29 August 1994 External T.I. 9336515 - ADJUSTED COST BASE BUMP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether an estate acquires property from deceased because of a bequest or inheritance for purposes of paragraph 88(1)(d.2)

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

XXXXXXXXXX		933651

Attention: XXXXXXXXXX

August 29, 1994

Dear Sirs:

Re: Paragraph 88(1)(d.2) of the Income Tax Act

This is in reply to your letter of December 8, 1993 wherein you requested a technical interpretation in respect of section 88 of the Income Tax Act.¹ Your questions are in the context of the following hypothetical circumstances.

1.An individual taxpayer transfers some non-depreciable capital property to a taxable Canadian corporation ("Holdco") in exchange for common shares of Holdco pursuant to subsection 85(1) of the Act.

2.Several years later, as part of an estate freeze, the taxpayer converts her common shares of Holdco into voting preferred shares having a redemption value equal to the fair market value of the common shares of Holdco pursuant to subsection 86(1) of the Act. Holdco issues new common shares to the taxpayer's child. The taxpayer controls Holdco.

3.Immediately before the taxpayer's death, the preferred shares of Holdco are deemed to have been disposed of at fair market value. Pursuant to the taxpayer's will, the preferred shares of Holdco are held in trust by her Estate.

4.The Estate and the common shareholder of Holdco transfer their shares of Holdco to a newly incorporated taxable Canadian corporation ("Newco") in exchange for shares of Newco pursuant to subsection 85(1) of the Act. In our telephone conversation of April 15, 1994 (XXXXXXXXXX/Plant), you indicated that Newco and the Estate do not deal at arm's length. Holdco is then wound up into Newco.

5.On the wind-up of Holdco, Newco elects to bump the cost of the capital property to the fair market value of the preferred shares of Holdco pursuant to paragraph 88(1)(d) of the Act.

In your view, when an estate acquires property from a deceased upon his or her death, it acquires the property from a person with whom it was not dealing at arm's length. You believe this view is supported by the decision of the Tax Court of Canada in the case of Estate of Karna May v. M.N.R. 88 DTC 1189. Paragraph 88(1)(d.2) of the Act provides that the acquisition of control of a subsidiary through a bequest or inheritance will be treated as having occurred at arm's length.

Your questions

1.Is the acquisition of control of Holdco by the Estate an acquisition of control because of a bequest or inheritance contemplated by paragraph 88(1)(d.2) of the Act for the purposes of paragraph 88(1)(d) of the Act?

2.On the wind-up of Holdco, does paragraph 88(1)(d.2) apply to deem that Newco last acquired control of Holdco, for the purposes of the rules in paragraph 88(1)(d) of the Act, at the time the Estate acquired control of Holdco?

3.If the answer to question 2 is no, will Newco be deemed to have last acquired control of Holdco for the purposes of the rules in paragraph 88(1)(d) at the time the deceased taxpayer acquired control of Holdco? Assuming that the capital property was transferred to Holdco subsequent to the taxpayer acquiring control of Holdco, would Newco be precluded from obtaining the increase in the adjusted cost base of the capital property provided for in section 88(1)(d) on the wind-up of Holdco?

Our Comments

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments.

It is the Department's general view that the estate of a deceased person acquires property from the deceased person by operation of law and not "because of a bequest or inheritance" as contemplated by paragraph 88(1)(d.2) of the Act. We also agree that an estate which acquires property of a deceased person under a testamentary trust acquires the property from a person with whom it was not dealing at arm's length. Consequently, paragraph 88(1)(d.2) will generally deem the estate of a deceased person to have acquired control of a company at the time that the deceased person last acquired control, or was deemed by paragraph 88(1)(d.2) to have last acquired control, of the company.

In the event that the estate subsequently transfers its shares of the company which it controls (i.e. Holdco) to a corporation (i.e. Newco) with which it does not deal at arm's length, then the date that Newco would be deemed by paragraph 88(1)(d.2) to have last acquired control of Holdco would be the date that the deceased taxpayer acquired control of Holdco. This conclusion is reached by applying the test in paragraph 88(1)(d.2), first to the non-arm's length acquisition by Newco, then to the acquisition of the shares of Holdco by the Estate, which we said above was also a non-arm's length acquisition, which leads us to look to the acquisition of control of Holdco by the deceased taxpayer.

If a capital property was transferred to Holdco subsequent to the deceased taxpayer acquiring control of Holdco, then it appears that Newco would be precluded from obtaining the increase in the adjusted cost base of the capital property provided for in paragraph 88(1)(d) of the Act on the wind-up of Holdco.

We trust you will find our comments helpful.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch

¹ All references to a statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

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