2022 Ruling 2022-0947921R3 - Post-mortem tax 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.

Principal Issues: 1) Whether paragraph 84.1(1)(b) applies to the proposed post-mortem pipeline transactions; 2) Whether subsection 84(2) applies to the proposed post-mortem pipeline transactions.

Position: 1) No; 2) No.

Reasons: 1) Non-share consideration does not exceed the adjusted cost base of the transferred shares; 2) In accordance with the Act and consistent with CRA's published positions.

XXXXXXXXXX									2022-094792

XXXXXXXXXX, 2022

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling (“Ruling”) on behalf of the above-noted taxpayers (“Taxpayers”).

The rulings provided herein are based solely on the facts, proposed transactions, purposes of the proposed transactions and the additional information described below. Any documentation submitted further to your request does not form part of the facts, proposed transactions or additional information unless specifically reproduced therein and any references thereto are provided solely for the convenience of the reader.

We understand that, to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/or issues involved in this Ruling are the same as, or substantially similar to, transactions and/or issues that are:

a) in a previously filed tax return of the Taxpayers or a person related to the Taxpayers;

b) being considered by the CRA in connection with a previously filed tax return of the Taxpayers or a person related to the Taxpayers;

c) under objection by the Taxpayers or a person related to the Taxpayers;

d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

e) the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate in connection with the Taxpayers or a person related to the Taxpayers.

The addresses, tax account numbers, Tax Services Offices and the Tax Centres of the Taxpayers are as follows:

XXXXXXXXXX

Unless otherwise stated:

a) Each references herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 c. 1 (5th Supp.), as amended to the date of this letter;

b) All terms and expressions used in this letter that are defined in the Income Tax Act have the meaning given in such definition;

c) All references to monetary amounts are in Canadian dollars; and

d) The singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified below:

“ACB” means adjusted cost base, as that expression is defined in section 54 and subsection 248(1);

“Act” means the Income Tax Act, R.S.C. 1985 c. 1 (5th Supp.), as amended to the date of this letter;

“Amalco” refers to the corporation to be created on the amalgamation of Opco and Newco as described in Paragraph 26;

“arm’s length” has the meaning assigned by subsection 251(1);

“capital property” has the meaning assigned by section 54;

“CCPC” means “Canadian-controlled private corporation” as that expression is defined in subsection 125(7);

“CDA” means “capital dividend account” as that expression is defined in subsection 89(1);

“Child1” refers to the Deceased’s XXXXXXXXXX;

“Child2” refers to the Deceased’s XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Deceased” means the late XXXXXXXXXX;

“dividend refund” has the meaning assigned by subsection 129(1);

“ERDTOH” means “eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“Estate” refers to the estate of the Deceased, whose beneficiaries are Child1 and Child2;

“Executors” means the executors of the Estate, namely Child1 and Child2;

“FMV” or “fair market value” means the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of money;

“GICs” mean guaranteed investment certificates;

“GRE” means a “graduated rate estate” of an individual as defined in subsection 248(1);

“GRIP” means “general rate income pool” as that expression is defined in subsection 89(1);

“Land” refers to the real property beneficially owned by Opco at XXXXXXXXXX;

“Newco” means a corporation to be incorporated pursuant to the XXXXXXXXXX, as described in Paragraph 22;

“NERDTOH” means “non-eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“XXXXXXXXXX” means the XXXXXXXXXX;

“Opco” means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX;

“Paragraph” refers to a numbered paragraph in this letter;

“PN1” means the promissory note to be issued by Opco to the Estate on the redemption of the Class A special shares. PN1 will be non-interest bearing and payable on demand;

“PN2” means the promissory note issued by Newco to the Estate in partial consideration for the Remaining Shares acquired by Newco from the Estate. PN2 will be non-interest bearing and payable on demand;

“Principal Amount” of PN1 or PN2, as the case may be, means the amount owing at time of its issue;

“Primary Will” refers to the primary last will and testament of the Deceased;

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in Paragraphs 16 to 29;

“PUC” means “paid up capital” as that expression is defined by subsection 89(1);

“Remaining Shares” means all the issued and outstanding shares of Opco other than the Class A special shares; specifically the Class 1 common, Class 2 common, Class B special and Class C special shares of Opco;

“Regulations” means the Income Tax Regulations, CRC, c. 945, as amended;

“resident in Canada” means resident in Canada for purposes of the Act;

“Secondary Will” refers to the secondary last will and testament of the Deceased;

“TCC” means “taxable Canadian corporation” as that expression is defined in subsection 89(1); and

“Wills” refers collectively to the Deceased’s Primary Will and Secondary Will.

FACTS

1. Opco was incorporated under the XXXXXXXXXX on XXXXXXXXXX.

2. For purposes of the Act, Opco is and will be, at all relevant times, a CCPC and TCC. Opco’s fiscal period and taxation year ends on XXXXXXXXXX.

3. Opco’s head office is located in XXXXXXXXXX.

4. Opco’s authorized share capital is as follows:

a) voting Class 1 common shares, dividends at the discretion of the directors and may be paid to the exclusion of other classes of common shares;

b) voting Class 2 common shares, dividends at the discretion of the directors and may be paid to the exclusion of other classes of common shares;

c) voting Class 3 common shares, dividends at the discretion of the directors;

d) voting Class 4 common shares, dividends at the discretion of the directors;

e) non-voting Class A special shares, non-cumulative dividends at the discretion of the directors, at an annual interest rate of XXXXXXXXXX% of the redemption amount, redeemable/retractable for $XXXXXXXXXX per share, rank in priority to all other shares;

f) non-voting Class B special shares, non-cumulative dividends at the discretion of the directors, at an annual interest rate of XXXXXXXXXX% of the redemption amount, redeemable/retractable for $XXXXXXXXXX per share, rank in priority to the Class C special, Class D special, Class E special, Class F special and common shares;

g) non-voting Class C special shares, non-cumulative dividends at the discretion of the directors not to exceed XXXXXXXXXX% of the redemption amount, redeemable/retractable for the value of consideration received upon issue subject to a price adjustment clause, rank in priority to the Class D special, Class E special, Class F special and common shares;

h) non-voting Class D special shares, non-cumulative dividends at the discretion of the directors not to exceed XXXXXXXXXX% of the redemption amount, redeemable/retractable for the value of consideration received upon issue subject to a price adjustment clause, rank in priority to the, Class E special, Class F special and common shares;

i) non-voting Class E special shares, non-cumulative dividends at the discretion of the directors, redeemable/retractable for $XXXXXXXXXX per share, rank in priority to the Class F special and common shares;

j) voting Class F special shares (XXXXXXXXXX votes per share), non-cumulative dividends at the discretion of the directors not to exceed $XXXXXXXXXX per share per annum, redeemable/retractable for $XXXXXXXXXX per share, rank in priority to the common shares.

5. The Deceased passed away on XXXXXXXXXX and was survived by his two children, Child1 and Child2. Immediately prior to death, the Deceased was resident in Canada, in the province of XXXXXXXXXX.

Child1 and Child2 are resident in Canada and will not, prior to the implementation of the Proposed Transactions, cease to be resident in Canada.

Immediately prior to death, the Deceased owned all the issued and outstanding shares of Opco. The shares of Opco were capital property to the Deceased. The Deceased realized a total capital gain on the deemed disposition of the shares of Opco equal to $XXXXXXXXXX. The number and classes of such shares and their FMV immediately before the Deceased’s death were as follows:

 Type of shares		Class		# of shares		FMV
 Common			Class 1	XXXXXXXXXX		XXXXXXXXXX
 Common			Class 2	XXXXXXXXXX		XXXXXXXXXX
 Special		      Class A 	XXXXXXXXXX		XXXXXXXXXX
 Special		      Class B	XXXXXXXXXX		XXXXXXXXXX
 Special		      Class C 	XXXXXXXXXX		XXXXXXXXXX

6. Previous reorganizations of the capital of Opco resulted in the issuance of the outstanding Class A, B and C special shares to the Deceased. The redemption amount, ACB and PUC of the shares of Opco immediately before the Deceased’s death were as follows:

 Class of Share		Redemption Amount			            ACB		PUC
 Class 1 common		N/A					            XXXXXXXXXX	XXXXXXXXXX
 Class 2 common		N/A					            XXXXXXXXXX	XXXXXXXXXX
 Class A special	      $XXXXXXXXXX/share: total $XXXXXXXXXX	XXXXXXXXXX	XXXXXXXXXX
 Class B special 	      $XXXXXXXXXX/share: total $XXXXXXXXXX	XXXXXXXXXX	XXXXXXXXXX
 Class C special	      $XXXXXXXXXX/share: total $XXXXXXXXXX	XXXXXXXXXX	XXXXXXXXXX

The ACB of the Class A special shares, for the purposes of section 84.1, as calculated pursuant to subsection 84.1(2) immediately before the Deceased’s death, was $XXXXXXXXXX. The ACB of each class of the Remaining Shares, for the purposes of section 84.1, is equal the amount described in the table above. Specifically, neither paragraph 84.1(2)(a) nor (a.1) apply to deem the ACB of any class of the Remaining Shares, for the purposes of applying section 84.1, to vary from the amounts described above.

7. Opco carries on a business the primary purpose of which is to XXXXXXXXXX. Opco’s investments were managed in consultation with the Deceased (prior to death) and continue to be managed in consultation with the Estate (following the death of the Deceased) by a professional advisor.

8. Immediately before the Proposed Transactions, it is expected that the FMV of Opco’s assets will be primarily attributable to XXXXXXXXXX. Currently, the assets of Opco, other than the XXXXXXXXXX, are primarily invested in XXXXXXXXXX with a target allocation being approximately XXXXXXXXXX% cash, XXXXXXXXXX% fixed income, and XXXXXXXXXX% equity.

9. As of XXXXXXXXXX, Opco had the following balances:

  	ERDTOH 	$XXXXXXXXXX
	NERDTOH 	$XXXXXXXXXX
	GRIP 		$XXXXXXXXXX
	CDA 		$XXXXXXXXXX

10. As of XXXXXXXXXX, Opco did not have non-capital losses as described in subsection 111(8).

11. All of the shares of Opco owned by the Deceased at the time of death were held as capital property. Pursuant to paragraph 70(5)(a), the Deceased was deemed to have disposed of the shares of Opco immediately before death and to have received proceeds of disposition equal to their FMV.

12. Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired all of the shares of Opco referred to in Paragraph 11 at a cost equal to their FMV immediately before the Deceased’s death. The shares of Opco are capital property to the Estate.

13. Pursuant to the Deceased’s Wills, Child1 and Child2 are each entitled an equal share of the residue of the Estate.

14. The Estate is resident in Canada and all of its beneficiaries are resident in Canada.

15. The Estate will designate itself as a GRE in its T3 Trust Income Tax and Information Return for the Estate’s first taxation year (which will end no later than one year after the death of the Deceased).

PROPOSED TRANSACTIONS

The proposed transactions will be implemented in the following order unless otherwise indicated. The transactions described in Paragraphs 16 - 25 will be completed before the end of the first taxation year of the Estate.

16. Opco will increase the legal stated capital of the Class A special shares. As a result, a dividend will be deemed to be paid by Opco and received by the Estate on the Class A special shares equal to the amount of the increase. The deemed dividend will be a taxable dividend to the Estate and will be reported as such on its T3 Trust Income Tax and Information Return. The increase in stated capital (and PUC) will be an amount such that the deemed dividend arising on the redemption of the Class A special shares, as described in Paragraph 17, will be equal to Opco’s CDA balance.

All or a portion of the taxable dividend may be designated, pursuant to subsection 89(14), to be an eligible dividend.

An amount will be added to the ACB of the Class A special shares equal to the amount added to the stated capital (and PUC) of those shares.

Redemption of Class A special shares

17. Opco will redeem the Class A special shares for their redemption amount of $XXXXXXXXXX. As a result of the redemption, Opco will be deemed to pay a dividend to the Estate equal to the amount by which the amount paid by Opco exceeds the PUC of those shares.

18. In consideration for the redemption of the Class A special shares, Opco will issue PN1 to the Estate. The Principal Amount and FMV of PN1 will be equal to the Class A special shares redemption amount. The Estate will accept PN1 as full payment for the redemption of the Class A special shares.

Opco will repay PN1 by using its existing cash and, if necessary, liquidating some of its investments. The liquidation of some of its investments, if necessary, will not impact the ongoing operation of Opco’s business, as described in Paragraph 7.

19. Opco will elect in respect of the full amount of the deemed dividend referred to in Paragraph 17, in prescribed manner and prescribed form and within the time referred to in subsection 83(2), to have the provisions of subsection 83(2) apply. For greater certainty, the amount of the deemed dividend will not exceed the CDA of Opco immediately prior to the payment of the dividend.

20. As a consequence of the redemption of the Class A special shares, the Estate will incur a capital loss equal to the difference between the proceeds of disposition and the ACB of the Class A special shares, less the amount determined under subsection 112(3.2).

21. The Executors will make an election in prescribed manner and within the prescribed time for the purposes of 164(6) to deem the Estate’s capital loss from the disposition of the Class A special shares (or such part of such loss that does not exceed the excess referred to in paragraph 164(6)(a)), to be a capital loss of the Deceased in the Deceased’s last taxation year.

Pipeline Transactions

22. The Estate will incorporate Newco. The authorized share capital of Newco will include an unlimited number of voting, fully participating common shares, designated as Class 1 common shares.

23. Upon incorporation of Newco, the Estate will subscribe for XXXXXXXXXX Class 1 common share for $XXXXXXXXXX. Newco will be a CCPC and TCC controlled by the Estate.

24. The Estate will dispose of the Remaining Shares to Newco in consideration for PN2 and XXXXXXXXXX Class 1 common shares of the capital stock of Newco. The Principal Amount and FMV of PN2 will not exceed, the total of all amounts, each of which is, in respect of each class of the Remaining Shares, an amount equal to the lesser of the ACB and the FMV of such class of shares at the time of the disposition.

