CRA rules on a double pipeline entailing the application of s. 84.1 and s. 88(1)(d) bump

Father bequested his shares of an investments holding company (Aco) directly to his surviving wife (Mother) and to a spousal trust (Trust) for her. Following the death of Mother, her estate and Trust were to engage in a pipeline transaction under which:

• The estate and Trust transfer their Aco shares under s. 85(1) to a Newco of Trust in consideration for Newco preferred shares. Given that the transferred shares include Aco shares which it had previously issued to Father in an exchange where he had utilized the s. 110.6(1) deduction, ss. 84.1(1) and (2)(a.1)(ii) grind the PUC of such Newco shares.
• After a specified period, Newco amalgamates with Aco, and redeems the preferred shares for notes. In light of the s. 84.1 grind, this generates deemed dividends and associated capital losses which, in the case of the Trust, it will carry back under s. 111(1)(b) to reduce its taxable capital gain realized on Mother’s death.
• Amalco will repay the notes at no more than a specified rate over the period commencing with their issuance.

CRA ruled regarding the application of s. 84.1 as described above, the non-application of ss. 84(2), 40(3.6) and s. 245(2), and the application of ss. 88(1)(d.2) and (d.3) to deem Newco to have last acquired control of Aco immediately following Mother's death (regarding a bump of shares held by Aco on the amalgamation).

Neal Armstrong. Summary of 2021 Ruling 2021-0887301R3 F under s. 84(2).