2020 Ruling 2020-0844081R3 F - Rollout of property to beneficiaries -- summary under Subsection 107(2)

Background

Trust 2, which is a discretionary inter vivos trust with Mr. A, his spouse Ms. A and their children (Child 1 and 2, or the “Children”) as discretionary beneficiaries, held Class D non-voting and participating shares of Xco (a CCPC investment corporation), which it had subscribed for as part of an estate freeze. On such estate freeze, Mr. A had received Class B non-voting preferred shares and subsequently subscribed for Class C voting and non-participating shares.

Trust 2 also had held Class D non-voting and participating shares and Class E non-voting preferred shares of Former Zco.

Former Zco was a holding company for an operating company, and also held Class D shares of Yco, which had been distributed to it, qua discretionary corporate beneficiary, by another discretionary trust (Trust 1 –which had since been wound-up) pursuant to s. 107(2).

Former Zco then amalgamated with Yco to form Zco (whose share capital was identical to that of Zco), and the Class E shares of Trust 2 were exchanged under s. 51(1) for Class D shares.

Preliminary transactions

1. Child 1 and Child 2 each incorporated a holding company (“Holdco-Child 1” and “Holdco-Child 2”) and subscribed for Class A voting participating shares.
2. Holdco-Mr. A was incorporated, with Mr. A (after giving effect to preliminary transactions involving the issuance and purchase for cancellation of other classes of shares) holding Class C voting and non-participating shares.
3. All the Class D shares of Zco held by Trust 2 were exchanged under s. 51 for Class D non-voting and participating shares, Class E non-voting preferred shares and Class F preferred shares (bearing a dividend that was potentially discretionary) – and then made a further s. 51 exchange of Class D for Class D and E shares.

Proposed transactions

Trust 2 will distribute the Class D shares of Xco to the Children, distribute the Class F shares of Xco, and the Class E and F shares of Zco to Mr. A, and the balance of the Class E shares to Ms. A. Trust 2 will then be wound up.

The following exchanges will occur, with s. 85(1) elections being made:

• Mr. A will transfer his Class F shares of Xco and his Class F shares of Zco to Holdco-Mr. A in exchange for Class F shares of Holdco-Mr. A.
• The Children will transfer their Class D shares of Xco and Zco to Holdco-Mr. A in exchange for Class D shares of Holdco-Mr.A.
• The Children will transfer their Class D shares of Holdco-Mr. A to their own respective Holdcos in exchange for Class A voting participating shares of their respective Holdcos.

Rulings

Regarding inter alia application of s. 107(2) and non-application of s. 56(2)

CRA indicated, having regard to Former Zco having received the Yco shares under s. 107(2), that s. 245(2) could be applied to deem s. 104(4) to be applicable to Trust 2 if the distribution by it of its Zco shares did not occur before the 21^st anniversary of the settlement of Trust 1.