Principal Issues: (1) Whether subsection 40(3.6) will apply to deem the capital loss resulting from the disposition of the shares that each of Succession and Fiducie will hold in Amalco to be nil? (2) For the purposes of paragraphs 88(1)(c), (d) and (d.2), whether the time control of A Ltée was last acquired will be deemed to have occurred immediately after the death of Mère?
Position: (1) No; (2) Yes.
Reasons: (1) Although each of Fiducie and Succession will hold a debt payable by Amalco, they will not be affiliated to Amalco immediately after the shares that they held in the capital stock of Amalco were redeemed pursuant to subparagraph 251.1(1)(b)(i) because they will not have de facto control over that corporation at that time; (2) The acquisition of control of A Ltée will be deemed to have occured immediately after the death of Mère pursuant to paragraph 88(1)d.3) because Newco can be viewed as having acquired all the shares of the capital stock of A Ltée that were previously held by Fiducie and Sucession as a consequence of the death of Mère.
XXXXXXXXXX 2021-088730
XXXXXXXXXX 2021
Dear Madam,
Subject: Request for advance income tax rulings
XXXXXXXXXX
This letter is in response to your request for advance income tax rulings dated XXXXXXXXXX ("Request"), as amended on XXXXXXXXXX, on behalf of XXXXXXXXXX ("Taxpayers").
We have also taken into consideration the information you sent us by email in response to the requests for additional information we sent you on XXXXXXXXXX.
To the best of your knowledge and that of the persons involved in the Proposed Transactions, none of the matters to which the Request relates:
i. relates to a tax return previously filed by the Taxpayers or a person related to them;
ii. is the subject of an examination by a Tax Services Office or Tax Centre in respect of a tax return previously filed by the Taxpayers or a person related to them;
iii. is the subject of a notice of objection filed by the Taxpayers or a person related to them;
iv. is the subject of a pending or completed legal proceeding involving the Taxpayers or a person related to them; or
v. was the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
Unless otherwise indicated, all statutory references below are to provisions of the Income Tax Act (the "Act").
DEFINITIONS:
Unless otherwise specified, the following terms have the meanings described below:
"ACB" means Adjusted Cost Base as defined in Section 54;
"Accountant" means XXXXXXXXXX;
"Affiliated Group of Persons" has the meaning set out in subsection 251.1(3);
"Agreed Amount" has the meaning assigned by subsection 85(1);
"Aco" means XXXXXXXXXX;
"Amalgamation" means the amalgamation of Aco and Newco to form Amalco as described in Paragraph 59;
"Capital Gain" has the meaning set out in Paragraph 39(1)(a);
"Capital Loss" has the meaning set out in Paragraph 40(1)(b);
"Capital Property" has the meaning set out in section 54;
"CCPC" means a Canadian-controlled private corporation as defined in subsection 125(7);
"CDA" means a capital dividend account as defined in subsection 89(1);
"Child 1" means XXXXXXXXXX;
"Child 2" means XXXXXXXXXX;
"Child 3" means XXXXXXXXXX;
"Child 4" means XXXXXXXXXX;
"Child 5" means XXXXXXXXXX;
"Children" means the group consisting of Child 1, Child 2, Child 3, Child 4 and Child 5;
"Distribution" means the remittance of the Residue of Father's Property that Father's executors have made to the Trust pursuant to Article XXXXXXXXXX of Father's Will and the terms of the Property Sharing Agreement as described in Paragraph 7;
"ERDTOH" means eligible refundable dividend tax on hand as defined in subsection 129(4);
"Estate Loss" refers to the Capital Loss in the amount of $XXXXXXXXXX that the Estate will realize as a result of the Redemption as described in Paragraph 69;
"Estate Transfer" means the transfer to Newco of the XXXXXXXXXX Class B Shares held by the Estate in the capital stock of Aco in consideration for XXXXXXXXXX Class C Shares in the capital stock of Newco having a FMV of $XXXXXXXXXX.
"Father" means XXXXXXXXXX;
"Father's Estate" means the estate of Father;
"Father's Executors" means the group of three individuals consisting of Mother, Child 1 and Child 2 who are responsible for administering Father's Estate in accordance with the terms of Father's Will;
"Father's Transfer" means the transfer of Father's shares in a SBC that were transferred to Aco in exchange for Class B shares of the capital stock of Aco having a FMV of $XXXXXXXXXX as described in Paragraph 2;
"Father's Will" means Father's notarial will dated XXXXXXXXXX;
"FMV on Transfer" means the FMV of the Class A, Class B and Class C shares of the capital stock of Aco that Trust will transfer to Newco in connection with the Transfer from Trust as described in Section 45;
"FMV" means the highest price, in dollars, that would be agreed upon in the open market by two knowledgeable and prudent arm's length parties, neither of whom is under any compulsion to act;
"Gain" has the meaning set out in paragraph 40(1)(a);
"GRE" means a graduation rate estate subject to graduated taxation within the meaning of the definition in subsection 248(1);
"GRIP" means general rate income account as defined in subsection 89(1);
"Mother" means XXXXXXXXXX;
"Mother’s Estate" means the estate of Mother;
"Mother's Will" means Mother's notarial will dated XXXXXXXXXX;
"NERDTOH" means non-eligible refundable dividend tax on hand as defined in subsection 129(4);
"Newco" means the corporation to be incorporated by Trust as described in Paragraph 38;
"Note 1" means the note with a principal amount equal to the FMV on the Transfer that Amalco issued to Trust in consideration for the redemption of the XXXXXXXXXX Class B preferred shares of the capital stock of Amalco held by Trust;
"Note 2" means the note with a principal amount equal to $XXXXXXXXXX that Amalco issued to Estate in consideration for the redemption of the XXXXXXXXXX Class C Preferred Shares of the capital stock of Amalco held by Estate;
"Paragraph" refers to a paragraph in this letter;
"Proceeds of Disposition" has the meaning set out in section 54;
"Proposed Transactions" means the transactions described in paragraphs 38 to 71;
"PUC" means paid-up capital as defined in subsection 89(1);
"QSBCS" means a qualified small business corporation share as defined in subsection 110.6(1);
"Redemption" means the redemption of the XXXXXXXXXX Class B shares that the Trust will hold in the capital stock of Amalco for an amount equal to the FMV at the time of the Transfer in consideration for the issuance of Note 1 as well as the redemption of the XXXXXXXXXX Class C preferred shares that the Estate will hold in the capital stock of Amalco for an amount of $XXXXXXXXXX in consideration for the issuance of Note 2. The Trust and the Estate will accept Note 1 and Note 2 respectively in full and absolute payment for the XXXXXXXXXX and XXXXXXXXXX Class B and C shares of the capital stock of Amalco to be redeemed by Amalco;
"Related Group" has the meaning set out in subsection 251(4);
"Residue of Father's Property" means Father's property not subject to a specific bequest to Mother following his death;
"SBC" means a small business corporation as defined in subsection 248(1);
"Sharing Agreement" means Father's property sharing agreement dated XXXXXXXXXX pursuant to which it was agreed that Mother would receive XXXXXXXXXX Class B shares of the capital stock of Aco with a FMV of $XXXXXXXXXX and Trust would receive XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares of the capital stock of Aco with a FMV of $XXXXXXXXXX on the date of execution of such Sharing Agreement;
"Spouse Trust" means a trust that meets the requirements of paragraph 70(6)(b);
"Taxable Capital Gain" has the meaning set out in paragraph 38(1)(a);
"TCC" means a taxable Canadian corporation as defined in subsection 89(1);
"Transitional Period" refers to the period commencing on the date that Newco acquired all of the shares of Aco and ending on the date of the Amalgamation;
"Trust Loss" means the Capital Loss in an amount equal to the excess of the ACB over the Proceeds of Disposition of the Amalco Shares that Trust will hold of the capital stock of Amalco and that Trust will realize as a result of the Redemption as described in Paragraph 69;
"Trust Transfer" means the transfer to Newco of the XXXXXXXXXX Class A Shares, XXXXXXXXXX Class B Shares and XXXXXXXXXX Class C Shares held by the Trust of the capital stock of Aco in consideration for XXXXXXXXXX Class B Shares in the capital stock of Newco having a FMV equal to the FMV on the Transfer;
"Trust" means the XXXXXXXXXX, which is a testamentary Trust for the benefit of Mother having been created pursuant to the terms of Article XXXXXXXXXX of Father's Will;
"Trustees" means the group of Trustees consisting of Child 1, Child 2 and Accountant responsible for the management of the Trust's assets in accordance with the terms of Article XXXXXXXXXX of Father's Will;
“Patrimony of the Trust” means the Residue of Father's Property which was the subject of the Distribution;
XXXXXXXXXX;
XXXXXXXXXX;
FACTS:
Facts about Father
Incorporation of Aco
(1) On XXXXXXXXXX, Father incorporated Aco under the XXXXXXXXXX.
