2014-0552071R3 Post Mortem Pipeline Planning

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

Position: Favourable rulings provided subject to the possible application of section 84.1.

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

Author: XXXXXXXXXX
Section: Section 84.1 and subsection 84(2)

XXXXXXXXXX                            2014-055207

XXXXXXXXXX, 2015 

Dear Sir,

Re:      Advance Income Tax Ruling
XXXXXXXXXX and XXXXXXXXXX, XXXXXXXXXX Tax Centre, XXXXXXXXXX Tax Services Office) (individually sometimes referred to as the “Taxpayer” and collectively sometimes referred to as the “Taxpayers”)

This is in reply to your letter in which you requested an advance income tax ruling on behalf of the Taxpayers.  We also acknowledge the information provided in your emails and during our telephone conversations (XXXXXXXXXX).

We understand that to the best of your knowledge and that of the Taxpayers involved, none of the issues described herein:

(a)    is in an earlier return of a Taxpayer or a related person;

(b)    is 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)    is under objection by a Taxpayer or a related person;

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

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

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, or the Income Tax Regulations, C.R.C., c. 945, as appropriate, and all references to monetary amounts are in Canadian dollars.  

DEFINITIONS:

“Act1” means the XXXXXXXXXX;

“Act2” means the XXXXXXXXXX;

“adjusted cost base” has the meaning assigned by section 54;

“Amalgamation Date” means the date stated in Amalco’s certificate of amalgamation;

“Beneficiary1” means XXXXXXXXXX, a Canadian resident and sibling of Beneficiary2, Beneficiary3 and Beneficiary4;

“Beneficiary2” means XXXXXXXXXX, a Canadian resident and sibling of Beneficiary1, Beneficiary3 and Beneficiary4;

“Beneficiary3” means XXXXXXXXXX, a Canadian resident and sibling of Beneficiary1, Beneficiary2 and Beneficiary 4;

“Beneficiary4” means XXXXXXXXXX, a Canadian resident and sibling of Beneficiary1, Beneficiary2 and Beneficiary3;

“Business Number” means the business number attributed by the CRA to each corporation for tax compliance purposes;

“Canadian-controlled private corporation” has the meaning assigned by subsection 125(7); 

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

“Capital Property” has the meaning assigned by subsection 54(1); 

“Corporation” means XXXXXXXXXX; 

“CRA” means the Canada Revenue Agency;

“Dividend Refund” means a dividend refund claimed by a taxpayer pursuant to paragraph 129(1)(b);

“Estate” means the estate of XXXXXXXXXX whose beneficiaries are Beneficiary1, Beneficiary2, Beneficiary3 and Beneficiary4 who are the children of XXXXXXXXXX;

“Executors” means Beneficiary2 and XXXXXXXXXX, the liquidators of the Estate, who were appointed as liquidators of the Estate pursuant to the terms of the Will;

“fair market value” means the highest price 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;

“general rate income pool” has the meaning assigned by subsection 89(1);

“Marketable Securities” means the diversified portfolio of investment property held by the Corporation that includes cash and cash equivalents, shares of public corporations and units in mutual funds;

“Newco” means the new corporation incorporated by the Estate;

“XXXXXXXXXX” means the late XXXXXXXXXX, a Canadian resident;

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

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

“PN” means the promissory note issued by Newco to the Estate in consideration for the XXXXXXXXXX common shares of the capital stock of the Corporation transferred by the Estate to Newco;

“Proceeds of Disposition” has the meaning assigned by section 54;

“refundable dividend tax on hand” has the meaning assigned by subsection 129(3);

XXXXXXXXXX;

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

“V-day” means XXXXXXXXXX; and

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

FACTS

1.    The Corporation was incorporated under Act1 on XXXXXXXXXX and was at all relevant times a Canadian-controlled private corporation and a taxable Canadian corporation.  

2.    The Corporation is a holding corporation whose only activity is to hold the Marketable Securities. The fair market value of the Marketable Securities as of XXXXXXXXXX, is $XXXXXXXXXX. 

