After noting that in 2018-0767431R3, the amount of the pipeline note paid in any single quarter in the first post-amalgamation year was not to exceed 15%, and in 2018-0780201R3, this percentage was 10%, the questioner asked whether, under a typical pipeline transaction, what are the limitations on the repayment terms for the pipeline note, and what is the maximum percentage of the principal amount of the note that can be repaid per quarter or per annum, in order for s. 84(2) to not apply? After referencing the breadth of s. 84(2) as interpreted in MacDonald, CRA stated:
[W]e continue to receive ruling requests whereby the taxpayers’ proposed transactions, include, among other things, the continuation of the original corporation’s business for a period of at least one year following the implementation of the pipeline structure, followed by a progressive distribution of the original corporation’s assets over an additional period of time.
As noted in your question, we have issued favourable subsection 84(2) rulings in the post-mortem pipeline context when the proposed repayment terms of the Pipeline Note have varied.
These repayment terms have been and continue to be part of the proposed transactions submitted by taxpayers, and as such, cannot be considered to be requirements stipulated by our Directorate.
Also asked: is it permissible for the creditor of the pipeline note (e.g., the estate) to borrow funds from the debtor (the corporation) in order to pay its liabilities (e.g., for taxes) during the period in which the note is being repaid? CRA noted:
We have issued favourable subsection 84(2) rulings in the post-mortem pipeline context when a separate note is issued either before or as part of the proposed transactions. An example of this is in a “hybrid pipeline” transaction, in which a partial subsection 164(6) plan is undertaken prior to the pipeline transaction in order for the estate to access certain tax attributes of the corporation, such as the capital dividend account or refundable dividend tax on hand, in addition to the corporate property. In some instances, a note was issued by the corporation to the estate as consideration for the redemption of a portion of its shares held by the estate; and some of the proposed transactions contemplated the corporation liquidating some of its assets in order to repay this note before the Pipeline Note is repaid. See for example: 2010-0377601R3 and 2015-0606721R3. In those rulings, corporate property was not distributed to the estate on the wind-up, discontinuance or reorganization of the business of the corporation. Furthermore, one of the factors that the CRA considered when accepting these “hybrid pipeline” transactions is the fact that the deemed dividend provisions in subsection 84(3) applied on the redemption of the shares in the corporation held by the estate.