2012 Ruling 2012-0464501R3 - Post-mortem planning

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: Post-mortem pipeline planning.

Position: Favourable rulings provided except for the application of section 84.1 with respect to the transfer of the Class A shares of the capital stock held by the Estate (dividend corresponding to the V-day value of the shares for which the Class A shares were substituted).

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

XXXXXXXXXX 2012-046450

XXXXXXXXXX, 2012

Madam,

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the XXXXXXXXXX ("Estate"). We also acknowledge the information provided in your emails of XXXXXXXXXX.

We understand that to the best of your knowledge and that of Estate and the taxpayers involved, none of the issues described herein:

i) is in an earlier return of Estate or a related person;

ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Estate or a related person;

iii) is under objection by Estate or a related person;

iv) is before the courts or, if a judgement has been issued, the time limit for the appeal to a higher court has expired; and

v) is the subject of a ruling previously considered by the Income Tax Rulings Directorate.

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (hereinafter the "Act"), or the Income Tax Regulations, C.R.C., c. 945, as appropriate.

Unless otherwise noted, all references to monetary amounts are in Canadian dollars and all references to Paragraphs are references to the numbered paragraphs in this Ruling.

DEFINITIONS

Unless otherwise noted, the following terms have the meanings ascribed to them below:

"A" means XXXXXXXXXX;

"Amalco" means the corporation formed on the amalgamation of HOLDCO and OPCO as described in Paragraph 5;

"Amalco II" means the corporation formed on the amalgamation of Amalco and Newco as described in Paragraphs 33 to 35;

"adjusted cost base" or "ACB" has the meaning assigned to that term in section 54;

"agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

"Canadian-controlled private corporation" or "CCPC" has the meaning assigned to that term in subsection 125(7);

"capital dividend account" or "CDA" has the meaning assigned to that term in subsection 89(1);

"capital property" has the meaning assigned to that term in section 54;

"Class A shares" means the non-voting Class A preferred shares of the capital stock of Amalco;

"Class B shares" means the voting Class B preferred shares of the capital stock of Amalco;

"Class C shares" means the voting Class C preferred shares of the capital stock of Amalco;

"CRA" means the Canada Revenue Agency;

"Estate" means the XXXXXXXXXX;

"fair market value" or "FMV" means the highest price available in an open and unrestricted market between informed and prudent parties action at arm's length and under non compulsion to transact;

"general rate income pool" or "GRIP" has the meaning assigned to that term in subsection 89(1);

"HOLDCO" means XXXXXXXXXX;

XXXXXXXXXX;

"OPCO" means XXXXXXXXXX;

"paid-up capital" or "PUC" has the meaning assigned to that term in subsection 89(1);

"Paragraph" means a numbered paragraph in this letter;

"Proposed Transactions" means the transactions that are described under the heading "Proposed Transactions" in this letter;

"qualified small business corporation shares" has the meaning assigned to that term in subsection 110.6(1);

"refundable dividend tax on hand" or "RDTOH" has the meaning assigned to that term in subsection 129(3);

"taxable Canadian corporation" has the meaning assigned to that term in subsection 89(1);

"Trust" means the XXXXXXXXXX;

"Valuation Day" and "V-day" means December 31, 1971;

"X" means XXXXXXXXXX;

"Y" means XXXXXXXXXX;

"Z" means XXXXXXXXXX.

FACTS

The OPCO Group

1. OPCO was incorporated on XXXXXXXXXX and was at all relevant times and for all purposes of the Act a taxable Canadian corporation and a CCPC. OPCO has a XXXXXXXXXX year end.

2. OPCO carried on the business of XXXXXXXXXX.

3. Prior to XXXXXXXXXX, HOLDCO was the sole shareholder of OPCO and held XXXXXXXXXX% of the common shares of the capital stock of OPCO.

4. X was the sole shareholder of HOLDCO. HOLDCO was incorporated in XXXXXXXXXX. X transferred his shares of the capital stock of OPCO to HOLDCO pursuant to the provisions of section 85 immediately after the incorporation of HOLDCO. The FMV of X's shares of the capital stock of OPCO at the time of transfer was $XXXXXXXXXX. The value of the shares at V-day was equal to $XXXXXXXXXX.

