Background
On A’s death, he owned appreciated common and redeemable retractable preference shares and a non-interest-bearing demand promissory note (the “ACo Debt”) of ACo (which had a marketable securities business). No s. 110.6 deduction will have been claimed respecting the ACo shares by A or a non-arm’s length person; and no V-Day basis is included in their ACB. A’s will provided for the division and distribution of his ACo shares equally to the Beneficiaries (his children).
Proposed transactions
- ACo Debt will be repaid.
- The Estate will transfer its remaining ACo Shares (electing under s. 85(1)) to a newly-incorporated corporation formed by it (“Newco”) in consideration mostly for a note (the “Newco Note”) with a principal amount and FMV equal to the lesser of such shares’ current FMV and their FMV on A’s death, minus the redemption amount of the Class A Newco Preferred Shares which are issued by Newco as the balance of the consideration. ACo will continue to carry on its marketable securities business for at least 12 months following such transfer during which time ACo will pay dividends approximating ACo’s after –tax net income.
- After 12 months have elapsed from such transfer, ACo will amalgamate with Newco to form Amalco as described in s. 87(1). Amalco’s authorized share capital, as well as the PUC and ACB of each of its outstanding share classes, will be the same as Newco’s.
- Amalco will begin repaying the Newco Note owing to the Estate, but “for greater certainty, the amount paid in any single quarter of the first year that the Newco Note is outstanding after the amalgamation will not exceed 15% of the principal amount of the Newco Note when it was first issued.”
- Amalco will continue to carry on the business, but will sell some of its marketable securities to fund Newco Note repayments.
Rulings
Standard ss. 84.1, 84(2) and 245(2) rulings.