(2) In XXXXXXXXXX, Father transferred shares qualifying as a QSBCS to Aco under the provisions of subsection 85(1) in exchange for Class B shares of the capital stock of Aco with a FMV of $XXXXXXXXXX.
(3) As a result of Father's Transfer, Father realized a Capital Gain of $XXXXXXXXXX for which he claimed a deduction pursuant to subsection 110.6(1).
(4) Before his death, Father was Mother's husband.
Powers and duties of Father's Executors
(5) Father died on XXXXXXXXXX.
(6) Pursuant to the terms of the property Sharing Agreement of Father, Father's Executors agreed to transfer to Mother XXXXXXXXXX Class B shares of the capital stock of Aco having a FMV of $XXXXXXXXXX as of XXXXXXXXXX.
(7) Pursuant to section XXXXXXXXXX of Father's Will and under the terms of the Property Sharing Agreement, Father's Executors transferred the Residue of Father's Property to the Trust consisting of XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares of the capital stock of Aco
(8) Father’s Executors have been discharged from the administration of the Residue of Father's Property as a result of the Distribution.
Facts about Aco
Tax assets and attributes
9) Aco is and will be, at all relevant times and for all purposes of the Act, a TCC and a CCPC incorporated under the authority of the XXXXXXXXXX. The fiscal period end of Investments is XXXXXXXXXX of each year.
(10) Aco is a holding company. Its only activities are to hold, manage and transact in various investments.
(11) As of XXXXXXXXXX and XXXXXXXXXX, the assets of Aco consisted of XXXXXXXXXX.
(12) Since the issuance of its financial statements as of XXXXXXXXXX, the composition of Aco's assets has remained essentially the same with the exception of XXXXXXXXXX.
(13) As of XXXXXXXXXX, the balance of Aco's tax accounts were: (a) ERDTOH: XXXXXXXXXX; (b) NERDTOH: XXXXXXXXXX; (c) GRIP: XXXXXXXXXX. As of XXXXXXXXXX, Aco's CDA was XXXXXXXXXX.
Shareholding before Mother's death
(14) Immediately prior to Mother's death, the issued and outstanding share capital of Aco consisted of:
- XXXXXXXXXX Class A common shares (voting and participating) ("Class A shares");
- XXXXXXXXXX Class B preferred shares (non-voting, non-participating, entitled to a non-cumulative preferential monthly dividend of XXXXXXXXXX% of the redemption value, redeemable at the option of the corporation or the holder at the FMV of the consideration received by the corporation on issuance) ("Class B shares");
- XXXXXXXXXX Class C preferred shares (non-voting, non-participating, entitled to a non-cumulative preferential monthly dividend of XXXXXXXXXX% of the redemption value, redeemable at the option of the corporation or the holder at the FMV of the consideration received by the corporation on issue) ("Class C shares").
(15) Immediately prior to Mother's death, the issued and outstanding shares of the capital stock of Aco were held as follows:
Shareholder Number and class ACB CV FMV
($) ($) ($)
Trust XXXX Class A shares XXXX XXXX XXXX
XXXX Class B shares XXXX XXXX XXXX
XXXX Class C shares XXXX XXXX XXXX
Mother XXXX Class B shares XXXX XXXX XXXX
Total XXXX XXXX XXXX
(16) Mother and Trust held the shares of the capital stock of Aco as a Capital Property. The shares of the capital stock of Aco do not qualify as QSBCSs.