3.    The Corporation’s authorized share capital is as follows:

(a)    Unlimited common shares; and

(b)    Unlimited preferred shares.

4.    XXXXXXXXXX died on XXXXXXXXXX. XXXXXXXXXX held de jure control of the Corporation prior to XXXXXXXXXX’s death. Immediately before XXXXXXXXXX’s death, XXXXXXXXXX held XXXXXXXXXX common shares of the capital stock of the Corporation with an aggregate fair market value of $XXXXXXXXXX, paid-up capital of $XXXXXXXXXX and adjusted cost base to XXXXXXXXXX of $XXXXXXXXXX. 

5.    The shares of the capital stock of the Corporation held by XXXXXXXXXX were capital property to XXXXXXXXXX. Pursuant to paragraph 70(5)(a), immediately before XXXXXXXXXX’s death, XXXXXXXXXX is deemed to have disposed of the XXXXXXXXXX common shares that XXXXXXXXXX held in the Corporation and to have received proceeds of disposition equal to the fair market value of those shares immediately before XXXXXXXXXX’s death. 

6.    The Estate is deemed to have acquired the XXXXXXXXXX common shares that were held by XXXXXXXXXX at the time of XXXXXXXXXX’s death at a cost equal to their fair market value immediately before XXXXXXXXXX’s death pursuant to paragraph 70(5)(b). These shares of the capital stock of the Corporation are capital property to the Estate.

7.    The aggregate fair market value of the XXXXXXXXXX common shares of the capital stock of the Corporation held by the Estate was equal to approximately $XXXXXXXXXX.

8.    Pursuant to XXXXXXXXXX’s Will Beneficiary1, Beneficiary2, Beneficiary3 and Beneficiary4 will receive an equal portion of the XXXXXXXXXX common shares of the capital stock of the Corporation.

9.    The mix and value of the assets that the Corporation currently holds remain substantially the same as before XXXXXXXXXX’s death.  There will not be any material change to the investment activities carried on by the Corporation from the date of the ruling request until the date the Proposed Transactions described herein are completed and thereafter.  

PROPOSED TRANSACTIONS

10.    The Estate will incorporate a new corporation, Newco, pursuant to the provisions of Act2. Newco will be a Canadian-controlled private corporation and a taxable Canadian corporation. The authorized share capital of Newco will consist of an unlimited number of:

(a)    Class A shares, voting, participating, entitling the holder to discretionary dividends; 

(b)    Class B shares, voting, participating, entitling the holder to discretionary dividends;

(c)    Class C shares, non-voting, participating, entitling the holder to discretionary dividends;

(d)    Class D shares, voting, redeemable, retractable, participating, entitling the holder to non-cumulative dividends at a rate equal to the greater of: (i) the amount declared thereon at the sole discretion of the majority of the directors of the Corporation and (ii) XXXXXXXXXX of XXXXXXXXXX% per month on the redemption value of the Class D share held;

(e)    Class E shares, voting, redeemable, retractable, participating, entitling the holder to non-cumulative dividends at the rate of XXXXXXXXXX% per annum on the redemption value of the Class E shares;

(f)    Class F shares, non-voting, redeemable, retractable, participating, non-cumulative dividends at the rate of XXXXXXXXXX% per month on the redemption value of the Class F shares; and

(g)    Class G shares, voting, redeemable, retractable, participating, entitling the holder to non-cumulative dividends at a rate per annum equal to the greatest of the prescribed rates of interest on amounts due to the Minister of Revenue of Canada calculated on the redemption value of the Class G shares. 

11.    Upon incorporation of Newco, the Estate will subscribe for XXXXXXXXXX Class A common shares for $XXXXXXXXXX cash consideration. 

