CRA rules on a hybrid pipeline transaction involving an interim loan to fund terminal return taxes, and PUC distributions rather than note repayments out of the Amalco

CRA ruled on what it called a “hybrid” pipeline transaction involving a corporation that held only marketable securities under which:

• The estate exchanges the common shares of the Corporation on a s. 85(1) rollover basis for new Class A common shares and redeemable retractable preferred shares of the Corporation.
• The Corporation’s CDA is accessed by electing under s. 83(2) on an increase in the stated capital of the preferred shares.
• The Corporation redeems the preferred shares in consideration for a note, designates a portion (based on its GRIP account) of the resulting deemed dividend as an eligible dividend and reports a resulting capital loss, which is carried back under s. 164(6).
• The Estate then transfers the Class A Common Shares to a “Newco” formed by it in consideration for Newco common shares.
• The Corporation makes a loan to Newco, which makes a stated capital distribution on its common shares to fund income taxes owing under the deceased’s terminal return.
• At least 12 months later, the Corporation and Newco amalgamate and, thereafter, Amalco makes stated capital distributions at a rate not exceeding 25% per quarter of the initial aggregate paid-up capital of the Amalco common shares.

Neal Armstrong. Summary of 2021 Ruling 2020-0874851R3 under s. 84(2).