Background
The will of Mr. X bequeathed his preferred shares (carrying voting control) of Holdco (which had a portfolio which it managed and whose shares were not qualified small business corporation shares and whose common shares were held by Mr. X's spouse and children) to the spouse (on a s. 70(6) rollover basis) and the children (on a s. 70(5) taxable basis).
Proposed transactions
- The spouse will exchange Holdco Class A preferred shares (distributed to her by the estate) on a s. 51 rollover basis for Class E preferred shares of Holdco.
- Holdco will redeem Class C preferred shares held by the estate and spouse for cash.
- In the first taxation year of the estate, Holdco will redeem Class A preferred shares held by the estate for "Note 1" (which Holdco will repay through liquidating investments), thereby generating a s. 84(3) dividend (permitting the recovery of Holdco’s ERDTOH and NERDTOH) and a capital loss (which will not be denied under 40(3.6) by virtue of s. 40(3.6)), which will be carried back to the deceased’s terminal year pursuant to s. 164(6).
- The estate will transfer, to a “Newco” formed by it under the CBCA, Class A preferred shares of Holdco in consideration for a demand note ("Note 2") of Newco and a Class A share of Newco (apparently, its only issued and outstanding share), electing under s. 85(1).
- After a period of at least one year following such transfer, Newco may progressively repay Note 2 at the rate of 1/3 of its principal per year, with such repayments funded through Holdco redeeming Class A preferred shares.
- After the expiry of a specified period of years, Newco will be dissolved under the CBCA.
Rulings
Re ss. 84.1(1). 84(2) and 245(2).