12.    The Estate will hold de jure control of Newco.

13.    The Estate will transfer the XXXXXXXXXX common shares of the capital stock of the Corporation to Newco in consideration for the PN. The principal amount of the PN will be equal to the fair market value of the XXXXXXXXXX common shares of the capital stock of the Corporation held at the date of transfer. 

14.    The Corporation will remain a separate and distinct entity for a period of one year after the transfer of the XXXXXXXXXX common shares of the capital stock of the Corporation during which the asset allocation of the Marketable Securities as well as the investment activities carried on by the Corporation in respect of the Marketable Securities will be governed by the same guidelines as before the implementation of the Proposed Transactions (see Additional Information below). 

15.    After at least one year has elapsed since the transfer of the XXXXXXXXXX common shares of the capital stock of the Corporation to Newco, the Corporation and Newco will amalgamate pursuant to section 276 of Act2 to form Amalco.

16.    In accordance with subsection 87(1), all the property and all the liabilities of the Corporation and Newco immediately before the Amalgamation will become the property and liabilities of Amalco. In addition, all of the shareholders (except the Corporation and Newco) who owned shares of the capital stock of the Corporation or Newco immediately before the amalgamation will receive shares in Amalco.

17.    The authorized share capital of Amalco will be the same as Newco’s authorized share capital.  Moreover, the tax attributes of each class of shares that the Estate will hold in Amalco after the amalgamation will be identical to the tax attributes of the corresponding class of issued and outstanding shares that the Estate held in Newco prior to the amalgamation.

18.    The PN will be gradually repaid over a period of at least one year after the date of amalgamation of the Corporation and Newco, but the amount of the repayments in any given quarter of that year will not exceed XXXXXXXXXX% of the principal amount of the PN when it was issued.

19.    While Amalco may sell some of the Marketable Securities in order to enable it to make the above mentioned repayments of the PN, it will continue carrying on its investment activities with the remaining Marketable Securities. 

20.    Once all debts and liabilities of the Estate have been ascertained and settled, the Executors will complete the administration of the Estate and distribute the residue to Beneficiary1, Beneficiary2, Beneficiary3 and Beneficiary4 in accordance with the terms of the Will.

ADDITIONAL INFORMATION

21.    The Corporation engages a broker to manage the Marketable Securities. The broker has managed the Marketable Securities in conjunction with XXXXXXXXXX prior to XXXXXXXXXX’s death and subsequently with Beneficiary2. Throughout the years and on a going forward basis the investment strategy has consisted of and will consist of actively seeking the best investment opportunities while attempting to maintain a balanced approach and reduce volatility.

PURPOSE OF THE PROPOSED TRANSACTIONS

22.    The purpose of the Proposed Transactions is to return to the Estate, an amount equal to the value of the XXXXXXXXXX common shares of the capital stock of the Corporation immediately before XXXXXXXXXX’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 of the 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 apply to deem the Estate to have received a dividend from Newco, on the transfer to Newco of the XXXXXXXXXX common shares of the capital stock of the Corporation as described in Paragraph 13, if the fair market value of the PN exceeds the greater of the paid-up capital of the XXXXXXXXXX common shares of the capital stock of the Corporation immediately before the transfer and the adjusted cost base, subject to paragraphs 84.1(2)(a) and (a.1), of the XXXXXXXXXX common shares of the capital stock of the Corporation immediately before the transfer.

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

The above rulings are given subject to the limitations and qualifications set out in Information Circular 706R6 dated August 29, 2014 and are binding on the CRA provided that the Proposed Transactions, other than those described in Paragraphs 14 to 20, are completed within six months of 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, could have an effect on the rulings provided herein.

OTHER COMMENTS

We were not provided with any information in respect of the V-day value of the XXXXXXXXXX common shares of the capital stock of the Corporation nor any possible deduction under section 110.6.

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

(a)    the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b)    the balance of the capital dividend account, general rate income pool, or refundable dividend tax on hand of any corporation; or

(c)    any other tax consequence relating to the facts, 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, other than those specifically described in the rulings given above.

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

Yours truly,

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

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