Section 84

CRA provided rulings for a pipeline transaction in which the estate with a resident beneficiary sells a company (Opco) with apparently a real estate business to a Newco for consideration consisting mostly of a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time. These pipeline transactions are to be immediately preceded by transactions in which the estate utilizes Opco's capital dividend account to step up the ACB of a portion of its Opco shares and also to redeem those Opco shares so as to generate a capital loss that can be carried back under s. 164(6).

Background.

The central management and control of ACo, which was originally incorporated under the Country A Corporate Act, shifted to Canada. In order to avoid any deemed dividend under paragraph 128.1(1)(c.2), it did not elect under s. 128.1(2)(b)(i) to add the amount of the positive PUC adjustment available to it under s. 128.1(2)(a) in computing its PUC. Its common shares had a nominal value, which had been added to its “Issued Capital” and also had a “Share Premium Account” which among other elements included premiums received by it in excess of the Issued Capital on share issuances (the “Share Issue Surplus”). As a result of a share-for-share exchange, it became a wholly-owned subsidiary of CCo.

Proposed transactions.

1. ACo will be continued to Province 2. The Articles of Continuance will provide that the issued common shares in the capital of ACo will be converted into common shares without par value, and that ACo’s Issued Capital will become the initial stated capital of such common shares, and that ACo’s Share Premium Account will be renamed as its “Contributed Surplus Account”.
2. Pursuant to the Province 2 Corporate Act, the board of directors of ACo will pass a resolution whereby ACo will add a portion of its Contributed Surplus Account equal to the Share Issue Surplus to its Stated Capital Account in respect of its common shares.

Ruling

Re no s. 84(1) dividend.

A spin-off butterfly reorganization by DC includes a preliminary step for distributing a small portion of DC's retained business from its immediate subsidiary (Subco 1) to DC. This involves Subco 1 selling that business on a taxable basis for a note, and then setting that note off against amounts that became owing by Subco 1 to DC as a result of a stated capital and dividend distribution.

See summary under s. 55(1) – distribution.

Aco holds 30 common shares of Opco (30% of the common shares) having an ACB and PUC of $30 and an FMV of $300 (the net fair market value of all Opco assets being $1,000). A and Aco deal at arm's length with Opco. A (an individual who is the sole shareholder of Aco) transfers all his common shares of Aco (being 30 common shares having an FMV of $300 and ACB and PUC of $30) to Opco in exchange for 30 Opco shares, realizing a capital gain of $270.

There is no deemed dividend under s. 84(1) by virtue of s. 84(1)(b)(i) because the value of Opco's assets increase by $300 when Opco acquires the Aco common shares.

On an internal crystallization transaction, the corporation purchases the individual’s common shares, having a nominal stated capital, in consideration for the issuance of preferred shares with an equivalent FMV; and the agreed amount in their s. 85(1) election is also that FMV. Is there a deemed dividend under s. 84(1) or (3)? The Directorate responded:

[T]here would be no reduction pursuant to subsection 85(2.1) of the PUC of the preferred shares received by the individual. Consequently, the individual would be deemed to have received a dividend pursuant to subsection 84(1) equal to the amount by which the increase in the PUC … of the preferred shares exceeds the amount by which the PUC of the common shares is reduced.

Where an individual transfers his 5% shareholding in Opco, having a paid-up capital and ACB of $100,000 and a fair market value of $1 million, to Holdco in exchange for shares of Holdo whose stated capital is limited under s. 24(3)(a) of the Business Corporations Act (Ontario) to $100,000 and an election is filed under s. 85(1) to limit the proceeds of disposition to $600,000, RC is of the view that s. 84(1)(c.3)(iii) is not available. In its view, Holdco used s. 24(3)(a) to set the stated capital of Holdco at $100,000, rather than initially setting the stated capital at a higher figure and reducing it.

Where preferred shares having a low paid-up capital are transferred by the shareholder to the corporation in exchange for common shares having a high paid-up capital, s. 84(1) will apply to deem the receipt by the shareholder of a dividend, without any relief under s. 85(2.1).

CRA provided detailed comments on Foix (finding that s. 84(2) applied to a particular hybrid sale transaction) in 10 October 2024 APFF Roundtable, Q.3. In brief oral comments regarding Foix when a question about this case was repeated at the 2024 CTF Roundtable, CRA indicated that: the reasons in Foix should be carefully considered in connection with any proposed hybrid sale, with the one exception of transactions identical to those in Geransky; the decision reinforces the broad scope of s. 84(2), and the role of that subsection as an anti-avoidance provision; and that it represents a departure in some respects from the more restrictive view of s. 84(2) evident in some earlier cases.

In its written response, it further stated:

[T]he decision in Foix confirms that subsection 84(2) is to be applied in a manner that supports its anti-avoidance purpose. With this in mind, it is incumbent on the CRA to determine whether, in any particular case, the transactions underlying a particular hybrid sale involve the distribution or appropriation of property of a corporation in circumstances where the entirety of the conditions for the application of subsection 84(2) are met.

Background

At the time of the death of the spouse beneficiary of a testamentary spousal trust, the trust held preferred and common shares of Opco, whose significant assets consisted primarily of interest-bearing loans receivable, interest receivable and investments in private corporations.

The trust then distributed its Opco common shares to its two capital beneficiaries (Beneficiaries 1 and 2) pursuant to s. 107(2), and OPco redeemed some of the preferred shares, giving rise to a capital loss, which the trust applied against the capital gain realized by it on the spouse’s death.

Proposed transactions

1. The trust will transfer its preferred shares on a s. 85(1) rollover basis to a “Newco” (incorporated by Beneficiaries 1 and 2) in consideration for a non-interest-bearing demand note, and non-voting non-cumulative redeemable retractable preferred shares of Newco.
2. Beneficiaries 1 and 2 will transfer their common shares of Opco to Newco on a s. 85(1) rollover basis in consideration for non-voting non-cumulative redeemable retractable preferred shares of Newco.
3. After the elapse of one year, Opco will be wound up into Newco.
4. The note issued in 1 will be gradually repaid over a period of at least two years after the wind-up of Opco into Newco. “For greater certainty, Newco will pay down no more than 25% of the principal amount of the Note by 3 months following the winding-up, no more than 50% of the principal amount of the Note by 6 months following the winding-up, and no more than 75% of the principal amount of the Note by 9 months following the winding-up.”

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

Trust 1 is a discretionary inter vivos family trust, settled almost 21 years ago, whose principal (resident) beneficiaries are Child 1 and 2 (the sons of A) and which holds inter alia Class F-1 non-voting preferred shares of Holdco 2 (the “Subject Shares”).

Non-voting common shares of Holdco 2 (which holds portfolio investments and debt and shares of private companies) are held by Trusts 2 to 4, special voting shares are held by Child 1 and 2 and Holdco 1, and non-voting preferred shares by Child 1 and Holdco 1, as well as Trust 1’s Subject Shares.

The shares of Holdco 1 (which holds portfolio investments and debt or shares of private companies including subsidiaries) are held by Trust 2 (holding non-voting common shares) and by A.

Proposed transactions

1. Trust 1 will distribute pursuant to s. 107(2) a portion of its Class F-1 preferred shares to Child 1 and 2 who, in turn, will transfer those shares on a s. 85(1) rollover basis to Newco 1 or 2, respectively, which will be wholly-owned by them except for special voting shares thereof held by A (representing all the voting rights).
2. Following the realization by Trust 1 of gain pursuant to s. 104(4)(b)(ii) on the subject shares, it will dispose of the Subject Shares to Holdco 1 in consideration for Notes 1, 2 and 3 of Holdco 1.
3. Notes 2 and 3 will be distributed by Trust 1 (apparently, immediately) pursuant to s. 107(2) to Child 1 and 2, respectively; and repayment of Note 1 will fund the capital gains tax of Trust 1 from 2.
4. Trust 1 will be wound-up pursuant to s. 107(2), and its remaining property distributed to Child 1 and 2.
5. After [one?] year, Holdco will commence to repay Notes 1 and 2, in tranches not exceeding specified maximums.

Rulings

Re ss. 84.1, 84(2) and 245(2).

When asked to comment on Foix, which found that s. 84(2) applied to a particular hybrid sale transaction, CRA stated (footnotes omitted):

According to the broad interpretation of subsection 84(2) adopted by the Court, “transactions leading to an alleged distribution or appropriation of funds or property are to be considered as a whole in a way that is temporally flexible”. With respect to the expression “in any manner whatever’ in subsection 84(2), the Court noted that “[t]hese far-reaching words are anchored in history as they have always been part of this provision, and they faithfully reflect its anti-avoidance purpose”. Finally, the Court emphasized that when a facilitator is involved, “the distribution or appropriation of the target corporation’s funds or property can be carried out in a variety of different ways and take place through various steps that are organized so as to occur at different times”. It then added that “in the presence of an orchestrated attempt to extract surpluses without tax or at a reduced rate, the intention of Parliament requires a reading of subsection 84(2) that balances the words that are used, as an overly literal reading would defeat its anti-avoidance mission”.

It should also be noted that the Federal Court of Appeal also resolved the uncertainties arising from certain decisions that taxpayers frequently invoked against the application of subsection 84(2), namely McNichol … Descarries … and Robillard … . The Court issued an important warning against the formalistic and restrictive application of subsection 84(2) put forward in those decisions.

CRA also indicated that “Foix did not express an opinion on the Tax Court of Canada's analysis in Geransky” and implied that Gernasky has been overtaken by the subsequent decisions of the Federal Court of Appeal in MacDonald and Foix, which “clearly ruled that subsection 84(2) should be interpreted broadly.”

Background

The Deceased held Opco preferred shares, and preferred shares (with no accrued capital gain) and common shares of Holdco, which held the common shares of Opco. The Opco assets included cash, short-term investments and investments in subsidiaries. The capital gains deduction was claimed by the estate in respect of the Holdco common shares.

Completed transaction

Opco redeemed 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).

Proposed transactions

1. The estate will transfer the Holdco shares to Newco (newly formed by it) in exchange for (i) a note (the “Note”) with a principal amount equal to the lesser of the adjusted ACB of the shares under s. 84.1(2)(a.1), and their FMV minus $X, and (ii) Newco common shares for the balance, and with a s. 85(1) election being made.
2. Newco will use the proceeds of an interest-bearing loan from Holdco (funded, in turn by an interest-bearing loan from Opco, funded in turn by Opco out of its cash and short-term investments) 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.
3. At least one year following 1, Newco and Holdco will amalgamate to form Amalco.
4. Over the period of at least one year following the amalgamation, the Note will be gradually repaid, with the repayment in any quarter not exceeding X% of the principal after the repayment in 2.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Regarding the status of post-mortem pipeline transactions following the amended GAAR rule, the Directorate stated:

The Directorate does not consider the use of a pipeline transaction as a means to preserve the capital gain arising on the death of a shareholder while limiting double taxation on the subsequent distribution of Opco’s assets to be a … [GAAR] abuse … . Accordingly, the Directorate will continue to issue favourable Rulings on the non-application of the amended GAAR in the context of post-mortem pipeline transactions that meet our existing administrative guidelines described in document 2018-0748381C6.

However, the Directorate noted the example provided in the Explanatory Notes for the GAAR amendments of a surplus-stripping transaction of Jane in which she realized a capital gain on a dirty s. 85 exchange of her Opco shares, transferred her stepped-up Opco shares to another corporation controlled by her (Buyco) in consideration for a Buyco note, with Opco then dividending its earnings to Buyco for application in repaying the note. It stated:

Given that the above-noted example raises concerns regarding the application of the amended GAAR to the series of transactions described therein, the Directorate will not provide Rulings in respect of such transactions. In addition, the Directorate will not provide Rulings in similar circumstances where an individual shareholder proposes to engage in non-arm’s length transactions, one of the main purposes of which is to create cost basis to extract retained earnings.

Background

At the time of X’s death, he held the Class A and B shares of Investco, which had a portfolio investment business (holding, e.g., GICs). No capital gains deduction was available for claiming in his terminal return.

Proposed transactions

1. A portion of the Class B shares of the estate will be exchanged under s. 51 for Class C shares of Investco.
2. The PUC of the Class C shares will be increased, resulting in an s. 84(1) dividend to the estate and an increase in the ACB of its Class C shares pursuant to s. 53(1)(b).
3. Investco will redeem the Class C shares in consideration for a note, and designate a portion of the resulting deemed dividend to be an eligible dividend.
4. The estate will elect pursuant to s. 164(6) to carry back the resulting capital loss to X’s terminal year. Pursuant to s. 40(3.61), s. 40(3.6) will not apply.
5. Following the incorporation by the executors of Newco, the estate will transfer its Class A and B shares to Newco under s. 85(1) in consideration for a non-interest-bearing note and for Class A shares of Newco.
6. At least one year after the transfer in 5, Newco will amalgamate with Investco to form Amalco, which will continue to carry on the investment business.
7. The note issued in 5 above will be repaid no more rapidly than [25%] per quarter.

Rulings

Re ss. 84.1. 84(2) and 245(2).

Background

A family inter vivos trust for resident beneficiaries (Trust 1) had distributed its common shares of a CCPC that was an investment holding company (Holdings) on an s. 107(2) rollover basis to a corporate beneficiary (Holdco – which already held the balance of the common shares of Holdings) that was held by Father and a newly-formed inter vivos trust (Trust 2) for the same family, a corporation and a foundation (with the shares of and an advance to Holdings being the sole assets of Holdco). After a precautionary disclosure was made to CRA, it determined that GAAR applied to the rollout of the Holdings shares to Holdco, so that s. 104(5.8) should be treated as applying to the capital property of Trust 2 upon the (now imminent) occurrence of the 21^st anniversary of the formation of Trust 1 so as to result in a deemed disposition of such property pursuant to s. 104(4)(b)(ii) – and the Directorate so ruled in this ruling letter.

Proposed transactions

1. Holdco will add Class D preferred shares to its authorized capital.
2. Trust 2 will then exchange its Class A common shares for Class B and D preferred shares pursuant to s. 51(1) and, concurrently with such exchange, a newly-formed trust for Father, his children, a foundation, and certain trusts and corporations (“Trust 3”), will subscribe for Class A common shares of Holdco.
3. Trust 2 will distribute the Class D preferred shares of Holdco to Father and his three children without making an s. 107(2.001) election.
4. Father will transfer his multiple-voting shares of Holdco (with nominal economic attributes) to a newly-incorporated corporation (Newco) for similar multiple-voting Newco shares.
5. At the same time, Trust 3 will transfer its Class A common shares of Holdco to Newco in consideration for Class A common shares of Newco, electing under s. 85(1) for this to occur on a rollover basis.
6. At the same time, Father and his three adult children will transfer their Class D preferred shares of Holdco to Newco in consideration for Class B preferred shares of Newco, electing under s. 85(1) for this to occur on a rollover basis.
7. At the end of the 21^st anniversary referred to above, Trust 2 will be deemed by ss. 104(4)(b)(ii) and 104(5.8) to have disposed of all its property (mainly, its Class B shares of Holdco) for FMV proceeds and to have reacquired such property immediately thereafter at the same amount. It will file an s. 159(6.1) to stagger the payment of the resulting taxes over up to 10 years.
8. Trust 2 will distribute some of its Class B preferred shares of Holdco to Father in satisfaction of a portion of his capital interest, without making an s.107(2.001) election.
9. Father will sell those Class B shares to Newco in consideration for a note.
10. In order to annually fund the taxes payable by Trust 2 on a staggered basis until the completion of the transactions below, Holdings will make an interest-bearing advance to Holdco, Holdco will make an equivalent interest-bearing advance to Newco, and Newco will make an equivalent repayment to reduce the note amount, which Father will use to make a capital contribution to Trust 2.
11. After a specified minimum period following 9 above, Newco and Holdco will amalgamate to form Amalco.
12. Amalco will progressively repay the balance of the note payable to Father upon future receipts of dividends from Holdings, or other receipts. However, any repayment made in any of the first four quarters of the second year following 9 above will not exceed a stipulated percentage of the total initial principal.
13. Trust 2 will be wound-up following full payment of the taxes payable.

Rulings

Including re ss. 51, 107(2) (regarding Trust 2 distributions), 245(2) as described above and generally, 84.1 and 84(2).

Background

Trust 1, a discretionary inter vivos family trust for A, his Spouse, her child and their children and entitles formed and controlled by A, held the Class H non-voting preferred shares of Holdco which, in turn, wholly-owned Opco (with business assets, such as property, plant and equipment). The Class G special voting shares of Holdco were held by Newco 1, which A controlled and its Class A common shares were held both by Trust 2 (with the same family beneficiaries and a somewhat expanded set of potential corporate beneficiaries, as Trust 1) and a third party (Holdco B). No capital gains deduction has been claimed, nor is the tax-free zone relevant.

On the 21^st anniversary of the creation of Trust 1, it was deemed pursuant to s. 104(4)(b) to have disposed of, and reacquired, all its property including the Class H shares of Holdco at FMV.

Proposed transactions

1. Newco 1 will incorporate Newco 2 and subscribe for Class E.1 special voting shares.
2. At the same time as the subscription in 1, Trust 2 will transfer its Class A shares of Holdco to Newco 2 in consideration for Class D.2 non-voting common shares of Newco 2 on a s. 85(1) rollover basis.
3. Concurrently with 1 and 2, Trust 1 will transfer the Class H shares of Holdco to Newco 2 in consideration for Class H.2 non-voting preferred shares of Newco 2 whose PUC will equal the ACB of the transferred shares.
4. One year after 1 to 3, Opco will begin gradually paying dividends on its shares out of cash from operations or borrowings to fund dividends by Holdco on its Class A shares held by Newco 2 and Newco 2 will start making phased reductions of the PUC of its Class H.2 shares, which will be distributed in part by Trust 1 to its beneficiaries.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

The Trust was a spousal trust for Mother holding shares of Aco (an investments holding company). Such shares had been bequested to the Trust by Father and included Class B shares of Aco which it had previously issued to Father in exchange for the transfer to it under s. 85(1) of qualified small business corporation shares, resulting in the recognition by Father of a capital gain for which he claimed a deduction pursuant to s. 110.6(1).

Mother also held shares of Aco directly. Thus, on the death of Mother, those shares were deemed to be disposed of for their FMV pursuant to ss. 70(5)(b) and 104(4).

Proposed transactions

1. Trust will transfer its Aco shares on a s. 85(1) rollover basis to Newco (newly-incorporated by it) in consideration for non-voting redeemable retractable Class B shares of Newco. Similarly, the estate of Mother will transfer its Aco shares on a s. 85(1) rollover basis to Newco in consideration for non-voting redeemable retractable Class C shares of Newco.
2. For both of the above transfers, s. 84.1(1) will reduce the PUC of those Newco shares which were issued in consideration for Class B shares of Aco by the amount by the excess of the increase in their PUC over the ACB of such transferred shares computed pursuant to s. 84.1(2)(a.1)(ii).
3. Following the redacted transition period, Newco and Aco will amalgamate.
4. Immediately thereafter, Amalco will redeem the Class B and C shares of the Trust and Estate for Note 1 and Note 2, giving rise to deemed dividends, and 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.
5. Amalco will repay the notes at no more than a specified rate over the period commencing with their issuance.

Rulings

Re application of s. 84.1 as described above, non-application of ss. 84(2), 40(3.6) and s. 245(2), and 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.

Background

The will of Mr. X bequeathed his preferred shares (carrying voting control) of Holdco (which had a portfolio which it managed and whose shares were not qualified small business corporation shares and whose common shares were held by Mr. X's spouse and children) to the spouse (on a s. 70(6) rollover basis) and the children (on a s. 70(5) taxable basis).

Proposed transactions

1. The spouse will exchange Holdco Class A preferred shares (distributed to her by the estate) on a s. 51 rollover basis for Class E preferred shares of Holdco.
2. Holdco will redeem Class C preferred shares held by the estate and spouse for cash.
3. In the first taxation year of the estate, Holdco will redeem Class A preferred shares held by the estate for "Note 1" (which Holdco will repay through liquidating investments), thereby generating a s. 84(3) dividend (permitting the recovery of Holdco’s ERDTOH and NERDTOH) and a capital loss (which will not be denied under 40(3.6) by virtue of s. 40(3.6)), which will be carried back to the deceased’s terminal year pursuant to s. 164(6).
4. The estate will transfer, to a “Newco” formed by it under the CBCA, Class A preferred shares of Holdco in consideration for a demand note ("Note 2") of Newco and a Class A share of Newco (apparently, its only issued and outstanding share), electing under s. 85(1).
5. After a period of at least one year following such transfer, Newco may progressively repay Note 2 at the rate of 1/3 of its principal per year, with such repayments funded through Holdco redeeming Class A preferred shares.
6. After the expiry of a specified period of years, Newco will be dissolved under the CBCA.

Rulings

Re ss. 84.1(1). 84(2) and 245(2).

Background

The deceased (X) held all the shares of Holdco (being Class A voting and participating shares, and Class B voting redeemable preferred shares), which carried on an investment management business. An s. 110.6(2.1) deduction was claimed by X and by an individual with whom X did not deal at arm's length in respect on a previous disposition of shares for which the current Holdco shares were substituted.

Preliminary transactions

Holdco will redeem Class B shares held by the estate, giving rise to a deemed dividend (which will be designated as an eligible dividend up to the balance in Holdco’s GRIP account) and a capital loss which will be carried back pursuant to s. 164(6) (with s. 40(3.6) not applying pursuant to s. 40(3.61).

Proposed transactions

1. The estate will transfer to a corporation newly incorporated by it (Newco) its Class A and Class B shares of Holdco in consideration for Note 1 (plus some Newco Class A voting and participating shares) and Note 2 (plus some Newco Class B voting redeemable preferred shares), respectively, electing under s. 85(1). The principal amount of each Note will not exceed the ACB, to the estate of the shares transferred therefor, having regard to s. 84.1(2)(a.1).
2. Following a specified number of months, Holdco and Amalco amalgamate. Pursuant to s. 88(1)(d), Amalco will designate an amount to increase the ACB of property, other than ineligible property, of Holdco that will be acquired on the amalgamation, in anticipation of an eventual sale, but not to a person described in s. 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series.
3. Amalco will progressively redeem Note 1 and Note 2 at a maximum rate of XX% of their total principal per quarter, and will continue to carry on the business of Holdco for a minimum period of XX months.
4. At the appropriate time, the estate will distribute the Amalco shares and the Notes (or the funds derived from their repayment) equally among the heirs.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

On the death of X, X held all the shares of Holdco, which had investments in public company shares and bonds, and mutual fund and income trust units.

Preliminary transactions

The Estate of X exchanged Class A shares for Class D shares of Holdco under s. 51(1) and also subscribed for additional Class A shares of Holdco.

Holdco redeemed some of its Class D shares in order to recover its ERDTOH and NERDTOH account balances and the executors elected pursuant to s. 164(6) to carry back the resulting capital loss to X’s terminal year.

Proposed transactions

1. The Estate will transfer its Class D shares to a corporation newly incorporated by it (Newco) in consideration for voting and participating shares of Newco, electing under s. 85(1).
2. After the passage of a specified number of months, Newco will issue 8 promissory notes to the Estate as a reduction of the PUC of its shares, with such notes (apparently of equal amounts) maturing at successive quarterly intervals (the last one not being payable until the 7^th quarter following such issuance).
3. After a period of specified years, Holdco will be amalgamated with Newco, with Amalco continuing to carry on the investment business of Holdco.

Background

At the time of the death of A, he held the shares (being Class A voting participating shares) of the Corporation (a portfolio investments company).

Completed transactions

The Corporation, which received life insurance proceeds on the life of A, paid a capital dividend to the estate, thereby reducing the FMV of its shares.

The estate exchanged its (Class A) shares under s. 51 for non-voting Class F preferred shares, and subscribed for one Class A share.

Reviewed transactions

The estate exchanged its Class F shares under s. 51 for Class A shares.

The estate transferred its Class F shares of the Corporation to Newco in consideration for four notes maturing 3, 6, 9 and 12 months after the amalgamation below, and in consideration for voting participating Class A shares of Newco, electing under s. 85(1), and realizing a capital loss (which, by virtue of s. 40(3.61), was not denied under s. 40(3.6)) that was carried back pursuant to an election under s. 164(6).

Proposed transactions

Newco will be amalgamated with the Corporation after a specified period.

The notes will thereafter commence to be repaid consistently with their maturity dates.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

Before his death, Father transferred his shares (i.e., 50.5% of the common shares) of ACo (which held a diverse portfolio of bonds, equities, a minority position in a privately-held investment management company, real estate and oil and gas properties) and some other property to a newly-formed alter ego trust (the “Trust”) on a s. 73(1) rollover basis (given the application of ss. 73(1.01)(c)(ii) and (1.02)). On his death, there was a deemed disposition of Trust property under s. 104(4)(a)(iv), giving rise to a capital gain to the Trust. The Trust beneficiaries were the three children (the “Siblings”) of Father, as to the Trust’s shares of ACo, and Father’s surviving spouse, as to much of the balance of the property. All beneficiaries were resident. The Siblings each held 16.5% of the common shares (being the only outstanding class of shares) of ACo. No s. 110.6 deduction has been claimed respecting the ACo shares.

Following Father’s death, ACo paid a capital and an eligible dividend on its common shares.

Proposed transactions

1. The Trust will transfer its ACo common shares to a resident corporation newly-formed by it (“Newco”) in consideration for notes and Newco preferred shares, electing under s. 85(1).
2. ACo will continue to carry on its business, and there will be no repayment of the Newco notes or redemptions of the Newco preferred shares, within one year following the above transfer.
3. The Trust will distribute the Newco common and preferred shares and the Newco notes pro rata to the Siblings on a s. 107(2) rollover basis, so that Newco will be equally owned by the Siblings.
4. After at least one year has elapsed from the transfer in 1 above, Newco and ACo will amalgamate (under a long-form amalgamation, given that the Siblings until then had been minority shareholders of ACo).
5. Subsequently, Amalco will repay no more than 10% of the initial aggregate principal amount of the notes during the first year following the amalgamation and, absent extraordinary events, will repay no more than that sum in each of the subsequent years.

Rulings

Re ss. 84.1, 84(1) and 245(2).

Background

At the time of the death of X, he held shares of Newco (whose only undertaking was to hold shares of Investments) and a portion of the shares of Investments (a portfolio investment company).

Completed transactions

• Investments redeemed various shares held by the estate for Note1, giving rise to deemed dividends and capital losses which were carried back under s. 164(6).
• The estate then disposed of all its shares of Investments to Newco in consideration for Note2.
• Investments then paid a dividend to Newco through issuing Note3 and Newco paid a dividend to the estate through the issuance of Note4.
• Investments then transferred its stock market investments to four testamentary trusts created under X’s will (Trust1, Trust2, Trust3 and Trust4) in consideration for Trust-Note1, Trust-Note2, Trust-Note3 and Trust-Note4.

Proposed transactions

1. Investments will be wound-up into Newco pursuant to s. 88(1).
2. Newco will pay a dividend (designated to be an eligible dividend) thorough the issuance of a note to the estate.
3. The estate will make a substantial distribution to Trust1, Trust2, Trust3 and Trust4 through a distribution of inter alia Notes1 to 4 now owing by Newco – with such Trusts agreeing with Newco to pay the accrued but unpaid interest owing by then on Trust-Note1 to 4 to Newco, by way of set-off against part of Notes1 to 4 owing to them by Newco.
4. Newco will then by wound-up into the Estate pursuant to s. 88(2).
5. The executors will distribute the remaining estate property to the heirs in accordance with X’s will in due course.

Rulings

Re ss. 84(2) and 245(2).

Two discretionary inter vivos trusts, with an individual (“Father”) and his child (“Child”) as the beneficiaries (both resident in Canada) and which had been settled by Father’s parent, held shares of a portfolio investment company (Aco) directly and through a holding company (Bco). In order to respect the wishes of the settlor, the trustees determined that most of the capital and accumulated income of the two trusts would be retained rather than distributed on the 21^st anniversaries of the settling of the two trusts. Accordingly, the two trusts realized capital gains pursuant to s. 104(4)(b)(ii) on their shares of Aco and Bco on that anniversary.

After preliminary transactions to distribute capital dividends and eligible dividends from the companies, the trusts were then to engage in pipeline transactions in which the Aco and Bco shares were to be transferred to a ULC Newco on a s. 85(1) rollover basis in consideration for notes and nominal value preferred shares with redemption values subject to a price adjustment clause, and then convert those notes to high-PUC shares of the ULC – and only after a number of years, might ULC be amalgamated with Aco and Bco (which would have been continued to the same jurisdiction as Aco and Bco). The ULC will not make substantial distributions for quite some time otherwise than to fund the taxes payable by the two trusts under s. 104(4).

Background

After he was placed in a long-term care facility, an individual (the “Deceased”) who had owned and been managing the investing business of Aco and Bco, transferred property including the shares of Aco and Bco, on a s. 73(1) rollover basis to a newly-formed alter ego trust (“AE Trust”) of which a child (“Child 1”) was the trustee, and Child 1, Child 1’s spouse and their three adult children (the “Grandchildren”) were beneficiaries with entitlements to income and capital as determined in the discretion of the trustee (except that he could not distribute capital to himself). On the death of the Deceased, there was a deemed disposition of inter alia the shares of Aco and Bco for their FMV pursuant to s. 104(4)(a).

Proposed transactions

1. The Trustee pursuant to a provision of the AE Trust Deed will execute an irrevocable deed to amend the AE Trust Deed to thereupon remove Grandchild 1 (who is a non-resident) as a beneficiary of AE Trust. (The stated purpose “is to preclude the potential application of the provisions of section 212.1 that may otherwise result, to the extent that Grandchild 1 would be a non-resident beneficiary of AE Trust at any relevant time.”)
2. AE Trust will transfer its common shares of Aco and Bco on a s. 85(1) rollover basis to a corporation newly-incorporated by it (Newco) in consideration for two notes of Newco and preferred shares whose redemption value is nominal subject to the operation of a price adjustment clause.
3. After the passage of a specified minimum period of time, Newco will amalgamate with Aco and Bco, and make a bump designation pursuant to ss. 87(11), 88(1)(c) and (d) respecting various capital properties that had been held by Aco and Bco before the death of the Deceased.
4. The notes then will gradually be repaid over no less than a specified number of quarters, which might entail the sale of securities or their distribution in specie to AE Trust qua noteholder.

Rulings

Including re ss. 84(2), 84.1 and application of s. 88(1)(d.3).

Background

At the time of his death, X held all of the shares of Investco (a portfolio holding company) other than non-voting common shares held by his two children (Child1 and Child2) and certain voting, non-participating, redeemable shares held by his common-law partner (“Spouse”) At that time, the shares of Holdco, a company holding real estate, cash and a loan to Investco) were held by X, his Spouse and Investco.

On his death, X realized a gain on his shares of Investco pursuant to s. 70(5)(a). There was no gain on the deemed disposition of his shares of Holdco.

Preliminary transactions

Investco redeemed or repurchased various of its shares held by the estate or by the Spouse (thereby resulting in an acquisition of control of Investco) and paid a capital dividend and taxable dividends (a portion of which were designated as eligible dividends) to the estate. The capital dividend and taxable dividends were satisfied through the issuance of notes (Note2 and Note3), with Investco paying off Note2 in full. The Investco also paid off part of a note (Note1) that had been owing to X on his death, in order to help fund estate taxes.

Holdco also purchased for cancellation shares held by the Spouse (resulting in an acquisition of control of it) and redeemed shares held by the estate.

Proposed transactions

1. After the estate incorporates Newco and subscribes for special voting shares, Child1 and Child2 will transfer their shares of Investco for non-voting common shares of Newco, electing under s. 85(1).
2. The estate will transfer its shares of Investco to Newco for Note4 and Class J shares, electing under s. 85(1).
3. Note1 and Note3 will be repaid at various times.
4. After a specified period following the transfer in 3 above, Newco and Investco will be amalgamated and Note4 will be repaid progressively over several years, with repayments in each of the first four quarters not exceeding a specified percentage of the note principal.
5. The estate will distribute its shares of Newco or Amalco as the case may be, together with the unredeemed Note1, Note3 and Note4 or the funds resulting from their repayment, in equal parts to Child Trust1 and Child Trust2, being the two residuary beneficiaries.

Rulings

Re ss. 84.1, 84(2) and 245(2).

In order to implement pipeline planning, the estate of an individual ("Estate") generally incorporates a new corporation ("Newco") to which it sells shares of a private corporation ("Target"), with or without a tax rollover, in consideration for shares of Newco (the "Shares") or a note issued by Newco ("Note").Newco will remain in existence for at least one year before being merged with Target to form Amalco, whose assets are gradually used to redeem the Shares or Note.

Does CRA have concerns with these transactions being varied by the Estate selling the Target shares to an existing corporation in which it does not hold any shares (the "Existing Corporation") and whose shares may be held by heirs of the deceased? CRA responded:

[T]he transfer of the shares held by the Estate in the capital stock of Target to the Existing Corporation rather than to Newco does not appear to raise any immediate concerns with respect to the application of subsection 84(2). However, it is still necessary to consider the application of section 84.1, subsection 245(2), as well as other relevant provisions … .

Background

Immediately before her death, A held the common shares (being the only class of shares) of the Corporation, which held marketable securities.

Proposed transactions

1. The Corporation will dispose of a portion of its marketable securities, generating gain and an addition to its capital dividend account (“CDA”).
2. The estate will exchange all the common shares of the Corporation on a s. 85(1) rollover basis for new Class A common shares and non-voting redeemable retractable Class A preferred shares of the Corporation.
3. The Corporation will increase the stated capital of the Class A Preferred Shares by an amount not exceeding the lesser of (i) the CDA of the Corporation immediately before such increase and (ii) the amount that would have been the CDA of the Corporation immediately before the death of A had the Corporation at that time disposed of all of its marketable securities at that time, with the resulting s. 84(1) being elected to be a capital dividend.
4. The Corporation will redeem the Class A Preferred Shares in consideration for a demand noninterest bearing promissory note, designate a portion (not exceeding its GRIP account) as an eligible dividend pursuant to s. 89(14) and report a resulting capital loss, which will be carried back under s. 164(6).
5. The Corporation will make a repayment of the note.
6. The Estate will transfer the Class A Common Shares to a “Newco” formed by it in consideration for Newco common shares, electing under s. 85(1).
7. The Corporation will make a loan to Newco, which will make a stated capital distribution on its common shares to fund income taxes owing under A’s terminal T1 return.
8. For a period of one year after the transfer of the Class A Common Shares, the asset allocation of the Marketable Securities as well as the investment activities carried on will be governed by the same guidelines as before.
9. Thereafter, the Corporation and Newco will amalgamate to form Amalco, with the loan in 7 being cancelled.
10. Over the twelve months following the amalgamation, the directors of Amalco will resolve no more often than quarterly to reduce the stated capital of the common shares of Amalco by an aggregate amount not exceeding the paid-up capital of the common shares, and will make distributions of such amounts to the Estate. The amount of the reductions in stated capital in any given quarter of that year will not exceed 25% of the aggregate paid-up capital of the common shares of Amalco immediately following the amalgamation … .
11. Once all debts and liabilities of the Estate have been ascertained and settled, the residue of the estate will be distributed to the family beneficiaries.

