Background
The Deceased held Opco preferred shares, and preferred shares (with no accrued capital gain) and common shares of Holdco, which held the common shares of Opco. The Opco assets included cash, short-term investments and investments in subsidiaries. The capital gains deduction was claimed by the estate in respect of the Holdco common shares.
Completed transaction
Opco redeemed preferred shares held by the estate, giving rise to a deemed dividend and a capital loss, which the estate carried back under s. 164(6).
Proposed transactions
- The estate will transfer the Holdco shares to Newco (newly formed by it) in exchange for (i) a note (the “Note”) with a principal amount equal to the lesser of the adjusted ACB of the shares under s. 84.1(2)(a.1), and their FMV minus $X, and (ii) Newco common shares for the balance, and with a s. 85(1) election being made.
- Newco will use the proceeds of an interest-bearing loan from Holdco (funded, in turn by an interest-bearing loan from Opco, funded in turn by Opco out of its cash and short-term investments) to repay a portion of the Note so as to fund the payment by the estate of income taxes arising in the Deceased’s terminal return.
- At least one year following 1, Newco and Holdco will amalgamate to form Amalco.
- Over the period of at least one year following the amalgamation, the Note will be gradually repaid, with the repayment in any quarter not exceeding X% of the principal after the repayment in 2.
Rulings
Re ss. 84.1, 84(2) and 245(2).