2022 Ruling 2022-0945301R3 - Post-mortem Pipeline

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1) Whether section 84.1 applies to deem the estate to have received a dividend on the disposition of shares to the new corporation. 2) Whether subsection 84(2) applies to the proposed transactions. 3) Whether subsection 245(2) applies to the proposed transactions.

Position: 1) No. Favourable ruling given. 2) No. Favourable ruling given. 3) No. Favourable ruling given.

Reasons: Based on the provisions of the Act, jurisprudence, and CRA publications.

XXXXXXXXXX								2022-094530

XXXXXXXXXX, 2022

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, as amended XXXXXXXXXX, in which you requested an advance income tax ruling (the “Ruling”) on behalf of the executor of the above named taxpayer. The tax account numbers, Tax Services Offices, and Tax Centres of the taxpayers involved are as follows:

XXXXXXXXXX

(collectively, the “Taxpayers”)

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

a) in a previously filed tax return of the Taxpayers or a related person and:

i. being considered by the CRA in connection with such return;

ii. under objection by the Taxpayers or a related person; or

iii. the subject of a current or completed court process involving the Taxpayers or a related person; or

b) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

This letter is based solely on the Facts and Proposed Transactions described below. The documentation submitted with the request does not form part of the Facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated:

a) all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”) or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);

b) all terms and conditions used in this Ruling that are defined in the Act (or in the Regulations) have the meaning given in the Act or the Regulations, as applicable;

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

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

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to, as follows:

“ACB” means “adjusted cost base” and has the meaning assigned in section 54;

“ACo” means XXXXXXXXXX, the corporation described in Paragraph 1;

“ACo Shares” means the shares of ACo as described in Paragraph 8;

“agreed amount” means the amount agreed on by the transferor and transferee in respect of a transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

“ACo Debt” means a non-interest-bearing, demand obligation that ACo has to the Estate (and formerly to BP) that had a principal amount and FMV of $XXXXXXXXXX at the time of BP’s death and currently has a principal amount and FMV of approximately $XXXXXXXXXX;

“Amalco” means a corporation to be formed by way of an amalgamation of ACo and Newco, as described in the Proposed Transactions;

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

“Beneficiary 1” means a testamentary trust created in the Will for the benefit of BP’s child, XXXXXXXXXX, who is a resident of Canada;

“Beneficiary 2” means a testamentary trust created in the Will for the benefit of BP’s child, XXXXXXXXXX, who is a non-resident;

“BCA1” means the XXXXXXXXXX, as amended;

“BCA2” means the XXXXXXXXXX, as amended;

“BP” means the late XXXXXXXXXX, an individual who was a resident of Canada at all material times, including immediately before her death on XXXXXXXXXX;

“BPCo” means XXXXXXXXXX, which later became XXXXXXXXXX upon continuation under the BCA1, as described in Paragraph 1;

“Business” means the business of ACo as described in Paragraph 1(e);

“capital gain” has the meaning assigned in paragraph 39(1)(a);

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

“CCPC” means “Canadian-controlled private corporation” and has the meaning assigned in
subsection 125(7);

“CDA” means “capital dividend account” and has the meaning assigned in subsection 89(1);

“Condo Unit” means the residential property located at XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“disposition” has the meaning assigned in subsection 248(1);

“eligible property” has the meaning assigned in subsection 85(1.1);

“ERDTOH” means “eligible refundable dividend tax on hand” and has the meaning assigned in subsection 129(4);

“Estate” means the estate of BP, which will be designated as a GRE when the Executor files the first tax return for the Estate;

“Executor” means the executor of the Estate and is XXXXXXXXXX;

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

“GRE” means “graduated rate estate” and has the meaning assigned in subsection 248(1);

“GRIP” means “general rate income pool” and has the meaning assigned in subsection 89(1);

“Marketable Securities” means a diversified portfolio of investment property, including government and corporate bonds, and shares of public corporations, but excluding cash and cash equivalents;

“NERDTOH” means “non-eligible refundable dividend tax on hand” and has the meaning assigned in subsection 129(4);