Rulings

Re ss. 84.1, 84(2) and 2435(2).

Background

On the death of the deceased, there was a deemed disposition at FMV of all the Class A common shares of Opco, which is a CCPC with a business and ERDTOH, NERDTOH and GRIP balances. The capital gains exemption was claimed. The Estate Beneficiary is a Canadian resident. To assist the Estate with funding the Deceased’s terminal T1 income tax liability, the Estate transferred land and buildings owned by it to Opco on a s. 85(1) rollover basis in consideration for a demand, non-interest bearing promissory note (“Note 1”) of Opco and Class C preferred shares of Opco, with Opco then borrowing under a mortgage and repaying Note 1.

Proposed transactions

• The Estate will redeem Class A common share of Opco on which the capital gains exemption was claimed resulting in a deemed dividend and a capital loss, and then carry back the Estate’s capital loss under s. 164(6).
• The Estate will transfer its Class A common shares of Opco to a corporation newly incorporated by it (Newco) in consideration for a demand non-interest bearing promissory note (“Note 2”) and non-voting, redeemable and retractable Class C preferred shares of Newco, jointly electing under s. 85(1).
• The Estate will transfer its Class C preferred shares of Opco to Newco under s. 85(1) in consideration for non-voting, redeemable and retractable Class D preferred shares of Newco.
• Opco will continue to carry on its business for at least 12 months following the above share transfers. During that period, Newco may pay taxable dividends equal to the amount of the dividends paid by Opco, which will be funded from the ongoing business operations of Opco.
• After such 12-month period has expired, Opco will amalgamate with Newco to form Amalco.
• In connection with the amalgamation, Amalco will designate, in its return of income for its first taxation year, an amount under ss. 87(11) and 88(1)(c) and (d) and within the limits thereto, to increase the ACB of the capital property, other than ineligible property, previously owned by Opco, being certain lands which have been owned continuously by Opco, from a time that is before the date of death of the Deceased until immediately prior to the amalgamation. Shares of Opco will not be acquired by a person described in s. 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Opco with Newco.
• Note 2 will be gradually repaid over a period of at least one year after the amalgamation of Newco and Opco. The amount of the repayments in any given quarter of that year will not exceed XX% of the principal amount of Note 2 when it was issued. While Amalco may sell some of its assets to repay Note 2, at all times, it will continue to carry on the business formerly carried on by Opco.

Rulings

Including re ss. 84.1, 84 and 88(1)(d) and (d.3).

Background

The Corporation is a portfolio corporation, with ERDTOH and GRIP balances and no CDA, whose Class E and Class K non-voting discretionary redeemable retractable shares, and Class J special voting shares, were deemed to be disposed of on the death of A, a resident Canadian. The residuary beneficiaries of his estate were Trust 2, 3 and 4, being testamentary trust established by him for his daughter and her son and daughter. A resident family inter vivos trust (Trust 1), holds the Class A shares of the Corporation, which are non-voting non-dividend bearing shares with a right to participate on the Corporation’s winding-up.

Preliminary transactions

• Trust 1 sells its Class A shares of the Corporation to the estate.
• The estate effects a s. 51 exchange of its Class K shares for Class F non-voting discretionary redeemable retractable shares and Class A shares.
• The Corporation then redeems Class F shares, makes an eligible dividend designation respecting the resulting deemed dividend and elects under s. 164(6) for a capital loss to have been realized in A’s terminal return.
• The estate distributes the Class J shares to Trusts 2, 3 and 4 qua residuary beneficiaries,
• The Corporation lends a sum to the estate (the “Corporation Advance”) sufficient to fund the payment of income taxes for A’s terminal year. The interest thereon will be paid at the time of the transfer of Note 1 by the estate to the Corporation in 2 below.

Proposed transactions

1. The estate will transfer its Class A and Class E shares of the Corporation to a newly-incorporated corporation (“Newco” – whose voting common shares are held by it) in consideration for Class A common shares and a Newco and two non-interest-bearing notes (“Note 1” and “Note 2”), electing under s. 85(1).
2. The estate will then transfer Note 1 to the Corporation, which will be accepted by the Corporation as absolute payment of the Corporation Advance.
3. Trusts 1, 2 and 3 will transfer their Class J shares of the Corporation to Newco in consideration for Class F shares of Newco, electing under s. 85(1).
4. After the passage of a specified minimum period (during which the Corporation will continue to carry on its business), the Corporation will be wound-up into Newco under s. 88(1), with Note 1 being extinguished by operation of law.
5. Thereafter, Newco will commence to repay Note 2.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

The will of A provided for his shares of Holdco (which were not qualified small business corporation shares and for which no s. 110.6(2.1) deduction had been claimed) to be bequeathed equally to two testamentary trusts

Preliminary transactions

• The estate will exchange its Holdco shares under s. 51 for Class E non-voting discretionary-dividend redeemable retractable shares.
• Holdco will issue Class A common shares to the estate.

Proposed transactions

1. Holdco will redeem Class E shares held by the estate, and elect under s. 83(2) respecting the resulting deemed dividend, and will carry back the resulting capital loss under s. 164(6) (without limitation by s. 40(3.6) by virtue of the exception in s. 40(3.61).)
2. The estate will transfer to a newly-incorporated corporation (“Newco”) its Class E shares of Holdco in consideration for Class A voting participating shares of Newco, electing under s. 85(1) (no price-adjustment clause). The paid-up capital of the Newco Class A shares will be the lesser of: the greater of the PUC and ACB of the transferred Holdco Class E shares; and those Class E shares’ FMV.
3. After at least a specified period has passed, Newco will reduce the PUC of its Class A shares through the distribution of 8 non-interest-bearing promissory notes with staggered dates before which they are not repayable (with the first one occurring the next day), and with the estate continuing to hold the Class A shares of Holdco and Newco.
4. Following a specified period, Holdco and Newco will amalgamate.
5. At an appropriate juncture (which apparently could occur before the amalgamation), the estate will distribute to its beneficiaries the above promissory notes which had not yet been repaid, as well as the common shares of Newco or Amalco.

Rulings

Re ss. 84(2), 84.1 and 245(2).

After noting that in 2018-0767431R3, the amount of the pipeline note paid in any single quarter in the first post-amalgamation year was not to exceed 15%, and in 2018-0780201R3, this percentage was 10%, the questioner asked whether, under a typical pipeline transaction, what are the limitations on the repayment terms for the pipeline note, and what is the maximum percentage of the principal amount of the note that can be repaid per quarter or per annum, in order for s. 84(2) to not apply? After referencing the breadth of s. 84(2) as interpreted in MacDonald, CRA stated:

[W]e continue to receive ruling requests whereby the taxpayers’ proposed transactions, include, among other things, the continuation of the original corporation’s business for a period of at least one year following the implementation of the pipeline structure, followed by a progressive distribution of the original corporation’s assets over an additional period of time.

As noted in your question, we have issued favourable subsection 84(2) rulings in the post-mortem pipeline context when the proposed repayment terms of the Pipeline Note have varied.

These repayment terms have been and continue to be part of the proposed transactions submitted by taxpayers, and as such, cannot be considered to be requirements stipulated by our Directorate.

Also asked: is it permissible for the creditor of the pipeline note (e.g., the estate) to borrow funds from the debtor (the corporation) in order to pay its liabilities (e.g., for taxes) during the period in which the note is being repaid? CRA noted:

We have issued favourable subsection 84(2) rulings in the post-mortem pipeline context when a separate note is issued either before or as part of the proposed transactions. An example of this is in a “hybrid pipeline” transaction, in which a partial subsection 164(6) plan is undertaken prior to the pipeline transaction in order for the estate to access certain tax attributes of the corporation, such as the capital dividend account or refundable dividend tax on hand, in addition to the corporate property. In some instances, a note was issued by the corporation to the estate as consideration for the redemption of a portion of its shares held by the estate; and some of the proposed transactions contemplated the corporation liquidating some of its assets in order to repay this note before the Pipeline Note is repaid. See for example: 2010-0377601R3 and 2015-0606721R3. In those rulings, corporate property was not distributed to the estate on the wind-up, discontinuance or reorganization of the business of the corporation. Furthermore, one of the factors that the CRA considered when accepting these “hybrid pipeline” transactions is the fact that the deemed dividend provisions in subsection 84(3) applied on the redemption of the shares in the corporation held by the estate.

Background

On the death of X, he and his two resident brothers (Leg1 and Leg2 – who were the legatees under his will of his shares of Holdco) were the holders of all the shares of Holdco consisting, in each case, of Class A voting common shares and Class C voting redeemable preferred shares. Holdco was a portfolio company whose sole activities were the holding, management and transfer of various investments.

Preliminary transaction

The resident estate distributed all its (Class A and C) Holdco shares equally to Leg1 and Leg2 (thereby resulting in basis averaging under s.47(1).)

Proposed transactions

1. Leg1 and Leg2 will incorporate Newco and subscribe equally for Class A shares of Newco.
2. Each of Leg1 and Leg2 will transfer all of their shares of Holdco to Newco in consideration for a note (Note 1 or Note 2) equalling the aggregate ACB of the transferred shares and for Class E non-voting non-cumulative redeemable retractable Class C shares of Newco, electing under s. 85(1).
3. After a specified number of months have passed, with Holdco continuing to carry on its portfolio business pursuant to the same investment policy as before, Holdco and Newco will amalgamate.
4. Notes 1 and 2 will thereafter commence to be repaid by Amalco in accordance with a specified schedule.

Rulings

Re ss. 84.1, 84(2) and 245(2)

Background

Holdco is a portfolio company that holds cash, public company shares, shares of Opco (which are not liquid) and an interest in a general partnership (SENC). On the death of A, A held Class A common shares of Holdco and Class E preferred shares (with no such shares qualifying as qualified small business corporation shares (QSBCS),) and also held shares of Opco which qualified as QSBCS.

Preliminary transactions were engaged in whereunder Opco redeemed various shares held by Holdco and another company (Holdco 2) acquired the interest in SENC, as a result of which the estate and Holdco no longer held any shares of Opco or an interest in SENC.

Proposed transactions

1. Holdco will redeem Class E shares held by the estate.
2. Holdco will declare and pay a dividend on its Class A shares and satisfy the dividend with the issuance of Note 1, and elect for such dividend to be a capital dividend.
3. The estate will transfer all of its Class A shares to a newly formed corporation (Newco) in consideration for Note 2 and one Class A share of Newco, electing under s. 85(1).
4. Holdco will continue to carry on its portfolio business for one year, after which Newco and Holdco will amalgamate.
5. Given the age of the two child beneficiaries, Note 2 may not be repaid for some time but, in any event, will be repaid no faster than on a specified basis over the first post-amalgamation year.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

On A’s death, A (a Canadian resident) held all the outstanding shares of Opco, being Class A common shares and Class E preferred shares, and also held all the shares of Holdco (a portfolio company), being Class A shares. Following the death of A, the executors continued to carry on the business of Opco, but then Opco sold the assets of that business including goodwill to a third party. The shares of Opco and Holdco (which did not qualify for the capital gains deduction) were bequeathed to Child, a resident, but to be held in trust as Child had not attained a specified age.

Preliminary transactions

Opco redeemed Class E shares in consideration for Note 1 and designated the resulting deemed dividend as an eligible dividend, with the estate carrying back the resulting capital loss to it under s. 164(6).

The estate exchanged its Class A shares of Opco, and of Holdco, under s. 51 for non-voting non-cumulative retractable Class F shares of Opco and Class A shares of Opco.

Opco and Holdco then redeemed the Class F shares for Note 2 and Note 3, respectively, and designated the resulting deemed dividend as an eligible dividend, and with the resulting capital losses being carried back by the estate under s. 164(6).

Notes 1, 2 and 3 were then paid off.

Opco redeemed further Class F shares for Note 4, with the resulting deemed dividend elected to be a capital dividend, and with the resulting capital losses being carried back by the estate under s. 164(6).

Opco and Holdco amalgamated to form Opco 2, with the issued share capital of Opco consisting of Class A shares.

Opco 2 adopted a policy for the growth of its capital.

Proposed transactions

1. The estate will transfer its Class A shares of Opco 2 to a corporation newly incorporated by it (“Newco”) in consideration for a note (“Note 5”) and for Class B non-voting redeemable retractable shares, electing under s. 85(1) and with a price adjustment clause.
2. During the specified period following this transfer, Opco 2 will pay dividends to Newco up to the amount of its after-tax net income. Opco 2 will continue to carry on its business of managing investments and not change its investment policy.
3. At the end of that period, Opco 2 and Newco will amalgamate to form Amalco.
4. Thereafter, Amalco will progressively repay Note 5 at a specified rate.
5. Amalco will thereafter be wound-up, so that ss. 84(2) and 88(2) will apply.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

Pubco, a public corporation with one class of shares (the “Pubco Shares”) and which (directly and through subsidiaries) had been carrying on a business with different segments, now holds cash proceeds (the “Financial Assets”) from the sale of two sub-segments of one of the segments. The “Continuing Shareholders” (being three Holdcos”) have now delivered a non-binding proposal to purchase for cash all of the Pubco Shares not already owned or controlled by them (other than Pubco Shares held by key employees).

Proposed transactions

1. The Continuing Shareholders and key employees will transfer their Pubco Shares to newly-incorporated Newco under s. 85(1) in consideration for common shares (or common shares and notes, in the case of the key employees).
2. Under a Plan of Arrangement, after Pubco has repurchased outstanding stock options for a cash payment equalling their in-the-money value and repurchased the shares of those validly exercising dissent rights for an obligation to pay the shares’ fair value, Newco will use the proceeds of a bank loan to purchase the remaining Pubco Shares for cash.
3. Newco and Puboc will amalgamate.
4. Amalco will repay the bank loan with the Financial Assets and continue to carry on the business.

Ruling

S. 84(2) will apply to the sale in 2 "such that Pubco will be deemed to have paid, and each holder of Public Shares having such shares purchased by Newco will be deemed to have received, a dividend to the extent that the amount paid by Newco to each such holder on the Public Share Sale exceeds the amount of PUC attributable to such holder’s shares."

Background

On the death of A, he was deemed to have disposed of his shares of Realco (but with no capital gain resulting), and of his Class A and C shares (being qualified small business corporation shares) of a holding company for Realco (Holdco), with the capital gains deduction under s. 110.6(2.1) being expected to be claimed as to a portion of the capital gain on such disposition of the Class A shares, and the capital gains deduction already having been used in part in a crystallization transaction respecting the Class C shares, of Holdco. Realco had other shareholders as well.

Proposed transactions

1. Realco will pay a stock dividend consisting of Class F preferred shares, thereby reducing its accumulated profits and safe income attributable to its common shares by the amount of the dividend.
2. Realco will use the proceeds of a bank loan (Loan 1) and of the sale of marketable securities and cashing in of term deposits to redeem the Class F preferred shares held by Holdco (so that Loan 1 replaces the capital represented by the Class F preferred shares whose redemption it funded).
3. Holdco will lend such funds to a corporation newly incorporated by the Estate of A (“Newco”) for a non-interest-bearing demand promissory note.
4. Realco will make an interest-bearing loan to Newco pursuant to a demand note.
5. Newco will acquire the shares of Holdco for cash consideration funded as described in above, for a note and for Class B non-voting redeemable retractable preferred shares of Holdco (whose paid-up capital is limited in accordance with s. 84.1(1)(a)), with a s. 85(1) election being made.
6. Realco will use the proceeds of a second bank loan (Loan 2) to redeem the Class F preferred shares held by the other shareholders (so that Loan 2 replaces the capital represented by the Class F preferred shares whose redemption it funded).
7. At a specified juncture, Newco and Holdco will amalgamate to form Amalco and in the course of which Amalco will bump the cost amount of its shares of Realco pursuant to ss. 87(11) and 88(1)(d), and with the loan that Holdco made to Newco being settled pursuant to s. 80.01(3).
8. Amalco will continue to carry on its business, and it (or Newco) will repay the loan made in 4 above out of dividends received from Realco out of the accumulated profits of Realco.
9. The marketable securities held by Holdco on the date of death of A will be progressively liquidated.

Purpose of transactions

[T]he main purpose of the Proposed Transactions … is to progressively place in the hands of A's heirs certain property whose FMV corresponds to the ACB resulting from the application of subsection 70(5), to the Estate, of the Holdco Shares that were acquired as a result of A's death. Furthermore, the purpose of the Proposed Transactions is also to fund the taxes resulting from the application of subsection 70(5) on A's death to the Holdco Shares with funds from a bank loan and from Realco. [TaxInterpretations translation]

Rulings

Including re ss. 84(2), 84.1 and 20(1)(c).

Background

On the death of Mr. X, he was deemed to have realized a capital gain on his Class A (common) shares of ACo (a CCPC portfolio company holding inter alia shares of public corporations) under s. 70(5)(a). He also held Class B and C preferred shares with a paid-up capital equalling their retraction amounts. He had never claimed the s. 110(2.1) deduction, and the tax-free zone had no relevance to his shares.

Preliminary transactions

• After redeeming the Class B and C preferred shares through the issuance of demand promissory notes (with no resulting deemed dividend or capital gain to the estate), ACo will purchase for cancellation (in consideration for issuing a demand promissory note) a sufficient such number of its Class A shares to result in a refund of its eligible refundable dividend tax on hand, or its non-eligible refundable dividend tax on hand, balances.
• The executors will carry back the resulting capital loss under s. 164(6), with s. 40(3.61) thereby precluding the application of the s. 40(3.6) stop loss rule.
• ACo will then declare and pay (through the issuance of a demand promissory note) a capital dividend to the estate.

Proposed transactions

1. The Estate will transfer its remaining Class A shares (electing under s. 85(1)) to a newly-incorporated corporation formed by it (“Newco”) in consideration mostly for a note (the “Note 6”) with a principal amount and FMV equal to the lesser of such shares’ current FMV and their (stepped-up) ACB, and for a Class A (common) share of Newco. ACo will continue to carry on its marketable securities business for at least a specified number of months following such transfer.
2. ACo will partially repay the notes referred to above (other than Note 6, which will not be repaid for a specified number of months following the commencement of the proposed transactions) in order to pay estate income tax and make specific bequests – but not so as to result in a winding-up, discontinuance or reorganization of its business.
3. After a specified number of months have elapsed from such transfer, ACo will amalgamate with Newco to form Amalco as described in s. 87(1), or will be wound up into Newco as described in s. 88(1).
4. Thereafter, Amalco will begin repaying Note 6, at a rate not exceeding a specified amount per quarter.
5. At an appropriate juncture, the estate will distributed its assets.

Rulings

Standard ss. 84.1, 84(2) and 245(2) rulings.

Background

On the death of Mr. X, he was deemed to have disposed at a capital gain of his shares of two holding companies (Corporation A and B) and his voting non-participating shares of Corporation C, which carries on a business and all of whose non-voting participating shares were held by Corporation A. The beneficiaries of his estate were three testamentary trusts (perhaps for children and issue). Mr. X also held by Class E preferred shares of Corporations D (a holding company), whose participating shares were held by Trust 1

Proposed transactions

1. Corporations A and B will purchase for cancellation a portion of its voting participating shares in consideration for notes, thereby generating a deemed dividend and a dividend refund of their respective RDTOH balances. Corporation A will also purchase for cancellation, in consideration for a note, a further portion of its voting participating shares so as to give rise to a deemed dividend that is elected to come out of its capital dividend account. The estate will elect under s. 164(6) to treat the resulting capital loss to the estate as a capital loss of Mr. X
2. The estate will transfer its remaining shares of Corporations A and B to a newly-incorporated corporation (“Newco”) in consideration for notes and shares of Newco, electing under s. 85(1).
3. Corporations A and B will not amalgamate with Newco or be wound-up into Newco until XX months have passed, but in the meantime may pay off the notes referred to in 1 above.
4. On the amalgamation or winding-up, the parent or amalgamated corporation (either, “Amalco”) will designate an amount to increase the ACB of the shares of Corporations D and other proprety, in order to benefit from such bump on any eventual sale. “However, no property will be acquired by a person described in subclause 88(1)c)(vi)(B)(I), (II) or (III) in the course of the following series: the transactions or events which include the amalgamation …. or winding-up … .” (TaxInterpretations translation).
5. Amalco will progressively over various years repay the notes issued in 2 above, with repayments not exceeding XX% of the principal of the respective notes Although Amalco will continue to carry on the business of Corporations A and B, it will sell securities to fund such repayments
6. After completing the above transactions, Amalco’s directors will wind it up, with ss. 88(2) and 84(2) thereby applying.

Rulings

Including re ss. 84(2) and 84.1.

Background

The Deceased held voting redeemable retractable Class A Special Shares of Opco (which the Deceased thereby controlled) and a Family Trust held Opco Common Shares. The assets of Opco (a CCPC) consist mostly of capital and depreciable properties (the “Specified Properties”). A resident of Canada, is the executor and beneficiary of the Estate of the Deceased.

Proposed transactions

1. Opco will transfer the Specified Properties on a s. 85 rollover basis to a newly-incorporated subsidiary (Subco) in consideration for Subco common shares.
2. The Estate will convert its Class A Special Shares into Opco Class B Special Shares (having similar attributes).
3. Opco will increase the stated capital of is remaining Class A Special Shares and elect on the full amount of the resulting s. 84(1) dividend under s. 83(2).
4. Opco will redeem all of the Opco Class A Special shares for their redemption amount and FMV in consideration for Opco’s issuance of the Opco Note to the Estate having a principal amount and FMV equal to the redemption amount and FMV of the redeemed shares, with Opco designating the resulting s. 84(3) dividend as an eligible dividend under s. 89(14), and carrying back its resulting capital loss under s. 164(6).
5. The Estate will transfer its Opco Class B Special Shares (electing under s. 85(1)) to a newly-incorporated corporation formed by it (“Newco”) in consideration mostly for a note (the “Newco Note”), and also Newco Class A Preference Shares which are issued by Newco as the balance of the consideration.
6. After 12 months (see para. 33) have elapsed from such transfer, Opco will amalgamate with Newco to form Amalco as described in s. 87(1). Amalco’s authorized share capital, as well as the PUC and ACB of each of its outstanding share classes, will be the same as Newco’s.
7. Amalco will begin repaying the Newco Note owing to the Estate, but “for greater certainty, the amount paid on the Newco Note to the Estate during the first year immediately following the amalgamation, will not exceed 10% of the principal amount of the Newco Note when it was first issued.”
8. Amalco will continue to carry on the Opco business.

Rulings

Standard ss. 84.1, 84(2) and 245(2) rulings.

Background

On A’s death, he owned appreciated common and redeemable retractable preference shares and a non-interest-bearing demand promissory note (the “ACo Debt”) of ACo (which had a marketable securities business). No s. 110.6 deduction will have been claimed respecting the ACo shares by A or a non-arm’s length person; and no V-Day basis is included in their ACB. A’s will provided for the division and distribution of his ACo shares equally to the Beneficiaries (his children).

Proposed transactions

1. ACo Debt will be repaid.
2. The Estate will transfer its remaining ACo Shares (electing under s. 85(1)) to a newly-incorporated corporation formed by it (“Newco”) in consideration mostly for a note (the “Newco Note”) with a principal amount and FMV equal to the lesser of such shares’ current FMV and their FMV on A’s death, minus the redemption amount of the Class A Newco Preferred Shares which are issued by Newco as the balance of the consideration. ACo will continue to carry on its marketable securities business for at least 12 months following such transfer during which time ACo will pay dividends approximating ACo’s after –tax net income.
3. After 12 months have elapsed from such transfer, ACo will amalgamate with Newco to form Amalco as described in s. 87(1). Amalco’s authorized share capital, as well as the PUC and ACB of each of its outstanding share classes, will be the same as Newco’s.
4. Amalco will begin repaying the Newco Note owing to the Estate, but “for greater certainty, the amount paid in any single quarter of the first year that the Newco Note is outstanding after the amalgamation will not exceed 15% of the principal amount of the Newco Note when it was first issued.”
5. Amalco will continue to carry on the business, but will sell some of its marketable securities to fund Newco Note repayments.

Rulings

Standard ss. 84.1, 84(2) and 245(2) rulings.

Background

Trust1, which is a resident inter vivo trust (whose beneficiaries are family members consisting of Indvidual1, who apparently is resident in Canada, and others who might not be resident in Canada) holds preferred shares of three Canadian-controlled private corporations (“CCPCs”) (Opco1, Opco2 and Opco3), cash, a Canadian condo and certain other assets. The assets of Opco1 are mainly rental properties and shares of subsidiaries. Opco1’s other shareholders are Trust3 (holding non-voting participating shares and non-voting redeemable discretionary-dividend shares), Indvidual1 (holding special voting shares), Trust2 (holding non-voting redeemable retractable preferred shares) and Holdco (holding non-voting redeemable discretionary-dividend shares).

Proposed transactions

1. Trust1 will distribute all of its assets to Indvidual1 excepting its shares of Opco1 pursuant to s. 107(2).
2. On the 21^st anniversary of its formation, Trust1will realize a capital gain under s. 104(4)(b)(ii) on the deemed disposition of its Class C non-voting redeemable retractable preferred shares of Opco1 shares of a Canadian controlled private corporation, and will include the resulting taxable capital gain in its income for the year.
3. The other shareholders of Opco1 will transfer their shares to a newly-formed CCPC (Newco) on a s. 85(1) rollover basis, taking back shares of Newco.
4. Concurrently with 3, Trust1 will transfer its shares of Opco1 to Newco for Newco in consideration for Class C shares of Newco with full PUC, electing under s. 85(1) at the transferred shares’ stepped-up ACB.
5. The activities of Opco1 will be maintained over the years, and after one year Newco and Opco1 will amalgamate to form Amalco, whose share capital will replicate that of Newco.
6. Thereafter, Aamlco will begin to progressively (over a period of XX) redeem its Class C shares, with the redemption proceeds paid partly with the profits generated by Opco1 subsequently to the pipeline transaction.
7. Such redemption proceeds will be distributed by Trust1 to its beneficiaries.

Rulings

Re ss. 84.1, 84(2) and 245(2).

Background

On the death of X, Class G non-voting preferred shares of Holdco passed on a rollover basis to X’s surviving spouse and on a non-rollover basis to X’s estate for ultimate distribution to two surviving children. No capital gains deduction had been claimed by X respecting such shares. Holdco held and managed investments. Holdco held all the shares of Opco other than Class B participating non-voting shares held by the Family Trust. Opco redeemed preferred shares held by Holdco, electing under s. 83(2) and, following the conversion under s. 51 of the Class G shares of the surviving spouse into Class H shares, such shares were redeemed.

Proposed transactions

The estate will transfer its voting Class C and non-voting G preferred shares of Holdco on a s. 85(1) rollover basis to a newly-incorporated corporation (with no shareholders yet) in consideration for Class A and C shares of Newco.

Holdco will pay a capital dividend on the Class B shares held by the Family Trust.

After a period of at least one year, Newco will effect a reduction in the paid-up capital of its Class A shares through the issuance of 8 promissory notes payable to the Estate. They will each be payable in the 1^st, 2^nd, 3^rd (etc. through to the 8^th) quarter thereafter. Such notes will ulimately r be paid in accordance with their terms.

After the passing of at least XX months, Holdco and Newco will amalgamate.

The proceeds of the promissory notes will gradually be distributed by the Estate to its beneficiaries.

Rulings

Re ss. 84(2), 84.1 and 245(2).

Background

The Taxpayer, a listed public corporation, has CCEE, CCDE and no-capital loss pools, has two resource properties used in its first business and a third property used in its second business.

Proposed transactions under Plan of Arrangement

1. After purchasing for cancellation any common shares of dissenting shareholders, the Taxpayer will transfer the third property to a newly-incorporated subsidiary (“Newco”) in consideration for common shares of Newco (the “Newco Distribution Shares”) equaling in number the number of outstanding common shares of the Taxpayer. This transfer will take place at FMV, with no s. 85(1) election made.
2. Pursuant to an authorization received from the Board of Directors, the Taxpayer will reduce its Stated Capital Account by an amount equal to the aggregate FMV of the Newco Distribution Shares and, concurrently with such reduction, the Taxpayer will make a pro-rata distribution of the Newco Distribution Shares to its common shareholders.
3. Newco (which now will be listed) will purchase for cancellation its one Newco Common Share issued to the Taxpayer on incorporation.

Additional information

The FMV of the Newco Distribution Shares distributed to the Taxpayer’s common shareholders will not exceed the portion of the PUC of the Taxpayer’s common shares at that time that arose from cash subscriptions for common shares of the Taxpayer.

The reduction and distribution in 2 above are one-time transactions made outside of the ordinary course of the Taxpayer’s business, and are not being made in lieu of ordinary course dividends.

Rulings

S. 84(2) will apply, and s. 84(4.1) will not apply to the distribution of the Newco Distribution Shares in 2 such that a dividend will be deemed to be paid only to the extent that the aggregate FMV of the Newco Distribution Shares received by the common shareholders exceeds the aggregate amount by which the PUC of the Taxpayer’s common shares is reduced on the distribution of the Newco Distribution Shares.

An amount equal to the aggregate FMV of the Newco Distribution Shares received by that common shareholder on the distribution shall be deducted in computing the ACB of their common shares (held on capital account) pursuant to s. 53(2)(a)(ii), and where such amount exceeds that common shareholder’s ACB thereof, the excess will be deemed to be an s. 40(3) gain.

The cost of a Newco Distribution Share received by a common shareholder of the Taxpayer as a consequence of the distribution will be equal to the FMV of that Newco Distribution Share at the time of such distribution.

Background

As a result of the death of A, the estate of A acquired A’s Class A common shares of Predecessor1, exchanged such shares for Class B common shares and Class D redeemable preferred shares, received a stock dividend from Predecessor1 of Class E redeemable preferred shares, and received redemption proceeds for its Class D preferred shares (giving rise to a deemed dividend and a s. 164(6) carryback). Predecessor1 then amalgamated with its subsidiary (Predecessor2) to form DC, whose main assets comprised marketable securities (and is not anticipated to have any business property for butterfly purposes), and which has an RDTOH and CDA balnce. Pursuant to A’s will, the residue of the Estate (including the Class B common shares and Class E preferred shares) is transferred to Grandchild1 Trust, Grandchild2 Trust and Grandchild3 Trust.

Proposed transactions

1. Each Grandchild1 Trust transfers its Class B common shares and Class E preferred shares under s. 85(1) to newly-incorporated TC1, TC2 or TC3, as the case may be in consideration for Class A common shares of the TC.
2. After XX has elapsed, DC will transfer under s. 85(1) equal portions of its two types of property to TC1, TC2 and TC3 in consideration for the assumption of liabilities and in consideration for non-voting redeemable retractable “Butterfly Shares.”
3. TC1, TC2 and TC3 redeem the Butterfly Shares for Notes and select their first taxation years to end on that day.
4. After at least XX has elapsed since the above transactions, DC will be wound-up, so that the respective redemption notes will be assigned to the TCs and be extinguished.
5. To the extent that there is a CDA balance in its CDA, DC will elect under s. 83(2) respecting portions of the winding-up dividends to treat them as capital dividends, and TC1, TC2 and TC3 will elect under s. 83(2) on the proportion of such separate dividend described in s. 88(2)(b)(iv).
6. To the extent it has a positive GRIP balance, DC will designate, pursuant to s. 89(14), to treat a portion of the winding-up dividend referred to in subsection 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by timely notifying TC1, TC2 and TC3 in writing.
7. Following receipt of the dividend refund to which it will become entitled, DC will immediately transfer the cash received on the dividend refund in the form of a dividend to each of TC1, TC2 and TC3 in the same proportions as described above, and then be dissolved.
8. Subsequently, TC1, TC and TC3 may gradually sell their remaining investment, provided that the sale of their remaining investment does not result in an acquisition of property in the circumstances described in s. 55(3.l)(c) and transfer the proceeds to TC1, TC2, and TC3 over a period of at least one year. The amount paid in any quarter of that year on a class of shares will not exceed XX% of the PUC of such class of shares of TC1, TC2 and TC3.

Rulings

Including re s. 84.1 and s. 55(3.1).

In the course of confirming that its position on pipeline transactions has not changed as a result of s. 246.1 being proposed, nor of it being dropped, CRA referenced with approval the positions taken at STEP 2011 (2011-0401861C6).

If the funds or property of the original corporation were to be distributed to the estate in a short timeframe following the death of the testator, that would raise concerns.

CRA will continue to issue favourable rulings where the facts of the proposed transaction do not involve a cash corporation, and contemplate the continuation of the particular business for a period of at least one year, to be followed by a progressive distribution of the corporate assets over a period of time.

Background

A (a Canadian resident like the other persons mentioned), who is the residuary beneficiary of the estate of C (“Trust C”) and also Trust C’s executor, holds shares of Opco 1 whose ACB is attributable in part to V-Day basis and in part to “Hard ACB” resulting from the application of s. 70(5) on C’s death, and likewise for A’s common shares of Opco 3 except that a portion of their ACB also is attributable to an s. 110.6 deduction claimed by C immediately before her death. A also holds an interest in a rental property (“Property 2”).

B has Hard ACB in her shares of Opcos 4, 5 and 6 resulting from the application of s. 70(5) respecting the death of E in addition to ACB respecting V-Day basis or the capital gains deduction (and somewhat similarly for B’s shares of Opco 2 and shares held by Trust D&E, described below) - and also has an interest in Property 2. Trust D&E is a spousal trust that came into existence upon the death of E, the late husband of D and whose Trustees are A and B.

Proposed transactions

1. Newco 2 and 3 will be incorporated, with B subscribing for Class A voting preferred shares and Class G common shares of Newco 2 and Class C voting preferred shares of Newco 3.
2. B and Trust D&E will transfer their interests in various rental properties to Newco 3 under s. 85(1) for consideration including Class A common shares.
3. B will transfer various Opco shares and her Newco 2 common shares to Newco 2 under s. 85(1) in consideration for a non-interest-bearing demand promissory note equalling most of the Hard ACB of the transferred shares, and for Class B preferred shares of Newco 2 as to the balance – and similarly for Trust D&E.
4. Newco 1 will be incorporated, with A subscribing for Class A voting preferred shares and Class G common shares.
5. A and Trust C will transfer their interests in rental properties to Newco 3 under s. 85(1) for consideration including Class A common shares.
6. A will transfer his Opco 1 shares and his common shares of Opco 2, Opco 3 and Newco 3, to Newco 1 under s. 85(1) in consideration for a non-interest-bearing demand promissory notes equalling most of the Hard ACB of the transferred shares, and for Class B.1 or Class B.2 preferred shares of Newco 1 as to the balance.
7. Trust C will transfer its Class A common shares of Newco 3 to Newco 1 under s. 85(1) in consideration for a non-interest-bearing demand promissory note equalling most of the Hard ACB of the transferred shares, and for Class C preferred shares of Newco 1 as to the balance.
8. Newco 1 and Opco 1 will not be amalgamated, nor will Opco 1 be wound-up into Newco 1 for a period of at least one year following the transfer of the Opco 1 shares. Opco 1 will continue to operate the business in the same manner as before.
9. In XXXX, Newco 1 will repay to A an amount not exceeding $X of the promissory note issued in 6 respecting the Opco 1 share transfer. After this payment, it is not envisioned that A would seek any repayment of the notes issued in 6 before XXXX. Moreover, the amount of the repayment, if any, in the year ending XXXX will not exceed XX% (inclusive of the $X already repaid) of the sum of the original principal amount of such notes.

Rulings

S. 84.1 will not apply to deem A to have received a dividend from Newco 1 on the share transfers in 6 provided that the FMV, immediately after the transfers, of the notes received therefor by A is equal to or less than the ACB to A of the transferred shares as modified by ss. 84.1(2)(a) and (a.1).

S. 84(2) will not apply to deem A to have received a dividend on the common shares of Opco 1 and Opco 3 held by A.

Background

On A’s death, he owned appreciated common and preference shares of PCo, which operated a business of dealing and investing in marketable securities (bonds, shares and cash), and also held a life insurance policy on A’s life and an illiquid note owing by a company owned directly or indirectly by A’s children. No s. 110.6 deduction will have been claimed respecting the PCo shares by A or a non-arm’s length person; and no V-Day basis is included in their ACB.

Application of life insurance proceeds

Within a year of the death, PCo purchased for cancellation a portion of its common shares held by the Estate (which had been stepped up under s. 70(5)(b)) in consideration for a note, elected under s. 83(2) on the resulting deemed dividend and used the insurance proceeds and other cash to repay the note. The Estate will report a capital loss equal to the difference between the proceeds of disposition of such common shares (determined pursuant to para. (j) of the definition thereof) and the ACB of such shares, less the adjustments under subsection 112(3.2); and the executor will elect under s. 164(6) so that such capital loss will be deemed to be a capital loss of A in A’s terminal year.

Proposed transactions

1. The Estate will incorporate Newco and subscribe for 100 Newco Common Shares for $100.
2. The Estate will transfer its remaining PCo Shares (electing under s. 85(1)) to Newco in consideration mostly for a note (the “Newco Note”) with a principal amount and FMV equal to the lesser of such shares’ current FMV and their FMV on A’s death, minus $100. As additional consideration, it also will receive 100 Class A Newco Preferred Shares with a stated capital of $100, and a redemption value and FMV of $100 plus any appreciation in the remaining PCo Shares from A’s death to such transfer date.
3. PCo will continue to carry on its marketable securities business for at least 30months following the transfer in 2 above.
4. After 30 months have elapsed from such transfer, PCo will amalgamate with Newco to form Amalco as described in s. 87(1). Amalco’s authorized share capital, as well as the PUC and ACB of each of its outstanding share classes, will be the same as Newco’s.
5. Amalco will begin repaying the Newco Note owing to the Estate, but “for greater certainty, the amount paid in any single quarter of the first year that the Newco Note is outstanding after the amalgamation will not exceed 15% of the principal amount of the Newco Note when it was first issued.”
6. Amalco will continue to carry on the business, but will sell some of its marketable securities to fund Newco Note repayments.

Rulings

Standard ss. 84.1, 84(2) and 245(2) rulings.

A holds 50 common shares of Opco with a nominal adjusted cost base and paid-up capital and fair market value of $500,000, and B holds the other 50 common shares (also with a $500,000) FMV) with the same nominal PUC and an ACB of $100,000. A wishes to sell 30 of his shares to B for $300,000. B transfers his shares to Newco under s. 85 in exchange for a $100,000 note and common shares. Newco borrows $300,000 from a bank and purchases 30 Opco shares from A. Newco and Opco then amalgamate. Would CRA consider that s. 84(2) or 245(2) applied to the sale of shares by A or B to Newco?

CRA acknowledged that it was unlikely that s. 84(2) applied given that the amalgamation by itself would not produce a “winding-up, discontinuance or reorganization” of Opco’s business. However, it could not be clear on this point in the absence of more information, viz.:

information regarding the nature of the business carried on by Opco, the composition of the assets of Opco (for example, the level of liquidity), the magnitude of the surplus of the corporation or the time within which the loan from the financial institution and the note due to Mr. B would be repaid by Amalco.

CRA indicated that whether s. 84.1 applied turned on the factual question whether there was arm’s-length dealing, without commenting much further, nor could it comment on the application of GAAR to the bare-bone facts.

An individual (Mr. X), and a corporation (Holdco) wholly owned by him are the beneficiaries of a Quebec discretionary trust (Trust) holding all the shares of Opco. A deemed dividend of $100,000 generated under s. 84(1) from increasing the stated capital of Opco’s shares was allocated to Holdco pursuant to s. 104(19). This dividend did not exceed the applicable safe income. Opco then made a cash distribution of stated capital of $100,000 to Trust, which makes a capital distribution to Mr. X of $100,000.

After noting that these transactions would require the Trust to have the power to distribute amount equal to deemed income, that the determination to do so would need to be documented and that an amount would be considered to be payable “if a promissory note is issued that is payable on demand without any restriction,” CRA stated that the transactions appeared

to strip the Opco surplus by converting a taxable dividend to a payment of a capital nature that is not taxable to Mr. X. This type of tax planning appears prima facie to be contrary to the integration principle.

Were such transaction submitted in a ruling request, the Directorate:

would recommend to the General Anti Avoidance Committee to confirm the application of subsection 245(2).

An estate acquires the shares of Corporation 1 on a stepped-up basis under s. 70(5) and, in August 20X0, transfers the shares to Corporation 2 (whose common shares are held by it) in consideration for preferred shares with full paid-up capital and adjusted cost base (and without s. 84.1 applying). One year later, Corporation 1 is wound up into Corporation 2 under s. 88(1). The estate then distributes its shares of Corporation 2 to the two beneficiaries in full or partial satisfaction of their capital interests. Corporation 2 does not massively redeem the preferred shares and continues to carry on the business previously carried on by Corporation 1.

Two months after the wind-up, both shareholders of Corporation 2 transfer their shares thereof to Corporations 3 and 4, respectively; and Corporation 2 makes a distribution as described in s. 55(1) to Corporations 3 and 4 within the s. 55(3)(b) butterfly exception, with Corporations 3 and 4 using the property received to continue to carry on a business. Is such a post-pipeline butterfly permissible? CRA responded (TaxInterpretations translation):

[W]e have been willing to confirm the non-application of subsection 84(2) when the corporation continues to carry on its business for a year before the winding-up of the corporation in favour of its shareholder (the new corporation) and when the reimbursement of the note was effected gradually during the course of the second year of the implementationputting in of the structure (or when…shares…were redeemed progressively).

…Corporations 3 and 4 continued to carry on the business of Corporation 1.

The question is whether the interposition of Corporations 3 and 4 and the distribution of the property of Corporation 2 in favour of these corporations in a butterfly transaction would permit us to conclude that the property or funds were distributed or otherwise appropriated in any manner whatever by the first corporation (Corporation 1) to its initial shareholder (the estate and the beneficiaries of the estate).

One of the important facts …is that following the winding-up…there would not be a bulk redemption of the preferred shares in the capital of Corporation 2…and there would not be a bulk redemption of the shares in the capital of Corporations 3 and 4…received in consideration for the preferred shares in the capital of Corporation 2. …[T]he beneficiaries of the estate, who would remain the holders of such shares…of Corporation 3 or Corporation 4…would only receive progressively...the property or funds of which could derive from Corporation 1, and only over a period of months that we have accepted in the past…. [W]e could accept, in such a case, that the beneficiaries of the estate would not receive the property or funds of Corporation 1, in any manner whatever, on the winding-up, discontinuance or reorganization of the business of Corporation 1 and that what they received came instead from Corporation 2, or Corporations 3 or 4. In such circumstances, subsection 84(2) would not apply.

Background. All of the shares of Mr. A in A Co (which carried on a "business activity" of trading a portfolio) at the time of his death were deemed under ss. 70(5)(a) and (b) to be disposed of and reacquired at fair market value (“FMV”) and were bequeathed along with the residue equally to his four children (Child 1, 2, 3 and 4). They also were the executors of the resident Estate, and were resident in Canada, except for Child 2, who was resident in the U.S. The shares had no V-day value basis and no deduction had been or could be claimed under s. 110.6.

Completed transactions. After two preliminary s. 86 reorganizations, including an exchange by the Estate of shares of three classes (which had been created on the first s. 86 reorganization) for shares of a further new Class (Class B shares), and following the subscription by the Estate for shares of a new class (Class C), A Co repurchased Class B shares (the “Purchased Shares”), being XX% of all outstanding shares, for their FMV, thereby resulting in the receipt by the Estate of a deemed dividend. Such redemption proceeds will be allocated and paid (less withholding tax) by the Estate to Child 2 through its issuance of a non-interest bearing demand promissory note. The Estate will claim a capital loss from the share repurchase based on its proceeds of disposition being reduced under para. (j) of the definition thereof. By virtue of an election under s. 164(6), that loss will be deemed to be a terminal year loss.

Proposed transactions. A conventional pipeline transaction will be implemented respecting the the remaining Class B shares, as well as the Class C shares, of A Co now held by the Estate:

1. The Estate will transfer the shares to its newly-incorporated subsidiary ("Newco") in consideration for a note equal to the ACB of the transferred shares minus $X, and for additional Class A shares, electing under s. 85(1).
2. After at least one year (during which A Co will continue to carry on its portfolio business activity), A Co will be amalgamated with Newco to form Amalco.
3. Thereafter, Newco may gradually repay (out of proceeds of marketable securities) the note payable to the Estate over a period of at least one year (and without discontinuing its portfolio-trading business activity), but with any quarter's payments not exceeding XX% of the note's original principal.
4. After full repayment of the note, Amalco will distribute its assets (net of discharged obligations) to the Estate pursuant to winding-up proceedings.
5. Within a reasonable time following the receipt of any dividend refund, Amalco will be dissolved. By virtue of written agreement of the four legatees/trustees, no portion of the amount received by the Estate under Amalco's winding-up will be allocated to Child 2, so that any capital dividend account will only be distributed to Canadian resident legatees.

U.S. tax considerations. A Co is a PFIC. The manner of Child 2's removal as an A Co shareholder ensures that he can receive the distribution from A Co "as a capital gain" for Code purposes and avoid the complications of being a PFIC shareholder. Unless Amalco is dissolved within a reasonable time following the purchase of the Purchased Shares by Newco [sic, A Co], Child 2 will suffer adverse U.S. tax consequences with respect to the dividend received by him. The transactions are being undertaken as a “Plan of Liquidation” of A Co, which encompasses all of the completed and proposed transactions. As long as all distributions directly or indirectly from A Co are made pursuant to such Plan of Liquidation, they will be received by Child 2 as "capital gains...rather than as dividends" for Code purposes. [TaxInterpretations comment: the quoted references to capital gains treatment are potentially confusing. The estate would have acquired its A Co shares with a stepped up basis, so that they could then be disposed of with no gain being recognized, provided that dividend treatment was avoided through receiving Code s. 331 liquidation treatment.]

Rulings. For ss. 84.1, 84(2) and 245(2).

Background

On the death of B (the surviving spouse of A), B was deemed under s. 70(5)(a) to have disposed of the Class C common shares of the Corporation for their fair market value and the Trust (which had been settled for the exclusive benefit of A and B for their lifetimes, with the beneficiaries on the death of the survivor being their four children), was deemed to have disposed of Class F and I preferred shares of the Corporation under s. 104(4)(a) for their FMV, as well as non-interest bearing demand notes which the Corporation had issued to the Trust as consideration for a previous redemption of preferred shares ("Debt1"). The only assets of the Corporation were marketable securities.

Proposed transactions

1. The estate will transfer its Class C common shares of the Corporation to a newly-incorporated corporation ("Newco") in consideration for a promissory note ("PN") and for non-participating voting common shares of Newco, with a joint election being made under s. 85(1).
2. The Trust will transfer its Class F and I preferred shares of the Corporation to Newco in consideration for a promissory note ("PN1") with a principal equal to the FMV of such shares.
3. The four holding companies ("Holdcos") for the four children (and their spouses) will transfer their respective Class D common shares of the Corporation to Newco in consideration for Class B non-voting participating shares of the Corporation with par value, with a joint election being made under s. 85(1).
4. During the following one year, the Trust will transfer Debt1 to Newco in exchange for a promissory note with the same principal amount and terms.
5. During the one year following 1 to 3, the Corporation will pay part of Debt1 up to a maximum amount of $XX, with Newco, in turn, paying part of the promissory note payable by it to the Trust. Dividends funded out of the earnings of the Corporation will be paid on the Class B common shares of the Holdcos.
6. At least one year after 1 to 4, Newco and the Corporation will amalgamate.
7. The PN and PN1 will be repaid over a period of no less than one year after the amalgamation, and the repayment in any given quarter of the period of one year after the date of the amalgamation will not exceed XX% of the aggregate principal amount of the PN and PN1 when they were issued. The amalgamated corporation ("Amalco") will continue carrying on the investment business with the remaining marketable securities.
8. The Trust and estate will distribute their properties to the four children.

Rulings

Re ss. 84.1 and 84(1) not applying to the Trust or estate, and s. 245(2) not applying.

Background

At death, X was the sole shareholder of Investments (a CCPC, whose shares did not qualify as QSBCs), which held bank balances, shares of public companies and fixed income investments. Although X's spouse was a beneficiary (as well as their adult children), X's estate made the election in s. 70(6.2) for the shares bequeathed to the surviving spouse to be disposed of for their fair market value.

Proposed transactions

1. Investments will redeem preferred shares held by the estate for cash.
2. Investments will purchase for cancellation a portion of its Class A common shares for Note 1 thereby giving rise to a capital loss to be carried back under s. 164(6).
3. The estate will transfer its remaining Class A shares to Newco in consideration for Newco issuing Note 2 (with an amount equal to the ACB of the transferred shares) and a common share, with a joint election being made under s. 85(1).
4. At least one year following 3, Investments will be wound-up into or amalgamated with Newco (thereafter, "Amalco").
5. Amalco will repay the Notes and its other debts, then be liquidated. The Note repayments will occur at a maximum rate of XX% per quarter for the year following the amalgamation.
6. At the opportune time, the estate will distribute the funds to its beneficiaries.

Rulings

Standard ss. 84(2), 84.1 and 245(2) rulings.

Current structure

All the shares of A Co (being Class A voting common shares and Class B non-voting common shares) are held by a spousal trust (the "Trust"), which reported a deemed disposition of its assets at their fair market value on the death of the surviving spouse (Mrs. X). The sole asset of A Co is all the shares of C Co, whose sole asset is all the shares of D Co. D Co carries on a business directly and through four U.S. subsidiaries. The Trust will continue until the X anniversary of Mrs. X's death.

Proposed transactions

1. The Trust will transfer its shares of A Co to its newly-incorporated subsidiary ("Newco") in consideration for a note equal to their combined fair market value and for a preferred share, electing under s. 85(1). A capital loss on the transfer will be suspended under s. 40(3.4).
2. After at least one year, A Co and C Co will be amalgamated with, or wound-up into, Newco.
3. Thereafter, Newco may gradually begin to make payments on the note payable to the Trust and/or to the Beneficiaries and Grandchildren, to whom the note will be distributed on XX. For greater certainty, the amount paid in any quarter of the first year that the note is outstanding after the amalgamation or wind-up in 2 will not exceed XX% of the note' original principal.

Rulings

. For ss. 84.1, 84(2) and 245(2).

Current structure

Since the death of A (who used Investmentco in his professional practice but had Investmentco accumulate investments, Investmentco has been a portfolio investment company holding bank deposits, fixed income investments and shares. On the death of A, his Estate acquired his shares of Investmentco for their fair market value. None of the shares of Investmentco were qualified small business corporation shares at any time, and their adjusted cost base was not based on the tax-free zone. A's Class A common shares of Investmentco were bequeathed to his three adult children (Child 1, 2 and 3) and Child 1 was his executor.

Proposed transactions

1. The Estate of A will subscribe for common shares of newly-incorporated "Newco."
2. The Estate of A will transfer its Class A common shares of Investmentco to Newco in consideration for a demand non-interest bearing note ("Newco Note") and in consideration for Class B non-voting retractable preferred shares of Newco and with a s. 85(1) election made.
3. The preferred shares of Investmentco held by Child 1, 2 and 3 will be redeemed by them.
4. One year after 2, Investmentco will be wound-up into Newco under s. 88(1).
5. Newco then will proceed to repay the Newco Note held by the Estate of A at the rate of 25% at the beginning of each trimester.
6. Newco then will be liquidated, with ss. 88(2) and 84(2) applying.

Standard Rulings

respecting ss. 84.1, 84(2) and 245(2).

Current Holdco structure

Holdco is a portfolio investment company holding bank deposits, certificates of deposit, notes payable and preferred shares of Opco, and some real estate. Its sole liability is demand notes (Notes A to D) payable to its "Shareholders" (Brother 1, Brother 2, Sister, and the Estate of A, who was the fourth child of deceased Father.) Trust 2 holds the Class A voting common shares of Holdco, Brother 1 and 2, and Sister along with the Estate of A, hold its Class B non-voting retractable preferred shares and Trust 1 holds its Class D voting retractable preferred shares, giving Trust 1 de jure control of Holdco.

Trusts 1 and 2, A Estate and Opco

Opco carries on an active business and its Class A common shares are held by Trust 2. Trust 1 is a testamentary trust that came into existence on the death of Father, with the Shareholders (including now the Estate of A) as equal beneficiaries and with Brother 2, Sister and an Opco employee as trustees. Trust 2 is a discretionary inter vivos trust that participated in an estate freeze, and whose beneficiaries are Mother, the Shareholders and their issue or any of their corporations, and an income beneficiary (X). The principal beneficiary of the Estate of A is Trust 3, which, in turn, has A's two children as beneficiaries.