17) As directors of Aco, Child 1 and Child 2 were responsible for managing the assets of Aco following Father's death and prior to Mother's death.
Facts about Trust
Creation and implementation of Trust
(18) Pursuant to Article XXXXXXXXXX of Father's Will, the Trust was created to manage the Residue of Father's Property which had vested in a separate and autonomous estate for the sole benefit of Mother.
(19) The Trust qualified as a Spouse Trust as no person other than Mother could receive or obtain the use of all or any part of the income or capital of the Trust prior to Mother's death.
(20) The management of the Trust's assets was entrusted to the Trustees, who did not constitute an Affiliated Group of Persons.
Powers and duties of the Trustees
(21) Pursuant to Article XXXXXXXXXX of Father's Will, the Trustees have the necessary powers to preserve the value of the Trust's assets and to carry out corporate reorganizations, share redemptions or dissolve corporations in order to reduce the income taxes that may be payable in respect of the assets thereof.
(22) In accordance with Article XXXXXXXXXX of Father's Will, the Trustees may also exercise the following powers in relation to the management of the Trust's assets:
(a) exchange any property for any consideration deemed appropriate,
(b) incorporate, amalgamate, alter the capital of or reorganize any companies, transactions or contracts,
(c) consent to any transfer of property to any corporation,
(d) consent to any reduction of capital or other transactions as the Trustees may deem expedient,
(e) exercise any elections, options or choices permitted by the Act; and
(f) sell or transfer any property to any company created by the Trustees and receive shares in exchange.
(23) Pursuant to Articles XXXXXXXXXX of Father's Will, the Trustees are required to transfer the residue of the Trust's assets to the Children in their capacity as heirs of Father and beneficiaries of the Trust's capital following Mother's death.
(24) Since Father's death, the Trustees have had de jure control of Aco
(25) The Trust has also had de jure control of Aco since Father's death.
Facts about Mother's death
Tax consequences to Mother
(26) Mother died on XXXXXXXXXX.
(27) Mother was Father's wife before he died.
(28) Pursuant to paragraph 70(5)(a), Mother is deemed to have disposed of each of her Capital Propertys, including the XXXXXXXXXX Class B shares of the capital stock of Aco, for proceeds of disposition equal to the FMV of such Capital Property immediately before Mother's death.
(29) Mother realized a Gain from the deemed disposition of her Capital Properties.
(30) Pursuant to paragraph 70(5)(b), Mother's Estate was deemed to have acquired Mother's Capital Property at a cost equal to the FMV of such Capital Property immediately before Mother's death.
(31) Pursuant to Article XXXXXXXXXX of Mother's Will, Child 1, Child 2 and Child 4 are the Executors of Mother's Estate.
(32) In accordance with Article XXXXXXXXXX of Mother's Will, the Executors of Mother's Estate have the following powers:
(a) exchange any property for any consideration deemed appropriate,
(b) incorporate, amalgamate, alter the capital of or reorganize any companies, transactions or contracts,
(c) to consent to any transfer of property to any corporation,
(d) consent to any reduction of capital or other transactions as the Trustees may deem expedient,
(e) exercise any elections, options or choices permitted by the Act; and
(f) sell or transfer any property to any company created by the trustees and receive shares in exchange.
(33) Mother's Estate has been designated as a GRIP.
Tax consequences to Trust
(34) Pursuant to subsection 104(4), the Trust was deemed to have disposed of each of its Capital Property, including the XXXXXXXXXX Class A shares, the XXXXXXXXXX Class B shares and the XXXXXXXXXX Class C shares of the capital stock of Aco for proceeds of disposition equal to the FMV of such Capital Property on the day Mother died.
(35) Trust realized a Gain on the deemed disposition of its Capital Property.
(36) Pursuant to subsection 104(4), the Trust was deemed to have acquired the Capital Property it held for an amount equal to its FMV immediately after the date of its deemed disposition.
