Background
On the death of the deceased, there was a deemed disposition at FMV of all the Class A common shares of Opco, which is a CCPC with a business and ERDTOH, NERDTOH and GRIP balances. The capital gains exemption was claimed. The Estate Beneficiary is a Canadian resident. To assist the Estate with funding the Deceased’s terminal T1 income tax liability, the Estate transferred land and buildings owned by it to Opco on a s. 85(1) rollover basis in consideration for a demand, non-interest bearing promissory note (“Note 1”) of Opco and Class C preferred shares of Opco, with Opco then borrowing under a mortgage and repaying Note 1.
Proposed transactions
- The Estate will redeem Class A common share of Opco on which the capital gains exemption was claimed resulting in a deemed dividend and a capital loss, and then carry back the Estate’s capital loss under s. 164(6).
- The Estate will transfer its Class A common shares of Opco to a corporation newly incorporated by it (Newco) in consideration for a demand non-interest bearing promissory note (“Note 2”) and non-voting, redeemable and retractable Class C preferred shares of Newco, jointly electing under s. 85(1).
- The Estate will transfer its Class C preferred shares of Opco to Newco under s. 85(1) in consideration for non-voting, redeemable and retractable Class D preferred shares of Newco.
- Opco will continue to carry on its business for at least 12 months following the above share transfers. During that period, Newco may pay taxable dividends equal to the amount of the dividends paid by Opco, which will be funded from the ongoing business operations of Opco.
- After such 12-month period has expired, Opco will amalgamate with Newco to form Amalco.
- In connection with the amalgamation, Amalco will designate, in its return of income for its first taxation year, an amount under ss. 87(11) and 88(1)(c) and (d) and within the limits thereto, to increase the ACB of the capital property, other than ineligible property, previously owned by Opco, being certain lands which have been owned continuously by Opco, from a time that is before the date of death of the Deceased until immediately prior to the amalgamation. Shares of Opco will not be acquired by a person described in s. 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Opco with Newco.
- Note 2 will be gradually repaid over a period of at least one year after the amalgamation of Newco and Opco. The amount of the repayments in any given quarter of that year will not exceed XX% of the principal amount of Note 2 when it was issued. While Amalco may sell some of its assets to repay Note 2, at all times, it will continue to carry on the business formerly carried on by Opco.
Rulings
Including re ss. 84.1, 84 and 88(1)(d) and (d.3).