Proposed transactions

1. Trust 1 will subscribe for Class A common shares of newly-incorporated "Newco," so that Holdco will be connected to Newco by virtue of ss. 186(4)(a) and 186(2)
2. The Estate of A will transfer its Class B preferred shares of Holdco (which were stepped up under s. 70(5) on the death of A, without the s. 110.6(2.1) deduction being available) to Newco in consideration for a demand non-interest bearing note ("Note 1").
3. Holdco will subscribe for Class A common shares of newly-incorporated "Investmentco."
4. Holdco will redeem the Class B preferred shares held by Sister, Brother 1 and Brother 2, in consideration for a demand non-interest bearing note, with Holdco making eligible dividend designations.
5. Holdco will transfer its GICs to Investmentco in consideration for Class B non-voting retractable preferred shares, with the sale agreement containing a price adjustment clause, and with a s. 85(1) election made.
6. Holdco will redeem the Class B preferred shares which Newco acquired in 2, in consideration for a demand non-interest bearing note ("Note 2"), with Note 2 containing a price adjustment clause. Newco thereby will realize a capital loss, which will be deemed to be nil by s. 40(3.6).
7. Investmentco will be wound-up into Holdco under s. 88(1).

Subsequent transactions

The Estate of A will demand repayment of Note A by Holdco. At an opportune time, the Estate of A will distribute Note 1 to Trust 3 as described in s. 107(2). At least one year following 2, the Estate of A (or Trust 3, as the case may be) will progressively over various years demand the repayment of Note 1 in order to generate distributions to its beneficiaries. Newco will generate the necessary liquidity to satisfy such demands by making demands for repayments of Note 2 owing by Holdco. It is contemplated that Holdco and Opco will continue their activities in a similar manner as before (including maintaining their separate existence.)

Standard Rulings

respecting ss. 84.1, 84(2) and 245(2).

underline;">: Current structure. The Company is a listed public corporation carrying on the "Business" (comprising resource projects) directly and through subsidiaries and, with the exception of one non-resident individual shareholder, its common shares are widely held. It holds one common share (being all the issued shares) and non-interest-bearing advances (the "Subco1 Loan") of Subco1, which is a holding company for the "investments" (including advances) of the Company (likely foreign resource project subsidiaries held directly or through a further holdco), other than a share and warrant investment in another public company, which is held through Subco2.

Proposed transactions

"The Company proposes to reorganize its Business as follows" pursuant to a Plan of Arrangement:

1. The Company will exchange a portion of the Subco1 Loan for Subco1 treasury common shares (the "Subco1 Distribution Shares") and "Subco1 Warrants," entitling the holder to purchase one common share of Subco1 at an exercise price which will increase after XX months.
2. The Company will distribute the Subco1 Distribution Shares and Subco1 Warrants as a paid-up capital reduction (with the fair market value of each distributed share or warrant being approximately $XX and $XX, respectively), and with the Subco1 common shares thereafter being listed.

Rulings

Ss. 15(1) and 246(1) will not apply to the distribution. S. 84(2) will apply and ss. 84(4.1) and 212(2) will not apply to such distribution. The cost to the Company shareholders of the distributed shares and warrants will be equal to their FMV at that time.

What is the CRA position on Descarries? After noting that the case was not appealed because in the result it was favourable and it was only an informal procedure case, CRA then summarized the facts, stating that the Oka shareholders engaged in "three avoidance transactions" (TaxInterpretations translation) for appropriating the surplus of Oka which, in December 2004, had already " ... and was in the course of liquidating the remainder of its assets:"

First, on March 1, 2005, there was an internal rollover of their shares in the capital stock of Oka in order to crystallize in the adjusted cost base ("ACB") of new shares, the excess of the fair market value ("FMV") of the transferred shares over their ACB, thereby realizing a capital gain in respect of which the capital gains deduction in section 110.6 was not claimed.

The second transaction, effected on March 15, 2005, was to roll those new shares in the capital stock of Oka to a new corporation (9149-7321 Quebec Inc., hereafter « Quebec Inc. ») in exchange for shares of two classes in the capital of Quebec Inc.: the first class of shares having a low PUC and an ACB equal to their FMV (the "1971 FMV Shares") and the second class of shares having a high PUC (which was the purpose of the second transaction) and a high ACB equal to their FMV (the "Stripping Shares").

The third transaction was to redeem for cash on March 29, 2005 all of the Stripping Shares, and part of the 1971 FMV Shares, so as to generate a capital loss sufficient to eliminate the capital gain generated in the first transaction.

The CRA continues of the view that ITA subsection 84(2) should have applied in this case especially by reason of …MacDonald… . Furthermore, the CRA is concerned by the approach adopted by the TCC respecting the analysis of the avoidance transactions for purposes of the application of ITA subsection 245(2).

Respecting its s. 84(2) concerns, CRA noted the broad wording of s. 84(2), that the funds received on the redemption of the shares of Quebec Inc. "corresponded closely in dollars to the advance which was provided to Quebec Inc. by Oka," so that , paraphrasing RMM, the funds in the shareholders hands "were actually the funds of Oka, notwithstanding the interposition of Quebec Inc.," and that the "restrictive interpretation" accorded by Hogan J to the word "on" was inconsistent with the meaning of "as a result of" suggested in David, where there was a delay of five months. As for any potential double taxation arising from the applicability of s. 84(3), in practice CRA would avoid double taxation through applying s. 248(28)(a).

After also articulating its concerns about the decision's GAAR analysis, CRA concluded that it will seek a decision of the Federal Court of Appeal or the Supreme Court of Canada:

…confirming the broad scope of subsection 84(2) recently established….in… MacDonald …and, also, whether or not there is a specific scheme under the Act for taxing any direct distribution of surplus of a Canadian corporation as taxable dividends in the hands of individual shareholders; as well as a specific scheme under the Act against indirect surplus stripping.

See also summary under s. 245(4).

underline;">: Current structure. Parent, a public corporation which previously had been spun-off by Subco 2 (also a public corporation, but with Subco 1 holding all its common shares), owns all the common shares of Subco 1, Subco 3, Can Holdco (as well as preferred shares of Subco 1), and a portion of the common shares of FA2. Subco 3 owns the remaining common shares of FA2 and Subco 2 owns all the common shares of FA 1. The assets held in Subco 2 and FA 1 constitute the majority of the assets in the Parent group.

Proposed transactions

1. Parent will transfer to Can Holdco (which currently has nominal assets) all its FA 2 shares in consideration for common shares of Can Holdco having an equal FMV, and elect at the lesser of under s. 85(1)(c.1)(i) and (ii).
2. Subco 3 will transfer all its FA 2 shares to Can Holdco for a purchase price equal to the shares' adjusted cost base (and with a price adjustment clause based only on any adjustment to such ACB), and Can Holdco will issue in consideration therefor redeemable retractable Class B shares having a redemption amount, apid-up capital and FMV equal to such purchase price. Subco 3 and Can Holdco will elect at the lesser of the s. 85(1)(c.1)(i) and (ii) amounts.
3. Similarly, Subco 2 will transfer its FA 1 shares to Can Holdco for Can Holdco Class C preferred shares with a redemption amount, paid-up capital and FMV equal to the ACB of the transferred shares, with a similar s. 85(1) election made.
4. Can Holdco will transfer all its FA 1 shares to FA 2 in consideration for additional FA 2 shares with an equivalent FMV.
5. Can Holdco will redeem its Class C shares held by Subco 2 for demand notes (accepted as full payment, and with their terms acknowledging that their principal amount is subject to adjustment based on the Class C share price adjustment clause).
6. Similarly, Can Holdco will redeem its Class B shares held by Subco 3 for demand notes.
7. Parent will draw down under its credit facility and subscribe for Can Holdco common shares in amounts sufficient to fund the note redemptions in 8 below.
8. Can Holdco will satisfy the notes owing to Subco 2 and 3 in cash.
9. Subco 2 will reduce the stated capital of its common shares by making a single cash distribution, within XX months from the transfer in 3, with the reduction being subject to a price adjustment clause.
10. Subco 1 will make a corresponding stated capital distribution in cash to Parent.
11. Subco 3 will reduce the stated capital of its common shares by making a cash distribution, subject to a price adjustment clause.
12. Parent will repay the advance in 7.

Rulings

Ss. 85(1)(e.2), 15(1), 56(2), 69(4) and 246(1) will not apply to the transfers in 2 and 3. The transfer of FA 1 shares in 4 will not by itself cause those shares to cease to be capital property. S. 84(2) will apply and s. 84(4.1) will not apply to the distribution in 9.

Background

Prior to the death of B (who had been predeceased by her spouse), the Class A common shares of Investmentco, which was a portfolio investment company, were held by Trusts A and B, and its non-voting non-cumulative redeemable retractable Class F shares were held by B and a spousal trust (B2 Trust). Accordingly, the Class F shares were deemed to be disposed of and reacquired under s. 70(5) or 104(4)(a) for their fair market value. The adjusted cost base of the Class F shares was not based on the tax free zone.

Proposed transactions

Following capital dividends on the Class A and F shares paid through the issuance of demand promissory notes:

1. Trusts A and B will sell their Class A shares of Investmentco to newly-incorporated Newco for Class A shares of Newco with identical attributes and elect under s. 85 with Newco.
2. B2 Trust and the estate of B will sell their Class F shares of Investmentco to newly-incorporated Newco for shares of Newco with identical attributes and with a paid-up capital equal to the fair market value of the transferred shares (being also their FMV on death).
3. After a period of XX, during which it will continue its portfolio investment activities, Investmentco will amalgamate with Newco.
4. Thereafter, Amalco will proceed with partial seriatim redemptions of its Class F shares held by the Estate of B and by B2 Trust in maximum amounts of $XX per quarter.

Rulings

Respecting non-application of s. 84.1 to the transfer of the Class F shares and non-application of s. 84(2) to B Estate and B2 Trust to deem a dividend on their Class F shares of Investmentco.

Overview

A testamentary spousal trust (the "Spousal Trust") whose basis in pref shares of a portfolio investment company ("Holdco") was stepped up under s. 104(4)(a) on the death of the spouse in question (B), will engage in a "pipeline" transaction under which it will transfer those shares to a Newco for inter alia the "Newco Note," with Newco then amalgamating with Opco (at least one year later) so that marketable securities of "Amalco" may be used to pay down the Newco Note.

Prior to B's death

Following the death of A, the Spousal Trust engaged in an estate freeze transaction under which it received redeemable retractable non-cumulative Class A preferred shares of Holdco under s. 86 in exchange for its common share, and inter vivos trusts for her son (Trust C) and daughter (Trust D) each subscribed for one common shares. Spousal Trust also subscribed cash for redeemable retractable non-cumulative Class B preferred shares of Holdco, and holds debt of Holdco. Holdco's only activity is to hold marketable securities.

B's death and preliminary transactions

On B's death, there was a deemed disposition at fair market value by Spousal Trust under s. 104(4)(a) of its property including its Class A preferred shares. Newco was incorporated with Trusts C and D as nominal common shareholders.

Proposed transactions

:

1. Spousal Trust will transfer its Class A and B preferred shares of Holdco to Newco in consideration for the Newco Note (in the case of the A's) and voting redeemable retractable non-cumulative Class B preferred shares (in the case of the B's).
2. Trusts C and D will each transfer its common share of Holdco to Newco under s. 85(1) for one Newco common share.
3. Holdco and Newco will amalgamate to form Amalco no sooner than one year after the above transfers. Any dividends paid in the interim by Holdco or Newco will not be funded through a disposition of corporate investments. Pursuant to ss. 87(11) and 88(1)(d), Amalco will designate an amount to increase the cost amount of some or all of the Marketable Securities. "The shares of the capital stock of Holdco will not be acquired by a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Holdco with Newco."
4. The Newco Note "will be gradually repaid over a period of at least one year after the amalgamation date, but the amount of the repayments in any given quarter of that year will not exceed X% of the principal amount of the Newco Note when it was issued. …While Amalco may sell some of the Marketable Securities in order to enable it to make the above-mentioned repayments of the Newco Note, it intends to continue carrying on its investment business with the remaining Marketable Securities left."
5. On completion of its administration, Spousal Trust will transfer its remaining assets to its beneficiaries (C and a testamentary trust for D).

Rulings

:

• S. 84.1 will not apply to the transfer of shares by Spousal Trust to Newco.
• S. 84(2) will not apply to deem Spousal Trust to have received a dividend on the Class A preferred shares.

Background

Pubco (which is a listed Canadian public corporation engaged in the commercialization of innovative products, and is reorganizing to concentrate on XX) and its indirect Canadian subsidiary, Subco, completed an arm's length sale of the X Business. Following the sale, the Board announced an X% reduction in the workforce. No material amount of the PUC of Pubco was the result of its "acquisition of shares of previously unaffiliated corporations for FMV that was significantly less than the aggregate PUC of such corporations or the result of an acquisition that involved non-capital losses…being made available to Pubco" (para. 7).

Proposed transactions

Pubco may effect a distribution (Distribution #1) of its paid-up capital in an amount equal to or less than the proceeds of the sale of its X Business, with Distribution #1 being derived from such sale and occurring within X months thereof.

Within the same time period, Pubco may effect a distribution (Distribution #2) of its paid-up capital which is derived from cash or near cash on hand of it or its subsidiaries.

Rulings

Standard.

X and Y each hold half of the common shares of Opco. X deals at arm's length with Y and Buyer. Buyer incorporates Holdco and subscribes $100,000 for its shares. Opco borrows $500,000 and on-lends at interest to Holdco. Holdco purchases X's shares for $1,000,000, with $600,000 paid on closing, with the deferred $400,000 portion of the purchase price bearing interest.

Holdco and Opco then amalgamate. Buyer and Y each receive 50% of the voting common shares of Amalco, and Amalco preferred shares with a value of $100,000 and $1,000,000 respectively, minus the value of the common shares. Amalco continues to carry on the Opco business.

In response to a query as to whether s. 84(2) applied, CRA stated (TaxInterpretations translation):

As we understand it, Holdco was incorporated solely to borrow from Opco and to acquire the shares of X. Holdco did not carry on any businesses. In addition, you indicated that Opco's business continued after the amalgamation. In light of these facts, we are of the view that it would be difficult to consider that this business was reorganized by virtue of the amalgamation as the amalgamation would not entail a change to that business. Your request does not provide any other information that would permit us to conclude that there was a winding-up, discontinuance or reorganization of Opco's or Amalco's business.

Two Canadian-resident brothers (Messrs. A and B), who each hold a 50% block of the common shares of a small business corporation (Dividend Payor) having a fair market value of $1.5M and nominal adjusted cost base and paid-up capital, and safe income on hand of perhaps $1M, transfer their respective shareholdings to wholly-owned Newcos (Holdco A and Holdco B), utilizing the s. 85(1) rollover, in consideration for common shares of Holdco A and Holdco B with the same attributes (FMV- $1.5M; nominal ACB and PUC). Each of the two Holdcos then transfers its common shares of Dividend Payor under s. 85(1) to Dividend Payor in consideration for the issuance by Dividend Payor of preferred shares, also with such attributes (FMV- $1.5M; nominal ACB and PUC). Immediately thereafter, A and B subscribe equally for common shares of Dividend Payor.

Thereafter, Dividend Payor annually redeems preferred shares held by each of the Holdcos for $150,000. Although $100,000 of the resulting deemed dividend of approximately $150,000 is attributable to safe income on hand, no s. 55(5)(f) designation is made, so that the full amount of such deemed dividend is converted to a capital gain under s. 55(2). Each Holdco then pays a capital dividend of $75,000 to its individual shareholder (A or B).

In indicating that the general anti-avoidance rule could be applied to this and similar transactions involving trusts, CRA stated (TaxInterpretations translation):

[T]he surplus of Dividend Payor is annually stripped in favour of Mr. A and Mr. B given that annual taxable dividends of $150,000 which otherwise would be paid by Dividend Payor (namely, its accumulated surplus) directly to each are, through a series of transactions entailing the insertion of Holdco A and Holdco B, converted in form into capital dividends free of tax (in the amounts of $75,000), through utilizing, inter alia, section 55.

...[T]he insertion of Holdco A and Holdco B is part of a surplus-stripping scheme respecting Dividend Payor with a purpose of converting annual taxable dividends paid by Dividend Payor, which dividends would normally be inter-corporate dividends eligible for the subsection 112(1) deduction in the computation of taxable income of HoldcoA and HoldcoB, into proceeds of disposition of shares in a manner that abuses subsections 84(3), 55(2) and 83(2).

After referring to the adverse view taken by the GAAR committee of the somewhat similar transactions in 2004-0099201R3, CRA stated that (notwithstanding the decision in Gwartz v. The Queen, 2013 TCC 86) (TaxInterpretations translation):

the CRA proposes, at the first favourable occasion, to demonstrate to the Court that there is a specific scheme under the Act for taxing the distribution of surplus of a Canadian corporation as a taxable dividend in the hands of individual shareholders who are the taxpayers; and that there is also an overall scheme of the Act against surplus stripping.

Background

X's Class A, B and C shares of Amalco (a Canadian private corporation that was not a small business corporation) passed on his death to an estate (the Estate) of which two of his sons (Y and Z) were the executors. After giving effect to the immediate bequest of the Class B shares of Amalco to Y and Z, the shares of Amalco were held by the estate (holding Class A and C shares), Y and Z (each holding Class B shares and one common share) and a trust (the Trust) for the children of the other son of X (holding the other common share).

