2016-0629511R3 Post-Mortem Planning and Extraction of "Hard ACB"

Principal Issues: Post-Mortem Planning and Extraction of "Hard ACB" that mainly resulted from the application of subsection 70(5) or is attributable to properties rolled into a corporation.

Position: Favourable rulings given.

Reasons: In accordance with the Act, jurisprudence and our published positions.

Author: XXXXXXXXXX
Section: 84.1, 84(2), 245(2)

XXXXXXXXXX                                                                                                              2016-062951

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
         XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers.  We also acknowledge the information provided in various e-mails correspondence and during various telephone conversations in connection with your ruling request (XXXXXXXXXX).

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

(i)   dealt with in an earlier return of the taxpayers or a related person,

(ii)  being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,

(iii) under objection by the taxpayers or a related person,

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

(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Throughout this letter, except in Paragraph 62, the corporate and individual taxpayers will be referred to as follows:

“A” refers to XXXXXXXXXX;

“B” refers to XXXXXXXXXX;

“C” refers to late XXXXXXXXXX;

“D” refers to XXXXXXXXXX;

“E” refers to late XXXXXXXXXX;

“Newco 1” refers to a corporation to be incorporated by A;

“Newco 2” refers to a corporation to be incorporated by B;

“Newco 3” refers to a corporation to be incorporated by B;

“Newco 1 First Transferred Shares” means the shares transferred by A to Newco 1 as described in Paragraph 52;

“Newco 1 Second Transferred Shares” means the shares transferred by A to Newco 1 as described in Paragraph 53;

“Newco 1 Third Transferred Shares” means the shares transferred by Trust C to Newco 1 as described in Paragraph 54;

“Newco 2 First Transferred Shares” means the shares transferred by B to Newco 2 as described in Paragraph 45;

“Newco 2 Second Transferred Shares” means the shares transferred by Trust D&E to Newco 2 as described in Paragraph 47;

“Newco 1 Promissory Note 1” means the non-interest-bearing demand promissory note issued by Newco 1 to A in Paragraph 52;

“Newco 1 Promissory Note 1.1” means the non-interest-bearing demand promissory note issued by Newco 1 to A in Paragraph 53;

“Newco 1 Promissory Note 2” means the non-interest-bearing demand promissory note issued by Newco 1 to Trust C in Paragraph 54;

“Newco 2 Promissory Note 1” means the non-interest-bearing demand promissory note issued by Newco 2 to B in Paragraph 45;

“Newco 2 Promissory Note 2” means the non-interest-bearing demand promissory note issued by Newco 2 to Trust D&E in Paragraph 47;

“Opco 1” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX;

“Opco 2” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX;

“Opco 3” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX;

“Opco 4” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX;

“Opco 5” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX;

“Opco 6” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX;

“Opco 7” refers to XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX;

“Opco 8” refers to XXXXXXXXXX, a corporation incorporated in XXXXXXXXXX;

XXXXXXXXXX

XXXXXXXXXX

“Property 1” refers to XXXXXXXXXX rental property and to every property related to this rental property;

“Property 2” refers to XXXXXXXXXX rental properties and to every property related to those rental properties;

“Property 3” refers to XXXXXXXXXX rental properties and to every property related to those rental properties;

“Trust C” refers to XXXXXXXXXX;

“Trust D&E” refers to XXXXXXXXXX;

DEFINITIONS

In this letter, unless otherwise noted, the following terms have the meaning specified herein:

(a)   “ACB” has the meaning assigned to the expression “adjusted cost base” in section 54;

(b)   “Act” means the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c.1, as amended from time to time and consolidated to the date of this letter and unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;

(c)   “agreed amount” has the meaning assigned by subsection 85(1);

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

(e)   “CGD” means “capital gains deduction” and refers to the amount available to be deducted against taxable income, as described in subsection 110.6(2.1);

(f)   “CRA” means the Canada Revenue Agency;

(g)   “FMV” means fair market value and refers to the highest price available in an open and unrestricted market between informed, prudent parties acting at arm’s length and under no compulsions to act;

(h)   “Hard ACB” of shares means the amount of the adjusted cost base (as such term is defined in section 54) less adjustments contemplated under paragraph 84.1(2)(a), under subparagraph 84.1(2)(a.1)(i) (V-Day value adjustments claimed by non-arm’s length persons) and subparagraph 84.1(2)(a.1)(ii) (in respect of capital gains deductions claimed by non-arm’s length persons);

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

(j)   “Proposed Transactions” means the transactions described in Paragraphs 41 to 56;

(k)   “PUC” has the meaning assigned to the expression “paid-up capital” in subsection 89(1);

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

(m)   “V-Day basis” means the adjustments contemplated under paragraph 84.1(2)(a) and subparagraph 84.1(2)(a.1)(i).

FACTS

Corporations:

1. Opco 1 was incorporated on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX) and is a CCPC and a TCC.  Opco 1 has a XXXXXXXXXX taxation year end and files its tax returns with the XXXXXXXXXX Tax Centre as required.

2. The principal business of Opco 1 involves the XXXXXXXXXX.  Opco 1 owns an interest in the following corporations, unincorporated joint venture, and partnership (also all related to the management and earning of income from real estate):

Name        Percentage of Shares/Units/Interest                                  Business Number
Opco 7      XXXX common shares (XXXX% of votes and value)        XXXX
Opco 8      XXXX common shares (XXXX% of votes and value)        XXXX
XXXX        XXXX%                                                                              XXXX
XXXX        XXXX%                                                                              XXXX

3.    Each of these properties is capital property to Opco 1.

4.    Opco 2 was incorporated on XXXXXXXXXX and is a CCPC and a TCC.  Opco 2 owns XXXXXXXXXX% of the shares of the capital stock of Opco 3.  Opco 2 has a XXXXXXXXXX taxation year end and files its tax returns with the XXXXXXXXXX Tax Centre as required.

5.    Opco 3 was incorporated on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX) and is a CCPC and a TCC.  Opco 3 owns and operates XXXXXXXXXX.  Opco 3 also has an investment in XXXXXXXXXX.  Opco 3 has a XXXXXXXXXX taxation year end and files its tax returns with the XXXXXXXXXX Tax Centre as required.

6.    Opco 4 was incorporated on XXXXXXXXXX and is a CCPC and a TCC.  Its principal business involves the XXXXXXXXXX.  In addition, Opco 4 holds investments in shares of XXXXXXXXXX as well as a XXXXXXXXXX% interest in XXXXXXXXXX.  Opco 4 has a XXXXXXXXXX taxation year end and files its tax returns with the XXXXXXXXXX Tax Centre as required.

7.    Opco 5 was incorporated on XXXXXXXXXX and is a CCPC and a TCC.  Its principal business involves the XXXXXXXXXX, a XXXXXXXXXX% interest in XXXXXXXXXX and the provision of financing to affiliated companies.  Opco 5 has a XXXXXXXXXX taxation year end and files its tax returns with the XXXXXXXXXX Tax Centre as required.

8.    Opco 6 was incorporated on XXXXXXXXXX and is a CCPC and a TCC.  Its assets are composed of loan receivables from affiliated companies.  Opco 6 has a XXXXXXXXXX taxation year end and files its tax returns with the XXXXXXXXXX Tax Centre as required.

9.    Opco 7 was incorporated on XXXXXXXXXX and is a CCPC and a TCC.  It was formed to hold investments in XXXXXXXXXX.  Opco 7 has a XXXXXXXXXX taxation year end and files its tax returns with the XXXXXXXXXX Tax Centre as required.

10.   Opco 8 was incorporated in XXXXXXXXXX and is a CCPC and a TCC.  It was formed to hold investments in XXXXXXXXXX.  Opco 8 will have a XXXXXXXXXX taxation year end and will file its tax returns with the XXXXXXXXXX Tax Centre as required.

