2003 Ruling 2003-0018823 - Estate 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Post-mortem estate planning and utilization of election under subsection 164(6)

Position: Acceptable.

Reasons: Meets the requirements.

XXXXXXXXXX 								2003-001882

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, which replace your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of your knowledge that of the taxpayers involved, none of the issues involved in the ruling:

? is in an earlier return of the taxpayers or of a related person;

? is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or of a person related to them;

? is under objection, or before the courts; or,

? is the subject of a ruling previously issued by this Directorate.

DEFINITIONS

In this letter, the following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof and all references to a statute are to the Act, unless otherwise indicated;

"adjusted cost base" or "ACB" has the meaning assigned by section 54;

"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

"arm's length" has the meaning assigned by section 251;

"assessable dividend" has the meaning assigned by subsection 186(3);

"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

"Canco Note" means the promissory note described in paragraph 22;

"cost amount" has the meaning assigned by subsection 248(1);

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

"PUC" or "paid-up capital" has the meaning assigned by subsection 89(1);

"related persons" has the meaning assigned by subsection 251(2);

"refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

"stated capital" means stated capital as that expression is used in the Business Corporations Act (Ontario);

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

"taxable dividend" has the meaning assigned by paragraph 89(1)(j);

"Trustees" means the individuals duly appointed by the Will, i.e.: Wife (wife of the deceased), XXXXXXXXXX (XXXXXXXXXX of the deceased) and XXXXXXXXXX (XXXXXXXXXX of the deceased); and

"Will" refers to the notarized will of the XXXXXXXXXX dated XXXXXXXXXX.

Our understanding of the facts, purposes of the proposed transactions and proposed transactions is as follows:

FACTS

1. XXXXXXXXXX ("Mr. X") died on XXXXXXXXXX.

2. Prior to his death, Mr. X was an individual resident in Canada within the meaning of the Act. His last residence was situated at XXXXXXXXXX. His personal income tax return for the taxation year ended before XXXXXXXXXX was filed at the XXXXXXXXXX Tax Centre. His social insurance number was XXXXXXXXXX.

3. Mr. X was legally married to XXXXXXXXXX ("Wife") (XXXXXXXXXX). Mr. X and Wife have a daughter, XXXXXXXXXX ("Daughter") XXXXXXXXXX who is XXXXXXXXXX years of age and is resident in Canada. Wife was, at the time of Mr. X's death, and is currently, a resident of Canada.

4. At the time of his death, Mr. X owned all of the issued shares of XXXXXXXXXX ("Canco"), a Canadian-controlled private corporation and a taxable Canadian corporation. The shares of Canco held by Mr. X consisted of XXXXXXXXXX common shares (the "Canco Common Shares") and XXXXXXXXXX preferred shares (the "Canco Preferred Shares") which are not entitled to a dividend, are non-voting, redeemable and retractable. These shares were held by Mr. X as capital property.

5. The aggregate fair market value of the Canco Common Shares and the Canco Preferred Shares as at XXXXXXXXXX, was estimated to be $XXXXXXXXXX including Canco's RDTOH of $XXXXXXXXXX. The aggregate PUC and ACB of the Canco shares owned by Mr. X at the time of his death was:

Canco Common Shares: 	PUC   $XXXXXXXXXX
				ACB   $XXXXXXXXXX 

Canco Preferred Shares:	PUC   $XXXXXXXXXX
			ACB   $XXXXXXXXXX 

6. The Will appointed the Trustees as liquidators, administrators and trustees of the Estate. All of the Trustees are resident in Canada within the meaning of the Act.

7. In the Will, XXXXXXXXXX% of the residual property of Mr. X, which included the shares of Canco was bequeathed to a trust for the benefit of Daughter to be administered by the Trustees. The remaining XXXXXXXXXX% of the residual property was bequeathed to Wife. The Will sets out how the Estate is to be administered and divided. It also sets out the powers of the Trustees. The Will was passed before notaries and is an authentic document.

8. As provided for in the Will, decisions concerning the Estate are made by a majority of the Trustees.

9. In accordance with the Will, the Trustees intend to distribute approximately XXXXXXXXXX% of the shares of Canco to Wife and the balance (approximately XXXXXXXXXX%) in trust for Daughter.

10. At the time the proposed transactions will be carried out, all bequests under the Will concerning persons other than Wife and Daughter will have been settled. The only remaining beneficiaries of the Estate will be Wife and Daughter.

