Principal Issues: Post-mortem planning.
Position: Favourable rulings provided.
Reasons: Previous positions and see below.
XXXXXXXXXX 2021-089563
XXXXXXXXXX 2021
Dear Madam,
Subject: Request for advance income tax rulings
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX and updated on XXXXXXXXXX requesting advance income tax rulings on behalf of your client XXXXXXXXXX. We have also taken into account the information you have sent us by email, as well as additional information submitted during telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or matters covered in this Ruling are the same as, or substantially similar to, any transaction or matter that:
i. was addressed in a previously filed tax return of the taxpayer, or a related person, that is
A. being considered by the Canada Revenue Agency in connection with that return;
B. under objection by the taxpayer or a related person;
C. the subject of a current or completed court process involving the taxpayer or a related person;
ii. has been the subject of an advance ruling request previously considered by the Income Tax Rulings Directorate.
Definitions
Unless otherwise indicated:
i. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act")
ii. all words and expressions used in this Ruling and defined in the Act have the meaning assigned to them in the Act;
iii. all monetary amounts are in Canadian dollars;
iv. words importing the singular number shall include the plural and vice versa, if the context so requires.
In this letter, with the exception of paragraph 26, the names and corporate names of the taxpayers are replaced by the following names and corporate names.
“A” means XXXXXXXXXX;
"Amalco" means the corporation resulting from the amalgamation of Corporation and Newco;
"B" means XXXXXXXXXX, the spouse of A;
"C" means XXXXXXXXXX, the daughter of A;
"Corporation" means XXXXXXXXXX Corporation;
"D" means XXXXXXXXXX, the son of A;
"Estate" means the estate of A;
"Executors" means C and D, collectively;
"Newco" means a corporation formed by the Estate under the CBCA;
"Will" means the last will and testament of A.
Unless otherwise indicated, the following abbreviations, terms and expressions have the meanings defined below.
"Class A Shares" means the XXXXXXXXXX issued and outstanding Class A shares of the capital stock of the Corporation;
"ACB" has the same meaning as in the definition of "adjusted cost base" in section 54;
"Agreed Amount" has the meaning assigned by subsection 85(1);
"Capital Property" has the same meaning as in section 54;
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C44;
"CCPC" has the same meaning as in the definition "Canadian-controlled private corporation" in subsection 125(7);
"CDA" has the same meaning as in the definition of "capital dividend account" in subsection 89(1);
“CGD” has the same meaning as in the definition “capital gains deduction” in subsection 110.6(2.1;
"CRA" means the Canada Revenue Agency;
"CSV" means cash surrender value.
"ERDTOH" has the meaning assigned by the definition "eligible refundable dividend tax on hand" in subsection 129(4);
"FMV" means fair market value;
"GRE" has the same meaning as in the definition of "graduated rate estate" in subsection 248(1);
"GRIP" has the same meaning as in the definition of "general rate income pool" in subsection 89(1);
"NERDTOH" has the same meaning as in the definition "non-eligible refundable dividend tax on hand" in subsection 129(4);
"Note 1", "Note 2", "Note 3" and "Note 4" mean the notes issued in paragraph 21;
"Preliminary Transactions" means the transactions referred to in paragraphs 16 to 18;
"Proposed transactions" means the transactions referred to in paragraphs 23 to 25;
"PUC" has the same meaning as in the definition "paid-up capital" in subsection 89(1);
"QSBCS" has the same meaning as in the definition of "qualified small business corporation share" in subsection 110.6(1);
"Reviewed Transactions" means the transactions referred to in paragraphs 19 to 22;
"taxable Canadian corporation" has the same meaning as in the definition "taxable Canadian corporation" in subsection 89(1);
"Transferred Shares" has the meaning assigned to that term in paragraph 21;
FACTS
Facts regarding the Corporation
1. The Corporation is a TCC and CCPC incorporated on XXXXXXXXXX, under the provisions of the CBCA. The Corporation's fiscal period end is XXXXXXXXXX.
2. The balances in certain tax accounts of the Corporation on XXXXXXXXXX were as follows: GRIP: $XXXXXXXXXX and CDA: $XXXXXXXXXX.
3. The Corporation is a holding company and manages various stock market investments. Immediately prior to A's death, the Corporation's assets consisted primarily of mutual funds, shares of public corporations, the cash surrender value of life insurance, a loan receivable and cash on hand.
4. Corporation was the beneficiary of a life insurance policy on the life of A. This policy was taken out on XXXXXXXXXX and has not been amended since.
5. The Class A Shares are voting (XXXXXXXXXX vote per share) and participating.
6. The Class A Shares, immediately prior to A's death, were held as follows:
Shareholder
Class
Number PUC($)
ACB($)
FMV($)
A
A XXXXX
XXXXX
XXXXX
XXXXX
7. The Class A Shares held by A at the time of his death were Capital Property to him.
Facts regarding the death of A
8. A died on XXXXXXXXXX. Immediately before his death, A was a Canadian resident.
9. Under the terms of the Will, A made B his sole legatee by particular title and C and D his sole residuary universal legatees, in equal shares between them.
10. Pursuant to paragraph 70(5)(a), A was deemed to have disposed of, inter alia, immediately before his death, all of the Class A Shares held by him and to have received as proceeds of disposition an amount equal to their FMV at that time. This deemed disposition of the Class A Shares resulted in a capital gain to A of $XXXXXXXXXX. This capital gain was reported on A's final income tax return for the year of death.
11. At the time of A's death, the Class A Shares did not qualify as QSBCSs. As a result, A did not claim and will not claim the CGD in computing his taxable income in respect of the capital gain arising on the deemed disposition of the Class A Shares. In addition, no CGD has been claimed or will be claimed by A (or by an individual with whom A did not deal at arm's length) in respect of a previous disposition of such shares or a share for which such shares were substituted.
12. Pursuant to paragraph 70(5)(b), the Estate was deemed to have acquired the Class A Shares at a cost equal to their FMV immediately before A's death. Those shares acquired by the Estate as a result of A's death are Capital Property to the Estate. The tax characteristics of the shares held by the Estate were as follows:
Description
ACB($)
PUC$)
FMV($)
XXXXXXX XXX
XXX XXXXXX X
XXXXX
13. The FMV of the Class A Shares to the estate takes into account the receipt of the life insurance proceeds, described in 16 below, of which the Corporation was the beneficiary and the elimination of the cash surrender value of such insurance.
14. The Executors are the sole executors of the Estate.
15. At all relevant times, the Estate is a Canadian resident.
PRELIMINARY TRANSACTIONS
16. In XXXXXXXXXX, following A's death, the Corporation received $XXXXXXXXXX representing the life insurance proceeds of the insurance policy of which it was the beneficiary. The FMV of Class A Shares increased from $XXXXXXXXXX to $XXXXXXXXXX.
17. On XXXXXXXXXX, the Corporation declared and paid a dividend in the amount of $XXXXXXXXXX. The Corporation made an election pursuant to subsection 83(2) to have the entire amount of the dividend constitute a CDA dividend. As a result of the dividend payment, the FMV of the Class A Shares increased from $XXXXXXXXXX to $XXXXXXXXXX.
18. On XXXXXXXXXX, following the transaction described in the preceding paragraph, the Estate:
a) exchanged the Class A Shares. In return, the Estate received XXXXXXXXXX Class F shares of the capital stock of the Corporation with a PUC of $XXXXXXXXXX and an ACB to the Estate of $XXXXXXXXXX. Subsection 51(1) applied to this transaction. The Class F shares are non-voting, entitled to fixed preferential dividends of XXXXXXXXXX% on the amount paid up, with no right to participate in the remaining property, redeemable at the option of the holder and the corporation at the amount paid into the stated capital account;
b) subscribed for one Class A share of the capital stock of the Corporation for $XXXXXXXXXX.
REVIEWED TRANSACTIONS
19. The Estate has incorporated Newco under the CBCA. Newco is a TCC and a CCPC. Newco's fiscal period end is XXXXXXXXXX.
20. The Estate exchanged the XXXXXXXXXX Class F shares of the capital stock of the Corporation. In return, the Estate received XXXXXXXXXX Class A shares of the capital stock of the Corporation with a PUC of $XXXXXXXXXX and an ACB to the Estate of $XXXXXXXXXX. Subsection 51(1) applied to this transaction.
21. The Estate transferred XXXXXXXXXX Class A shares of the capital stock of the Corporation (the "Transferred Shares") to Newco, in consideration for XXXXXXXXXX Class A shares of the capital stock of Newco, namely voting and participating shares, and Note 1, Note 2, Note 3 and Note 4 (collectively the "Notes"), all of which are non-interest bearing, in full and absolute payment. The Notes have the following characteristics:
- Note 1: principal equal to XXXXXXXXXX% of the excess of the Agreed Amount over $XXXXXXXXXX, maturing three months after the amalgamation of Newco and Corporation described in 24 below;
- Note 2: principal equal to XXXXXXXXXX% of the excess of the Agreed Amount over $XXXXXXXXXX, maturing six months after the amalgamation of Newco and Corporation described in 24 below;
- Note 3: principal equal to XXXXXXXXXX% of the excess of the Agreed Amount over $XXXXXXXXXX, maturing nine months after the amalgamation of Newco and Corporation described in 24 below;
- Note 4: principal equal to XXXXXXXXXX% of the excess of the Agreed Amount over $XXXXXXXXXX, maturing twelve months after the amalgamation of Newco and Corporation described in 24 below.
The Estate and Newco will jointly make the election provided for in section 85(1), in the prescribed form and within the period provided for in section 85(6), so that the rules of subsection 85(1) apply to the transfer. For greater certainty, the Agreed Amount between the Estate and Newco for the Transferred Shares will be equal to the lesser of the ACB of such shares held by the Estate and the FMV of the shares at that time, being the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).
The amount that Newco added to the PUC of the Class A shares of its capital stock issued to the Estate in consideration for the transfer was equal to the amount by which the Agreed Amount exceeded the principal amount of the Notes. For greater certainty, the PUC of the Class A shares of the capital stock of Newco issued as consideration for the Transfer did not exceed the maximum amount that may be added to the PUC under the provisions of paragraph 84.1(1)(a).
In addition, as a result of the share transfer described above, the Estate sustained a capital loss equal to the difference between the proceeds of disposition defined in section 54 and the ACB of the shares so transferred. In this regard, and considering the application of subsection 112(3.2), A's legal representatives will elect, pursuant to subsection 164(6), to treat the entirety of the Estate's capital loss resulting from the above-described disposition of the Transferred Shares as a capital loss of A resulting from the disposition of those shares by A in his last taxation year. In addition, pursuant to subsection 40(3.61), subsection 40(3.4) will not apply to the Estate to deem such capital loss to be nil.
22. Since the completion of the transactions described in paragraph 21, the Corporation has been connected to Newco pursuant to paragraph 186(4)(a).
PROPOSED TRANSACTIONS
23. Corporation will remain a separate legal entity (i.e., Corporation will not be wound up into Newco or any other corporation, or amalgamated with Newco or any other corporation) for a period of at least XXXXXXXXXX from the time the share transfer described in paragraph 21 was completed. In addition, during that same period, the Corporation will continue to carry on the business it was carrying on at the time and its investment policy will remain the same.
24. After a period of at least XXXXXXXXXX following the share transfer described in paragraph 21, Corporation will be amalgamated with Newco pursuant to the provisions of subsection 87(1) to form Amalco. Amalco will continue to carry on the business that the Corporation was then carrying on and its investment policy will remain the same.
25. Following the amalgamation described in the preceding paragraph, Amalco will commence repayment of the Notes according to the following schedule:
- XXXXXXXXXX after the amalgamation: payment of Note 1;
- XXXXXXXXXX after the amalgamation: payment of Note 2;
- XXXXXXXXXX after the amalgamation: payment of Note 3;
- XXXXXXXXXX after the amalgamation: payment of Note 4.
ADDITIONAL INFORMATION
26. The main contact details for the taxpayers covered by the advance rulings are:
XXXXXXXXXX
PURPOSE OF THE REVIEWED AND PROPOSED TRANSACTIONS
27. The purpose of the Completed Transactions and the Proposed Transactions is to: (i) maximize the use of the various tax pools of the Corporation; (ii) deliver to A's heirs property with a FMV equal to the greater of the FMV and the ACB of the shares held by the Estate, which is the result of the application of subsection 70(5); (iii) simplify the corporate structure; (iv) continue the Corporation's business in Newco; and (v) gradually repay the Notes.
ADVANCE RULING ISSUED
Provided that the statement of facts, the Preliminary Transactions, the Reviewed Transactions, the Proposed Transactions and the Additional Information constitute full disclosure of all relevant facts and of all Preliminary, Reviewed and Proposed Transactions, and that the Proposed Transactions are carried out as described above, our determinations are as follows
A. To the extent that:
(a) the aggregate principal amount of the Notes payable by Newco will not exceed the Agreed Amount, as described in 21 above, in respect of the Class A shares of the capital stock of the Corporation; and
(b) the PUC of the XXXXXXXXXX Class A shares of the capital stock of Newco shall not exceed the maximum amount that may be added to the PUC of such shares under paragraph 84.1(1)(a),
the provisions of section 84.1 will not apply to deem a dividend to be paid by Newco to the Estate and received by the Estate, or to reduce the PUC of the Class A shares of the capital stock of Newco upon the disposition of such shares described in paragraph 21 above.
B. The provisions of subsection 84(2) will not apply as a result of and by reason of the Proposed Transactions described above to deem the Corporation to pay to the Estate, and the Estate to receive, a dividend on the Class A shares of the capital stock of the Corporation.
C. The provisions of subsection 245(2) will not apply as a result of and by reason of the Proposed Transactions described above to redetermine the tax consequences stated in the rulings above.
These rulings are subject to the limitations and general conditions set out in Information Circular IC70-6R11 Advance Income Tax Rulings and Technical Interpretations dated April 1, 2021, issued by the CRA and are binding on the CRA, provided that the Proposed Transactions described in paragraph 23 and following are completed within the time frames set out herein, as described above. These rulings are based on the current Act and do not take into account any proposed amendments thereto.
The rulings should in no way be construed as an acquiescence on the part of the CRA that:
(a) we have considered the other tax consequences that may result from the facts or transactions set out herein;
(b) the estate qualifies as a GRE;
(c) the amount attributed to a property in the statement of facts and transactions is truly the FMV or ACB of a property, or the PUC amount of a share; and
(d) the amount attributed to the CDA, GRIP, ERDTOH or NERDTOH of a corporation truly represents the CDA, GRIP, ERDTOH or NERDTOH of such corporation.
The statement of our fees for the time spent on your case will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch