The estate of B gifts her shares of a portfolio holding company (“Holdco”) with an RDTOH Balance to a private foundation, with Holdco thereafter using its liquid assets to redeem the common shares held by the private foundation. The balance of the Holdco shares were held before B’s death in a spousal trust, whose terms in the wills of B’s deceased husband (A) provided that the residue (including such shares) was to be transferred to the Foundation on B’s death.
CRA ruled that s. 129(1.2) would not deny a dividend refund to Holdco on the deemed dividend arising on the redemption of the shares that had been gifted to it. However, it also opined that any dividend or deemed dividend that is paid on the Holdco shares that had been transferred to the Foundation out of the residue of the spousal trust will be deemed by s. 129(1.2) not to be a taxable dividend for s. 129(1) purposes. The CRA summary states:
The main purpose test in subsection 129(1.2) is not met where the estate transfers the shares of the holding company to the foundation because subsections 118.1(4.1) and (5), as amended by Budget 2014 second bill, do not apply to the estate. However, we are of the view that subsection 129(1.2) would apply to the transfer of shares held by the spousal trust to the foundation. Similarly, we are of the view that subsection 129(1.2) might have applied had the surviving spouse’s death occurred after 2015 as the estate would then have been governed by the amended wording of subsections 118.1(4.1) and (5).