Proposed transactions

:

• The Estate will transfer its Class A and C shares to a newly-incorporated corporation (Newco), whose common shares are owned equally by X, Y and the Trust, in consideration for two Notes
• Y and Z will transfer their common and Class B shares, and the Trust will transfer its common share, of Amalco to Newco in consideration for non-voting preferred shares of Newco
• Amalco will be amalgamated with Newco no sooner than one year after the above transfers
• The Notes "will be gradually repaid over a period of at least one year after the amalgamation date, but the amount of the repayments in any given quarter of that year will not exceed X% of the principal amount of Note 1 and Note 2 when they were issued"

Rulings

:

• S. 84.1 will not apply to the transfer of shares by the Estate to Newco for the Notes, except that it will so apply to the extent of the V-Day value of the Class A shares so transferred by it
• S. 84(2) will not apply to deem the Estate to have received a dividend on the Class A and C shares

CRA would generally not differentiate between a corporation carrying on an active business and a corporation carrying on a business of earning income from property when considering whether funds or property of a corporation resident in Canada have been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders, on the winding-up, discontinuance or reorganization of the corporation's business.

Moreover, the Federal Court of Canada, Trial Division has mentioned in Conrad David v. The Queen, 75 DTC 5136, that the word "on" used in the expression "on the winding-up, discontinuance or reorganization of its business" may possibly mean "as a result of" or "consequential to". Therefore, it could be argued that, even if no business exists at the time of the distribution or appropriation of funds or property, such distribution or appropriation could still occur "on" the winding-up, discontinuance or reorganization of the corporation's business if it happens "as a result of" or is "consequential to" the winding-up, discontinuance or reorganization of the business. For example and depending on the circumstances, subsection 84(2) could apply to the distribution by a corporation to its shareholders of funds or investments resulting from the prior sale of operating assets linked to a former business.

Pubco holds foreign affiliates owning non-core foreign exploration properties through two Canadian holding companies (Canco 1 and Canco 2). After preliminary transactions to capitalize these holdings (which are designed to increase the adjusted cost base of its shares of Canco 1 and Canco 2), Pubco transfers its shares of Canco 1 and 2 to a newly-incorporated Canadian subsidiary (Spinco), utilizing the s. 85(1) election. Spinco then may obtain equity financing from third parties on a private placement basis, thereby diluting Pubco's ownership of Spinco.

Pubco then distributes Spinco to its shareholders as a reduction in the paid-up capital of its common shares (such reduction being equal to the fair market value of the Spinco shares).

Rulings that s. 84(2) will apply, and s. 84(4.1) will not apply, to the distribution; and that subject to s. 47, the cost amount to a Pubco shareholder of the Spinco shares will be equal to their fair market value at the time of distribution.

A CBCA Canadian public company (the "Corporation") transferred Canadian property, which represented substantially all of the assets used by it in an active business, to a CBCA Newco on an s. 85(1) rollover basis in consideration for common shares. It then sold Newco to PurchaseCo (a Canadian public company which was a "capital pool company") in consideration for PurchaseCo common shares and special warrants (apparently in order to qualify the issuance of the related common shares of PurchaseCo for securities law purposes).

Corporation will distribute the PurchaseCo common shares to its shareholders, as a one-time reduction of its paid-up capital.

Ruling that s. 84(2) will apply, and s. 84(4.1) will not apply, to the distribution.

Ruling that s. 84(2) will apply to the distribution by a resource public company of a resource subsidiary as a reduction of stated capital, in order that the former can focus on its more promising projects.

At the time of death of Mr X, he held common and preferred shares of (and controlled) Holdco, which carried on an investing business and held a wholly-owned subsidiary carrying on a business (Opco). Mrs X held common shares and preferred shares of Holdco of a different class.

A testamentary trust created by Mr X will transfers the estate shares to a Canadian corporation (Newco) which is jointly owned by the trust and Mrs X and controlled by the trust in consideration for two promissory notes equal to the fair market value of such common and preferred shares at the death of Mr X, and for preferred shares having a redemption amount equal to any appreciation in the fair market value of the common shares subsequent to such death (and having a nominal paid-up capital so as not to engage s. 84.1). A s. 85(1) election is filed in due course. Mrs X effects a similar transfer of her Holdco shares to Newco.

After at least one year has elapsed since the transfer of the shares of the capital stock of Holdco to Newco, Holdco will be amalgamated with or wound-up into Newco. Pursuant to paragraph 88(1)(d) and within the limits of this provision, Newco will designate an amount to increase the ACB of the shares of the capital stock of Opco that will be distributed or acquired on the amalgamation/winding-up.

Subsequently to such amalgamation or winding-up, Newco may gradually begin to make payments on the notes owing by it to the testamentary trust in order to fund distributions to beneficiaries in accordance with the terms of the trust.

Ruling that s. 84(2) will not apply to deem Holdco to have paid a dividend to the testamentary trust.

Respecting the treatment of the winding up of an agricultural cooperative within the meaning of s. 135.1(1) pursuant to which the cooperative distributes the balance of its assets to its members (with such distribution not satisfying the definition of "allocation in proportion to patronage” in s. 135(4).

Provided that the distribution of property to members is not connected to tax deferred cooperative shares within the meaning of subsection 135.1(1) (footnote 1), we are of the view that the general rules relating to winding ups apply to determine the tax consequences of such distribution to members. Thus, it is possible that subsection 84(2) applies in order to deem the corporation to have paid a dividend ... .

An estate engages in a "pipeline" strategy in which it disposes of its shares of ACo (having a stepped-up adjusted cost base under s. 70(5)) to a newly-incorporated holdco ("AHoldco") in consideration for a promissory note, and AHoldco applies an intercorporate dividend from ACo to repay the promissory note. CRA stated that the circumstances which "could" lead to the application of s. 84(2) included: the funds or property of ACO being distributed in a short time frame following the death of the deceased; and ACo having no business and instead holding mostly cash.

Given the acceptance of a tuck-under transaction in Vaillancourt-Tremblay, does CRA still consider that s. 84(2) should not apply to such a transaction? After noting that this decision contained a dissent and did not address s. 245(2), CRA stated:

[T]he CRA intends to continue to challenge surplus stripping situations that are considered abusive, including those in the form of "tuck under" transactions, in particular by reviewing the potential application of subsections 84(2) and 245(2) in the particular situations.

That being said, it is possible that, under appropriate circumstances, "tuck under" transactions may be performed without triggering the application of subsections 84(2) and 245(2). For example, the CRA maintains its long-standing position that subsections 84(2) and 245(2) should not apply to a "tuck under" transaction to extract the safe income on hand relating to the interest of a corporate taxpayer in a target corporation, of the type described in this question. However, and on the basis of the foregoing, the CRA is of the view that the Tremblay decision cannot be interpreted as having the effect of automatically validating all other types of "tuck under" transactions.

A non-resident holds 40% of the common shares of Opco and all of the shares of Holdco (also a Canadian private corporation) which, in turn, holds the other 60% of the common shares of Opco. The non-resident transfers the Holdco shares to Opco in consideration for redeemable preferred shares of Opco, thereby realizing a capital gain that is treaty-exempt. Holdco is eventually wound up into Opco. Would s. 84(2) or 245(2) apply? After noting in its summary that “Tremblay ... contains a strong dissent based on ... Smythe,” CRA responded:

Furthermore ... section 245 was not raised in the Tremblay case.

Consequently, and despite the Tremblay decision, the CRA intends to continue to challenge surplus stripping situations that are considered abusive, including those in the form of "tuck under" transactions, in particular by reviewing the potential application of subsections 84(2) and 245(2) in particular situations.

That said, it is possible that, under appropriate circumstances, "tuck under" transactions may be performed without triggering the application of subsections 84(2) and 245(2). For example, the CRA maintains its long-standing position that subsections 84(2) and 245(2) should not apply to a "tuck under" transaction to extract the safe income on hand relating to the interest of a corporate taxpayer in a target corporation.

CRA , respecting the winding-up of a non-profit organization described in s. 149(1)(l):

If the association is a corporation with capital stock, subsection 84(2) could apply to the transfer of property to the shareholders so that the corporation is deemed to have paid a dividend to them. Under subsection 84(2), the shareholder will be deemed to have received that dividend. However, if the association does not have capital stock, such a transfer to a member could be a payment on account of capital and represent the proceeds of disposition of a member's interest. In the latter situation, subsection 84(2) would not apply.

In explaining why, in contrast to 2005-0134731R3 F (the "Advance Ruling"), the Directorate could not rule on the proposed transactions, it stated:

[O]ne important distinction is that the Advance Ruling was essentially an intergenerational transfer of a family business whereas, in your case, a minority shareholder is essentially transferring his interest in a corporation to his brother. We are of the view that the series of proposed transactions submitted constitutes a mechanism to strip the corporation's surplus and that all the conditions for the application of the GAAR of the Act would be met.

CRA noted that the taxpayer’s request for rulings had been withdrawn for the reasons noted below in the summary (the text of the letter is similar):

The purpose of the proposed series of transactions is to convert a taxable dividend that would otherwise have been paid by a corporation (Opco) out of the proceeds of sale of its business, into a proceeds of disposition the shareholders of Opco would have received from the sale, in favour of an unrelated purchaser, of the shares of a newly formed corporation that would have acquired Opco's business on a taxable basis before its shares being sold to the unrelated purchaser. The proposed series of transactions corresponds to a dividend stripping arrangement of Opco to which all the conditions under either 84(2) or the GAAR are met.

In two rulings on post-mortem pipeline transactions (2002-0154223 and 2005-0142111R3), CRA required that the subject corporation remain in existence and continue its business as before, rather than being wound up or amalgamated. Why does CRA impose this one-year requirement, and can it be shortened? CRA responded:

As you indicated, one of the important elements of those files was that the particular corporation remained a separate legal entity (i.e. that it was not wound up into another corporation or amalgamated with another corporation) for a period of at least one year and that, during that same period, the particular corporation continued to carry on its business in the same manner as before. The advance income tax rulings also provided that after the above-described period, the particular corporation was wound up into a newly incorporated corporation of which the legatee was a shareholder. Finally, the advance income tax rulings indicated that the newly incorporated corporation progressively distributed assets to the legatee, either as repayment of the principal of a note or as a reduction of the paid-up capital relating to shares of its capital stock…. [T]hose elements contributed to this Directorate's conclusion that subsection 84(2) did not apply.

Furthermore, our Directorate's position is to decide on the potential application of section 84(2), section 84.1 or section 245(2) on a case-by-case basis … .

Mr. A is the sole shareholder of Aco, which generates an annual profit from its operations of more than $100,000. His Aco shares have a significant fair market value and nominal paid-up capital and adjusted cost base.

In a given year, A transfers a portion of his shares of Aco, having a FMV of $100,000, to Aco in consideration for preferred shares of Aco having a redemption amount of $100,000 and a nominal PUC. As s. 84(5) applies, there is no deemed dividend and A realizes a capital gain of $100,000.

In the same year, A transfers his $100,000 preferred shares of Aco to a Newco formed by him (Bco) in consideration for a demand promissory note of $100,000. As his preferred shares had an ACB for purposes of s. 84.1(2)(a.1) of $100,000, no deemed dividend arises. Aco then redeems the $100,000 of preferred shares (giving rise to a deemed dividend to Bco of that amount – which is not subject to s. 55(2) as Bco had full ACB in those shares), and BCo uses the redemption proceeds to discharge the note owing to A.

CRA stated (TaxInterpretations translation):

The goal of the series of transactions which you presented to us was to convert an annual dividend, which otherwise would have been paid by your corporation, into a taxable capital gain, by the annual conversion, in a taxable transaction, of participating shares in your corporation into preferred shares and the transfer of such preferred shares to a holding company controlled by you….[This] series of transactions constitutes a mechanism for the stripping of surplus of your corporation so that all the conditions for the application of the GAAR are satisfied.

An indirect foreign subsidiary ("Forco 1") of a Canadian public company ("Opco 1" - likely, BCE Emergis Inc.) sold a foreign subsidiary of Forco 1 ("Forco 2" - likely BCE Emergis Corporation) in an arm's length sale to a purchaser. As a condition to the sale of Forco 2, a loan owing by Forco 2 to another indirect foreign subsidiary of Opco 1 ("Forco 3") was required to be paid off. Accordingly, Opco 1 used money borrowed by it from a Canadian bank to contribute, through a series of transactions, capital to Forco 2, in order that Forco 2 could pay off the loan owing by it to Forco 3. Upon completion of the sale of Forco 2, the sale proceeds were distributed, through winding-up of Forco 1 and its immediate parent to Opco 1 ,which used a portion of the proceeds so received by it to pay off the bank loan. Thereafter, Forco 3 uses the loan repayment proceeds received by it to effect a capital distribution to its immediate Canadian parent ("Sub 2") which, in turn, will effect a capital distribution directly (and through another intermediate corporation) to Opco 1, which will then effect a stated capital distribution of a portion of such cash proceeds on its shares.

CRA gave a favourable s. 84(2) ruling.

The four equal common shareholders of Opco were X (a director and vice president), his wife ("Y"), Y's sister and the sister's husband, and X and Y also held preferred shares. After Opco, which had been carrying on a business, fell into financial difficulties, it sold the property of that business to X at an undervalue, without any change to Opco’s share capital. Proceedings for the dissolution of Opco had not been commenced. In finding that s. 84(2) would not apply (and that s. 15(1) or s. 246(1) might apply to the benefit conferred on the sale), the Directorate stated:

Subsection 84(2) ... provides that each person who held at the particular time one or more of the issued shares is deemed to have received at that time a dividend in proportion to the number of shares of that class held by each person. In the present case, X, to the exclusion of any other Opco shareholder, would have received property from Opco pursuant to a deed of sale of property between Opco and X. We are therefore of the view that subsection 84(2) would not apply in the particular circumstances of this case.

U.S.-resident shareholders of a Canadian investment company ("Canco") sell their shares of Canco to an unrelated Canadian purchaser ("Holdco"), and Holdco winds-up Canco, "bumps" the investments of Canco under s. 88(1)(d) and sells some of those investments to persons other than those described in s. 88(1)(c)(vi)(B)(I), (II) and (III). S.84(2) does not apply to the transactions as Holdco is not a special purpose corporation and has been an investment holding company since the 1970s, and sales by it of the bumped assets will be in the ordinary course of its business. "Therefore it cannot be said that Holdco is an instrumentality designed to facilitate these proposed transactions."

After negotiations with a purchaser, who is interested in the assets of the business of Opco, it is agreed that the Opco shareholders will sell their Opco shares after Opco has transferred all its assets in a taxable transaction to a newly-incorporated subsidiary ("Subco"). The capital dividend account of Opco is distributed to the vendor shareholders of Opco immediately after the taxation year end resulting from the amalgamation of Opco and Subco and the acquisition of control of Opco. The sale price for the shares is adjusted to reflect the income tax payable on the asset drop-down and the funds distributed on payment of the capital dividend. The vendors utilize their capital gains exemption on the sale.

Would s. 84(2) (which was invoked in Geransky) be applied? Given that tax was paid on the asset sale, would s. 245(2) be applied? CRA responded:

[W]here none of Opco's funds or property are distributed or otherwise appropriated in any manner whatever to or for the benefit of the selling shareholders of Opco in the Given Situation, subsection 84(2) of the ITA would not be applicable. This could be the case where the selling shareholders and the purchaser are dealing at arm's length, the selling shareholders would receive a cash amount from the purchaser's own funds in return for their Opco shares, and Opco's assets would continue to be used in an active business by Opco or by another entity within the purchaser's corporate group.

Respecting the application of subsection 245(2)…it is possible to confirm that in a situation of the type described in the preceding paragraph, subsection 245(2) would not normally apply to the selling shareholders to redetermine the tax consequences arising from the sale of their shares.

…[I]t is not possible to comment definitively on the application of subsection 84.1 in the Given Situation given…the brief description [respecting facts relevant to arm's length dealing].

…[However] where the proposed transaction is a business transaction and is supported by bona fide business purposes (other than obtaining a tax benefit), where a purchaser is interested in the assets of an unrelated person (the "Target Corporation"), and where the purchaser and the shareholders of the Target Corporation are unrelated persons with distinct and different interests, the sole fact that the parties have finally agreed that the purchaser would acquire the Target Corporation's assets by purchasing shares of its capital stock would not be sufficient, in and by itself, to consider that the purchaser and the vendors are not dealing at arm's length, with respect to the disposition of the shares of the capital stock of the Target Corporation. …

Two brothers (A and B), and their cousins (C and D, who were brothers) each held 50% of the shares of a holding company ("ABco" and ) ("CDco)" for portfolio investments and for the holding by each of 50% of the shares of Opco. An inter vivos trust (the “Trust”), holding 600 shares of Xco (a CCPC with a bond portfolio) with a nominal ACB and PUC of $600 and an FMV of $1,200,000, distributed those shares equally to its “Beneficiaries” (A, B, C and D – as well as E and F, who were brothers and cousins of the others). By virtue of an election by the trust pursuant to s. 107(2.001), s. 107(2.1) applied to this distribution, so that Trust realized deemed proceeds of $1,200.000 (resulting in a taxable capital gain of $99,950 being allocated to each Beneficiary under s. 104(21)), each Beneficiary was deemed to have acquired 100 shares at a cost of $200,000, and each Beneficiary disposed of the beneficiary’s capital interest in the Trust for proceeds of $100, which under s. 107(1)(a) had a deemed ACB equal to the cost amount of the distributed shares of $100 – so that no gain was realized on the disposition of each such capital interest.

A and B (and C, D, E and F) each then transferred to ABco (or to CDco) their 100 Xco common shares in exchange for a term note for $200,000 (equaling their ACB) bearing interest at 6% payable in equal instalments on the 12^th, 18^th and 26^th month after such transfer. After the term notes of ABco and CDco were paid in full, Xco would be wound up and all of its property distributed pro rata to ABco and CDco, so that Xco would realize deemed proceeds pursuant to s. 69(5)(a) and ABco and CDco would have a deemed FMV cost pursuant to s. 69(5)(b).

