In order to implement pipeline planning, the estate of an individual ("Estate") generally incorporates a new corporation ("Newco") to which it sells shares of a private corporation ("Target"), with or without a tax rollover, in consideration for shares of Newco (the "Shares") or a note issued by Newco ("Note").Newco will remains in existence for at least one year before being merged with Target to form Amalco, whose assets are gradually used to redeem the Shares or Note.
After indicating that it generally did not have concerns with these transactions being varied by the Estate selling the Target shares to an existing corporation in which it does not hold any shares (the "Existing Corporation") and whose shares may be held by heirs of the deceased, CRA went on to state:
In general, section 84.1 will only apply if the Estate is not dealing at arm's length with Existing Corporation at the time of the transfer of the shares of the capital stock of Target (the "Transfer") and Target and Existing Corporation are connected within the meaning of subsection 186(4) immediately after the Transfer. In addition, the tax consequences under paragraphs 84.1(1)(a) and 84.1(1)(b) will apply only if the shares of the capital stock of Target had an increase in value prior to 1971 or a capital gains deduction was claimed by the individual or a person not dealing at arm's length with the individual in connection with a previous disposition of the shares of the capital stock of Target. In such circumstances, the amount of the increase in the ACB of the Target shares held by the Estate as a result of the application of paragraph 70(5)(a) (the "Increased ACB") will be reduced, as applicable, to the extent of the amounts provided for in subparagraphs 84.1(2)(a), 84.1(2)(a.1)(i) and 84.1(2)(a.1)(ii).
The Estate should generally be able to monetize the modified Increased ACB of Target's capital stock (the "Hard ACB") without being subject to section 84.1 and subsection 245(2).
The application of subsection 245(2) could be considered if the Pipeline Planning is structured to avoid the application of section 84.1 … .