11.   The head office for all the entities is XXXXXXXXXX.

C and Trust C

12.   C passed away on XXXXXXXXXX.  Immediately before C’s death, C was a Canadian resident for tax purposes.

13.   At the time of C’s death, C held shares in the following corporations:

Corporations     Class of shares     Number        Estimated value       PUC              ACB
                                                        of shares
Opco 1              common                 XXXX           XXXX                      XXXX            XXXX
Opco 3              common                 XXXX           XXXX                      XXXX            XXXX

14.   Each of these properties was capital property to C.

15.   Trust C is the estate of C.  Trust C is a Canadian resident for tax purposes.

16.   All the shares of the capital stock of Opco 1 and Opco 3 owned by Trust C were transferred to A in XXXXXXXXXX on a tax-deferred basis under subsection 107(2).

17.   In addition to the ownership in the corporations listed above, Trust C also owns a XXXXXXXXXX% interest in Property 1.  This XXXXXXXXXX% interest in Property 1 is capital property to Trust C.

18.   Pursuant to subsection 70(5), C was deemed to have disposed of the Opco 1 common shares, the Opco 3 common shares and of her interest in Property 1, immediately prior to her death and to have received proceeds of disposition equal to the FMV thereof at that time.  This deemed disposition resulted in the realization of capital gains which were reported on C’s terminal T1 personal tax return.  C has also claimed a CGD of $XXXXXXXXXX on her terminal T1 personal tax return with respect to the Opco 3 common shares.

The Trust C was deemed to have acquired the Opco 1 common shares, the Opco 3 common shares and the XXXXXXXXXX% interest in Property 1 at a cost equal to their FMV immediately prior to C’s death.

19.   The executor of Trust C is A.

20.   In accordance with C’s last will dated XXXXXXXXXX, the executor is required to distribute the residue of the Trust C to A.

A

21.   A was XXXXXXXXXX.  A is a Canadian resident for tax purposes.

22.   A owns interests in the following corporations:

Corporations                      Shares Held       ACB          PUC            FMV
Opco 2 XXXXXXXXXX      XXXX                 XXXX        XXXX          XXXX
Opco 1 XXXXXXXXXX      XXXX                 XXXX        XXXX          XXXX
Opco 3 XXXXXXXXXX      XXXX                 XXXX        XXXX          XXXX

23.   The ACB of the common shares of Opco 1 to A can be broken down as follows:

* $XXXXXXXXXX is attributable to V-Day basis,

* $XXXXXXXXXX represents the Hard ACB.  The Hard ACB results from the application of the deemed disposition rules in subsection 70(5) on death of C.

24.   The ACB of the common shares of Opco 2 to A can be broken down as follows:

 * $XXXXXXXXXX is attributable to V-Day basis,

 * $XXXXXXXXXX represents the Hard ACB.  The Hard ACB results from the application of the deemed disposition rules in subsection 70(5) on death of A’s XXXXXXXXXX.

25.   The ACB of the common shares of Opco 3 to A can be broken down as follows:

* $XXXXXXXXXX is attributable to V-Day basis,

* $XXXXXXXXXX was claimed by C immediately before her death as a deduction under section 110.6,

* $XXXXXXXXXX represents the Hard ACB.  The Hard ACB results from the application of the deemed disposition rules in subsection 70(5) on death of C.

26.   Each of these properties is capital property to A.

27.   In addition to the ownership in the corporations listed above, A also owns an XXXXXXXXXX% interest in Property 2.  This XXXXXXXXXX% interest in Property 2 is capital property to A.