“Newco” means a corporation to be incorporated under the provisions of the BCA1 as described in the Proposed Transactions;

“Newco Class A Special Shares” means the Class A Special Shares in the capital of Newco of which Newco will be authorized to issue an unlimited number. The terms and conditions of these shares do not entitle the holder to vote, and each share is redeemable and retractable at a price equal to the FMV of the property transferred to Newco in exchange for the issuance of Newco Class A Special Shares. The terms and conditions also entitle the holder to non-cumulative dividends as and when declared by the board of directors of Newco not to exceed XXXXXXXXXX% per annum of the redemption price and, on the winding-up, liquidation, or dissolution of Newco, the holder is entitled to the redemption price in priority to any Newco Class B Special Shares and participation by the holders of the Newco Common Shares;

“Newco Class B Special Shares” means the Class B Special Shares in the capital of Newco of which Newco will be authorized to issue an unlimited number. The terms and conditions of these shares do not entitle the holder to vote, and each share is redeemable and retractable at a $1 per share. The terms and conditions also entitle the holder to non-cumulative dividends as and when declared by the board of directors of Newco and, on the winding-up, liquidation, or dissolution of Newco, the holder is entitled to the redemption price after the Class A Special shares but, in priority to any participation by the holders of the Newco Common Shares;

“Newco Common Shares” means the Common Shares in the capital of Newco of which Newco will be authorized to issue an unlimited number. The terms and conditions of these shares entitle the holder to one vote per share, non-cumulative dividends as and when declared by the board of directors of Newco, and participation in the remaining assets of Newco in the event of a wind-up, dissolution, or liquidation of Newco;

“Newco Note” means a non-interest-bearing promissory note with no set terms of repayment to be issued by Newco to the Estate as described in Paragraph 16(a);

“non-resident” has the meaning assigned by subsection 248(1);

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

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

“Proposed Transactions” means the proposed transactions which are described herein under the heading Proposed Transactions;

“PUC” means “paid-up capital” and has the meaning assigned in subsection 89(1);

“resident of Canada" means resident of Canada for the purposes of the Act;

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

“V-Day basis” means the amount, if any, described in subparagraph 84.1(2)(a.1)(i) for purposes of element “B” of paragraph 84.1(1)(a) and element “E” of paragraph 84.1(1)(b); and

“Will” means the last will and testament of BP, which deals only with the ACo Shares and the ACo Debt.

FACTS

A complete description of all of the relevant facts is as follows:

1. ACo is a CCPC and a taxable Canadian corporation with a taxation year-end of XXXXXXXXXX.

a) A predecessor of ACo, with the same name, was incorporated under the BCA1 on XXXXXXXXXX. On XXXXXXXXXX, BP and BPCo purchased all the shares of this predecessor of ACo from its shareholders, all of whom acted at arm’s length with BP and BPCo at all material times. The purchase price for the shares was approximately equal to their PUC.

b) BPCo was incorporated under the BCA2 on XXXXXXXXXX and its shareholders were BP and her spouse. BP acquired her spouse’s shares of BPCo a result of her spouse’s death on or about XXXXXXXXXX for their FMV, which was approximately equal to their PUC.

c) On XXXXXXXXXX, BP transferred all of her shares of the predecessor of ACo to BPCo on a tax-deferred basis under section 85, and consequently, the predecessor of ACo became a wholly owned subsidiary of BPCo. On XXXXXXXXXX, BPCo was continued under the BCA1, and on XXXXXXXXXX BPCo amalgamated with the predecessor of ACo to form ACo.

d) Prior to XXXXXXXXXX, the predecessor of ACo carried on the business of owning and renting residential properties. By XXXXXXXXXX, the predecessor of ACo had sold all but one of its residential properties. ACo currently owns only this one residential property (the “Condo Unit”)..

e) Since XXXXXXXXXX, the predecessor of ACo (and subsequently ACo), has carried on, and currently carries on, the business of investing in Marketable Securities and owning and renting the Condo Unit (collectively, the “Business”).

f) At the time of BP’s death, ACo’s assets consisted of (i) $XXXXXXXXXX of cash and near cash, which represented approximately 7% of the aggregate FMV of all of ACo’s assets; (ii) Marketable Securities, which were managed by discretionary investment managers, and had an FMV of $XXXXXXXXXX and an ACB of $XXXXXXXXXX; and (iii) the Condo Unit, which had an FMV of $XXXXXXXXXX and an ACB of $XXXXXXXXXX.

g) At the time of BP’s death, ACo’s liabilities included the ACo Debt.

