2021 Ruling 2020-0874851R3 - Post-mortem Hybrid Pipeline -- summary under Subsection 84(2)

Background

Immediately before her death, A held the common shares (being the only class of shares) of the Corporation, which held marketable securities.

Proposed transactions

1. The Corporation will dispose of a portion of its marketable securities, generating gain and an addition to its capital dividend account (“CDA”).
2. The estate will exchange all the common shares of the Corporation on a s. 85(1) rollover basis for new Class A common shares and non-voting redeemable retractable Class A preferred shares of the Corporation.
3. The Corporation will increase the stated capital of the Class A Preferred Shares by an amount not exceeding the lesser of (i) the CDA of the Corporation immediately before such increase and (ii) the amount that would have been the CDA of the Corporation immediately before the death of A had the Corporation at that time disposed of all of its marketable securities at that time, with the resulting s. 84(1) being elected to be a capital dividend.
4. The Corporation will redeem the Class A Preferred Shares in consideration for a demand noninterest bearing promissory note, designate a portion (not exceeding its GRIP account) as an eligible dividend pursuant to s. 89(14) and report a resulting capital loss, which will be carried back under s. 164(6).
5. The Corporation will make a repayment of the note.
6. The Estate will transfer the Class A Common Shares to a “Newco” formed by it in consideration for Newco common shares, electing under s. 85(1).
7. The Corporation will make a loan to Newco, which will make a stated capital distribution on its common shares to fund income taxes owing under A’s terminal T1 return.
8. For a period of one year after the transfer of the Class A Common Shares, the asset allocation of the Marketable Securities as well as the investment activities carried on will be governed by the same guidelines as before.
9. Thereafter, the Corporation and Newco will amalgamate to form Amalco, with the loan in 7 being cancelled.
10. Over the twelve months following the amalgamation, the directors of Amalco will resolve no more often than quarterly to reduce the stated capital of the common shares of Amalco by an aggregate amount not exceeding the paid-up capital of the common shares, and will make distributions of such amounts to the Estate. The amount of the reductions in stated capital in any given quarter of that year will not exceed 25% of the aggregate paid-up capital of the common shares of Amalco immediately following the amalgamation … .
11. Once all debts and liabilities of the Estate have been ascertained and settled, the residue of the estate will be distributed to the family beneficiaries.

Rulings

Re ss. 84.1, 84(2) and 2435(2).