Background
The deceased (X) held all the shares of Holdco (being Class A voting and participating shares, and Class B voting redeemable preferred shares), which carried on an investment management business. An s. 110.6(2.1) deduction was claimed by X and by an individual with whom X did not deal at arm's length in respect on a previous disposition of shares for which the current Holdco shares were substituted.
Preliminary transactions
Holdco will redeem Class B shares held by the estate, giving rise to a deemed dividend (which will be designated as an eligible dividend up to the balance in Holdco’s GRIP account) and a capital loss which will be carried back pursuant to s. 164(6) (with s. 40(3.6) not applying pursuant to s. 40(3.61).
Proposed transactions
- The estate will transfer to a corporation newly incorporated by it (Newco) its Class A and Class B shares of Holdco in consideration for Note 1 (plus some Newco Class A voting and participating shares) and Note 2 (plus some Newco Class B voting redeemable preferred shares), respectively, electing under s. 85(1). The principal amount of each Note will not exceed the ACB, to the estate of the shares transferred therefor, having regard to s. 84.1(2)(a.1).
- Following a specified number of months, Holdco and Amalco amalgamate. Pursuant to s. 88(1)(d), Amalco will designate an amount to increase the ACB of property, other than ineligible property, of Holdco that will be acquired on the amalgamation, in anticipation of an eventual sale, but not to a person described in s. 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series.
- Amalco will progressively redeem Note 1 and Note 2 at a maximum rate of XX% of their total principal per quarter, and will continue to carry on the business of Holdco for a minimum period of XX months.
- At the appropriate time, the estate will distribute the Amalco shares and the Notes (or the funds derived from their repayment) equally among the heirs.
Rulings
Re ss. 84.1, 84(2) and 245(2).