2. On XXXXXXXXXX, ACo had the following balances in its tax accounts:

a) ERDTOH: $XXXXXXXXXX;
b) NERDTOH: $XXXXXXXXXX
c) GRIP: $XXXXXXXXXX; and
d) CDA: $XXXXXXXXXX.

3. ACo’s assets are substantially similar to those that it held immediately before BP’s death. With respect to the Marketable Securities, the same investment managers that managed ACo’s Marketable Securities before BP’s death continue to manage ACo’s Marketable Securities. ACo’s risk tolerance with respect to its Marketable Securities and the investment approach taken by the investment managers in managing the Marketable Securities has not changed since BP’s death

4. BP continuously occupied the Condo Unit from its purchase until her death. BP paid the predecessor of ACo (and subsequently ACo), FMV rent during this entire period. The Condo Unit is currently unoccupied and ACo is consequently not collecting any rental income therefrom. The Executor is in the process of preparing the Condo Unit to be rented or sold.

5. In early XXXXXXXXXX, ACo liquidated some of its Marketable Securities to raise cash. It used this cash and some of its existing cash to repay approximately $XXXXXXXXXX of the ACo Debt to the Estate, which reduced the principal amount and FMV of the ACo Debt to approximately $XXXXXXXXXX. The Estate then used these funds to pay out XXXXXXXXXX beneficiaries of the Estate. As a result, Beneficiary 1 and Beneficiary 2 are currently the only remaining beneficiaries of the Estate.

6. Immediately after the partial repayment of the ACo Debt described in Paragraph 5, ACo’s assets, other than the Condo Unit, consisted of: (i) $XXXXXXXXXX of cash and near cash, which represented approximately 2% of the aggregate FMV of all of ACo’s assets; and (ii) approximately $XXXXXXXXXX of Marketable Securities (which is approximately 75% of the value at the time of BP’s death) with an ACB of $XXXXXXXXXX (which is approximately 78% of the value at the time of BP’s death). ACo’s assets, other than the Condo Unit, are currently substantially similar to this description.

7. At all material times, including immediately before her death, BP was a resident of Canada.

8. At the time of BP’s death, BP owned XXXXXXXXXX Common Shares of ACo (the “ACo Shares”), which were all the issued and outstanding shares of ACo, and had an ACB and PUC of $XXXXXXXXXX, and an FMV of $XXXXXXXXXX. The ACo Shares were capital property to BP during her lifetime and at the time of her death.

9. As a consequence of BP’s death, BP was deemed pursuant to paragraph 70(5)(a) to have disposed of the ACo Shares immediately before her death and to have received proceeds of disposition equal to the FMV of such shares at that time.

10. This deemed disposition gave rise to a capital gain of $XXXXXXXXXX, which will be reported in BP’s terminal income tax return. The estimated income taxes that will be due on the terminal return for the deemed capital gain are $XXXXXXXXXX. The payment of income taxes on BP’s terminal return will require ACo to liquidate a portion of its Marketable Securities, as described in the Proposed Transactions. At the time of BP’s death, her significant assets consisted of the ACo Shares and the ACo Debt.

11. Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired the ACo Shares for an amount equal to the proceeds of disposition as stated in Paragraph 9 (i.e., $XXXXXXXXXX). The Estate currently holds the ACo Shares as capital property.

