2017 Ruling 2016-0629511R3 - Post-Mortem Planning and Extraction of "Hard ACB" -- summary under Subsection 84(2)

Background

A (a Canadian resident like the other persons mentioned), who is the residuary beneficiary of the estate of C (“Trust C”) and also Trust C’s executor, holds shares of Opco 1 whose ACB is attributable in part to V-Day basis and in part to “Hard ACB” resulting from the application of s. 70(5) on C’s death, and likewise for A’s common shares of Opco 3 except that a portion of their ACB also is attributable to an s. 110.6 deduction claimed by C immediately before her death. A also holds an interest in a rental property (“Property 2”).

B has Hard ACB in her shares of Opcos 4, 5 and 6 resulting from the application of s. 70(5) respecting the death of E in addition to ACB respecting V-Day basis or the capital gains deduction (and somewhat similarly for B’s shares of Opco 2 and shares held by Trust D&E, described below) - and also has an interest in Property 2. Trust D&E is a spousal trust that came into existence upon the death of E, the late husband of D and whose Trustees are A and B.

Proposed transactions

1. Newco 2 and 3 will be incorporated, with B subscribing for Class A voting preferred shares and Class G common shares of Newco 2 and Class C voting preferred shares of Newco 3.
2. B and Trust D&E will transfer their interests in various rental properties to Newco 3 under s. 85(1) for consideration including Class A common shares.
3. B will transfer various Opco shares and her Newco 2 common shares to Newco 2 under s. 85(1) in consideration for a non-interest-bearing demand promissory note equalling most of the Hard ACB of the transferred shares, and for Class B preferred shares of Newco 2 as to the balance – and similarly for Trust D&E.
4. Newco 1 will be incorporated, with A subscribing for Class A voting preferred shares and Class G common shares.
5. A and Trust C will transfer their interests in rental properties to Newco 3 under s. 85(1) for consideration including Class A common shares.
6. A will transfer his Opco 1 shares and his common shares of Opco 2, Opco 3 and Newco 3, to Newco 1 under s. 85(1) in consideration for a non-interest-bearing demand promissory notes equalling most of the Hard ACB of the transferred shares, and for Class B.1 or Class B.2 preferred shares of Newco 1 as to the balance.
7. Trust C will transfer its Class A common shares of Newco 3 to Newco 1 under s. 85(1) in consideration for a non-interest-bearing demand promissory note equalling most of the Hard ACB of the transferred shares, and for Class C preferred shares of Newco 1 as to the balance.
8. Newco 1 and Opco 1 will not be amalgamated, nor will Opco 1 be wound-up into Newco 1 for a period of at least one year following the transfer of the Opco 1 shares. Opco 1 will continue to operate the business in the same manner as before.
9. In XXXX, Newco 1 will repay to A an amount not exceeding $X of the promissory note issued in 6 respecting the Opco 1 share transfer. After this payment, it is not envisioned that A would seek any repayment of the notes issued in 6 before XXXX. Moreover, the amount of the repayment, if any, in the year ending XXXX will not exceed XX% (inclusive of the $X already repaid) of the sum of the original principal amount of such notes.

Rulings

S. 84.1 will not apply to deem A to have received a dividend from Newco 1 on the share transfers in 6 provided that the FMV, immediately after the transfers, of the notes received therefor by A is equal to or less than the ACB to A of the transferred shares as modified by ss. 84.1(2)(a) and (a.1).

S. 84(2) will not apply to deem A to have received a dividend on the common shares of Opco 1 and Opco 3 held by A.