5. On XXXXXXXXXX, HOLDCO and OPCO amalgamated to form Amalco. An estate freeze was then carried out in favour of Y, Z and Trust.

6. Following the amalgamation, the issued and outstanding shares of the capital stock of Amalco were as follows:

Shareholder Class of Number of Adjusted Cost Redemption
Shares Shares Held Base amount per
Share

X Class A Shares XXXXX $ XXXXX $ XXXXX
Class B shares XXXXX $ XXXXX $ XXXXX
Class C Shares XXXXX $ XXXXX $ XXXXX
Y Common Share XXXXX $ XXXXX
Z Common Share XXXXX $ XXXXX
Trust Common Share XXXXX $ XXXXX

X held de jure control of Amalco prior to his death.

7. The Trust was settled for the benefit of the descendants of A who is X's eldest child. The trustees of Trust are Y and Z. Y is the second eldest child of X. Z is the youngest child of X.

8. At the time X passed away on XXXXXXXXXX, X held XXXXXXXXXX Class A, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares of the capital stock of Amalco.

9. Amalco has continued operations as XXXXXXXXXX.

10. XXXXXXXXXX.

11. The mix and value of the assets that Amalco currently holds remain substantially the same as before X's death. There will not be any material change to the business carried on by Amalco from the date of the ruling request until the date the Proposed Transactions described herein are completed and thereafter. Amalco plans to continue its business activities for at least five years after the Proposed Transactions.

12. Amalco has the following amount in its tax accounts (estimated as of XXXXXXXXXX):

a. RDTOH -$XXXXXXXXXX;
b. GRIP – $XXXXXXXXXX;
c. CDA-$XXXXXXXXXX.

The tax consequences resulting from X's death

13. X died on XXXXXXXXXX.

14. The shares of the capital stock of Amalco held by X were capital property to X. In accordance with subsection 70(5), X was deemed to dispose, immediately before X's death, of the shares of the capital stock of Amalco owned by X for proceeds equal to the FMV of the property at that time, resulting in a significant capital gain (a capital gain equal to $XXXXXXXXXX respectively upon X's death as a result of the deemed disposition of the Class A, Class B and Class C shares held in Amalco for a total gain of $XXXXXXXXXX). The Class A, Class B and Class C shares were not qualified small business corporation shares and, consequently, X was not eligible to claim the capital gains deduction under section 110.6 on the shares of the capital stock of Amalco nor did X, or any non-arm's length person to X previously make any capital gains deduction claim in respect of these shares.

15. Estate was deemed to have acquired the Class A shares, the Class B shares and the Class C shares of the capital stock of Amalco at a cost equal to their FMV of $XXXXXXXXXX immediately before X's death pursuant to paragraph 70(5)(b). These shares of the capital stock of Amalco are capital property to Estate.

Y and Z are the trustees of Estate.

16. The tax attributes of the Class A, B and C shares of the capital stock of Amalco that Estate held immediately after X's death are set out as follows:

Class of Number of Paid Up Capital Adjusted Cost FMV
Shares Shares Base

A – XXXXX $ XXXXX $ XXXXX $ XXXXX
Non-
Voting
Preferred
B – XXXXX $ XXXXX $ XXXXX $ XXXXX
Voting
Preferred
C – XXXXX $ XXXXX $ XXXXX $ XXXXX
Voting
Preferred

17. The will of X and the Shareholder Agreement of Amalco dated XXXXXXXXXX provide that the Class B shares are to be transferred equally to Y and Z upon the death of X. As such, the XXXXXXXXXX Class B shares were transferred to Y and Z equally.

18. Estate, created by the will of X, currently holds all of the issued and outstanding Class A shares and Class C shares of the capital stock of Amalco.

19. Since X's death, Y and Z hold de jure control of Amalco.

20. Estate is in charge of collecting X's assets, paying X's liabilities and distributing X's net assets in accordance with the terms of the will.

21. Amalco's loan payable to X (or Estate) was reduced by the amount of the payment made by Amalco to pay for the tax liability that arose on X's death.

