2021 Ruling 2020-0874931R3 F - Post-mortem Pipeline -- summary under Subsection 84(2)

Background

At the time of his death, X held all of the shares of Investco (a portfolio holding company) other than non-voting common shares held by his two children (Child1 and Child2) and certain voting, non-participating, redeemable shares held by his common-law partner (“Spouse”) At that time, the shares of Holdco, a company holding real estate, cash and a loan to Investco) were held by X, his Spouse and Investco.

On his death, X realized a gain on his shares of Investco pursuant to s. 70(5)(a). There was no gain on the deemed disposition of his shares of Holdco.

Preliminary transactions

Investco redeemed or repurchased various of its shares held by the estate or by the Spouse (thereby resulting in an acquisition of control of Investco) and paid a capital dividend and taxable dividends (a portion of which were designated as eligible dividends) to the estate. The capital dividend and taxable dividends were satisfied through the issuance of notes (Note2 and Note3), with Investco paying off Note2 in full. The Investco also paid off part of a note (Note1) that had been owing to X on his death, in order to help fund estate taxes.

Holdco also purchased for cancellation shares held by the Spouse (resulting in an acquisition of control of it) and redeemed shares held by the estate.

Proposed transactions

1. After the estate incorporates Newco and subscribes for special voting shares, Child1 and Child2 will transfer their shares of Investco for non-voting common shares of Newco, electing under s. 85(1).
2. The estate will transfer its shares of Investco to Newco for Note4 and Class J shares, electing under s. 85(1).
3. Note1 and Note3 will be repaid at various times.
4. After a specified period following the transfer in 3 above, Newco and Investco will be amalgamated and Note4 will be repaid progressively over several years, with repayments in each of the first four quarters not exceeding a specified percentage of the note principal.
5. The estate will distribute its shares of Newco or Amalco as the case may be, together with the unredeemed Note1, Note3 and Note4 or the funds resulting from their repayment, in equal parts to Child Trust1 and Child Trust2, being the two residuary beneficiaries.

Rulings

Re ss. 84.1, 84(2) and 245(2).