2020-0858741R3 Post-Mortem Pipeline

Principal Issues: 1. Does paragraph 84.1(1)(b) deem a dividend in the Proposed Transactions? 2. Does subsection 84(2) apply to the Proposed Transactions? 3. Does the GAAR apply to the Proposed Transactions?

Position: 1. No. 2. No. 3. No

Reasons: The Proposed Transactions are in accordance with the Act, relevant jurisprudence and are consistent with our previous positions.

Author: XXXXXXXXXX
Section: 84(2), 84.1, 245(2), 110.6(19), 83(1)

XXXXXXXXXX                                                                                                        2020-085874

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling for the Estate of XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the taxpayers described below (the “Taxpayers”). We also acknowledge the additional information provided in your various email correspondence.

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

1. in a previously filed return of the Taxpayers or a related person and;

1. 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;
2. under objection by the Taxpayers or a related person;
3. the subject of a current or completed court process involving the Taxpayers or a related person; or

2. the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX

The above-referenced Taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

DEFINITIONS

Unless otherwise stated:

1. 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 (5^th Suppl.) c.1, as amended, (the Act);

2. all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition;

3. all references to monetary amounts are in Canadian dollars; and

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

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

“A” means XXXXXXXXXX a deceased individual who was resident in Canada at all relevant times before his death on XXXXXXXXXX.

“Act1” means the XXXXXXXXXX, as amended;

“Amalco” means the corporation formed on the amalgamation of Opco and Newco as described in Paragraph 20;

“BN” means “business number” as that term is defined in subsection 248(1);

“CCPC” means “Canadian-controlled private corporation” as that expression is defined in subsection 125(7);

“CRA” refers to the Canada Revenue Agency;

“ERDTOH” means “eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“Estate” means the Estate of XXXXXXXXXX that was created as a consequence of the death of A and governed by the terms of A’s Will. The Estate is and will be a resident of Canada at all relevant times and its first taxation year-end will be XXXXXXXXXX; “F” means XXXXXXXXXX, the spouse of A until the date of her death on XXXXXXXXXX;

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

“GRIP” means “general rate income pool” as that expression is defined in subsection 89(1);

“NERDTOH” means “non-eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“Newco” means a corporation to be incorporated under Act1 as described in Paragraph 14;

”Opco” means XXXXXXXXXX, a corporation incorporated on the amalgamation of XXXXXXXXXX, and XXXXXXXXXX, on XXXXXXXXXX under Act1;

“Opco Business” means XXXXXXXXXX as described in Paragraph 1;

“Opco Class A Common Shares” means the shares described in Paragraph 1;

“Opco Class B Common Shares” means the shares described in Paragraph 1;

“Opco Class D Preferred Shares” means the shares described in Paragraph 1;

“Opco Class E Preferred Shares” means the shares described in Paragraph 1;

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

“Proposed Transactions” means the transactions described in Paragraphs 14 to 22.

“PUC” means “paid-up capital” as that term is defined in subsection 89(1);

“Real Estate” means the real property owned by Opco as described in subparagraph 3(a); and

“TCC” means “taxable Canadian corporation” as that expression is defined in subsection 89(1).

FACTS

1. Opco is CCPC and a TCC with a taxation year end of XXXXXXXXXX. Opco was formed on XXXXXXXXXX to operate an XXXXXXXXXX in Canada on land owned by Opco. As a consequence of the death of A, Opco XXXXXXXXXX (the “Opco Business”). Currently, the issued and outstanding shares of Opco consist of:

1. XXXXXXXXXX Class A common shares (Opco Class A Common Shares) having full voting rights (XXXXXXXXXX vote per share);
2. XXXXXXXXXX Class B common shares (Opco Class B Common Shares) having full voting rights (XXXXXXXXXX vote per share);
3. XXXXXXXXXX Class D non-voting preferred shares (Opco Class D Preferred Shares) that are redeemable, retractable (at $XXXXXXXXXX per share), entitling the holder to cumulative dividends with a dividend rate of XXXXXXXXXX%; and
4. XXXXXXXXXX Class E voting (XXXXXXXXXX vote per share) preferred shares (Opco Class E Preferred Shares) that are redeemable, retractable (at the subscription price).

All of the issued and outstanding shares of Opco are currently held by the Estate.

2. As of XXXXXXXXXX, Opco did not have a balance in any of its CDA, ERDTOH, NERDTOH, GRIP accounts. These balances are not expected to change before the Proposed Transactions.

3. Opco’s primary assets include:

1. real property, with the following legal description for the XXXXXXXXXX registry and tax attributes:

(the “Real Estate”); and

1. XXXXXXXXXX, classified as an investment, with an ACB and FMV of$XXXXXXXXXX, (the “XXXXXXXXXX”).

4. A and F were the only shareholders of Opco immediately before the time of F’s death. In particular, immediately before the time of F’s death F owned, solely, XXXXXXXXXX Opco Class A Common Shares, and, jointly with A, XXXXXXXXXX Opco Class D Preferred Shares.

5. A inherited F’s XXXXXXXXXX Opco Class A Common Shares as the residual beneficiary under F’s will at their ACB of $XXXXXXXXXX, pursuant to subsection 70(6). As such, F’s deemed proceeds of disposition were $XXXXXXXXXX, pursuant to subparagraph 70(6)(b)(ii), resulting in $ XXXXXXXXXX capital gain for F’s XXXXXXXXXX taxation year. F’s death also resulted in the severance of the joint tenancy for the XXXXXXXXXX Opco Class D Preferred Shares resulting in A owning all of these shares with an aggregate ACB of $XXXXXXXXXX.
6. Immediately prior to A’s death, A owned all the issued and outstanding classes of shares of Opco that are now currently held by the Estate. These shares were held by A as capital property and they had the following tax attributes immediately beforethe time of A’s death:

7. Pursuant to paragraph 70(5)(a), A was deemed to have disposed of each class of his Opco shares immediately before his death and to have received proceeds of disposition equal to the FMV of such class of shares at that time as set out in Paragraph 6. Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired each class of A’s Opco shares for an amount equal to A’s proceeds of disposition as set out in Paragraph 8 below, immediately before the time of A’s death.

8. The following table details the proceeds of disposition and capital gains reported on Opco’s terminal T1 income tax return in respect of each class of Opco shares:

9. For greater certainty, no capital gains exemption was claimed on A’s terminal T1 return with respect to the shares of Opco nor has any person not dealing at arm’s length with A or F previously claimed a deduction under section 110.6 in respect of such shares or any shares which they were substituted for, within the meaning of subsection 248(5).
10. The Estate currently holds all the shares of Opco described in Paragraph 6 as capital property.
11. The Executors of the Estate are XXXXXXXXXX and XXXXXXXXXX. XXXXXXXXXX dealt at arm’s length with each of A and F during their lifetime and deal with each other at arm’s length. XXXXXXXXXX and XXXXXXXXXX are both residents of Canada.
12. In A’s Will, A bequeathed, as particular legacy, the XXXXXXXXXX that was owned by Opco to the XXXXXXXXXX. The XXXXXXXXXX is a charitable organization, registered on XXXXXXXXXX.
13. In A’s Will, A also bequeathed, as particular legacy, all the shares of Opco as well as other property he owned at the time of his death to the XXXXXXXXXX as the residual beneficiary of the Estate.

PROPOSED TRANSACTIONS

The following transactions will be implemented in the order presented unless otherwise noted.

14. The Estate will incorporate a new corporation (“Newco”) under Act1. Newco will, at all relevant times, be a CCPC and a TCC. The authorized share capital will be comprised of:

1. an unlimited number of voting (XXXXXXXXXX vote per share), fully participating Class A common shares (Class “A” common shares); and
2. an unlimited number of non-voting Class III preferred shares, that are redeemable, retractable, with a redemption value equal to the fair market value of the consideration received for such shares (Class “III” preferred shares).

15. The Estate will subscribe for XXXXXXXXXX Class “A” common share of Newco for $XXXXXXXXXX.
16. The Estate will transfer all of its Opco shares received as described in Paragraphs 6 and 7 to Newco, and in exchange, the Estate will receive the following consideration from Newco:

1. a non-interest bearing, demand, promissory note (“Newco Note 1”), having a principal amount and FMV equal to the lesser of the:
   1. aggregate FMV of the Opco shares described in Paragraph 6 at the time of the transfer; and
   2. aggregate ACB of the Opco shares described in Paragraph 6 at the time of the transfer,

less XXXXXXXXXX dollar ($XXXXXXXXXX); and

2. XXXXXXXXXX Class “III” preferred share of Newco having a FMV and redemption value equal to $XXXXXXXXXX.

The Estate and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Opco shares held by the Estate to Newco. The aggregate of the agreed amounts will be equal to the aggregate ACB of the Opco shares to the Estate immediately before these transfers, subject to paragraph 85(1)(c). For greater certainty, the agreed amount for each class of Opco shares so transferred will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), and will not be less than the amount described in paragraph 85(1)(b).

Newco will add a nominal amount to the legal stated capital account of the Class “III” preferred 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 of such shares having regard to paragraph 84.1(1)(a).

For greater certainty, the sum of the principal amount of the Newco Note 1 and the PUC of the Class “III” preferred shares of Newco issued as consideration for the Opco shares will not exceed the aggregate FMV of the Opco shares owned by A immediately before A’s death.

17. The terms of Newco Note 1 shall be as follows;

1. The Newco Note 1 shall be paid by Newco:
   1. no earlier than XXXXXXXXXX after its issuance and delivery to the Estate; and
   2. after the expiration of that XXXXXXXXXX period, any repayment shall be in an amount not greater than XXXXXXXXXX for every subsequent quarter year period; except
2. the terms and conditions shall permit repayment of an amount to the Estate (subject to the above-noted XXXXXXXXXX% limit) solely for the purposes of funding the tax liability owed by A in respect of the deemed disposition of A’s Opco shares, immediately before A’s death, at their FMV, pursuant to paragraph 70(5)(a).

18. Immediately following the transfer of the Opco shares by the Estate to Newco:

1. Opco will be a wholly-owned subsidiary of Newco; and
2. all of the issued and outstanding shares of Newco shall be owned by the Estate.

19. Opco will continue to carry on the Opco Business for at least the XXXXXXXXXX.
20. After a period of at least XXXXXXXXXX after the transfer of the Opco shares to Newco, Newco and Opco will perform a vertical amalgamation pursuant to Act1 to form Amalco in such a manner that:

1. all of the property (except any amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the amalgamation became property of Amalco by virtue of the amalgamation;
2. all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation, became liabilities of Amalco by virtue of the amalgamation; and
3. the authorized share capital of Amalco will be the same as Newco's authorized share capital. Moreover, the PUC and ACB of each class of shares that the Estate will hold in Amalco after the amalgamation will be equal to the PUC and ACB of the corresponding classes of issued and outstanding shares that the Estate held in Newco immediately prior to the amalgamation.

For greater certainty, the amalgamation of Opco and Newco to form Amalco will be governed by subsection 87(1).

21. In connection with the amalgamation of Opco and Newco described in Paragraph 20, Amalco will designate, in its return of income for its first taxation year, an amount under the provisions of subsection 87(11) and paragraphs 88(1)(c) and (d) and within the limits thereto, to increase the ACB of the capital property, other than ineligible property, previously owned by Opco. For greater certainly, such capital property consists only of the Real Estate described in Paragraph 3(a) which has been owned continuously by Opco, from a time that is immediately before the date of death of A until immediately prior to the amalgamation and the Real Estate (or any property acquired in substitution therefor) will not be acquired by a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Opco with Newco.
22. After the amalgamation of Opco and Newco, Amalco will begin to gradually repay to the Estate the Newco Note 1 over a period of at least XXXXXXXXXX. For greater certainty, the amount of the repayments in any given XXXXXXXXXX of that XXXXXXXXXX will not exceed XXXXXXXXXX% of the principal amount of Newco Note 1 when it was issued. Amalco may dispose of a portion of its Real Estate as described in Paragraph 3, in order to finance the repayments.

ADDITIONAL INFORMATION

23. The active XXXXXXXXXX that was carried on by Opco, as described in Paragraph 1 transitioned to a rental business (Opco Business) on A’s death. The XXXXXXXXXX is currently managed by the Trustees of the Estate. There will not be any material change to the Opco Business operations carried on by Opco before the amalgamation of Newco and Opco described in Paragraph 20 or by Amalco following the amalgamation.
24. Amalco may distribute to the Estate the XXXXXXXXXX as a partial repayment of the Newco Note 1. This will allow the Estate to XXXXXXXXXX in accordance with the wishes expressed in A’s Will. This repayment will not exceed the maximum repayment limit set out in Paragraph 22.

PURPOSE OF THE PROPOSED TRANSACTIONS

25. The purpose of the Proposed Transactions is to return to the Estate, an amount up to the FMV immediately before A’s death of the common and shares of Opco, while minimizing the inherent double tax exposure that can result from the application of subsections 70(5), 84(2) and 84(3).

RULINGS GIVEN

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

1. Section 84.1 will not apply to deem the Estate to have received a dividend from Newco, on the disposition to Newco of any of the Opco shares as described in Paragraph 16, provided that the aggregate FMV of the Newco Note 1 and the PUC of Class “III” preferred shares of Newco received as consideration for such Opco shares, immediately after the disposition, is equal to or less than the aggregate ACB of such Opco shares to the Estate, immediately before the disposition, as modified by paragraph 84.1(2)(a.1).
2. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem Opco to have paid, and the Estate to have received, a dividend on any of the Opco shares held by the Estate.
3. As a result of the application of paragraphs 88(1)(d.2) and (d.3), for the purposes of paragraphs 88(1)(c) and (d), Newco will be deemed to have last acquired control of Opco from an arm’s length person at the time immediately after the death of A.
4. The provisions of subsections 87(11) and 88(1) will apply to the amalgamation of Opco and Newco to form Amalco as described in Paragraph 20 such that:
   1. provided Amalco makes the appropriate designation as described in Paragraph 21, paragraphs 88(1)(c) and 88(1)(d) will apply to increase the cost basis of the Real Estate to the amount designated, which for greater certainty, will not exceed the maximum amount that could be added to the ACB for such Real Estate having regard to paragraph 88(1)(d) and provided the Real Estate will not be acquired by a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Opco and Newco; and
   2. paragraph 88(1)(b) will apply to deem Newco to dispose of its shares of Opco upon the amalgamation for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii).

5. 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 given subject to the limitations and qualifications set forth in Information Circular 70-6R10 issued on September 29, 2020, and are binding on the CRA, provided that the Proposed Transactions are completed no later than XXXXXXXXXX after the date of this letter.

The above rulings are based on the law as it reads at the date of this letter 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:

1. the FMV or ACB of any property referred to herein, or the PUC in respect of any share referred to herein;
2. the balance of the NERDTOH, ERDTOH, GRIP, CDA or any other tax account for any corporation described herein;
3. the Executor’s ability to complete the Proposed Transactions under the terms of the Will;
4. whether any person described herein deals, or does not deal, with any other person at arm’s length; or
5. any other tax consequence 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 distribution of any assets of the Estate, other than those specifically described in the rulings given above.

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, Price Adjustment Clauses.

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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