22. According to the terms of the Will, the residue of X's property after Estate collects X's assets and discharges X's liabilities shall be distributed. The residue includes Class A and Class C shares but not the Class B shares which have already been distributed to Y and Z. The will dictates that the residue of the Estate is to be distributed evenly between the heirs Y, Z and the XXXXXXXXXX (the trustees of which are Y and Z and the beneficiaries of which are the children of A).

PROPOSED TRANSACTIONS

23. Newco will be incorporated. Newco will be at all relevant times and for all purposes of the Act a CCPC and a taxable Canadian corporation. Y, Z and Trust will each subscribe for 1 Class A common share of the capital stock of Newco for $XXXXXXXXXX each.

Y and Z will hold de jure control of Newco.

24. Newco's Class A common shares will be voting and participating.

Newco's authorized share capital will include Class G preferred shares which will be non-voting and non-participating. Each Class G preferred share will be redeemable and retractable for an amount (the "Redemption Amount") equal to the FMV of the consideration received by Newco upon the issuance of such share. Each Class G preferred share will entitle its holder to receive on the dissolution or winding-up of Newco, a distribution of the net assets of Newco in an amount equal to the Redemption Amount in priority to any distribution to be made to the holders of the Newco Class A common shares. Furthermore, no dividend will be declared or paid or set apart for payment on other class of shares for an amount that would reduce the fair market value of the Class G preferred shares below their redemption amount, or that would have the effect of reducing the assets available on a winding-up for distribution to the holders of the Class G preferred shares below the redemption amount payable for that class of preferred shares then issued and outstanding.

Newco's authorized share capital will also include another class of non-voting, non-participating shares having attributes similar to the Class G preferred shares.

25. Estate will transfer its Class A shares of the capital stock of Amalco to Newco. Estate will receive as consideration Note 1 issued by Newco for an amount equal to the FMV of the Class A shares of the capital stock of Amalco as at the date of X's death. Paragraph 84.1(1)(b) will apply to this transfer, resulting in a dividend in the amount of $XXXXXXXXXX, corresponding to the V-day value of the shares for which the Class A shares of the capital stock of Amalco were substituted, which dividend will be deemed to be paid to Estate by Newco and received by Estate from Newco.

26. Estate will transfer its Class C shares of the capital stock of Amalco to Newco. Estate will receive as consideration Note 2 issued by Newco for an amount equal to the FMV of the Class C shares of the capital stock of Amalco as at the date of X's death.

27. Y will transfer one common share of the capital stock of Amalco to Newco. Y will receive as consideration one Class G preferred share of the capital stock of Newco with a redemption value equal to the FMV of the common share of the capital stock of Amalco transferred.

Y and Newco will each jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the common share of the capital stock of Amalco held by Y to Newco. The agreed amount in respect of the transfer will be equal to the ACB of the common share of the capital stock of Amalco to Y immediately before the transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

Newco will add to the stated capital of the Class G preferred share of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Y's common share of the capital stock of Amalco.

28. Z will transfer one common share of the capital stock of Amalco to Newco. Z will receive as consideration one Class G preferred share of the capital stock of Newco with a redemption value equal to the FMV of the common share of the capital stock of Amalco transferred.

Z and Newco will each jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the common share of the capital stock of Amalco held by Z to Newco. The agreed amount in respect of the transfer will be equal to the ACB of the common share of the capital stock of Amalco to Z immediately before the transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

Newco will add to the stated capital of the Class G preferred share of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Z's common share of the capital stock of Amalco.

29. Trust will transfer one common share of the capital stock of Amalco to Newco. Trust will receive as consideration one Class G preferred share of the capital stock of Newco with a redemption value equal to the FMV of the common share of the capital stock of Amalco transferred.

Trust and Newco will each jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the common share of the capital stock of Amalco held by Trust to Newco. The agreed amount in respect of the transfer will be equal to the ACB of the common share of the capital stock of Amalco to Trust immediately before the transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

Newco will add to the stated capital of the Class G preferred share of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Trust's common share of the capital stock of Amalco.

