Principal Issues: Whether a beneficiary of an estate would be considered to be a specified shareholder of a corporation before control of the corporation was last acquired by the Estate.
Position: No.
Reasons: We would apply paragraphs 88(1)(d.2) and (d.3) on the understanding that the deemed acquisition of control of the corporation by the Estate occurs concurrently with the acquisition of the shares of the corporation by the Estate.
2024 CTF Annual Tax Conference
CRA Round Table
Question 7: Post-Mortem Pipeline Bump Planning
Assume that an individual (Individual A) owns all of the shares of the capital stock of Aco, a private corporation, which owns non-depreciable capital property with material gains that accrued after Individual A acquired control of Aco. Individual A dies and the beneficiaries of Individual A's estate (Estate) include a charity. The charity is not a specified shareholder of Aco prior to the death of Individual A, but it is entitled to 11% of the Estate.
Following the death of Individual A, the Estate intends to implement a standard post-mortem pipeline bump transaction. The post-mortem bump entails the incorporation of a Newco (parent) by the Estate and the transfer of the shares of Aco to Newco. Aco (the subsidiary) would then be wound up into, or amalgamated with, Newco.
Under subparagraph 88(1)(c)(vi), a bump will be denied if property distributed to the parent on the winding up (or substituted property) is acquired by a "specified shareholder" (other than a "specified person") of the subsidiary "at any time during the course of the series and before control of the subsidiary was last acquired by the parent."
In this fact scenario, the Estate will acquire control of Aco as a consequence of the death of Individual A. Paragraph 88(1)(d.3) will deem control to have been acquired by the Estate immediately after the death of Individual A from a person dealing at arm’s length. Further, pursuant to paragraph 88(1)(d.2), control of Aco by Newco will be deemed to occur at the time the Estate is deemed, by paragraph 88(1)(d.3), to have acquired control of Aco.
The question is whether the bump denial rules apply in these circumstances. In particular, would the CRA consider the charity to be a specified shareholder of Aco before control of Aco, the subsidiary, was last acquired by Newco?
CRA Response
We would not consider the charity to be a specified shareholder of the subsidiary (Aco) prior to the deemed acquisition of control of Aco by the Estate. We would apply paragraphs 88(1)(d.2) and (d.3) on the understanding that control of Aco was last acquired by the Estate concurrently with the acquisition of the shares of Aco by the Estate.
Allison Thomas
December 3, 2024
2024-103822