B

28.   B is XXXXXXXXXX.  B is a Canadian resident for tax purposes.

29.   B owns interests in the following corporations:

Corporation                                 Shares Held      Total ACB     ACB attributable           PUC       FMV
                                                                                                   to V-Day basis
                                                                                                   or CGD
Opco 6
(XXXX% votes and value)           XXXX                XXXX            XXXX                           XXXX      XXXX
Opco 5
(XXXX% votes and value)            XXXX               XXXX            XXXX                           XXXX      XXXX
Opco 4
(XXXX% votes and value)            XXXX               XXXX            XXXX                           XXXX      XXXX
Opco 2
(XXXX% votes and value)            XXXX               XXXX            XXXX                           XXXX       XXXX

30.   The Hard ACB to B of the shares of the stock capital of Opco 4, Opco 5 and Opco 6 results from the application of the deemed disposition rules in subsection 70(5) on death of E, B’s XXXXXXXXXX.

31.   The Hard ACB to B of XXXXXXXXXX common shares of the stock capital of Opco 2 results from the application of the deemed disposition rules in subsection 70(5) on death of A’s XXXXXXXXXX.  The Hard ACB to B of XXXXXXXXXX common shares of the stock capital of Opco 2 results from an arm’s length transaction.

32.   Each of these properties is capital property to B.

33.   In addition to the ownership in the corporations listed above, B also owns an XXXXXXXXXX% interest in Property 2.  This XXXXXXXXXX% interest in Property 2 is capital property to B.

Trust D&E

34.   Trust D&E is a spousal trust that came into existence upon the death of E, the late husband of D.  Trust D&E is a Canadian resident for tax purposes.

35.   The Trustees of Trust D&E are A and B.

36.   Trust D&E owns interests in the following corporations:

Corporation                            Shares         Held ACB       ACB attributable      PUC       FMV
                                                                                          to V-Day basis
                                                                                          or CGD
Opco 3
(XXXX% votes and value)      XXXX           XXXX             XXXX                       XXXX     XXXX
Opco 7
(XXXX% votes and value)      XXXX           XXXX             XXXX                       XXXX     XXXX
Opco 2
(XXXX% votes and value)      XXXX           XXXX             XXXX                       XXXX     XXXX
Opco 8
XXXX% votes and value)       XXXX           XXXX             XXXX                       XXXX     XXXX

37.   The Hard ACB to Trust D&E of the shares of the stock capital of Opco 2 results from the application of the deemed disposition rules in subsection 70(5) on death of A’s XXXXXXXXXX.

38.   The Hard ACB to Trust D&E of the shares of the stock capital of Opco 8 is attributable to land and building rolled into Opco 8.

39.   Each of these properties is capital property to Trust D&E.

40.   In addition to the ownership in the corporations listed above, Trust D&E owns the following interests in rental properties:

a.    XXXXXXXXXX% interest in Property 2.  This XXXXXXXXXX% interest in Property 2 is capital property to Trust D&E.

b.    XXXXXXXXXX% interest in Property 3.  This XXXXXXXXXX% interest in Property 3 is capital property to Trust D&E.

c.    XXXXXXXXXX% interest in Property 1.  This XXXXXXXXXX% interest in Property 1 is capital property to Trust D&E.

PROPOSED TRANSACTIONS

B and Trust D&E

41.   Before XXXXXXXXXX, Newco 2 will be incorporated.  Newco 2 will be a CCPC and a TCC.  The authorized share capital will be comprised of Class G (voting), Class H (non-voting) common shares, Class A, B, C, D, E, voting preferred shares, which are redeemable and retractable, and Class F non-voting preferred shares, which are redeemable and retractable.

42.   B will subscribe for XXXXXXXXXX Class A voting preferred shares for $XXXXXXXXXX in aggregate and XXXXXXXXXX Class G common shares for $XXXXXXXXXX in aggregate of the capital stock of Newco 2.

43.   Before XXXXXXXXXX, Newco 3 will be incorporated.  Newco 3 will be a CCPC and a TCC.  The authorized share capital will be comprised of Class A voting common shares, Class C voting preferred shares, which are redeemable and retractable.  B will subscribe for XXXXXXXXXX Class C voting preferred shares for $XXXXXXXXXX in aggregate of the capital stock of Newco 3.

44.   On XXXXXXXXXX, B will transfer her interest in Property 2 to Newco 3.  B and Newco 3 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property of Property 2.  The agreed amount in respect of each such eligible property will not be greater than the FMV of such property nor will it be less than the amount permitted under paragraph 85(1)(b).  For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

(a)   in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(b)   in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i) to (iii).

As consideration, B will receive Class A common shares of the capital stock of Newco 3 of value equal to the transferred properties.  The Class A common shares of the capital stock of Newco 3 will be issued at a price of $XXXXXXXXXX per share.

The increase to the PUC of the Newco 3 Class A common shares that are issued to B as consideration for Property 2, will not exceed the cost of Property 2, as determined pursuant to subsection 85(1), where applicable.  For greater certainty, the increase to the PUC of the Newco 3 Class A common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

45.   On XXXXXXXXXX, B will transfer her XXXXXXXXXX Class A Common Shares of Opco 6, XXXXXXXXXX Class A Common Shares of Opco 5, XXXXXXXXXX Class C Preferred Shares of Opco 5, XXXXXXXXXX Class A Common Shares of Opco 4, XXXXXXXXXX Class B Common Shares of Opco 4, XXXXXXXXXX Preferred Shares of Opco 4, XXXXXXXXXX Common Shares of Opco 2, and all her Class A Common Shares of Newco 3 (“Newco 2 First Transferred Shares”) to Newco 2.  B and Newco 2 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Consideration for the Newco 2 First Transferred Shares will consist of a non‑interest‑bearing demand promissory note (“Newco 2 Promissory Note 1”) in an amount equal to the Hard ACB of the Newco 2 First Transferred Shares, less $XXXXXXXXXX, and XXXXXXXXXX Class B preferred shares of the capital stock of Newco 2 for the remainder (the FMV of the Newco 2 First Transferred Shares on the transfer date over the principal amount of the Newco 2 Promissory Note 1).

Newco 2 will add an amount of $XXXXXXXXXX to the stated capital of its Class B preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of those shares, having regard to paragraph 84.1(1)(a).

46.   On XXXXXXXXXX, Trust D&E will transfer its interests in Property 1, in Property 2 and in Property 3 to Newco 3.  Trust D&E and Newco 3 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property of Property 1 and Property 2.

The agreed amount in respect of each such eligible property will not be greater than the FMV of such property nor will it be less than the amount permitted under paragraph 85(1)(b).  For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

(a)   in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(b)   in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i) to (iii).

As consideration, Trust D&E will receive Class A common shares of the capital stock of Newco 3 of value equal to the transferred properties.  The Class A common shares of the capital stock of Newco 3 will be issued at a price of $XXXXXXXXXX per share.

The increase to the PUC of the Newco 3 Class A common shares that are issued to Trust D&E as consideration for its interests in Property 1, Property 2 and Property 3, will not exceed the cost of Property 1, Property 2 and Property 3 for Trust D&E, as determined pursuant to subsection 85(1), where applicable.  For greater certainty, the increase to the PUC of the Newco 3 Class A common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

47.   On XXXXXXXXXX, Trust D&E will transfer XXXXXXXXXX Common Shares of Opco 2, XXXXXXXXXX Common Shares of Opco 7, XXXXXXXXXX Common Shares of Opco 3, XXXXXXXXXX Common Shares of Opco 8, and all its Class A Common Shares of Newco 3 (“Newco 2 Second Transferred Shares”) to Newco 2.  Trust D&E and Newco 2 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Consideration for the Newco 2 Second Transferred Shares will consist of an non‑interest‑bearing demand promissory note (“Newco 2 Promissory Note 2”) in an amount equal to the Hard ACB of the Newco 2 Second Transferred Shares, less $XXXXXXXXXX, and XXXXXXXXXX Class C preferred shares of the capital stock of Newco 2 for the remainder (the FMV of the Newco 2 Second Transferred Shares on the transfer date over the principal amount of the Newco 2 Promissory Note 2).