(37) The Capital Gain and Taxable Capital Gain realized by Mother and Trust as a consequence of Mother's death were as follows:
Shareholder Shares were subject to FMV ACB Capital Gain
deemed disposition ($) ($) Capital($) taxable ($)
Trust XXXX Class A shares XXXX XXXX XXXX XXXX
XXXX Class B shares XXXX XXXX XXXX XXXX
XXXX Class C shares XXXX XXXX XXXX XXXX
Subtotal XXXX XXXX XXXX XXXX
Estate XXXX Class B shares XXXX XXXX XXXX XXXX
Total XXXX XXXX XXXX XXXX
PROPOSED TRANSACTIONS:
Incorporation of Newco
(38) Trust will incorporate Newco pursuant to the XXXXXXXXXX.
(39) Newco will be a TCC with a taxation year ending on XXXXXXXXXX of each year.
(40) Child 1 and Child 2 will act as directors of Newco.
(41) The authorized share capital of Newco will consist of Class A common shares and Class B and C preferred shares with the following characteristics:
- Class A common shares (voting and participating in dividends and the remaining property of the corporation) ("Newco Class A shares"),
- Class B preferred shares (non-voting, non-participating, entitling the holder to receive a non-cumulative monthly dividend at a maximum rate of XXXXXXXXXX% per month calculated on the redemption value of the shares, redeemable at the option of the holder and the corporation for a consideration equal to the FMV of the consideration received upon issuance of the shares subject to the application of a price adjustment clause) ("Newco Class B shares"), and
- Class C preferred shares (non-voting, non-participating, entitling the holder to receive a non-cumulative monthly dividend at a maximum rate of XXXXXXXXXX% per month calculated on the redemption value of the shares, redeemable at the option of the holder and the corporation for a consideration equal to the FMV of the consideration received upon their issuance subject to the application of a price adjustment clause) ("Newco Class C shares").
(42) Each of the Children will subscribe for XXXXXXXXXX Class A common shares of the capital stock of Newco in consideration for the payment of $XXXXXXXXXX in cash.
(43) The Children will constitute a Related Group which will have de jure control of Newco.
Trust Transfer
(44) Following Mother's death, the Trust will hold the following shares in the issued and stated share capital of Aco:
Shares transferred ACB CV FMV
($) ($) ($)
XXXX Class A shares XXXX XXXX XXXX
XXXX Class B shares XXXX XXXX XXXX
XXXX Class C shares XXXX XXXX XXXX
Total XXXX XXXX XXXX
(45) In accordance with the rules provided in subsection 85(1), Trust will effect the Trust Transfer in the prescribed form and within the time period set out in subsection 85(6). In consideration therefor, Newco will issue to Trust XXXXXXXXXX Class B shares of its capital stock having a FMV equal to the FMV on the Transfer.
(46) Pursuant to subparagraph 85(1)(c.1)((i) and (ii), the Agreed Amount by the Trust and Newco for the shares of the capital stock of Aco to be transferred to Newco pursuant to the Trust Transfer will be equal to the lesser of their FMV and ACB at the time of transfer. In addition, the Agreed Amount will not exceed the FMV of the shares in the capital stock of Aco at the time of the transfer.
(47) Trust will not realize any Gain as a result of the Trust Transfer.
(48) Subsection 84.1(1) will apply to reduce the PUC of the Class B preferred shares to be issued by Newco to Trust by $XXXXXXXXXX, which is the amount by which the increase in paid-up capital of the shares issued by Newco exceeds the ACB computed pursuant to subparagraph 84.1(2)(a.1)(ii) of the Class B shares of the capital stock of Aco to be transferred to Newco.
49) The tax attributes of the shares of the capital stock of Newco to be held by Trust will be as follows:
Consideration received by Trust ACB PUC FMV
($) ($) ($)
XXXX Newco Class B shares XXXX XXXX FMV on Transfer
Estate Transfer
50) Following Mother's death, the Estate will hold the following shares in the issued and stated capital stock of Aco:
Shares transferred ACB PUC FMV
($) ($) ($)
XXXX Class B shares XXXX XXXX XXXX
(51) In accordance with the rules in subsection 85(1), Estate will effect the Estate Transfer in the prescribed form and within the time limits set out in subsection 85(6). In consideration, Newco will issue to Estate XXXXXXXXXX Class C shares of its capital stock having a FMV equal to the FMV on the date of the transfer of the shares transferred by Estate.
