2023 Ruling 2020-0862441R3 - Charitable donation by Estate -- summary under Paragraph 118.1(5.1)(b)

Background

At the time of the proposed transactions, the Estate of the deceased held the common shares of Aco, which the Estate had acquired through a reorganization of various shares (together with some related indebtedness). In particular, Aco was the result of the amalgamation of Bco with Cco, whose shares had been held by the deceased and then transferred on a s. 85(1) rollover basis by the Estate to Bco. Bco had been incorporated as a Newco by the Estate to acquire the Estate’s shares of Dco on a rollover basis, with Dco then being wound up.

Dco resulted from the amalgamation of Fco (distributed to the Estate from the spousal trust of his deceased mother given that the deceased had been a beneficiary of that trust) and Eco.

Eco was the result of the amalgamation of Gco and Hco. The deceased had held shares of Gco at the deceased’s death, and the estate then transferred those shares on a s. 85(1) rollover basis to a Newco formed by the estate (Hco).

Proposed transactions

1. Aco will declare and pay a dividend to the Estate, which the Estate will use to pay off liabilities.
2. Aco will pay a stock dividend on its common shares consisting of newly created preferred shares, and then redeem those shares for cash and make a s. 83(2) election for the resulting deemed dividend to be treated as a capital dividend.
3. Aco will repurchase the common shares of Aco for a cash amount equal to their paid-up capital, and then issue one common share to the Estate.
4. Aco will repay the balance of the shareholder loan account to the Estate.
5. Pursuant to a deed of gift, the Estate will gift the amount of cash received in 2 and 3 minus expenses (the “Final Donation Amount”) to a qualified donee.

Purposes

The purpose of the payment in 1 is to ensure that the dividends received by the Estate are used to pay the Estate’s liabilities and are not donated to the qualified donee, because the cash received in payment of the dividends would not constitute property that was acquired by the Estate on and as a consequence of the death of the deceased or property substituted for that property, as required by s. 118.1(5.1)(b).

The transaction in 2 is structured as the declaration of a stock dividend followed by the redemption of the shares issued in satisfaction of the stock dividend in order to satisfy the requirements of s. 118.1(5.1)(b) and the CRA’s position that cash paid as actual dividends cannot be substituted property.

The purpose of 3 is to return the capital account of the common shares of Aco to the Estate in substitution for its common shares, while also issuing a new common share so that Aco will have one common share outstanding.

Ruling

For the purposes of s. 118.1(5.1)(b), the Final Donation Amount is property that was acquired by the Estate on and as a consequence of the death of the deceased or is property that was substituted for that property.