2022 Ruling 2022-0937661R3 F - 104(4) and pipeline transaction -- summary under Subsection 84(2)

Background

A family inter vivos trust for resident beneficiaries (Trust 1) had distributed its common shares of a CCPC that was an investment holding company (Holdings) on an s. 107(2) rollover basis to a corporate beneficiary (Holdco – which already held the balance of the common shares of Holdings) that was held by Father and a newly-formed inter vivos trust (Trust 2) for the same family, a corporation and a foundation (with the shares of and an advance to Holdings being the sole assets of Holdco). After a precautionary disclosure was made to CRA, it determined that GAAR applied to the rollout of the Holdings shares to Holdco, so that s. 104(5.8) should be treated as applying to the capital property of Trust 2 upon the (now imminent) occurrence of the 21^st anniversary of the formation of Trust 1 so as to result in a deemed disposition of such property pursuant to s. 104(4)(b)(ii) – and the Directorate so ruled in this ruling letter.

Proposed transactions

1. Holdco will add Class D preferred shares to its authorized capital.
2. Trust 2 will then exchange its Class A common shares for Class B and D preferred shares pursuant to s. 51(1) and, concurrently with such exchange, a newly-formed trust for Father, his children, a foundation, and certain trusts and corporations (“Trust 3”), will subscribe for Class A common shares of Holdco.
3. Trust 2 will distribute the Class D preferred shares of Holdco to Father and his three children without making an s. 107(2.001) election.
4. Father will transfer his multiple-voting shares of Holdco (with nominal economic attributes) to a newly-incorporated corporation (Newco) for similar multiple-voting Newco shares.
5. At the same time, Trust 3 will transfer its Class A common shares of Holdco to Newco in consideration for Class A common shares of Newco, electing under s. 85(1) for this to occur on a rollover basis.
6. At the same time, Father and his three adult children will transfer their Class D preferred shares of Holdco to Newco in consideration for Class B preferred shares of Newco, electing under s. 85(1) for this to occur on a rollover basis.
7. At the end of the 21^st anniversary referred to above, Trust 2 will be deemed by ss. 104(4)(b)(ii) and 104(5.8) to have disposed of all its property (mainly, its Class B shares of Holdco) for FMV proceeds and to have reacquired such property immediately thereafter at the same amount. It will file an s. 159(6.1) to stagger the payment of the resulting taxes over up to 10 years.
8. Trust 2 will distribute some of its Class B preferred shares of Holdco to Father in satisfaction of a portion of his capital interest, without making an s.107(2.001) election.
9. Father will sell those Class B shares to Newco in consideration for a note.
10. In order to annually fund the taxes payable by Trust 2 on a staggered basis until the completion of the transactions below, Holdings will make an interest-bearing advance to Holdco, Holdco will make an equivalent interest-bearing advance to Newco, and Newco will make an equivalent repayment to reduce the note amount, which Father will use to make a capital contribution to Trust 2.
11. After a specified minimum period following 9 above, Newco and Holdco will amalgamate to form Amalco.
12. Amalco will progressively repay the balance of the note payable to Father upon future receipts of dividends from Holdings, or other receipts. However, any repayment made in any of the first four quarters of the second year following 9 above will not exceed a stipulated percentage of the total initial principal.
13. Trust 2 will be wound-up following full payment of the taxes payable.

Rulings

Including re ss. 51, 107(2) (regarding Trust 2 distributions), 245(2) as described above and generally, 84.1 and 84(2).