2018 Ruling 2018-0765411R3 F - Subsection 104(4) and Pipeline Transaction -- summary under Subsection 84(2)

Background

Trust1, which is a resident inter vivo trust (whose beneficiaries are family members consisting of Indvidual1, who apparently is resident in Canada, and others who might not be resident in Canada) holds preferred shares of three Canadian-controlled private corporations (“CCPCs”) (Opco1, Opco2 and Opco3), cash, a Canadian condo and certain other assets. The assets of Opco1 are mainly rental properties and shares of subsidiaries. Opco1’s other shareholders are Trust3 (holding non-voting participating shares and non-voting redeemable discretionary-dividend shares), Indvidual1 (holding special voting shares), Trust2 (holding non-voting redeemable retractable preferred shares) and Holdco (holding non-voting redeemable discretionary-dividend shares).

Proposed transactions

1. Trust1 will distribute all of its assets to Indvidual1 excepting its shares of Opco1 pursuant to s. 107(2).
2. On the 21^st anniversary of its formation, Trust1will realize a capital gain under s. 104(4)(b)(ii) on the deemed disposition of its Class C non-voting redeemable retractable preferred shares of Opco1 shares of a Canadian controlled private corporation, and will include the resulting taxable capital gain in its income for the year.
3. The other shareholders of Opco1 will transfer their shares to a newly-formed CCPC (Newco) on a s. 85(1) rollover basis, taking back shares of Newco.
4. Concurrently with 3, Trust1 will transfer its shares of Opco1 to Newco for Newco in consideration for Class C shares of Newco with full PUC, electing under s. 85(1) at the transferred shares’ stepped-up ACB.
5. The activities of Opco1 will be maintained over the years, and after one year Newco and Opco1 will amalgamate to form Amalco, whose share capital will replicate that of Newco.
6. Thereafter, Aamlco will begin to progressively (over a period of XX) redeem its Class C shares, with the redemption proceeds paid partly with the profits generated by Opco1 subsequently to the pipeline transaction.
7. Such redemption proceeds will be distributed by Trust1 to its beneficiaries.

Rulings

Re ss. 84.1, 84(2) and 245(2).