2010 Ruling 2010-0389551R3 - Post-Mortem Planning - Withdrawal of Ruling

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: Whether, on the facts provided, the Directorate would confirm that the repatriation of the surpluses of Holdco by the Estate in the context of a post-mortem, pipeline strategy, would not give rise to dividend treatment to the Estate?

Position: No ruling provided. Ruling request withdrawn.

Reasons: Holdco is inactive and owns liquid assets (possibly only cash). Consequently, Holdco's surpluses should be subject to dividend treatment in the hands of the Estate. Subsection 164(6) could then apply, in order to carry back the Estate's capital loss resulting from the winding-up or redemption of the shares of the capital stock of Holdco, to offset the deemed capital gain realized by the deceased.

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									2010-038955
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XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

RE: Advance Income Tax Ruling
XXXXXXXXXX ("Estate")
XXXXXXXXXX ("Holdco")
XXXXXXXXXX

Further to your letters dated XXXXXXXXXX , you request confirmation by our Directorate that the implementation of a "Pipeline Strategy" as contemplated by the above-noted taxpayers would not result in dividend treatment to the Estate on its repatriation of Holdco's surpluses. You have provided us with the following limited facts in conjunction with your advance income tax ruling request.

Facts

• XXXXXXXXXX ("Taxpayer") died on XXXXXXXXXX ;
• At the time of her death, the Taxpayer was the sole shareholder of Holdco, a private company incorporated under the laws of the Province of XXXXXXXXXX ;
• Holdco owns approximately $XXXXXXXXXX of liquid assets (possibly only cash); and,
• Holdco has no investment activities and is currently inactive.

Your Request

As a result of the Taxpayer's death, subsection 70(5) would apply and the Taxpayer would be deemed, immediately before death, to have disposed of all capital property for proceeds of disposition equal to the fair market value of the property. Consequently, the Taxpayer would realize a capital gain on the deemed disposition.

In the context of post-mortem planning, you suggest that, in order to avoid the double taxation that can result in such circumstances, the Estate could implement a strategy commonly known as the "Subsection 164(6) Capital Loss Carry Back Strategy."

Essentially, subsection 164(6) provides a taxpayer with the possibility of carrying back an estate's capital loss, resulting from a winding-up or a redemption of the shares of the capital stock of a private corporation, to offset the deemed capital gain realized by the deceased. This planning must be implemented within the first taxation year of the estate. This strategy essentially eliminates the capital gain of the deceased and allows the estate to be taxed once, as a deemed dividend.

Similarly, you consider another post-mortem strategy commonly referred to as the "Pipeline Strategy." When correctly implemented, the result of the Pipeline Strategy would be that tax is only imposed on the capital gain reported on the deceased's terminal tax return, without a deemed dividend to the estate as discussed in the previous strategy.

It is in the context of the implementation of a "Pipeline Strategy" that you request that our Directorate confirm that the repatriation by the Estate of Holdco's surpluses would not give rise to a dividend treatment to the Estate under subsection 84(2) or 245(2) of the Income Tax Act.

Unfortunately, we are unable to provide confirmation of the aforementioned matters as the particular facts and the proposed transactions would, in our view, give rise to a dividend treatment to the Estate. Consequently, you have advised us that you wish to withdraw your advance income tax ruling request.

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

Yours truly,

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