For greater certainty, the amount of any addition to the PUC of the Class 1 common shares of the capital stock of Newco will be subject to paragraph 84.1(1)(a).

The Estate and Newco will jointly elect, in prescribed form and within the prescribed time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the disposition. The agreed amount in respect of each class of shares so disposed of will not be less than the lesser of the amounts specified in paragraph 85(1)(c.1) nor will it be less than the amount described in paragraph 85(1)(b).

25. During the one year period following the disposition of the Remaining shares to Newco, Newco will not repay any portion of PN2. Further, neither Newco nor Opco will acquire or redeem any of their shares and, during this time, Opco will not discontinue or reorganize its business.

Amalgamation of Opco and Newco

26. After at least one year has elapsed since the disposition of the Remaining Shares by the Estate to Newco, Opco and Newco will amalgamate within the meaning of subsection 87(1) to form Amalco.

27. In accordance with subsection 87(1), all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) and all the liabilities (except amounts payable to any predecessor corporation) of Opco and Newco immediately before the amalgamation will become the property and liabilities of Amalco. Following the amalgamation, the Estate will be the sole shareholder of Amalco.

In connection with the amalgamation of Opco and Newco, Amalco will designate in its return of income for its first taxation year an amount under the provisions of subsection 87(11) and paragraphs 88(1)(c) and 88(1)(d), and within the limits thereto, to increase the cost of the capital property, other than ineligible property, owned by Opco.

28. The authorized share capital of Amalco will be the same as Newco’s authorized share capital. The PUC and ACB of the Amalco shares held by the Estate immediately after the amalgamation will be equal to those of the Newco shares.

29. PN2 will be repaid on a progressive basis following the amalgamation of Opco and Newco. During the three-month period immediately following the amalgamation, Amalco may make one or more payments in respect of PN2 that do not, in aggregate, exceed the greater of: (a) 25% of the Principal Amount of PN2; and (b) the amount by which the tax payable by the Deceased in the Deceased’s final year (taking into consideration the application of subsection 164(6)) and by the Estate in its first taxation year exceeds the Principal Amount of PN1. Further repayments on PN2 will not exceed, in any subsequent three-month period, 25% of the Principal Amount of PN2.

To the extent that the amount repaid on PN2 in any three-month period is less than the maximum amount that may be repaid, as described above, an amount equal to the difference may be repaid at any time thereafter and will not be treated as a repayment in any subsequent period.

ADDITIONAL INFORMATION

30. Once all debts and liabilities of the Estate have been ascertained and settled, the Executors will complete the administration of the Estate and distribute the residue of the Estate to Child1 and Child2 in accordance with the terms of the Wills.

31. By reason of the application of subsection 40(3.61), subsection 40(3.6) will not apply to reduce the capital loss realized on the disposition of the Class A special shares, as described in Paragraph 17 to which an election under subsection 164(6) applies.

PURPOSES OF THE PROPOSED TRANSACTIONS

32. The purposes of the Proposed Transactions are to:

a) return to the Estate an amount not exceeding the FMV of the Opco shares, immediately before the death of the Deceased, while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2) and 84(3);

b) integrate the tax on the underlying assets owned by Opco and the Opco shares owned by the Deceased at the time of death through the payment of capital dividends and taxable dividends and to trigger a capital loss on the Class A special shares owned by the Estate to reduce, subject to limitations in the Act, capital gains deemed to have been realized by the Deceased immediately before death; and

c) create a “pipeline” to allow for the distribution of funds from Opco/Amalco, in a manner which satisfies the administrative requirements established by the CRA, without triggering additional taxes.

RULINGS GIVEN

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Paragraph 84.1(1)(b) will not apply to deem the Estate to have received a dividend from Newco on the disposition of the Remaining Shares to Newco, as described in Paragraph 24.

B. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem the Estate or its beneficiaries to have received a dividend on the issuance of PN2 or any repayment of PN2.

C. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in any of the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022 and are binding on the CRA provided that the Proposed Transactions are completed within the time frames described in this letter.

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

Other Comments

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:

a) the PUC, ACB or FMV of any share referred to herein;

b) the balance of the NERDTOH, ERDTOH, CDA, GRIP, or any other tax account for any corporation described herein or whether any dividend paid or deemed to be paid is an eligible dividend or a capital dividend;

c) the capacity of the Executors of the Estate to complete the Proposed Transactions under the terms of the Wills;

d) the availability of an addition to the cost of any property owned by Opco and acquired by Amalco as a result of the amalgamation of Opco and Newco as described in Paragraphs 26 and 27.

e) any other tax consequences relating to the facts, additional information, Proposed Transactions or any transaction or event taking place either before or after the Proposed Transactions.

Nothing in this letter should be construed as confirmation that, for the purposes of any of the rulings given above, that any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.

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

Yours truly,

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