Background
The Trust was a spousal trust for Mother holding shares of Aco (an investments holding company). Such shares had been bequested to the Trust by Father and included Class B shares of Aco which it had previously issued to Father in exchange for the transfer to it under s. 85(1) of qualified small business corporation shares, resulting in the recognition by Father of a capital gain for which he claimed a deduction pursuant to s. 110.6(1).
Mother also held shares of Aco directly. Thus, on the death of Mother, those shares were deemed to be disposed of for their FMV pursuant to ss. 70(5)(b) and 104(4).
Proposed transactions
- Trust will transfer its Aco shares on a s. 85(1) rollover basis to Newco (newly-incorporated by it) in consideration for non-voting redeemable retractable Class B shares of Newco. Similarly, the estate of Mother will transfer its Aco shares on a s. 85(1) rollover basis to Newco in consideration for non-voting redeemable retractable Class C shares of Newco.
- For both of the above transfers, s. 84.1(1) will reduce the PUC of those Newco shares which were issued in consideration for Class B shares of Aco by the amount by the excess of the increase in their PUC over the ACB of such transferred shares computed pursuant to s. 84.1(2)(a.1)(ii).
- Following the redacted transition period, Newco and Aco will amalgamate.
- Immediately thereafter, Amalco will redeem the Class B and C shares of the Trust and Estate for Note 1 and Note 2, giving rise to deemed dividends, and capital losses which, in the case of the Trust, it will carry back under s. 111(1)(b) to reduce its taxable capital gain realized on Mother’s death.
- Amalco will repay the notes at no more than a specified rate over the period commencing with their issuance.
Rulings
Re application of s. 84.1 as described above, non-application of ss. 84(2), 40(3.6) and s. 245(2), and application of ss. 88(1)(d.2) and (d.3) to deem Newco to have last acquired control of Aco immediately following Mother's death.