Principal Issues: Questions with respect to rulings no. F 2002-0154223 and F 2005-0142111R3, which dealt with post mortem planning. The purpose of this type of planning was to bring back progressively at the shareholder level property of a corporation the fair market value of which would correspond to the adjusted cost base to the shareholder, for the purposes of section 84.1, of the shares of the capital-stock of the corporation. In each of the rulings mentioned above, it is indicated that the corporation would remain a separate and distinct entity for a period of at least one year, and that such corporation would continue to carry on its business during such period in the same manner than before. Question as to why the CRA is requiring these conditions. Whether the CRA would accept a shorter period. Whether the period referred to above has been "administratively" determined by the CRA.
Position: In the two files mentioned, the Rulings Directorate has issued favourable rulings on the non-application of section 84.1, 84(2) and 245(2). These rulings have been issued based on the facts and circumstances surrounding the situations examined. The fact that the corporation would remain a separate and distinct entity for a period of at least one year and that such corporation would continue to carry on its business during such period in the same manner than before were part of the proposed transactions submitted by the taxpayers involved and as such, cannot be considered as "requirements" from the CRA. However, these elements have contributed to the issuance of favourable rulings with respect to the non-application of subsection 84(2). Finally, CRA's position is to rule on the potential application of section 84.1, subsection 84(2) and subsection 245(2) on a case by case basis, after a review of all the facts and circumstances surrounding a specific situation.
Reasons: Wording of the Act and previous positions.
2006-017064 XXXXXXXXXX S. Prud'Homme (613) 957-8975 June 29, 2006
Dear Sir,
Subject: Application of subsection 84(2) of the Income Tax Act
This is in response to your letter of January 23, 2006, in which you requested additional information concerning certain elements of the advance rulings numbered F 2002-0154223 and F 2005-0142111R3 (the "Advance Rulings").
Unless otherwise indicated, all statutory references herein are to provision of the Income Tax Act (the "Act").
1) Your Comments
You indicated in your letter that under the terms of the Advance Rulings, the Canada Revenue Agency ("CRA") confirmed that the postmortem plans described in those documents are not subject to subsection 84(2) or 245(2).
Those Advance Rulings state that the purpose of the proposed transactions is to gradually bring into the hands of a legatee property of a particular corporation having a fair market value equal to the adjusted cost base to that legatee, for the purposes of section 84.1, of shares of the capital stock of the particular corporation.
You point out that the Advance Rulings state that the particular corporation will remain a separate legal entity (i.e. that it will not be wound up into another corporation or amalgamated with another corporation) for a period of at least one year. It is also stated that, during this same period, the particular corporation will continue to operate its business in the same way as in the past. Finally, you point out that this type of postmortem planning is particularly advantageous where the subsection 164(6) election cannot be made. Indeed, a transaction of the type described in the Advance Rulings allows you to avoid a form of double taxation at the level of the deceased and the estate. In that regard, you are of the view that the requirement in subsection 164(6) that the estate dispose of capital property and incur a capital loss in its first taxation year too often has the effect of rendering this legislative provision inapplicable. You are of the view that subsection 164(6) should be amended to take into account dispositions of capital property by an estate and losses incurred by the estate in the estate's first three taxation years.
2) Your Questions
You wish to know why the CRA requires, in a transaction of the type described in the Advance Rulings, that the particular corporation remain a separate legal entity and continue to carry on business for at least one year.
You also wish to know whether a shorter period would be acceptable, and whether the "period of at least one year" referred to above is a period that would have been determined "administratively" by the CRA.
3) Our Comments
This Directorate has issued favourable advance rulings on the non-application of section 84.1, subsection 84(2) and subsection 245(2) in the two cases to which you referred. Those favourable advance income tax rulings were rendered on the basis of the particular facts and circumstances of each of the situations analyzed.
As you indicated, one of the important elements of those files was that the particular corporation remained a separate legal entity (i.e. that it was not wound up into another corporation or amalgamated with another corporation) for a period of at least one year and that, during that same period, the particular corporation continued to carry on its business in the same manner as before. The advance income tax rulings also provided that after the above-described period, the particular corporation was wound up into a newly incorporated corporation of which the legatee was a shareholder. Finally, the advance income tax rulings indicated that the newly incorporated corporation progressively distributed assets to the legatee, either as repayment of the principal of a note or as a reduction of the paid-up capital relating to shares of its capital stock. In that regard, it should first be noted that the items described in the preceding paragraph were part of the proposed transactions submitted by the taxpayers involved and cannot be characterized, strictly speaking, as a "requirement" of our Directorate. We acknowledge, however, that those elements contributed to this Directorate's conclusion that subsection 84(2) did not apply.
Furthermore, our Directorate's position is to decide on the potential application of section 84(2), section 84.1 or section 245(2) on a case-by-case basis, after a full review of all the facts and circumstances relating to a particular situation.
In closing, you made some comments with respect to subsection 164(6). As you know, the responsibility for developing tax policy and amending the Act lies with the Department of Finance. If you wish to make representations concerning amendments to the Act, you may send your comments to the Department of Finance, Tax Policy Branch, Tax Legislation Division, L'Esplanade Laurier, 140 O'Connor Street, 17th Floor, East Tower, Ottawa, Ontario, K1A 0G5.
We apologize for the delay in responding to your request. We hope that our comments will be of assistance.
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch