In 2012-0456221R3, CRA ruled that s. 69(5) applied to the winding-up of a Newco so that s. 40(3.6) did not deny the capital loss from the resulting disposition to a spousal testamentary trust of its Newco shares, which it had acquired, after the death of its beneficiary, in exchange for shares of a corporation held by that trust before such death. CRA also confirmed the non-application of s. 245(2), since the purpose of the transactions was to avoid double taxation.
In confirming that this position was still valid in the context of such post-mortem planning, even if legal and commercial constraints prevent the winding-up of the corporation within three years of the death of the beneficiary spouse, CRA stated:.
Paragraph 69(5)(d) provides that where in a taxation year of a corporation property of the corporation has been appropriated in any manner whatever to, or for the benefit of, a shareholder, on the winding-up of the corporation, subsection 40(3.6) does not apply in respect of any property disposed of on the winding-up. Where the conditions and technical parameters of subsection 40(3.6) apply, the Trust finds itself in a situation of immediate double taxation (capital gain on the death of the beneficiary spouse and deemed dividend on the redemption of the corporation's shares). We understand that in a situation where legal and commercial constraints prevent the winding-up of the corporation within three years of the death, such double taxation could be permanent. The CRA does not consider that the use of post mortem transactions to eliminate the capital gain arising on the death of the beneficiary spouse in order to limit double taxation at the trust level results in a situation of abuse within the meaning of paragraphs 245(4)(a) and 245(4)(b). … 2012-0456221R3 is therefore still valid …