An individual exchanges preferred shares received in the course of a previous estate freeze for newly-issued preferred shares with a redemption amount equal to the current (lower) equity value of the underlying corporation
If s. 74.4(2) applied to the original estate freeze, the preferred shares received on the refreeze do not reduce the “outstanding amount” (as determined under s. 74.4(3)) on which the deemed interest benefit is computed under s. 74.4(2).
Furthermore, if the refrozen preferred shares are redeemed, the “outstanding amount” is only reduced to the extent of the value of those shares, leaving a potential indefinite “outstanding amount” on which the corporate attribution rules could continue to generate deemed interest income. Does CRA agree?
CRA agreed with the above analysis (but noted that usually an estate-freeze would be structured to avoid s. 74.4(2), e.g. by meeting the requirements of s. 74.4(4).)
Confirming the first point, CRA indicated that if an estate freeze is subject to s. 74.4(2), the deemed interest benefit is computed based on the outstanding amount determined under s. 74.4(3), and the shares received on the refreeze constitute excluded consideration as defined in s. 74.4(1) – so that such consideration does not reduce the outstanding amount under 74.4(3).
Confirming the second point, CRA agreed that the redemption of refrozen shares for cash consideration would reduce the outstanding amount, but only to the extent of the FMV of those shares. However, the corporate attribution rules would cease to apply, for example, when the children were no longer minors.