30. Y will transfer XXXXXXXXXX Class B shares of the capital stock of Amalco to Newco. Y will receive as consideration non-voting preferred shares of the capital stock of Newco (other than Class G preferred shares) with a redemption value equal to the FMV of the Class B shares of the capital stock of Amalco transferred.

Y and Newco will each jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Class B shares of the capital stock of Amalco held by Y to Newco. The agreed amount in respect of the transfer will be equal to the ACB of the XXXXXXXXXX Class B shares of the capital stock of Amalco to Y immediately before the transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

Newco will add to the stated capital of that class of preferred shares of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Y's XXXXXXXXXX Class B shares of the capital stock of Amalco.

31. Z will transfer XXXXXXXXXX Class B shares of the capital stock of Amalco to Newco. Z will receive as consideration non-voting preferred shares of the capital stock of Newco (other than Class G preferred shares) with a redemption value equal to the FMV of the Class B shares of the capital stock of Amalco transferred.

Z and Newco will each jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Class B shares of the capital stock of Amalco held by Z to Newco. The agreed amount in respect of the transfer will be equal to the ACB of the XXXXXXXXXX Class B shares of the capital stock of Amalco to Z immediately before the transfer. For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

Newco will add to the stated capital of that class of preferred shares of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the PUC, immediately before the disposition, of Z's XXXXXXXXXX Class B shares of the capital stock of Amalco.

32. Amalco will not be amalgamated for a period of at least one year following the transfer of the shares of the capital stock of Amalco to Newco. During that year, Amalco's operation and business activities will continue in the same manner as before the death of X.

The Amalgamation

33. Amalco and Newco will amalgamate pursuant to subsection XXXXXXXXXX to form Amalco II.

34. In accordance with subsection 87(1), all the property and all the liabilities of the predecessor corporations immediately before the amalgamation will become the property and liabilities of Amalco II. In addition, all of the shareholders (except Newco) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares in Amalco II.

35. The authorized share capital of Amalco II will be the same as Newco's authorized share capital.

The repayment of the Promissory Notes

36. Note 1 and Note 2 will be gradually repaid over a period of at least one year after the amalgamation date, but the amount of the repayments in any given quarter of that year will not exceed XXXXXXXXXX% of the principal amount of Note 1 and Note 2 when they were issued.

37. Once all debts and liabilities of Estate have been ascertained and settled, the Trustees will complete the administration of Estate and distribute the residue of $XXXXXXXXXX in accordance with the terms of the Will.

ADDITIONAL INFORMATION

38. The mailing address of each of Estate and Amalco is as follows:

XXXXXXXXXX

39. The business number for Amalco is XXXXXXXXXX and files it returns with the XXXXXXXXXX tax services office. The trust account number for Estate is XXXXXXXXXX and its tax services office is in XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

40. The purpose of the Proposed Transactions is to return $XXXXXXXXXX to Estate, an amount which is equal to the value of the shares of the capital stock of Amalco held by X, immediately before X's death, while minimizing the inherent double tax exposure that can result from the application of subsection 70(5) which applied in these particular circumstances.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, 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 Estate to have received a dividend from Newco, on the transfer of the Class C shares of the capital stock of Amalco held by Estate to Newco as described in Paragraph 26 provided that Note 2 is issued for an amount not to exceed the FMV of the Class C shares of the capital stock of Amalco as at the date of X's death.

B. Section 84.1 will apply to the transfer of the Class A shares of the capital stock of Amalco held by Estate to Newco as described in Paragraph 25 such that a dividend of $XXXXXXXXXX (corresponding to the V-day value of the shares for which the Class A shares of the capital stock of Amalco were substituted) will be deemed to be paid to Estate by Newco and received by Estate from Newco.

C. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Amalco to have paid, and Estate to have received, a dividend on the Class A and Class C shares of the capital stock of Amalco held by Estate.

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 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions, other than those described in Paragraphs 33 to 37, are completed 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 herein.

COMMENTS

1. Unless otherwise confirmed, nothing in this letter should be construed as implying that CRA has confirmed, reviewed, made any determination, or accepted any method for the 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 CDA, GRIP and RDTOH of any corporation; or

(c) any other tax consequence relating to the Facts, 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.

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 and 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 Interpretation Bulletin IT-169.

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