Newco 2 will add an amount of $XXXXXXXXXX to the stated capital of its Class C preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of those shares, having regard to paragraph 84.1(1)(a).

A and Trust C

48.   Before XXXXXXXXXX, Newco 1 will be incorporated.  Newco 1 will be a CCPC and a TCC.  The authorized share capital will be comprised of Class G (voting), Class H (non-voting) common shares, Class A, B1, B2, C, D, E, voting preferred shares, which are redeemable and retractable, and Class F non-voting preferred shares, which are redeemable and retractable.

49.   A will subscribe for XXXXXXXXXX Class A voting preferred shares for $XXXXXXXXXX in aggregate and XXXXXXXXXX Class G common shares for $XXXXXXXXXX in aggregate of the capital stock of Newco 1.

50.   On XXXXXXXXXX, A will transfer his interest in Property 2 to Newco 3.  A and Newco 3 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property of Property 2.  The agreed amount in respect of each such eligible property will not be greater than the FMV of such property nor will it be less than the amount permitted under paragraph 85(1)(b).  For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

(a)   in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(b)   in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i) to (iii).

As consideration, A will receive Class A common shares of the capital stock of Newco 3 of value equal to the transferred properties.  The Class A common shares of the capital stock of Newco 3 will be issued at a price of $XXXXXXXXXX per share.

The increase to the PUC of the Newco 3 Class A common shares that are issued to A as consideration for Property 2 will not exceed the cost of Property 2, as determined pursuant to subsection 85(1), where applicable.  For greater certainty, the increase to the PUC of the Newco 3 Class A common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

51.   On XXXXXXXXXX, Trust C will transfer its interest in the Property 1 to Newco 3.  Trust C and Newco 3 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property of Property 1.  The agreed amount in respect of each such eligible property will not be greater than the FMV of such property nor will it be less than the amount permitted under paragraph 85(1)(b).  For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

(a)   in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(b)   in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i) to (iii).

As consideration, Trust C will receive Class A common shares of the capital stock of Newco 3 of value equal to the transferred properties.  The Class A common shares of the capital stock of Newco 3 will be issued at a price of $XXXXXXXXXX per share.

The increase to the PUC of the Newco 3 Class A common shares that are issued to Trust C as consideration for Property 1, will not exceed the cost of Property 1, as determined pursuant to subsection 85(1), where applicable.  For greater certainty, the increase to the PUC of the Newco 3 Class A common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

52.   On XXXXXXXXXX, A will transfer his XXXXXXXXXX Common Shares of the capital stock of Opco 1 (“Newco 1 First Transferred Shares”) to Newco 1.  A and Newco 1 will make a joint election in prescribed form, and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).  In the event that the ACB of the Newco 1 First Transferred Shares is greater than their FMV at the time of the transfer described above, a capital loss will arise on the disposition.  Consequently, subparagraph 40(2)(g)(i) may apply.

Consideration for the Newco 1 First Transferred Shares will consist of a non‑interest‑bearing demand promissory note (“Newco 1 Promissory Note 1”) in an amount equal to the Hard ACB of the Newco 1 First Transferred Shares, less $XXXXXXXXXX, and XXXXXXXXXX Class B.1 preferred shares of the capital stock of Newco 1 for the remainder (the FMV of the Newco 1 First Transferred Shares on the transfer date over the principal amount of the Newco 1 Promissory Note 1).

Newco 1 will add an amount of $XXXXXXXXXX to the stated capital of its Class B.1 preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of those shares, having regard to paragraph 84.1(1)(a).

53.   On XXXXXXXXXX, A will transfer his XXXXXXXXXX Common Shares of the capital stock of Opco 2, XXXXXXXXXX Common Shares of the capital stock of Opco 3 and all its Common Shares of the capital stock of Newco 3 (“Newco 1 Second Transferred Shares”) to Newco 1.  A and Newco 1 will make a joint election in prescribed form, and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).  In the event that the ACB of the Newco 1 Second Transferred Shares is greater than their FMV at the time of the transfer described above, a capital loss will arise on the disposition.  Consequently, subparagraph 40(2)(g)(i) may apply.

Consideration for the Newco 1 Second Transferred Shares will consist of a non‑interest‑bearing demand promissory note (“Newco 1 Promissory Note 1.1”) in an amount equal to the Hard ACB of the Newco 1 Second Transferred Shares, less $XXXXXXXXXX, and XXXXXXXXXX Class B2 preferred shares of the capital stock of Newco 1 for the remainder (the FMV of the Newco 1 Second Transferred Shares on the transfer date over the principal amount of the Newco 1 Promissory Note 1.1).

Newco 1 will add an amount of $XXXXXXXXXX to the stated capital of its Class B preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of those shares, having regard to paragraph 84.1(1)(a).

54.   On XXXXXXXXXX, Trust C will transfer all its Class A common shares of the capital stock of Newco 3 (“Newco 1 Third Transferred Shares”) to Newco 1.  Trust C and Newco 1 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Consideration for the Newco 1 Third Transferred Shares will consist of a non‑interest‑bearing demand promissory note (“Newco 1 Promissory Note 2”) in an amount equal to the Hard ACB of the Newco 1 Third Transferred Shares, less $XXXXXXXXXX, and XXXXXXXXXX Class C preferred shares of the capital stock of Newco 1 for the remainder (the FMV of the Newco 1 Third Transferred Shares on the transfer date over the principal amount of the Newco 1 Promissory Note 2).

Newco 1 will add an amount of $XXXXXXXXXX to the stated capital of its Class C preferred shares which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of those shares, having regard to paragraph 84.1(1)(a).

55.   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 the implementation of the Proposed Transactions.

56.   In XXXXXXXXXX, Newco 1 will repay to A an amount not exceeding $XXXXXXXXXX of the Newco 1 Promissory Note 1.  After this payment, it is not envisioned that A would seek any repayment of the Newco 1 Promissory Note 1 or Newco 1 Promissory Note 1.1 before XXXXXXXXXX.  Moreover, the amount of the repayment, if any, in the year ending XXXXXXXXXX will not exceed XXXXXXXXXX% (inclusive of the $XXXXXXXXXX already repaid) of the sum of the original principal amount of the Newco 1 Promissory Note 1 and Newco 1 Promissory Note 1.1.

PURPOSES OF THE PROPOSED TRANSACTIONS

57.   The purpose of the Proposed Transactions is to return to A an amount up to the value of the shares of the capital stock of Opco 1 and Opco 3 held by C immediately before C’s death, while minimizing the inherent double tax exposure that can result from the application of paragraph 70(5)(a) which applied in these particular circumstances.

58.   Secondly, the purpose of the Proposed Transactions is to extract the Hard ACB, that mainly resulted from the application of subsection 70(5), of the shares held by A, B and Trust D&E in the capital stock of Opco 1, Opco 2, Opco 3, Opco 4, Opco 5, Opco 6, Opco 7, Opco 8 or to extract the Hard ACB of the shares held by A, Trust C, B and Trust D&E in the capital stock of Newco 3.

59.   Thirdly, Trust D&E wishes to implement an estate freeze in favour of the next generation family member of D.

60.   Lastly, coincident with this restructuring, A, Trust C, B and Trust D&E wish to transfer their undivided interests in Property 1, Property 2 and Property 3 to a newly incorporated company, Newco 3.  After this restructuring, Newco 3 will be owned by Newco 1 and Newco 2 in proportion to the value of the properties contributed.

ADDITIONAL INFORMATION

61.   There is no intention to liquidate, discontinue or wind-up the businesses of Opco 1, Opco 2, Opco 3, Opco 4, Opco 5, Opco 6, Opco 7 and Opco 8.  Opco 1, Opco 2, Opco 3, Opco 4, Opco 5, Opco 6, Opco 7 and Opco 8 intend to continue their operations and business activities in the same manner as before the implementation of the Proposed Transactions until at least XXXXXXXXXX.

