Principal Issues: Whether the CRA positions expressed in 2012-0456221R3 « Post Mortem Planning » Ruling and in 2013-0480361C6 STEP round table question are still valid.
Position: Yes.
Reasons: Subsection 69(5) can apply to prevent the capital loss from being deemed nil under subsection 40(3.6) without it being considered as abusive according to subsection 245(2). Subsection 129(1.2) does not apply, since the purpose test of that subsection is not met and the tax integration system is respected.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
13. Post-mortem planning following the death of the beneficiary of a testamentary spousal trust
In Advance Ruling 2012-0456221R3 (footnote 1), the CRA confirmed that subsection 69(5) applied on the winding-up of a newly incorporated corporation (“Newco”) so that subsection 40(3.6) did not deem to be nil the loss resulting from the disposition of shares of the capital stock of Newco held by a testamentary spousal trust (“Trust”) and acquired after the death of its beneficiary in consideration for shares of the capital stock of a corporation held by Trust prior to the death of its beneficiary. CRA also confirmed that subsection 245(2) would not apply, since the purpose of the transactions was to avoid double taxation.
Furthermore, the CRA confirmed in Question 12 (footnote 2) of the June 10, 2013 Society of Trust and Estate Practitioners Roundtable that it would not apply subsection 129(1.2) in the context of such post-mortem planning.
Question to the CRA
We would like you to confirm that the positions taken by the CRA in Advance Ruling 2012-0456221R3 and Question No. 12 of the June 10, 2013 Society of Trust and Estate Practitioners Roundtable are still valid in the context of such post mortem planning where legal and commercial constraints preclude the winding-up of the corporation held by the Trust within three years of the death of the beneficiary spouse.
CRA Response
Yes, the positions taken by the CRA are 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.
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). The position set out in document 2012-0456221R3 is therefore still valid and represents the CRA's current position.
Subsection 129(1.2) is a specific anti-avoidance rule under which, for the purposes of subsection 129(1), a dividend paid on a share of the capital stock of a corporation is deemed not to be a taxable dividend if the shareholder acquired the share (or another share for which the share was substituted) in a transaction or as part of a series of transactions one of the main purposes of which was to enable the corporation to obtain a dividend refund. Thus, the corporation is not entitled to its DR when subsection 129(1.2) applies. Whether the purpose test in subsection 129(1.2) is satisfied is a question of fact that can only be resolved in light of the facts and circumstances of a particular situation.
Generally, where, in light of the facts and circumstances of a particular situation, post mortem planning is undertaken primarily to prevent the application of the loss limitation rule in subsection 40(3.6) to limit double taxation and, to the extent that the integration principle is respected, i.e., a corresponding tax is ultimately paid by the Trust on the deemed dividend received, the CRA would be of the view that the specific anti-avoidance rule in subsection 129(1.2) should not apply in those circumstances. Consequently, the CRA's response to Question No. 12 of the Society of Trust and Estate Practitioners Roundtable of June 10, 2013 is still valid.
Yara Barrak
October 10, 2024
2024-102737
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Advance Income Ruling 2012-0456221R3, “Post Mortem Planning “, November 28, 2012.
2 CANADA REVENUE AGENCY, Technical Interpretation 2013-0480361C6, June 10, 2013.