11. Canco was incorporated under and is governed by the Business Corporations Act (Ontario). It is a taxable Canadian corporation.

12. Canco is an investment holding company.

13. Canco's last fiscal year-end occurred on XXXXXXXXXX.

14. As at XXXXXXXXXX, the fair market value of Canco was estimated to be $XXXXXXXXXX, including the value of refundable dividend tax on hand ("RDTOH") of $XXXXXXXXXX.

15. Certain assets of Canco might have a cost amount greater than their fair market value.

PROPOSED TRANSACTIONS

16. The Trustees of the Estate will reserve approximately XXXXXXXXXX% of the Canco Common Shares and XXXXXXXXXX% of the Canco Preferred Shares for Wife (the "Wife Shares") and approximately XXXXXXXXXX % of the Canco Common Shares and XXXXXXXXXX% of the Canco Preferred Shares for Daughter (the "Daughter Shares").

17. A new corporation, Subco, will be incorporated by the Estate. The Estate will then subscribe for 1 common share for consideration of $XXXXXXXXXX.

18. The authorized share capital of Subco will comprise of only an unlimited number of common shares.

19. The Estate will transfer all of the Daughter Shares to Subco, in consideration for additional common shares of Subco. The Estate and Subco will jointly and in a timely manner, file an election pursuant to subsection 85(1). The agreed amount in respect of the transfer of the Daughter Shares will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1) and (ii). For greater certainty, the agreed amount will not exceed the fair market value of the property transferred or be less than the amount described in paragraph 85(1)(b). In accordance with the corporate law governing the creation of Subco, the paid-up capital of the Subco common shares will be limited to a nominal amount.

20. The Trustees of the Estate will distribute the Wife Shares to Wife. The Wife Shares will vest indefeasibly in Wife. The shares will be held by Wife as capital property.

20A. Canco will amend its authorized capital to provide for two new classes of shares: a new class of common shares (the "Canco New Common Shares") which will be non-voting and fully participating; and a new class of preferred shares (the "Canco New Preferred Shares") which will be non-voting, non-participating and retractable. Subco will transfer the Daughter Shares to Canco in exchange for an equivalent number of Canco New Common Shares and Canco New Preferred Shares having a fair market value equal to the fair market value of the Daughter Shares so transferred. Canco and Subco will 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. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to Canco.

Canco will add to the paid-up capital maintained for the Canco New Common Shares and the Canco New Preferred Shares an amount determined pursuant to subsection 85(2.1).

21. In accordance with the Business Corporations Act (Ontario), Canco will reduce the paid-up capital of the Canco New Common Shares and the Canco New Preferred Shares held by Subco for no consideration.

22. Canco will redeem the Canco New Common Shares and the Canco New Preferred Shares held by Subco in consideration for the issuance of a demand interest-bearing promissory note with a principal amount equal to the fair market value of the shares redeemed ("Canco Note"). The rate of interest will be reasonable in the circumstances and similar to an interest rate normally charged by an arm's length lender with similar terms and conditions.

23. Before XXXXXXXXXX, i.e. within the first taxation year of the Estate, the Estate will cause Subco to be wound-up.

SUBSEQUENT TRANSACTION

24. The Estate may, after a period that ends XXXXXXXXXX days after Subco is wound-up, use the Canco Note to subscribe for additional shares of Canco.

OTHER REPRESENTATIONS

25. None of the corporations involved in the proposed transactions is a specified financial institutions as defined by subsection 248(1).

26. None of the corporations involved in the proposed transaction has or will have entered into a "dividend rental arrangement" as defined by subsection 248(1).

27. None of the shares to be issued as part of the proposed transactions will be issued or acquired as part of a transaction or a series of transactions of the type described in subsection 112(2.5).

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to divide and distribute the Estate property between the beneficiaries and to utilize subsection 164(6) in order to offset, to the extent permitted, capital gains realized by Mr. X in the year of death against any capital losses realized by the Estate in its first taxation year.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, we rule as follows:

A. The transfer of the Wife Shares by the Estate to Wife as described in paragraph 20 above will be governed by the provisions of subsection 70(6) such that:

(a) paragraphs 70(5)(a) and (b) will not apply;

(b) Mr. X will be deemed, pursuant to paragraph 70(6)(d), to have disposed of such shares immediately before his death and to have received proceeds of disposition equal to the adjusted cost base to him of such shares immediately before his death; and

(c) Wife will be deemed, pursuant to paragraph 70(6)(d) to have acquired such shares for an amount equal to those proceeds.

\* MERGEFORMAT

B. As a result of the transfer of the Wife Shares in favor of Wife as described in paragraph 20, the control of Canco will be deemed not to have been acquired pursuant to clause 256(7)(a)(i)(D).

C. The reduction in the paid-up capital of the Canco New Common Shares and the Canco New Preferred Shares, as described in paragraph \* MERGEFORMAT 21, by Canco without any payment will not, in itself, result in any dividend or capital gain.

D. Upon the redemption of the Canco New Common Shares and the Canco New Preferred Shares held by Subco as described in paragraph \* MERGEFORMAT 22:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), Canco will be deemed to have paid, and Subco will be deemed to have received a dividend at that time equal to the amount, if any, by which the amount paid to redeem the Canco New Common Shares and the Canco New Preferred Shares exceeds the paid-up capital of the shares immediately before the redemption;

(b) to the extent that the deemed dividend described in (a) above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of Subco for the year in which the dividend is deemed to have been received and such deduction will not be denied by any of the provisions of subsections 112(2.1),(2.2), (2.3) or (2.4);

(c) the amount of the deemed dividend described in paragraph (a) above will, by virtue of paragraph (j) of the definition "proceeds of disposition" in section 54, be excluded from Subco's proceeds of disposition of the Canco New Common Shares and the Canco New Preferred Shares and any loss arising from such disposition of those shares will be reduced by the amount of such dividend pursuant to subsection 112(3);

(d) Subco will be subject to Part IV tax in respect of such dividend;

(e) Canco will be entitled to a dividend refund as determined under subsection 129(1); and

(f) subsection 129(1.2) will not be applicable with respect to the dividend.

E. As a result of the distributions by Subco in the course of its winding-up as described in paragraph \* MERGEFORMAT 23:

(a) pursuant to paragraph 88(2)(b) and subsection 84(2), the Estate will be deemed to have received a dividend on the common shares of Subco equal to the amount by which the aggregate fair market value of the property distributed by Subco exceeds the paid-up capital of the common shares of Subco;

(b) the dividend will be deemed, pursuant to paragraph 88(2)(b)(iii) to be a taxable dividend;

(c) pursuant to paragraph 88(2)(b)(iv), the Estate will be deemed to have received a taxable dividend in the amount described in paragraph (a);

(d) the amount of the deemed dividend described in paragraph (c) will, by virtue of paragraph (j) of the definition "proceeds of disposition" in section 54, be excluded from the Estate's proceeds of disposition of the common shares of Subco;

(e) Subco will be entitled to a dividend refund pursuant to subsection 129(1); and

(f) subsection 129(1.2) will not be applicable with respect to the dividend.

F. Subsection 69(5) will apply to the winding-up of Subco as described in paragraph 23 above.

G. Subsection 40(3.6) will not apply to deem any capital loss arising on the disposition of the common shares of Subco by the Estate on the winding-up of Subco, as described in paragraph 23 above, to be nil.

H. To the extent that a capital loss is realized by the Estate on the disposition of the common shares of Subco within the first taxation year of the Estate, such capital loss, or portion thereof, will be deemed, except for the purposes of subsection 112(3) and paragraph 164(6)(c), to be a capital loss of Mr. X from the disposition of the common shares of Subco in his last taxation year and not to be a capital loss of the Estate from the disposition of such property provided that the legal representative of the Estate elects in prescribed manner and within the prescribed time pursuant to paragraph 164(6)(c).

I. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the proposed transactions described herein, in and of themselves.

J. Provided that as part of the series or transactions or events that includes the proposed transactions described herein, there is no disposition or significant increase in interest as described in subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the taxable dividend described in Ruling D above. For greater certainty, the proposed transactions described herein, in and by themselves, will not be considered to result in any disposition to or significant increase in interest by an unrelated person as described in subparagraphs 55(3)(a)(i) to (v).

K. Subsection 245(2) will not be applied, 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 70-6R5 issued on May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

a. the determination of the fair market value, adjusted cost base or paid-up capital of any shares referred to herein;

b. the determination of the refundable dividend tax on hand;

c. any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch