2021 Ruling 2021-0906111R3 - XXXXXXXXXX Post-mortem Pipeline -- summary under Subsection 84(2)

Background

Before his death, Father transferred his shares (i.e., 50.5% of the common shares) of ACo (which held a diverse portfolio of bonds, equities, a minority position in a privately-held investment management company, real estate and oil and gas properties) and some other property to a newly-formed alter ego trust (the “Trust”) on a s. 73(1) rollover basis (given the application of ss. 73(1.01)(c)(ii) and (1.02)). On his death, there was a deemed disposition of Trust property under s. 104(4)(a)(iv), giving rise to a capital gain to the Trust. The Trust beneficiaries were the three children (the “Siblings”) of Father, as to the Trust’s shares of ACo, and Father’s surviving spouse, as to much of the balance of the property. All beneficiaries were resident. The Siblings each held 16.5% of the common shares (being the only outstanding class of shares) of ACo. No s. 110.6 deduction has been claimed respecting the ACo shares.

Following Father’s death, ACo paid a capital and an eligible dividend on its common shares.

Proposed transactions

1. The Trust will transfer its ACo common shares to a resident corporation newly-formed by it (“Newco”) in consideration for notes and Newco preferred shares, electing under s. 85(1).
2. ACo will continue to carry on its business, and there will be no repayment of the Newco notes or redemptions of the Newco preferred shares, within one year following the above transfer.
3. The Trust will distribute the Newco common and preferred shares and the Newco notes pro rata to the Siblings on a s. 107(2) rollover basis, so that Newco will be equally owned by the Siblings.
4. After at least one year has elapsed from the transfer in 1 above, Newco and ACo will amalgamate (under a long-form amalgamation, given that the Siblings until then had been minority shareholders of ACo).
5. Subsequently, Amalco will repay no more than 10% of the initial aggregate principal amount of the notes during the first year following the amalgamation and, absent extraordinary events, will repay no more than that sum in each of the subsequent years.

Rulings

Re ss. 84.1, 84(1) and 245(2).