2019 Ruling 2018-0789911R3 F - Post-mortem Pipeline -- summary under Subsection 84(2)

Background

On the death of A, he was deemed to have disposed of his shares of Realco (but with no capital gain resulting), and of his Class A and C shares (being qualified small business corporation shares) of a holding company for Realco (Holdco), with the capital gains deduction under s. 110.6(2.1) being expected to be claimed as to a portion of the capital gain on such disposition of the Class A shares, and the capital gains deduction already having been used in part in a crystallization transaction respecting the Class C shares, of Holdco. Realco had other shareholders as well.

Proposed transactions

1. Realco will pay a stock dividend consisting of Class F preferred shares, thereby reducing its accumulated profits and safe income attributable to its common shares by the amount of the dividend.
2. Realco will use the proceeds of a bank loan (Loan 1) and of the sale of marketable securities and cashing in of term deposits to redeem the Class F preferred shares held by Holdco (so that Loan 1 replaces the capital represented by the Class F preferred shares whose redemption it funded).
3. Holdco will lend such funds to a corporation newly incorporated by the Estate of A (“Newco”) for a non-interest-bearing demand promissory note.
4. Realco will make an interest-bearing loan to Newco pursuant to a demand note.
5. Newco will acquire the shares of Holdco for cash consideration funded as described in above, for a note and for Class B non-voting redeemable retractable preferred shares of Holdco (whose paid-up capital is limited in accordance with s. 84.1(1)(a)), with a s. 85(1) election being made.
6. Realco will use the proceeds of a second bank loan (Loan 2) to redeem the Class F preferred shares held by the other shareholders (so that Loan 2 replaces the capital represented by the Class F preferred shares whose redemption it funded).
7. At a specified juncture, Newco and Holdco will amalgamate to form Amalco and in the course of which Amalco will bump the cost amount of its shares of Realco pursuant to ss. 87(11) and 88(1)(d), and with the loan that Holdco made to Newco being settled pursuant to s. 80.01(3).
8. Amalco will continue to carry on its business, and it (or Newco) will repay the loan made in 4 above out of dividends received from Realco out of the accumulated profits of Realco.
9. The marketable securities held by Holdco on the date of death of A will be progressively liquidated.

Purpose of transactions

[T]he main purpose of the Proposed Transactions … is to progressively place in the hands of A's heirs certain property whose FMV corresponds to the ACB resulting from the application of subsection 70(5), to the Estate, of the Holdco Shares that were acquired as a result of A's death. Furthermore, the purpose of the Proposed Transactions is also to fund the taxes resulting from the application of subsection 70(5) on A's death to the Holdco Shares with funds from a bank loan and from Realco. [TaxInterpretations translation]

Rulings

Including re ss. 84(2), 84.1 and 20(1)(c).