Principal Issues: Post-mortem "bump" transactions and when control last acquired for the purposes of paragraph 88(1)(c).
Position: Will rule on a case-by-case basis.
Reasons: Question of fact.
May 9, 2006
CALU - Conference for Advance Life Underwriting (2006)
Question 8
When Control Last Acquired for Purposes of Post-Mortem s.88(1)(c) Bump
Steps are sometimes taken after the death of an individual who controls a corporation to increase the adjusted cost base (ACB) of the corporation's non-depreciable capital property. Such steps generally involve the transfer of the shares of the old corporation that were owned by the deceased to a new corporation, winding up the old corporation, and making designations under paragraph 88(1)(d) in respect of some or all of the eligible property of the old corporation. These steps could be implemented by the estate or by the beneficiaries to whom the shares are distributed by the estate. Generally, this tax planning technique achieves the intended result only if paragraphs 88(1)(d.2) and (d.3) deem the new corporation to have last acquired control of the old corporation immediately after the death of the individual. Similar tax planning may also be considered where shares are held in an alter ego trust, a spousal trust, or a joint spousal or common-law partner trust. The bump would be implemented after the death of the individual who is the initial income beneficiary of the alter ego, spousal or common-law partner trust, or the death of the last to die of the individuals who are the initial income beneficiaries of the spousal or common-law partner trust. However, it is unclear in these types of situations whether paragraphs 88(1)(d.2) and (d.3) would deem the new corporation to last acquire control of the old corporation on the death of the relevant individual.
Question:
While we understand that the CRA has provided some favourable rulings on the above types of situations we would appreciate the CRA's current views on the proper interaction of paragraphs 88(1)(d.2) and (d.3).
Agency's Response
It is our understanding that the current tax policy of paragraphs 88(1)(d.2) and (d.3) is to treat an acquisition of control of a subsidiary corporation that arises solely because of an acquisition of shares of the corporation as a consequence of the death of an individual as being similar to that of an acquisition of control of a corporation that arises on a true arm's length takeover of the corporation for the purposes of paragraphs 88(1)(c) and (d) (the "bump rules").
CRA has considered the application of these provisions in the past in situations similar to those described above. In each of the situations where we have ruled favourably, the particular transactions in question did not violate our understanding of the underlying tax policy of the bump rules at the time such transactions were undertaken, such that the particular parent corporation was considered to have "last acquired control" of the particular subsidiary corporation for the purposes of paragraphs 88(1)(c), (d) and (d.2) at the time immediately after the particular individual's death.
While we agree that the wording of paragraph 88(1)(d.2) makes it somewhat difficult to ascertain what the appropriate result should be in all circumstances, we are prepared, on a case-by-case basis, to continue to provide rulings on post-mortem "bump" transactions where all relevant facts are identified and the particular transactions in question do not, in our view, contravene our understanding of the current tax policy of the bump rules.