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: The CRA has a position that an estate refreeze transaction in circumstances where the value of a corporation decreases after the implementation of an estate freeze transaction does not result in the conferral of a benefit on the common shareholders or the preferred shareholder(s) provided that the decrease in value of the corporation is not the result of the stripping of corporate assets and the fair market value of the new preferred shares is equal to the fair market value of the old preferred shares at the time of the refreeze. Question (a) Provide examples of transactions that might be considered to be the stripping of corporate assets. Question (b) In a situation where a dividend is paid, followed by a decrease in value of the corporation, whether such decrease in value would be considered to be the result of the stripping of corporate assets. Question (c) Whether the payment of a bonus or salary to a beneficiary of the freeze who is active in the business would be viewed as the stripping of corporate assets. Question (d) Whether the position be different if the bonus or salary was paid to the beneficiary of the freeze in the ordinary course of the corporation's business or in connection with a post-freeze asset sale by the corporation. Question (e) What is the effect on the shareholders involved in an estate refreeze if there has been a reduction in the corporation's value as a result of the stripping of corporate assets.
Position: General comments provided. Question (a) Dividends that would be paid by the corporation on the common shares of its capital stock and that would impair the value of the original freeze preferred shares. The payment by the corporation of a bonus or salary to the beneficiary of the freeze in connection with a post freeze asset sale by the corporation, and such a bonus or salary is not commensurate with the value of the services performed and the responsibilities assumed by the beneficiary of the freeze. Question (b) As a general comment, we would be inclined to consider that the payment of dividends by a corporation should not preclude the application of the CRA's position, provided that such dividends are paid out of the corporation's retained earnings and that they do not impair the value of the original freeze preferred shares. However, where a dividend is paid and followed shortly thereafter by a decline in value, the CRA would need to examine, on a case-by-case basis, all the facts and circumstances relating to the particular transaction before taking a final position. Question (c) No, provided that such a bonus or salary is commensurate with the value of the services performed and the responsibilities assumed by the beneficiary of the freeze. Question (d) See answer to Question (a). Question (e) The CRA would examine the potential application of subsections 15(1), 56(2), 69(1), 246(1) and/or 245(2), among others. Furthermore, in cases where the refreeze transaction is not implemented on a fair market value basis, the application of subsection 51(2), 86(2) or paragraph 85(1)e.2) would also have to be considered.
Reasons: Wording of the Act and previous positions.
2010 STEP Round Table
Question 1
The Canada Revenue Agency ("CRA") has a position that an estate refreeze transaction in circumstances where the value of a corporation decreases after the implementation of an estate freeze transaction does not result in the conferral of a benefit on the common shareholder(s) or the preferred shareholder(s) provided that the decrease in value of the corporation is not the result of the stripping of corporate assets and the fair market value ("FMV") of the new preferred shares is equal to the FMV of the old preferred shares at the time of the refreeze.
(a) Could you please provide some further guidance with respect to what transactions might be considered to be the stripping of corporate assets.
(b) If the corporation initially increased in value after the first freeze, dividends were paid but the value of the corporation was still greater than the value of the preferred shares at that time and then, subsequently, the value of the corporation declines below the initial freeze value, would the decrease in value be considered to be the result of the stripping of corporate assets?
(c) Could you please comment upon whether the payment of a bonus or salary to a beneficiary of the freeze who is active in the business would be viewed as the stripping of corporate assets.
(d) Would your position be different if the bonus or salary was paid to the beneficiary of the freeze in the ordinary course of the corporation's business or in connection with a post-freeze asset sale by the corporation?
(e) What is the effect on the shareholders involved in an estate refreeze if there has been a reduction in the corporation's value as a result of the stripping of corporate assets?
CRA response to question 1 (a)
The stripping of corporate assets in the context referred to above could be achieved in several ways. While it is very difficult to describe all of them, we can give the following two examples which would preclude the application of the CRA's position in the context of a refreeze transaction:
- Dividends that would be paid by the corporation on the common shares of its capital stock and that would impair the value of the original freeze preferred shares;
- The payment by the corporation of a bonus or salary to the beneficiary of the freeze in connection with a post-freeze asset sale by the corporation, and such a bonus or salary is not commensurate with the value of the services performed and the responsibilities assumed by the beneficiary of the freeze.
CRA response to question 1 (b)
It is not possible to provide a definitive answer to this question as it would require an analysis of all the facts and circumstances related to a given situation. However, as a general comment, we would be inclined to consider that the payment of dividends by a corporation should not preclude the application of the CRA's position, provided that such dividends are paid out of the corporation's retained earnings and that they do not impair the value of the original freeze preferred shares.
However, where a dividend is paid and followed shortly thereafter by a decline in value, the CRA would need to examine, on a case-by-case basis, all the facts and circumstances relating to the particular transaction before taking a final position.
CRA response to question 1 (c)
Again, the answer to this question would require an analysis of all the facts and circumstances related to a given situation. However, as a general comment, the payment of a bonus or salary to a beneficiary of the freeze who is active in the business should not preclude the application of the CRA's position, provided that such a bonus or salary is commensurate with the value of the services performed and the responsibilities assumed by the beneficiary of the freeze.
CRA response to question 1 (d)
As mentioned above, the CRA's position should not apply where the payment by the corporation of a bonus or salary to the beneficiary of the freeze is in connection with a post-freeze asset sale by the corporation, and such a bonus or salary is not commensurate with the value of the services performed and the responsibilities assumed by the beneficiary of the freeze.
CRA response to question 1 (e)
In situations where the CRA's position in the context of a refreeze transaction would not apply, the CRA would examine the potential application of subsections 15(1), 56(2), 69(1), 246(1) and/or 245(2), among others. Furthermore, in cases where the refreeze transaction is not implemented on a FMV basis, the application of subsection 51(2), 86(2) or paragraph 85(1)(e.2) would also have to be considered. Of course, the potential application of these provisions would require an analysis of all the facts and circumstances of a given situation.
Stéphane Prud'Homme
June 8, 2010
2010-036232
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