shares, and

iv. 100% of the stated capital of the Newco-A Shares immediately before the time of the first redemption of Opco-A shares, by the end of the XXXXXXXXXX period following the first redemption of the Opco-A Shares.

58. At the appropriate time, the Estate will distribute the consideration received as a result of the transactions described in Paragraph 57 in accordance with the terms of the Wills.

Continuance of Opco-B

59. Opco-B will be continued from Province 1 to Province 2.

Amalgamation of Newco-B and Opco-B

60. Subsequent to the end of the one-year period described in Paragraph 50, Opco-B will amalgamate with Newco-B to form Amalco (the “Amalgamation”). The Amalgamation will qualify as an amalgamation within the meaning assigned by subsection 87(1).

Amalco will be authorized to issue an unlimited number of Amalco Common Shares carrying 1 vote per share.

On the Amalgamation, the Estate will receive XXXXXXXXXX Amalco Common Shares as consideration for its XXXXXXXXXX Newco-B Common Shares. The PUC and ACB of the newly issued Amalco Common Shares will be equal to the Newco-B Common Shares.

PUC reductions on Common Shares of Amalco

61. Subsequent to the Amalgamation, Amalco will begin to gradually reduce the stated capital of the Common Shares of its capital stock held by the Estate. The stated capital reductions will not exceed in aggregate:

i. 25% of the stated capital of the Amalco Shares immediately after the Amalgamation, by the end of the XXXXXXXXXX period following the Amalgamation,

ii. 50% of the stated capital of the Amalco Shares immediately after the Amalgamation, by the end of the XXXXXXXXXX period following the Amalgamation,

iii. 75% of the stated capital of the Amalco Shares immediately after the Amalgamation, by the end of the XXXXXXXXXX period following the Amalgamation, and

iv. 100% of the stated capital of the Amalco Shares immediately after the Amalgamation, by the end of the XXXXXXXXXX period following the Amalgamation.

62. The Estate will distribute the consideration received as a result of the transactions described in Paragraph 61 in accordance with the terms of the Wills.

ADDITIONAL INFORMATION

63. There is no V-Day basis included in the ACB of any class of Opco-A Shares or Opco-B Shares.

64. Individual X did not claim a capital gains deduction under subsection 110.6(2.1) in computing taxable income in respect of the taxable capital gain resulting from the deemed disposition of the Opco-A Shares or Opco-B Shares, as described in Paragraph 29. In addition, no capital gains deduction under subsection 110.6(2.1) was claimed by Individual X (or by an individual with whom Individual X’s did not deal at arm’s length) on a previous disposition of such shares or of a share for which shares were substituted.

65. As and when Opco-A has sufficient liquidity, it is anticipated that Opco-A will redeem the shares of Opco-A held by the Foundation. It is expected that the redemption of the Opco-A shares held by the Foundation will occur from time to time as circumstances permit and without impeding the continuation of the Opco-A Business.

66. The Executors will exercise their discretion to determine which of the Gift 1 Beneficiary will receive an amount in satisfaction of Gift 1, however, it is not expected that this discretion will be exercised prior to the implementation of the Proposed Transactions.

PURPOSE OF PROPOSED TRANSACTIONS

67. The purpose of the Proposed Transactions is to return to the Estate, an amount up to the FMV immediately before X’s death of the Opco-A Shares and Opco-B Shares, while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2) and 84(3).

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, 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 reduce the paid-up capital of the Common Shares of Newco- A, provided that the paid-up capital of the Common Shares of Newco-A, immediately after the disposition described in Paragraph 41, is equal to or less than the ACB of the shares of Opco-A owned by the Estate, immediately before the disposition, as modified by paragraph 84.1(2)(a.1).

B. Section 84.1 will not apply to reduce the paid-up capital of the Common Shares of Newco- B, provided that the paid-up capital of the Common Shares of Newco-B immediately after the disposition described in Paragraph 42, is equal to or less than the ACB of the shares of Opco-B owned by the Estate, immediately before the disposition, as modified by paragraph 84.1(2)(a.1).

C. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Opco-A have paid, and the Estate or the Beneficiaries to have received, a dividend on any share of the capital stock of Opco-A.

D. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Opco-B have paid, and the Estate or the Beneficiaries to have received, a dividend on any share of the capital stock of Opco-B.

E. 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.

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 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.

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 share or the ACB or FMV of any property referred to herein;

(b) the balance of the CDA, GRIP, ERDTOH or NERDTOH of any corporation;

(c) the application of subsection 55(2) or Part VI.1 to any dividend or deemed dividend; or

(d) any other tax consequence relating to the facts, the transactions described in this letter, additional information, or any transaction or event taking place either prior to the transactions described in this letter or subsequent thereto.

Further, the CRA has not confirmed, nor has it made any determination in respect of, the application of section 212.1 to any of the transactions described in this letter. However, we are aware that the Department of Finance issued a letter dated December 2, 2019 stating that it was prepared to recommend to the Minister of Finance that the Act be amended to provide relief from the look-through rule in paragraph 212.1(6)(b), in respect of dispositions of shares by a Canadian resident graduated rate estate of an individual who was resident in Canada immediately before the individual's death, provided that those shares were acquired by the estate on and as a consequence of the individual's death. XXXXXXXXXX.

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