62.   The federal business number of the parties referred to herein, the location of the tax services office and taxation center where their returns are filed, and the address of their head office are as follows: 

XXXXXXXXXX
Social Insurance Number:                       XXXXXXXXXX
Tax Services Office:                                XXXXXXXXXX
Tax Centre:                                              XXXXXXXXXX
Address:                                                  XXXXXXXXXX

XXXXXXXXXX
Trust Account Number:                          XXXXXXXXXX
Tax Services Office:                               XXXXXXXXXX
Tax Centre:                                            XXXXXXXXXX
Address:                                                XXXXXXXXXX

XXXXXXXXXX
Business number:                                  XXXXXXXXXX
Tax Services Office:                               XXXXXXXXXX
Tax Centre:                                            XXXXXXXXXX
Address:                                                 XXXXXXXXXX

XXXXXXXXXX
Social Insurance Number:                       XXXXXXXXXX
Tax Services Office:                                XXXXXXXXXX
Tax Centre:                                             XXXXXXXXXX
Address:                                                 XXXXXXXXXX

XXXXXXXXXX
Trust Account Number:                          XXXXXXXXXX
Tax Services Office:                               XXXXXXXXXX
Tax Centre:                                            XXXXXXXXXX
Address:                                                XXXXXXXXXX

RULINGS GIVEN

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

A.    Section 84.1 will not apply to deem A to have received a dividend from Newco 1 on the transfer of Newco 1 First Transferred Shares and Newco 1 Second Transferred Shares by A to Newco 1 as described in Paragraphs 52 and 53 provided that the FMV, immediately after the transfers, of the Newco 1 Promissory Note 1 and the Newco 1 Promissory Note 1.1 received by A is equal to or less than the ACB to A, immediately before the transfer, of the Newco 1 First Transferred Shares and Newco 1 Second Transferred Shares respectively, as modified by paragraphs 84.1(2)(a) and (a.1).

B.    Section 84.1 will not apply to deem B to have received a dividend from Newco 2 on the transfer of Newco 2 First Transferred Shares by B to Newco 2 as described in Paragraph 45 provided that the FMV, immediately after the transfer, of the Newco 2 Promissory Note 1 received by B is equal to or less than the ACB to B, immediately before the transfer, of the Newco 2 First Transferred Shares, as modified by paragraphs 84.1(2)(a) and (a.1).

C.    Section 84.1 will not apply to deem Trust D&E to have received a dividend from Newco 2 on the transfer of Newco 2 Second Transferred Shares by Trust D&E to Newco 2 as described in Paragraph 47 provided that the FMV, immediately after the transfer, of the Newco 2 Promissory Note 2 is equal to or less than the ACB to Trust D&E, immediately before the transfer, of the Newco 2 Second Transferred, as modified by paragraphs 84.1(2)(a) and (a.1).

D.    Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Opco 1 and Opco 3 to have paid and A to have received, a dividend on the common shares of the capital stock of Opco 1 and Opco 3 held by A.

E.    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 forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX, unless otherwise specified.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

Opinions

For the purposes of paragraphs 88(1)(c), (d), and (d.2), subsection 88(1)(d.3) will apply to deem Trust C to be dealing at arm’s length with C when it acquired the shares from C on her death.  Accordingly, Newco 1 will be deemed to have last acquired control of Opco 1 immediately after the death of C rather than at the time Newco 1 acquired the Opco 1 shares from A.

The foregoing opinion is not a ruling and is not binding on the CRA.

COMMENTS

Unless otherwise expressively confirmed, nothing in this ruling 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, ACB or Hard ACB of any property referred to herein or the PUC in respect of any share referred to herein, or

b)    any provincial tax consequences of the Proposed Transactions or 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, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

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 FMV of the properties transferred and 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 and issuance of shares.  Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment 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.

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

Yours truly,

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

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018