2019 Ruling 2019-0822951R3 F - Post-mortem Hybrid Pipeline -- summary under Subsection 84(2)

Background

On the death of Mr. X, he was deemed to have realized a capital gain on his Class A (common) shares of ACo (a CCPC portfolio company holding inter alia shares of public corporations) under s. 70(5)(a). He also held Class B and C preferred shares with a paid-up capital equalling their retraction amounts. He had never claimed the s. 110(2.1) deduction, and the tax-free zone had no relevance to his shares.

Preliminary transactions

• After redeeming the Class B and C preferred shares through the issuance of demand promissory notes (with no resulting deemed dividend or capital gain to the estate), ACo will purchase for cancellation (in consideration for issuing a demand promissory note) a sufficient such number of its Class A shares to result in a refund of its eligible refundable dividend tax on hand, or its non-eligible refundable dividend tax on hand, balances.
• The executors will carry back the resulting capital loss under s. 164(6), with s. 40(3.61) thereby precluding the application of the s. 40(3.6) stop loss rule.
• ACo will then declare and pay (through the issuance of a demand promissory note) a capital dividend to the estate.

Proposed transactions

1. The Estate will transfer its remaining Class A shares (electing under s. 85(1)) to a newly-incorporated corporation formed by it (“Newco”) in consideration mostly for a note (the “Note 6”) with a principal amount and FMV equal to the lesser of such shares’ current FMV and their (stepped-up) ACB, and for a Class A (common) share of Newco. ACo will continue to carry on its marketable securities business for at least a specified number of months following such transfer.
2. ACo will partially repay the notes referred to above (other than Note 6, which will not be repaid for a specified number of months following the commencement of the proposed transactions) in order to pay estate income tax and make specific bequests – but not so as to result in a winding-up, discontinuance or reorganization of its business.
3. After a specified number of months have elapsed from such transfer, ACo will amalgamate with Newco to form Amalco as described in s. 87(1), or will be wound up into Newco as described in s. 88(1).
4. Thereafter, Amalco will begin repaying Note 6, at a rate not exceeding a specified amount per quarter.
5. At an appropriate juncture, the estate will distributed its assets.

Rulings

Standard ss. 84.1, 84(2) and 245(2) rulings.