2019 Ruling 2019-0793281R3 F - Post-mortem Hybrid Pipeline -- summary under Subsection 84(2)

Background

On the death of Mr. X, he was deemed to have disposed at a capital gain of his shares of two holding companies (Corporation A and B) and his voting non-participating shares of Corporation C, which carries on a business and all of whose non-voting participating shares were held by Corporation A. The beneficiaries of his estate were three testamentary trusts (perhaps for children and issue). Mr. X also held by Class E preferred shares of Corporations D (a holding company), whose participating shares were held by Trust 1

Proposed transactions

1. Corporations A and B will purchase for cancellation a portion of its voting participating shares in consideration for notes, thereby generating a deemed dividend and a dividend refund of their respective RDTOH balances. Corporation A will also purchase for cancellation, in consideration for a note, a further portion of its voting participating shares so as to give rise to a deemed dividend that is elected to come out of its capital dividend account. The estate will elect under s. 164(6) to treat the resulting capital loss to the estate as a capital loss of Mr. X
2. The estate will transfer its remaining shares of Corporations A and B to a newly-incorporated corporation (“Newco”) in consideration for notes and shares of Newco, electing under s. 85(1).
3. Corporations A and B will not amalgamate with Newco or be wound-up into Newco until XX months have passed, but in the meantime may pay off the notes referred to in 1 above.
4. On the amalgamation or winding-up, the parent or amalgamated corporation (either, “Amalco”) will designate an amount to increase the ACB of the shares of Corporations D and other proprety, in order to benefit from such bump on any eventual sale. “However, no property will be acquired by a person described in subclause 88(1)c)(vi)(B)(I), (II) or (III) in the course of the following series: the transactions or events which include the amalgamation …. or winding-up … .” (TaxInterpretations translation).
5. Amalco will progressively over various years repay the notes issued in 2 above, with repayments not exceeding XX% of the principal of the respective notes Although Amalco will continue to carry on the business of Corporations A and B, it will sell securities to fund such repayments
6. After completing the above transactions, Amalco’s directors will wind it up, with ss. 88(2) and 84(2) thereby applying.

Rulings

Including re ss. 84(2) and 84.1.