Background
At the time of the death of the spouse beneficiary of a testamentary spousal trust, the trust held preferred and common shares of Opco, whose significant assets consisted primarily of interest-bearing loans receivable, interest receivable and investments in private corporations.
The trust then distributed its Opco common shares to its two capital beneficiaries (Beneficiaries 1 and 2) pursuant to s. 107(2), and OPco redeemed some of the preferred shares, giving rise to a capital loss, which the trust applied against the capital gain realized by it on the spouse’s death.
Proposed transactions
- The trust will transfer its preferred shares on a s. 85(1) rollover basis to a “Newco” (incorporated by Beneficiaries 1 and 2) in consideration for a non-interest-bearing demand note, and non-voting non-cumulative redeemable retractable preferred shares of Newco.
- Beneficiaries 1 and 2 will transfer their common shares of Opco to Newco on a s. 85(1) rollover basis in consideration for non-voting non-cumulative redeemable retractable preferred shares of Newco.
- After the elapse of one year, Opco will be wound up into Newco.
- The note issued in 1 will be gradually repaid over a period of at least two years after the wind-up of Opco into Newco. “For greater certainty, Newco will pay down no more than 25% of the principal amount of the Note by 3 months following the winding-up, no more than 50% of the principal amount of the Note by 6 months following the winding-up, and no more than 75% of the principal amount of the Note by 9 months following the winding-up.”
Rulings
Re ss. 84.1, 84(2) and 245(2).