CCRA indicated that s. 84(2) would not apply (and went on to find that s. 84.1 also would not apply).

Ruling that a transfer by a Canadian public company in a taxable transaction of all the assets of a business to a Newco, followed by a distribution of Newco shares to its shareholders would give rise to a dividend only to the extent that the fair market value of the distributed shares exceeded the paid-up capital reduction associated with the distribution.

Description of reorganization of a public corporation in which the paid-up capital of its issued and outstanding common shares are reduced through the distribution of the common shares of Newco to the shareholders, with s. 84(4.1) not applying because of the application of s. 84(2).

Where Mr. A effectively wishes to withdraw cash from a corporation of which he is the sole shareholder and accomplishes this by selling the shares of the corporation to another unrelated corporation which then winds-up the purchased corporation, s. 84(2) may possibly apply to Mr. A.

Under an agreement for the sale of a corporation (Target) solely for shares of the purchaser, which were validly issued on the closing, a portion of such shares were placed in escrow at the time of their issuance – then were cancelled to satisfy an obligation of the vendor to repay a downward adjustment to the purchase price equal to such shares’ value (which exceeded their paid-up capital).

CRA indicated that the vendor would be deemed to have received a dividend under s. 84(3) to the extent that the amount paid by the purchaser on the cancellation of the escrow shares exceeded their PUC, and that the amount so paid would equal the amount of the downward adjustment: the vendor should be viewed as having received an amount equal to the downward adjustment on the cancellation of the escrow shares in order to satisfy its obligation to repay the overpayment of the purchase price.

The wording of the question begged the question by describing the transaction as a repayment of the purchase price rather than as a retroactive adjustment to the share consideration, but there was nothing in the wording of the response to suggest that it was sensitive to how the question was framed.

There has been a triangular amalgamation under which a subsidiary of Parent amalgamated with Target and the Target shareholders received shares of Parent. Suppose that, to address potential compensation to be received by Parent if representations made by Target are breached, some of the Parent shares issuable to the Target shareholders are placed in escrow. If no claim arises during the stipulated period, the shares are released from escrow. If an indemnity claim is made by Parent, Parent repurchases shares, having a value equaling the claim amount, for $1 and cancels them, with only the balance of the shares, if any, being released from escrow.

CRA indicated that it would consider the amount paid for the repurchased shares for s. 84(3) purposes to be the claim amount, so that a deemed dividend could arise.

Shareholders of DCco transfer shares of DCco having an aggregate PUC of $10,000 and an ACB of $1,000 and a FMV higher than $10,000 to TCco in consideration for shares of TCco and as part of a distribution of property of DCco to TCco. The DCco shares owned by TCco are subsequently redeemed, with the dividend from such redemption being exempt from the application of s. 55(2) under either s. 55(3)(a) or (b). CRA stated that although “the excess of PUC over ACB of the shares of DCco … could imply that the shareholders may have realized a bargain purchase of the tax attributes of the assets of DCco,” however:

[S]nce the main concern of paragraphs 55(3)(a) and 55(3)(b) is to allow for a tax-free reorganization, the CRA would not attempt to challenge a reduction of PUC on the shares of DCco that are held by TCco prior to their redemption where the potential gain on the shares of DCco is transferred to the shares of TCco that are held by the shareholders, i.e., where the PUC and ACB of the shares of TCco held by the shareholders are equal to the PUC and ACB respectively of the shares of DCco held by the shareholders at the beginning of the series of transactions.

A family farming partnership ("Partnership"), whose three partners equally owned the common shares of Opco, owned preferred shares of Opco, with a redemption value of $700,000, that had been issued to Partnership on a s. 85(2) transfer of inventory. On January 1, X9, the Partners transferred their interests in Partnership to Opco. Subsequently, Partnership was dissolved and Opco continue as sole owner of the business previously carried on by Partnership such that s. 98(5) applied. Upon the Partnership dissolution, Opco cancelled the preferred shares held by Partnership for no consideration. Did such cancellation result in the application of s. 84(3)?

CRA stated:

Opco cancelled, for no consideration, the preferred shares of its capital stock held by Partnership. Since no amount was paid in connection with the cancellation of these shares, the application of subsection 84(3) would not cause Opco to be deemed to have paid a dividend on a separate class of shares at the particular time.

CRA considered that a Canadian corporation which has the U.S. dollar as its elected functional currency nonetheless is required to keep track of the paid-up capital of its shares, so that if it issued U.S.$100,000 of shares when the Canadian dollar was at par and redeemed those shares when their Canadian-dollar equivalent was $125,000, there would be a resulting deemed dividend of $25,000 to the shareholder (unless the shareholder was a Canadian corporation that also had the U.S. dollar as its functional currency for the relevant period.). Thus, a U.S. shareholder receiving such redemption proceeds would be subject to Part XIII tax. However, there would be no Part VI.1 tax, as that tax relates to the tax results of the corporation rather than its shareholder.

Towards the completion of an intricate internal reorganization for a privately-held Canadian corporate group, a newly-amalgamated corporation (“Amalco”) will be wound-up into Newco. At the time of the winding-up, Amalco holds Newco Non-Voting Preference Shares.

CRA ruled that the cancellation of these shares upon their distribution to Newco on the wind-up will not give rise to a deemed dividend under s. 84(3).

A price adjustent clause in the share provisions for preferred shares issued by Opco to the taxpayer in Year 1 in consideration for the transfer of property to Opco provide that the redemption value of the shares issued will be changed if the FMV of the consideration for the shares is determined by CRA to be different than the determination at the time of the transaction (or an additional amount will be paid if the change is upward and the preferred shares issued are redeemed before the determination by CRA).

In year 5, Opco redeems all the preferred shares, in year 7, CRA determines that the FMV of the property and the redemption value of the preferred shares should have been higher, and "pursuant to the price adjustment clause" the taxpayer receives an additional payment from Opco in year 8.

When would the taxpayer have to include the additional payment as income? CRA stated:

[I]f the price adjustment… is valid…CRA's longstanding position is that the additional payment will be treated as a dividend that will be included in the taxpayer's income in the year of receipt under subsection 84(3) of the Act. …

However, as the additional payment is not determined at the time of the redemption of the shares… it should not be included in the income of the taxpayer in the year of the redemption as part of the amount paid under subsection 84(3)… .Rather, the CRA…[will] tax the additional payment pursuant to the general rules with respect to the dividends, that is, to tax such amount at the time it is received. …

[T]here would be no interest with respect to the income tax computed on that additional amount if the income tax is paid in a timely manner pursuant to the Act and if any instalment computed under the Act with respect to the income tax for the year of the receipt was remitted on time.

A CCPC ("Opco"), whose voting common shares were owned by two individuals (B and R) and by a Canadian-controlled private corporation ("M Holdco") wholly owned by a third individual ("M"), purchased for cancellation all of its shares (having nominal paid-up capital and adjusted cost base) held by M Holdco. This was a non-arm's length transaction. The safe income on hand was in excess of the purchase price, so that all of the purchase for cancellation was reported as giving rise to a deemed dividend under s. 84(3) that was not subject to s. 55(2). CRA determined that the purchase price for the shares was less than their fair market value, and that a price adjustment clause was invalid as there was no intention at the time for the transaction to occur at the shares' fair market value.

The Directorate indicated that the shares were deemed by s. 69(1)(b) to be disposed of for their fair market value. Such proceeds were reduced by the deemed dividend arising under s. 84(3), which was based on the actual amount paid rather than being modified by the application of s. 69(1)(b). CRA stated:

[T]he CRA's position is that the amount paid for the purposes of subsection 84(3) is not affected by the application of paragraph 69(1)(b).

Subsequent to an estate freeze, the freeze preferred shares were redeemed (in 2006). In 2011, it was determined that the redemption amount was too low, as a result of which an additional redemption amount was paid pursuant to a price adjustment clause contained in the articles. Is the resulting additional deemed dividend considered to have arisen in 2006 or 2011? CRA responded:

[T]his inclusion as a dividend pursuant to subsection 84(3) would take place in the year of receipt of the additional payment. Furthermore, and for the purposes of subsection 129(1), the dividend would be considered to have been paid by the payer in the taxation year in which the additional payment was actually made.

Consequently … the taxpayer should include in the computation of the taxpayer’s income for the 2011 taxation year a dividend equal to the additional payment received in 2011.

if preferred shares with a redemption amount which is subject to a price adjustment clause are redeemed before there is an upward adjustment to the redemption amount pursuant to that clause, a payment of the resulting additional amount will be included in the shareholder's income in the year of receipt under s 84(3).

Parentco owned preferred shares of a subsidiary wholly-owned corporation (Holdco) denominated in U.S. dollars. Holdco purchased the preferred shares for cancellation in consideration for the issuance of preferred shares denominated in Canadian dollars.

The Directorate indicated that there was a good argument that Holdco had not sustained a loss for purposes of s. 39(2) given that its patrimony was unaffected by the transaction. The only effect of the transaction was to change the claims of various classes of shareholders on its assets.

MacMillan Bloedel was distinguishable on the basis that in that case, the US-dollar preferred shares had been redeemed in cash, so that the net assets of the taxpayer were reduced. Furthermore, where there was a cash redemption, a loss realized by the redeeming corporation would be matched by a gain in the hands of the redeemed shareholder, whereas where there was a redemption for other preferred shares, the shareholder could enjoy rollover treatment under s. 86 or 51.

Confirmation of a previous position that in light of the MacMillan Bloedel decision, CRA intends to assess any redemption of foreign-currency-denominated redeemable and retractable preferred shares on the basis that s. 39(2) applies to the issuer corporation.

On January 1, 2005, Canco purchases for cancellation 100 common shares, having a fair market value of $100,000, in consideration for paying $25,000 per annum during the four following years to the redeemed shareholder (“Shareholder”). As a legal matter, the 100 shares were cancelled on January 1, 2005 and, thereafter, the Shareholder held a debt claim of $100,000. How would s. 84(3) apply? CRA responded:

… [T]he amount of the deemed dividend at the time of the purchase for cancellation of the shares of the capital stock of Canco on January 1, 2005 would be equal to the value of any consideration given by Canco and received by the Shareholder for the Shareholder’s shares of the capital stock of Canco at the time of the purchase for cancellation of such shares, including any covenants or promises to pay amounts in the future, that would be in excess of the paid-up capital in respect of such shares.

This position is consistent with Cabezuelo v. M.N.R., 83 DTC 679 (T.C.C.) and Belair v. M.N.R., 89 DTC 429 (T.C.C.). ... The term "amount" is defined very broadly in subsection 248(1) ... .

Respecting the situation where a subsidiary purchases for cancellation a portion of the common shares in its capital held by its wholly-owning parent, CRA noted that s. 69(1)(b) would apply only for capital gains purposes and not for purposes of determining the amount of a deemed dividend under s. 84(3), given that the presumption in s. 69(1)(b) applied only with respect to the person disposing of property.

In a situation where preferred shares were redeemed for an amount less than the fair market value, the Directorate stated that "where, in a non-arm's length situation, the fair market value of the shares exceeds the redemption amount, the difference will be taxed as a capital gain rather than as a deemed dividend. Paragraph 84(3)(a) speaks only of the 'amount paid' where shares are redeemed. It does not stipulate fair market value payment or the lack of fair market value payment or even the necessity for one as opposed to the other ... ."

A purchaser is interested in purchasing an operating subsidiary ("Opco") of a management corporation ("Managementco") and not Managementco. Accordingly, the individual shareholder of Managementco transfers his shares of Managementco to Opco in consideration for shares of Opco and Managementco is wound-up into Opco. The individual then sells all his shares of Opco utilizing the capital gains deduction.

No dividends will be deemed to have been paid by Opco at the time the shares in its capital stock held by Managementco are cancelled because no amount would have been paid by Opco at the time of this cancellation.

Where employees of Opco (who as a group, own 14% of its issued common shares) are terminated, they are required to sell their Opco common shares for cash consideration to a new corporation ("Newco") equal to the shares' fair market value; and Newco finances the purchase with a non-interest bearing loan from Opco and, shortly after the purchase, transfers the common shares to Opco for fair market value consideration.

Ss. 84.1 and 84(3) do not apply "as long the employees and the corporations are dealing with each other at arm's length and Newco is not purchasing the Opco shares as agent for Opco"; and s. 245(2) would generally not be applied.

A foreign subsidiary ("Holdco") which is making a takeover bid for a public corporation in the same foreign jurisdiction ("Targetco'), acquires (without obtaining beneficial ownership) common shares of the taxpayer in order to provide such treasury shares to the public shareholders of Targetco as consideration for the acquisition of shares of Targetco. Any shares of the taxpayer that are subscribed for by Holdco and which are not delivered by Holdco to Targetco shareholders are returned by Holdco to the taxpayer and cancelled in accordance with section 38 of the Canada Business Corporation Act regulations, with the subscription proceeds previously paid for the shares also being returned.

S.84(3) would not apply to deem a dividend to be received by Holdco or the Targetco shareholders as a result of the return and cancellation of such shares.

"Where an employee has income from employment under paragraph 7(1)(a) related to the disposition, by virtue of subsection 7(1.1), of shares and a deemed dividend under subsection 84(3) of the Act related to the redemption of shares in the same or a different year, we are of the view that subsection 248(28) of the Act will apply so that there will be no income inclusion under subsection 84(3) of the same amount as a deemed dividend resulting on the redemption of the shares."

Where shares held by a financial institution are redeemed, s. 84(3) will be considered to take precedence over s. 142.5(1), and s. 248(28) will apply to allow the financial institution to reduce its proceeds of disposition by the amount of the deemed dividend. The financial institution may claim a loss on the redemption.

S.142.5(1) takes precedence over s. 84(3). To the extent that an amount has been included in computing income under s. 142.5(1), such amount will not be taken into account again for purposes of s. 84(3), by virtue of s. 248(28).

In response to a proposal that a payment be made to a separated wife of a husband by her dissenting to the amalgamation of a corporation controlled by her husband and in which he had a minority interest with another corporation wholly-owned by her husband, RC stated that "where a payment to a shareholder pursuant to his/her right of dissent arises as a result of transactions the primary purpose of which is to realize a distribution of corporate surplus that is taxed as a capital gain rather than a dividend and the capital gains are taxed at a lower rate, it is our view that it would constitute an avoidance transaction and subsection 245(2) would be applicable unless it is not considered to result in an abuse ... . Transactions contrived to avoid the application of section 84.1 would be considered to result in an abuse for the purposes of subsection 245(4) of the Act".

Where there is a wind-up of a wholly-owned subsidiary that also owns shares of its parent, s. 84(3) will not apply to the subsidiary because the parent will not pay any amount to the subsidiary on the cancellation of its shares.

On the redemption of shares held as inventory, a deemed dividend will arise pursuant to s. 84(3) and, to the extent that the paid-up capital of the share exceeds its cost to the shareholder, the excess will be included as business income of the recipient under s. 9(1). Because s. 54(h)(x) is not applicable, any deemed dividend arising under s. 84(3) cannot result in the realization by the recipient of any loss.

S.84(3) does not apply to deem a dividend to have been paid when shares of a corporation owned by its wholly-owned subsidiary are cancelled on the winding-up of the subsidiary.

S.84(3) does not apply to an amalgamation to which s. 87 applies.

With respect to an argument that where a corporation purchases for cancellation only some of the shares of a given class and pays an amount greater than the average paid-up capital of each share, the paid-up capital of the class should be reduced by the entire amount paid, RCT indicated that a deemed dividend will arise under s. 84(3) where the amount paid for each share exceeds its paid-up capital.

On a reorganization of capital, Ms. A exchanges her common shares of Aco, having a PUC and ACB of $10 and an FMV of $10,000 (with the balance of the common shares being continued to be held by her husband) in exchange for newly-created preferred shares having an FMV and stated capital of $10,000. CCRA confirmed that, pursuant to ss. 86(1) and (2.1), the ACB and PUC of her preferred shares would be $10 (so that no deemed dividend would arise pursuant to ss. 84(3) and (5)).

On the transfer by Mr. A of 1/2 of the common shares of Opco to Opco in exchange for preferred shares of Opco having 1/2 the paid-up capital of the old common shares of Opco, s. 84(3) would not deem Opco to have paid a dividend to Mr. A because the amount paid by Opco by issuing preferred shares would be equal to the amount by which the paid-up capital in respect of the preferred shares increased by virtue of the issue of preferred shares to Mr. A.

A normal course issuer bid would not give rise to deemed dividends.

The purchase by the issuer of common shares held by a majority holding company would not taint the application of s. 84(6) with respect to its purchase of common shares of minority shareholders pursuant to a normal course issuer bid.

Before concluding that the “CRA does not intend to adopt a permissive administrative position permitting a s. 83(2) election where there is a s. 84.1 deemed dividend payable by a private corporation to a person other than a shareholder of the corporation, CRA stated:

2002-0128955 … stated that the Department of Finance was informed that the wording of subsection 84(7) could be interpreted as contradicting our position that an election under subsection 83(2) could not be made in respect of a deemed dividend paid under paragraph 84.1(1)(b) to a person who was not a shareholder of the corporation.

Where a corporation is wound up and the shares are cancelled as a result of the winding-up, s. 84(9) does not apply.

Under Canadian corporate law, the shares of a corporation which is being wound-up or liquidated are not disposed of "to a person" as a result of the liquidation. Consequently, the shareholders' shares of the corporation have not been redeemed, acquired or cancelled as a result of the liquidation and s. 84(9) would not apply to the disposition.