2014-0545531R3 Post-Mortem Pipeline Planning

Principal Issues: Whether section 84.1 or subsection 84(2) apply to the proposed transactions.

Position: Favourable rulings provided.

Reasons: In accordance with the provisions of the Act and our previously published positions.

Author: XXXXXXXXXX
Section: 84.1, 84(2)

XXXXXXXXXX                                2014-054553

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
 XXXXXXXXXX

We are writing in response to your request for an income tax ruling.  We also acknowledge the additional information provided in your letters and in various email correspondence, as well as information provided during our telephone conversations (XXXXXXXXXX). 

PRELIMINARY MATTERS

To the best of your knowledge and that of the Taxpayers, none of the issues involved in this letter are:

(a)   dealt with in a previously filed return of the Taxpayers or a related person;

(b)   being considered by a tax services office or taxation centre in connection with a previously filed tax return of a Taxpayer or a related person;

(c)   under objection by one or any of a Taxpayer or a related person;

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

(e)   the subject of a ruling previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended, or the Income Tax Regulations, C.R.C., c. 945, as appropriate.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms or expressions have the meanings ascribed to them below:

“A” means XXXXXXXXXX;

“ACB” has the meaning assigned to that term in section 54;

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

“Amalco” means the corporation formed on the amalgamation of Holdco and Newco;

“B” means XXXXXXXXXX;

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

“capital dividend account” or “CDA” has the meaning assigned to that term in subsection 89(1);

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

“Children” means the children of A, being B, XXXXXXXXXX;

“Class A shares” means the Class A common shares of the capital stock of Holdco;

“CRA” means the Canada Revenue Agency;

“eligible dividend” has the meaning assigned by subsection 89(1);

“Estate” means the estate of A, as represented by the Executor;

“Executor” means B, in his capacity as the executor of A’s estate;

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

“general rate income pool” or “GRIP” has the meaning assigned to that term in subsection 89(1);

“Holdco” means XXXXXXXXXX corporation;

“Investment Account” means the investment account held by XXXXXXXXXX which as of the date of this letter is composed of cash (approximately $XXXXXXXXXX), common shares of the capital stock of publicly traded corporations (approximately $XXXXXXXXXX) and mutual fund units and/or shares (approximately $XXXXXXXXXX);

“Investment Advisor” means the investment advisor who is advising on the Investment Account;

“Newco” means the new corporation incorporated under the Business Corporations Act (XXXXXXXXXX) as part of the Proposed Transactions;

“Note” means the promissory note issued by Holdco to Estate pursuant to Paragraph 20;

“paid-up capital” has the meaning assigned to that term in subsection 89(1);

“Paragraph” means a numbered paragraph in this letter;

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

“Proposed Transactions” means the transactions that are described under the heading “Proposed Transactions” in this letter;

“qualified small business corporation shares” has the meaning assigned to that term in subsection 110.6(1);

“refundable dividend tax on hand” or “RDTOH” has the meaning assigned to that term in subsection 129(3);

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

“taxable dividend” has the meaning assigned to that term in subsection 89(1);

“Valuation Day” and “V-day” means December 31, 1971; and

“Will” means A’s last will and testament.

FACTS

Holdco

1.    Holdco was incorporated on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX) and was at all relevant times a taxable Canadian corporation and a CCPC.  Holdco has a XXXXXXXXXX year end.

2.    XXXXXXXXXX.

3.    A died on XXXXXXXXXX.  At the time of his death, A held all of the issued and outstanding shares of the capital stock of Holdco being XXXXXXXXXX Class A shares. 

4.    Holdco is a holding corporation whose only activity is to carry on a business of XXXXXXXXXX:

a.    XXXXXXXXXX
b.    XXXXXXXXXX

5.    XXXXXXXXXX.

5.1   XXXXXXXXXX.

6.    The mix and value of the assets that Holdco currently holds remain substantially the same as before A’s death. 

7.    Holdco has the following amount in its tax accounts (estimated as of XXXXXXXXXX):

a.    RDTOH – $XXXXXXXXXX
b.    GRIP – $XXXXXXXXXX
c.    CDA – $XXXXXXXXXX

The Tax Consequences Resulting from A’s Death

8.    [Reserved]

9.    The shares of the capital stock of Holdco held by A were capital property to A.  Pursuant to paragraph 70(5)(a), immediately before A’s death, A is deemed to have disposed of the XXXXXXXXXX Class A shares of Holdco owned by him for proceeds equal to their fair market value at that time.  As a result, A reported a capital gain equal to $XXXXXXXXXX.  The Class A shares were not qualified small business corporation shares and, consequently, no deduction under section 110.6 was claimed on the shares of the capital stock of Holdco, nor did A or any non-arm’s length person to A previously claim any deduction under that provision in respect of these shares.

10.   Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired the Class A shares of Holdco at a cost equal to their fair market value of $XXXXXXXXXX immediately before A’s death.  These shares of the capital stock of Holdco are capital property to the Estate. 

11.   The attributes of the Class A shares of the capital stock of Holdco that the Estate held immediately after A’s death are as follows:

Class of    Number of                  Paid-Up                     Adjusted                  Fair market
Shares      Shares                       Capital                       Cost Base                value

A              XXXXXXXXXX           $XXXXXXXXXX        $XXXXXXXXXX       $XXXXXXXXXX

12.   The Estate, created by the will of A, currently holds all of the issued and outstanding Class A shares of the capital stock of Holdco.

13.   [Reserved]

14.   The Estate is in charge of collecting A’s assets, paying A’s liabilities and distributing A’s net assets in accordance with the terms of the Will.  According to the terms of the Will, the residue of A’s property after the Estate collects A’s assets and discharges A’s liabilities shall be distributed in equal shares to the Children.  The residue includes the Class A shares. 

