2017 Ruling 2016-0670871R3 - Post-mortem pipeline -- summary under Subsection 84(2)

Background

On A’s death, he owned appreciated common and preference shares of PCo, which operated a business of dealing and investing in marketable securities (bonds, shares and cash), and also held a life insurance policy on A’s life and an illiquid note owing by a company owned directly or indirectly by A’s children. No s. 110.6 deduction will have been claimed respecting the PCo shares by A or a non-arm’s length person; and no V-Day basis is included in their ACB.

Application of life insurance proceeds

Within a year of the death, PCo purchased for cancellation a portion of its common shares held by the Estate (which had been stepped up under s. 70(5)(b)) in consideration for a note, elected under s. 83(2) on the resulting deemed dividend and used the insurance proceeds and other cash to repay the note. The Estate will report a capital loss equal to the difference between the proceeds of disposition of such common shares (determined pursuant to para. (j) of the definition thereof) and the ACB of such shares, less the adjustments under subsection 112(3.2); and the executor will elect under s. 164(6) so that such capital loss will be deemed to be a capital loss of A in A’s terminal year.

Proposed transactions

1. The Estate will incorporate Newco and subscribe for 100 Newco Common Shares for $100.
2. The Estate will transfer its remaining PCo Shares (electing under s. 85(1)) to Newco in consideration mostly for a note (the “Newco Note”) with a principal amount and FMV equal to the lesser of such shares’ current FMV and their FMV on A’s death, minus $100. As additional consideration, it also will receive 100 Class A Newco Preferred Shares with a stated capital of $100, and a redemption value and FMV of $100 plus any appreciation in the remaining PCo Shares from A’s death to such transfer date.
3. PCo will continue to carry on its marketable securities business for at least 30months following the transfer in 2 above.
4. After 30 months have elapsed from such transfer, PCo will amalgamate with Newco to form Amalco as described in s. 87(1). Amalco’s authorized share capital, as well as the PUC and ACB of each of its outstanding share classes, will be the same as Newco’s.
5. Amalco will begin repaying the Newco Note owing to the Estate, but “for greater certainty, the amount paid in any single quarter of the first year that the Newco Note is outstanding after the amalgamation will not exceed 15% of the principal amount of the Newco Note when it was first issued.”
6. Amalco will continue to carry on the business, but will sell some of its marketable securities to fund Newco Note repayments.

Rulings

Standard ss. 84.1, 84(2) and 245(2) rulings.