In a post-mortem “pipeline” transaction, a Canadian resident estate (the “Trust”) has full ACB and low paid-up capital in shares of a Canadian-resident private corporation (“Canco”), which it transfers to a non-arm’s length Canadian resident corporation (“Holdco”) for a note (the “Note”). If the Trust has a non-resident beneficiary, such non-resident beneficiary would be deemed to receive a certain proportion of any non-share consideration (the Note) received by the Trust on the disposition of the Canco low paid-up capital shares, resulting in a dividend deemed to be received by the non-resident beneficiary. Would the CRA seek to apply s. 212.1 based on a technical application of the look-through rules?
CRA indicated that, under s. 212.1(6)(b)(i), there will be a deemed disposition by each non-resident beneficiary, based on the fair market value of the beneficiary’s interest in the trust, divided by the fair market value of all the direct interests in the trust. Under s. 212.1(6)(b)(ii), each non-resident beneficiary will be deemed to have received consideration other than the shares of the purchaser corporation, and that consideration received will, again, be equal to the proportion of their interest in the trust. If that amount exceeds the PUC of the disposed-of shares, and all the conditions of s. 212.1(1) have been met for the non-resident beneficiary, that amount in excess of the PUC would generally be a deemed dividend under s. 212.1(1.1).
Notwithstanding the recent comfort letter, the above answer would still be relevant for non-GRE trusts.