(52) Pursuant to subparagraph 85(1)(c.1)((i) and (ii), the Agreed Amount by the Estate and Newco for the shares of the capital stock of Aco that will be transferred to Newco as part of the Estate Transfer will be equal to the lesser of their FMV and ACB at the time of transfer. In addition, the Agreed Amount will not exceed the FMV of the shares of the capital stock of Aco at the time of the transfer.
(53) Estate will not realize any Gain as a result of the Estate Transfer.
(54) Subsection 84.1(1) will apply to the Estate Transfer to reduce the PUC of the Class C preferred shares to be issued by Newco to the Estate by $XXXXXXXXXX, which is the amount by which the increase in paid-up capital of the shares to be issued by Newco exceeds the ACB as computed pursuant to subparagraph 84.1(2)(a.1)(ii) of the Class B shares of the capital stock of Aco that will be transferred to Newco.
(55) The tax attributes of the shares of the capital stock of Newco to be held by Estate will be as follows:
Consideration received by Estate ACB PUC FMV
($) ($) ($)
XXXX Newco Class C shares XXXX XXXX XXXX
Management of Aco assets during the Transitional Period
(56) The Transitional Period shall be for a period of at least XXXXXXXXXX.
(57) During the Transitional Period, Child 1 and Child 2 will manage the assets of Aco in the same manner as they did prior to Mother's death in their capacity as directors of the corporation.
(58) Aco will not wind-up any substantial part of its assets during the Transitional Period.
Amalgamation of Aco and Newco
(59) At the end of the Transitional Period, Aco and Newco will amalgamate in accordance with the rules of subsection 87(1) to form Amalco, which will have a fiscal period ending on XXXXXXXXXX.
(60) The fiscal period of Aco and Newco will be deemed to end immediately before the date of the Amalgamation.
(61) The authorized share capital of Amalco will consist of Class A common shares and Class B and Class C preferred shares having identical characteristics as those to be issued by Newco.
(62) In connection with the Amalgamation, the holders of Class A common shares of Newco will receive Class A common shares of Amalco and the holders of Class B and C preferred shares of Newco will receive Class B and C preferred shares of Amalco.
(63) Following the Amalgamation, the issued and outstanding shares of Amalco will be held as follows
Shareholders Number and Class of Shares ACB CV FMV
($) ($) ($)
Child 1 XXXX Amalco Class A Shares XXXX XXXX N/A
Child 2 XXXX Amalco Class A Shares XXXX XXXX N/A
Child 3 XXXX Amalco Class A Shares XXXX XXXX N/A
Child 4 XXXX Amalco Class A Shares XXXX XXXX N/A
Child 5 XXXX Amalco Class A Shares XXXX XXXX N/A
Trust XXXX Amalco Class B shares XXXX XXXX FMV on Transfer
Estate XXXX Amalco Class C shares XXXX XXXX XXXX
Total: XXXX XXXX XXXX
(64) Pursuant to paragraph 87(11)(b), the cost of the Assets may be increased if the requirements of paragraphs 88(1)(c) and (d) are satisfied, up to the limits set out in paragraph 88(1)(d), as determined at the time Newco is deemed to have last acquired control of Aco.
Redemption of Amalco shares held by Trust and Estate
Deemed dividends paid by Amalco and received by Trust and Estate
(65) Immediately following the Amalgamation, Amalco will proceed with the Redemption.
(66) Amalco will repay the Note 1 held by the Trust over a period of XXXXXXXXXX from its date of issue at a maximum of XXXXXXXXXX (XXXXXXXXXX%) of the value of the Note 1 per XXXXXXXXXX.
67) Amalco will repay the Note 2 held by the Estate over a period of XXXXXXXXXX from its date of issue at a maximum of XXXXXXXXXX (XXXXXXXXXX%) of the value of the Note 2 per XXXXXXXXXX.
