2020 Ruling 2019-0824211R3 F - Post-mortem Hybrid Pipeline -- summary under Subsection 84(2)

Background

On A’s death, A (a Canadian resident) held all the outstanding shares of Opco, being Class A common shares and Class E preferred shares, and also held all the shares of Holdco (a portfolio company), being Class A shares. Following the death of A, the executors continued to carry on the business of Opco, but then Opco sold the assets of that business including goodwill to a third party. The shares of Opco and Holdco (which did not qualify for the capital gains deduction) were bequeathed to Child, a resident, but to be held in trust as Child had not attained a specified age.

Preliminary transactions

Opco redeemed Class E shares in consideration for Note 1 and designated the resulting deemed dividend as an eligible dividend, with the estate carrying back the resulting capital loss to it under s. 164(6).

The estate exchanged its Class A shares of Opco, and of Holdco, under s. 51 for non-voting non-cumulative retractable Class F shares of Opco and Class A shares of Opco.

Opco and Holdco then redeemed the Class F shares for Note 2 and Note 3, respectively, and designated the resulting deemed dividend as an eligible dividend, and with the resulting capital losses being carried back by the estate under s. 164(6).

Notes 1, 2 and 3 were then paid off.

Opco redeemed further Class F shares for Note 4, with the resulting deemed dividend elected to be a capital dividend, and with the resulting capital losses being carried back by the estate under s. 164(6).

Opco and Holdco amalgamated to form Opco 2, with the issued share capital of Opco consisting of Class A shares.

Opco 2 adopted a policy for the growth of its capital.

Proposed transactions

1. The estate will transfer its Class A shares of Opco 2 to a corporation newly incorporated by it (“Newco”) in consideration for a note (“Note 5”) and for Class B non-voting redeemable retractable shares, electing under s. 85(1) and with a price adjustment clause.
2. During the specified period following this transfer, Opco 2 will pay dividends to Newco up to the amount of its after-tax net income. Opco 2 will continue to carry on its business of managing investments and not change its investment policy.
3. At the end of that period, Opco 2 and Newco will amalgamate to form Amalco.
4. Thereafter, Amalco will progressively repay Note 5 at a specified rate.
5. Amalco will thereafter be wound-up, so that ss. 84(2) and 88(2) will apply.

Rulings

Re ss. 84.1, 84(2) and 245(2).