Two discretionary inter vivos trusts, with an individual (“Father”) and his child (“Child”) as the beneficiaries (both resident in Canada) and which had been settled by Father’s parent, held shares of a portfolio investment company (Aco) directly and through a holding company (Bco). In order to respect the wishes of the settlor, the trustees determined that most of the capital and accumulated income of the two trusts would be retained rather than distributed on the 21st anniversaries of the settling of the two trusts. Accordingly, the two trusts realized capital gains pursuant to s. 104(4)(b)(ii) on their shares of Aco and Bco on that anniversary.
After preliminary transactions to distribute capital dividends and eligible dividends from the companies, the trusts were then to engage in pipeline transactions in which the Aco and Bco shares were to be transferred to a ULC Newco on a s. 85(1) rollover basis in consideration for notes and nominal value preferred shares with redemption values subject to a price adjustment clause, and then convert those notes to high-PUC shares of the ULC – and only after a number of years, might ULC be amalgamated with Aco and Bco (which would have been continued to the same jurisdiction as Aco and Bco). The ULC will not make substantial distributions for quite some time otherwise than to fund the taxes payable by the two trusts under s. 104(4).