2020 Ruling 2019-0819191R3 F - Post-mortem planning - Pipeline -- summary under Subsection 84(2)

Background

The Corporation is a portfolio corporation, with ERDTOH and GRIP balances and no CDA, whose Class E and Class K non-voting discretionary redeemable retractable shares, and Class J special voting shares, were deemed to be disposed of on the death of A, a resident Canadian. The residuary beneficiaries of his estate were Trust 2, 3 and 4, being testamentary trust established by him for his daughter and her son and daughter. A resident family inter vivos trust (Trust 1), holds the Class A shares of the Corporation, which are non-voting non-dividend bearing shares with a right to participate on the Corporation’s winding-up.

Preliminary transactions

• Trust 1 sells its Class A shares of the Corporation to the estate.
• The estate effects a s. 51 exchange of its Class K shares for Class F non-voting discretionary redeemable retractable shares and Class A shares.
• The Corporation then redeems Class F shares, makes an eligible dividend designation respecting the resulting deemed dividend and elects under s. 164(6) for a capital loss to have been realized in A’s terminal return.
• The estate distributes the Class J shares to Trusts 2, 3 and 4 qua residuary beneficiaries,
• The Corporation lends a sum to the estate (the “Corporation Advance”) sufficient to fund the payment of income taxes for A’s terminal year. The interest thereon will be paid at the time of the transfer of Note 1 by the estate to the Corporation in 2 below.

Proposed transactions

1. The estate will transfer its Class A and Class E shares of the Corporation to a newly-incorporated corporation (“Newco” – whose voting common shares are held by it) in consideration for Class A common shares and a Newco and two non-interest-bearing notes (“Note 1” and “Note 2”), electing under s. 85(1).
2. The estate will then transfer Note 1 to the Corporation, which will be accepted by the Corporation as absolute payment of the Corporation Advance.
3. Trusts 1, 2 and 3 will transfer their Class J shares of the Corporation to Newco in consideration for Class F shares of Newco, electing under s. 85(1).
4. After the passage of a specified minimum period (during which the Corporation will continue to carry on its business), the Corporation will be wound-up into Newco under s. 88(1), with Note 1 being extinguished by operation of law.
5. Thereafter, Newco will commence to repay Note 2.

Rulings

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