Eligible Dividends

15.   On XXXXXXXXXX, Holdco paid a dividend on the Class A shares in the amount of $XXXXXXXXXX by crediting the shareholder loan account of the Estate.  In the resolution authorizing the payment of the dividend, Holdco designated this dividend to be an eligible dividend pursuant to subsection 89(14) and, as result of this dividend, $XXXXXXXXXX was refunded to Holdco under subsection 129(1).

16.   On XXXXXXXXXX, Holdco paid a dividend on the Class A shares in the amount of $XXXXXXXXXX by crediting the shareholder loan account of the Estate.  In the resolution authorizing the payment of the dividend, Holdco designated this dividend to be an eligible dividend.  As a result of this dividend, Holdco expects to receive a refund under subsection 129(1). 

17.   [Reserved]

PROPOSED TRANSACTIONS

Incorporation of Newco

18.   Newco will be incorporated under the Business Corporations Act (XXXXXXXXXX).  Newco will be at all relevant times a CCPC and a taxable Canadian corporation.  The Estate will subscribe for XXXXXXXXXX.

19.   Newco’s Class A shares will be voting and participating.  Newco’s authorized share capital will consist only of the Class A shares.  Each Class A share will entitle its holder to receive on the dissolution or winding-up of Newco, a distribution of the net assets of Newco. 

Transfer of the Shares of Holdco by the Estate to Newco

20.   The Estate will transfer its Class A shares of the capital stock of Holdco to Newco.  The Estate will receive as consideration:

a.    the Note, the principal amount of which will be equal to the lesser of the fair market value of the Class A shares as at the time of A’s death and the fair market value of the Class A shares as at the date of the transfer, and

b.    if the fair market value of the Class A shares at the date of transfer is higher than the fair market value on the date of A’s death, Class A shares in the capital stock of Newco with a fair market value equal to the excess between the fair market value of the Class A shares as at the date of the transfer and the fair market value of the Class A shares as at the time of A’s death.

21.   The Estate and Newco will elect, jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer described in the previous Paragraph so that the agreed amount will be equal to the lesser of the ACB and the fair market value of the Class A shares of the capital stock of Holdco to the Estate immediately before the transfer.  For greater certainty, the agreed amount will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). 

22.   Newco will add to the stated capital of the Class A shares of the capital stock of Newco a nominal amount which, for greater certainty, will not exceed the maximum amount that could be added to the paid-up capital of such shares without resulting in an adjustment in computing the paid-up capital having regard to paragraph 84.1(1)(a).

22.1  Holdco will remain a separate and distinct entity for a period of at least one year following the transfer of the Class A shares of the capital stock of Holdco to Newco.  During that year, Holdco’s operations and business activities will continue in the same manner as before the implementation of the Proposed Transactions.

The Amalgamation

23.   After at least one year has elapsed since the transfer of the Class A shares of the capital stock of Holdco to Newco, Newco and Holdco will amalgamate to form Amalco.

24.   In accordance with subsection 87(1), all the property and all the liabilities of the predecessor corporations immediately before the amalgamation will become the property and liabilities of Amalco.  The Estate will receive shares in Amalco.

25.   The authorized share capital of Amalco will be the same as Newco’s authorized share capital.

The Repayment of the Promissory Note

26.   The Note will be gradually repaid over a period of at least one year after the amalgamation of Holdco and Newco, but the amount of the repayments in any given quarter of that year will not exceed XXXXXXXXXX% of the principal amount of Note when it was issued.  Amalco may use funds received from income earned from Amalco’s investments or from proceeds from the sale thereof to repay the Note.

26.1  While Amalco may sell some of its investments in order to enable it to make the above mentioned repayments of the Note, it will continue carrying on its investment activities with its remaining investments.  After the note has been repaid, Amalco will be wound-up and its remaining assets will be transferred to the Estate.

27.   Once all debts and liabilities of the Estate have been ascertained and settled, the Executor will complete the administration of the Estate and distribute the residue to the Children in accordance with the terms of the Will.

ADDITIONAL INFORMATION

28.   The mailing address of each of Estate and Holdco is as follows:

XXXXXXXXXX

29.   [Reserved]

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to return to the Estate an amount equal to the fair market value of the Class A shares of the capital stock of Holdco immediately before A’s death, while minimizing the inherent double tax exposure that can result from the application of subsection 70(5) which applied in these particular circumstances.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the Proposed Transactions, the additional information and the purpose of the Proposed Transactions, and that the Proposed Transactions are completed in the manner contemplated 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 transfer of the Class A shares of the capital stock of Holdco held by Estate to Newco as described in Paragraph 20, provided that the fair market value, immediately after the transfer, of the Note is equal to or less than the adjusted cost base to the Estate, immediately before the transfer, of the Class A shares of the capital stock of Holdco.

B.    Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Holdco to have paid, and the Estate to have received, a dividend on the Class A shares of the capital stock of Holdco held by the Estate.

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

These rulings are subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014 and are binding on the CRA provided that the Proposed Transactions are completed no later than six months after the date of 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 into law, could have an effect on the rulings provided herein.

COMMENTS

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 paid-up capital of any shares or the fair market value or the ACB of any particular asset referred to herein;

(b)   the outstanding balance of the GRIP, CDA or RDTOH of any corporation; or

(c)   any other tax consequences relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to or subsequent to the Proposed Transactions whether described in this letter or not, other than those specifically described in the above rulings.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the fair market value of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares.  Furthermore, none of the rulings listed above are intended to apply to or in the event of the operation of a price adjustment clause since such adjustments will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.  The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, dated March 28, 2013.

An invoice for our fees in connection with this Ruling Request 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

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