(68) As a result of the Redemption, Amalco will be deemed to pay, and Trust and Estate will be deemed to receive, a deemed dividend pursuant to subsection 84(3) in an amount equal to the amount by which the redemption value of the Class B Preferred Shares and Class C Preferred Shares, respectively, in the capital stock of Amalco exceeds the PUC of such shares:
Shareholders Amount of deemed dividend on
redemption of Class B and C shares ($)
Trust To be determined
Estate XXXX
Capital loss realized by Trust and Estate
(69) The Redemption will also result in a deemed disposition of the shares of the capital stock of Amalco held by Trust and Estate for proceeds of disposition equal to the amount by which the FMV of the redeemed Amalco shares exceeds the amount of the dividend deemed to have been received by Trust and Estate pursuant to subsection 84(3).
Consequently, Trust and Estate will realize the Trust Loss and the Estate Loss, respectively, as a result of the Redemption.
Retroactive carryback of capital losses realized by Trust
(70) Pursuant to paragraph 111(1)(b), Trust will carry back the Trust Loss to reduce the Gain that Trust realized as a result of Mother's death.
(71) In addition, at the appropriate time, Trust will distribute for the benefit of Father's heirs, the Note 1 issued in Paragraph 65 of the Proposed Transactions or the funds from the redemption of that note. At the appropriate time, Estate will also distribute for the benefit of Mother's heirs, Note 2 issued in Paragraph 65 of the Proposed Transactions or the funds from the repayment of that note.
PURPOSE OF THE PROPOSED TRANSACTIONS:
The purpose of the Proposed Transactions is to gradually distribute to the Children property having a FMV equal to the ACB of the shares of the capital stock of Aco respectively acquired by Trust and Estate following the death of Mother calculated in accordance with the rules set out in paragraphs 104(4)(a) and 70(5)(a) as modified, where applicable, by the application of subparagraph 84.1(2)(a.1)(ii).
ADDITIONAL INFORMATION:
The main contact details for the taxpayers covered by the advance rulings are:
XXXXXXXXXX
ADVANCE RULINGS ISSUED :
Provided that the statement of facts, the Proposed Transactions and the Additional Information constitute full disclosure of all relevant facts and of all the Proposed Transactions and that the transactions are carried out as described above, our determinations are as follows:
(A) The provisions of section 84.1 will only apply to the Proposed Transactions to reduce the PUC of the Class B and Class C preferred shares of the capital stock of Newco issued to the Trust and the Estate respectively as a result of the Trust Transfer and the Estate Transfer to the extent provided for in Section 84.1(1)(a), i.e., up to an amount of $XXXXXXXXXX and $XXXXXXXXXX, as provided for in Paragraphs 48 and 54;
(B) The provisions of subsection 84(2) will not apply as a result of and by reason of the Proposed Transactions to deem Aco to pay to each of Trust and Estate, and each of Trust and Estate to receive, a dividend on the Class A, Class B and Class C shares held by them respectively of the capital stock of A Ltd;
(C) Subsection 40(3.6) will not apply to deem the Trust Loss and the Estate Loss to be nil, as described in paragraph 69;
D) For the purposes of an increase to the cost of the Aco Assets that will become Amalco Assets as a result of the Amalgamation, paragraphs 88(1)(d.2) and (d.3) will apply to deem Newco to have last acquired control of Aco immediately following Mother's death; and
E) The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions to redetermine the tax consequences otherwise confirmed in the rulings above.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R11 dated April 1, 2021, issued by the CRA and are binding on the CRA provided that the Proposed Transactions described in paragraphs 38 to 55 are completed by XXXXXXXXXX and the Proposed Transactions described in Paragraphs 56 to 71 are completed in accordance with the timelines set out in this letter. These determinations are based on the current Act and do not take into account the proposed amendments to the Act.
OTHER COMMENTS:
The decisions rendered 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 Proposed Transactions set out herein;
(b) Estate qualifies as a GRIP;
(c) the amount attributed to a property in the Statement of Facts and Proposed Transactions truly represents the cash surrender value, FMV or ACB of a property, or the PUC amount of a share; and
(d) the amount attributed to the GRIP, CDA, ERDTOH or NERDTOH of a corporation truly represents the GRIP, CDA, ERDTOH or NERDTOH of such a corporation.
The statement of our fees for the time spent on your file will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch