2022-0928291C6 STEP 2022, Q. 7 - paragraph 88(1)(d.3)

Principal Issues: Whether document 2009-0350491R3 represents the CRA's current views on the application of paragraph 88(1)(d.3); 2) Whether the deemed reacquisition, pursuant to subsection 104(4), of shares of the capital stock of a corporation wholly-owned by an alter ego trust on the death of the settlor results in an acquisition of control of the corporation in circumstances described in paragraph 88(1)(d,3).

Position: 1. Yes - document 2009-0350491R3 represents the current views of the CRA; 2. No.

Reasons: 1. No change in CRA’s position; 2. See below.

Author: Boychuk, Daryl
Section: 88(1)(d.3)

2022 STEP CRA Roundtable – June 15, 2022

QUESTION 7. Paragraph 88(1)(d.3) “as a consequence of the death of an individual”

Paragraph 88(1)(d.3) of the Income Tax Act (the “Act”) states that “for the purposes of paragraphs 88(1)(c), (d) and (d.2), where at any time control of a corporation is last acquired by an acquirer because of an acquisition of shares of the capital stock of the corporation as a consequence of the death of an individual, the acquirer is deemed to have last acquired control of the corporation immediately after the death from a person who dealt at arm's length with the acquirer”.

In 2010, the CRA issued an advance tax ruling described in document 2009-0350491R3 dealing with the availability of a section 88 bump to a series of transactions involving property owned by a subsidiary of an alter ego trust immediately after the death of the settlor. It was stated that among the reasons for granting the ruling was that the parent corporation seeking the bump, another subsidiary of the alter ego trust, acquired control of the subsidiary as a consequence of the death of the settlor of the alter ego trust because the shares of the subsidiary were acquired by the parent corporation pursuant to the terms governing the alter ego trust which imposed an equitable obligation on the trustees to transfer the shares of the subsidiary to the parent on the death of the settlor.

1. Does this continue to be CRA’s position and as a consequence the provisions of paragraph 88(1)(d.3) would apply to the parent in these circumstances?

2. Does the deemed reacquisition, pursuant to subsection 104(4) of the Act, of the shares of a corporation wholly-owned by an alter ego trust on the death of the settlor of the alter ego trust result in an acquisition of control of the corporation by the alter ego trust as “a consequence of the death of an individual” for purposes of paragraph 88(1)(d.3)?

CRA Response

1. The CRA has not modified its views on the application of paragraph 88(1)(d.3) of the Act in the circumstances described in document 2009-0350491R3.

2. Where subsection 104(4) of the Act applies to deem a trust to have disposed of and reacquired shares of the capital stock of a wholly-owned corporation, the deemed reacquisition of the shares pursuant to this subsection would not, in itself, result in an acquisition of control of the corporation. While such shares are deemed, for tax purposes, to be reacquired by the trust at their fair market value, the shares continue to be legally owned by the trust. Thus, there is no transfer of the legal ownership of those shares in circumstances that would result in an acquisition of control.

Daryl Boychuk
2022-092829

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