2024 Ruling 2023-0998721R3 - Double post-mortem pipeline -- summary under Subsection 84(2)

Background

Taxpayer A died holding preferred shares of Opco. Opco carried on a business of deriving interest income from a portfolio of loans receivable and deriving dividend income from shares of private corporations. Before the estate of Taxpayer A (Estate A) was settled, the surviving spouse (Taxpayer B) also died while holding common and preferred shares of Opco. The other shares of Opco were held by respective trusts for the three children of Axpayers A and B.

Upon Taxpayer B's death, Opco received life insurance proceeds, resulting in an addition to its capital dividend account (CDA). The articles of Opco required Opco, following the death of Taxpayer A or Taxpayer B, to redeem shares of particular classes of preferred shares that had been held by them, which occurred. The estate of Taxpayer B borrowed money from Opco to pay income taxes owed under Taxpayer B’s terminal return. Both estates and their beneficiaries were resident in Canada.

Proposed transactions

1. Estate A will transfer its remaining preferred shares of Opco to a newly incorporated corporation (Newco A), in consideration for a non-interest bearing promissory note (the “Note”) and preferred shares of Newco A, with a joint election under s. 85(1) being filed.
2. Estate B will transfer its shares of Opco to a newly incorporated corporation (Newco B) in consideration for common and preferred shares of Newco B, with a joint election under subsection 85(1) being filed.
3. Newco B will purchase for cancellation up to 25% of the preferred shares in its capital held by Estate B in consideration for a promissory note (the Newco B Note).
4. Estate B will assign the Newco B Note to Opco as consideration for the partial repayment for the tax-funding loan described above.
5. One year following the share transfers in 1 and 2, Newco A, Newco B, and Opco will amalgamate to continue as Amalco. As a result, the Newco B Note owed by Newco B to Opco will be extinguished. The authorized share capital of Amalco will be identical to that of Opco except that it will be authorized to issue an unlimited number of Amalco Class CC non-voting discretionary shares.
6. The Note will gradually be repaid after the amalgamation with no more than 25% of the initial principal being repaid in any single quarter of the first year after amalgamation.
7. Preferred shares of Amalco will gradually be redeemed such that in any quarter of that first year, no more than 25% of their initial redemption value will be redeemed.
8. The stated capital of Class CC shares of Amalco will be gradually reduced through payments, with the amount thereof in any single quarter of the first year after the amalgamation not exceeding 25% of the stated capital of such shares when they were first issued.

Rulings

Re ss. 84.1 and 84(2).