12. The Estate is a resident of Canada and its first taxation year-end will be XXXXXXXXXX.

13. According to the Will, the ACo Shares are to be equally shared between Beneficiary 1 and Beneficiary 2.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

14. The Estate will incorporate Newco under the BCA1. Newco will be a CCPC and a taxable Canadian corporation. Newco’s authorized share capital will consist of the Newco Common Shares, the Newco Class A Special Shares, and the Newco Class B Special Shares.

15. On incorporation, the Estate will subscribe for XXXXXXXXXX Newco Common Shares for $XXXXXXXXXX, and therefore the Estate will control Newco.

16. The Estate will transfer the ACo Shares to Newco in exchange for consideration consisting of:

a) the Newco Note, which will have a principal amount and FMV equal to the lesser of:

i. the ACB of the ACo Shares (to the Estate) at the time of transfer less $XXXXXXXXXX; and

ii. the FMV of the ACo Shares at the time of transfer less $XXXXXXXXXX; and

b) XXXXXXXXXX Newco Class A Special Shares with a redemption price and FMV equal to $1.00 plus the positive difference (if any) between the FMV and ACB of the ACo Shares at the time of transfer.

17. The Estate and Newco will make a joint election under subsection 85(1), in the prescribed form and within the time limits set out in subsection 85(6), so that the rules in subsection 85(1) apply to the transfer outlined in Paragraph 16. For greater certainty the agreed amount agreed to by the Estate and Newco for the ACo Shares will be equal to the lower of the ACB of the said shares held by the Estate and the FMV of the shares at that time (i.e., the lower of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii)). The agreed amount will also not be less than the amount described in paragraph 85(1)(b).

18. Newco will add $XXXXXXXXXX to the legal stated capital account and PUC of the Newco Class A Special Shares which, for greater certainty will not exceed the maximum amount that could be added to the PUC of these shares without resulting in an adjustment in computing the PUC having regard to paragraph 84.1(1)(a).

19. For greater certainty, the sum of the principal amount of the Newco Note and the PUC of the XXXXXXXXXX Newco Class A Special Shares will not exceed the ACB of the ACo Shares to the Estate.

20. ACo will continue to carry on its Business in the same manner as it has been conducted and the Business will not be materially changed or altered for at least one year following the transfer of the ACo Shares to Newco. During this one year period, there will not be any repayment of the Newco Note in part or in whole, nor will any Newco Class A Special Shares be redeemed or retracted.

21. During the one year period following the transfer of the ACo Shares to Newco, ACo will liquidate a portion of its Marketable Securities in order to raise funds for the Estate to pay BP’s income taxes on her terminal return (approximately $XXXXXXXXXX). ACo will facilitate this by fully repaying the ACo Debt (approximately $XXXXXXXXXX). The Estate will pay the remaining amount of BP’s income tax liability with its own funds (approximately $XXXXXXXXXX). The FMV of Marketable Securities that will be liquidated will not exceed the amount required to fully repay the ACo Debt. ACo may also sell the Condo Unit during this one year period, however, none of the proceeds therefrom will be transferred to the Estate during this one year period.

22. After a period of one year has elapsed from the time of the transfer of the ACo Shares to Newco, ACo will be amalgamated with Newco to form Amalco under the BCA1. In accordance with the BCA1 and as required by subsection 87(1):

a) all of the property of each of ACo and Newco immediately before the amalgamation (other than the ACo Shares held by Newco) will become property of Amalco by virtue of the amalgamation;

b) all of the liabilities of each of ACo and Newco immediately before the amalgamation (including the amounts owing by Newco under the Newco Note) will become liabilities of Amalco by virtue of the amalgamation; and

c) all of the shareholders (other than a predecessor corporation) who owned shares of the capital stock of ACo or Newco immediately prior to the amalgamation will receive shares of the capital stock of Amalco because of the amalgamation.

23. On the amalgamation:

a) the 100 Newco Common Shares held by the Estate will be exchanged for 100 Amalco Common Shares having terms and conditions identical to the terms and conditions attached to the Newco Common Shares;

b) the 100,000 Class A Newco Special Shares will be exchanged for 100,000 Amalco Class A Special Shares having terms and conditions identical to the terms and conditions attached to the Newco Class A Special Shares; and

c) the ACo Shares held by Newco will be cancelled without payment of any consideration.

24. The aggregate PUC of the newly issued Amalco Common Shares will be equal to the aggregate PUC of the Newco Common Shares. The aggregate PUC of the newly issued Amalco Class A Special Shares will be equal to the aggregate PUC of the Newco Class A Special Shares. In this regard, no amount will be added to the PUC of the Amalco Common Shares or the Amalco Class A Special Shares in respect of the ACo Shares held by Newco that will be cancelled upon the amalgamation.

25. No amount will be added to the ACB of the Amalco Common Shares or the Amalco Class A Special Shares in respect of the ACo Shares held by Newco that will be cancelled upon the amalgamation.

26. After the amalgamation, Amalco will begin to make payments on the Newco Note to the Estate. The amount paid in any single quarter of the first year that the Newco Note is outstanding after the amalgamation will not exceed 25% of the principal amount of the Newco Note when it was first issued.

27. Amalco will continue to carry on the Business in the same manner as it is currently conducted until Amalco is wound-up, which may occur at or about the time the Estate is wound-up, but in any event will not occur earlier than two years after the time the Estate transfers the ACo Shares to Newco. Amalco will sell a portion of its Marketable Securities in order to make payments on, and settle, the Newco Note. Amalco may also sell the Condo Unit, assuming it has not already been sold by ACo.

ADDITIONAL INFORMATION

28. BP did not claim a deduction under section 110.6 in respect of the ACo Shares or any other shares for which they were substituted, within the meaning of subsection 248(5). Moreover, there was no person not dealing at arm’s length with BP or with the Estate that previously claimed a deduction under section 110.6 in respect of any ACo Shares, or any other shares of ACo for which such shares were substituted, within the meaning of subsection 248(5).

29. For greater certainty, there is no V-Day basis included in the ACB of the ACo Shares, or any other shares of ACo for which such shares were substituted, within the meaning of subsection 248(5). On V-Day (i.e., December 31, 1971), the FMV of the shares of the predecessor of ACo was substantially the same as their original cost, and the FMV of the shares of BPCo was substantially the same as their original cost.

30. The Proposed Transaction steps in Paragraphs 14 to 18 will be implemented within 6 months of receiving this letter.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The purpose of the Proposed Transactions is to return to the Estate, an amount up to the FMV of the ACo Shares immediately before BP’s death, while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2), 84(3), and section 84.1.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions, Additional Information, and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Section 84.1 will not apply to deem the Estate to have received a dividend from Newco on the disposition of the ACo Shares to Newco, as described in Paragraph 16, provided that the FMV of the Newco Note, immediately after the disposition, is equal to or less than the ACB of the ACo Shares to the Estate, immediately before the disposition, as modified by paragraph 84.1(2)(a.1).

B. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem ACo to have paid, and the Estate to have received, a dividend on the ACo Shares.

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

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within the time frame described in this letter. The above Rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the Rulings provided herein.

COMMENTS

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

(a) the FMV or ACB of any property referred to herein, including the ACo Shares, shares of the predecessor of ACo, and shares of BPCo, or the PUC in respect of any share referred to herein;

(b) the balances of the ERDTOH, NERDTOH, GRIP, CDA or any other tax account for any corporation described herein;

(c) the Executor’s ability to complete the Proposed Transactions under the terms of the Will or any other will of BP;

(d) whether any person described herein deals, or does not deal, with any other person at arm’s length;

(e) the application of section 116 to any future disposition of a capital interest in the Estate by any beneficiary of the Estate;

(f) whether or not any of BP’s, and immediately following her death, the Estate’s, assets are subject to the Ontario estate administration rules, including, but not limited to, Ontario estate administration tax; or

(g) any other tax consequence (including provincial tax consequences) relating to the Facts, Additional Information, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including, but not limited to the tax consequences associated with the settlement and distribution of the Newco Note and ACo Debt, as well as any other assets of the Estate, other than those specifically described in the Rulings given above.

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

Yours truly,

XXXXXXXXXX
For Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch