CRA rules on a post-mortem pipeline with a 24-month implementation timeline, and an earlier note repayment to fund terminal return taxes

CRA ruled on a straightforward post-mortem pipeline concerning the estate of the deceased - who had died holding high-ACB preferred shares of Opco and common shares and preferred shares of the Holdco holding the Opco common shares – providing for:

1. Opco redeeming preferred shares held by the estate, giving rise to a deemed dividend and a capital loss, which the estate carried back under s. 164(6).
2. The estate transferring its Holdco shares under s. 85(1) to Newco (newly formed by it) in exchange for a Note of Newco whose principal was limited in accordance with s. 84.1(2)(a.1) to reflect that the estate had claimed the capital gains deduction, and Newco common shares for the balance.
3. Newco using proceeds of interest-bearing loan (made on a back-to-back basis by Opco to Holdco, and by Holdco to Newco) to repay a portion of the Note so as to fund the payment by the estate of income taxes arising in the deceased’s terminal return.
4. At least one year following 2, Newco and Holdco amalgamating.
5. Over the following year (or more), the Note being gradually repaid.

Neal Armstrong. Summary of 2024 Ruling 2023-0993651R3 under s. 84(2).