substituted

Canco contributed (for no share consideration) its shares of a non-resident Finco subsidiary (Luxco2 – which previously had paid exempt dividends to Canco) to another wholly-owned subsidiary (Luxco1). CRA found that s. 93(2.01) denied a subsequent capital loss realized on an arm’s length sale of the Luxco1 shares to the extent of such dividends, on the grounds that the shares of Luxco1 were substituted shares for those of Luxco2. The Directorate stated:

Amended s. 118.1(5.1) require that a donation be a gift of "property that was acquired by the estate on and as a consequence of the death" or "property that was substituted for that property." The individual, at death after 2015, held "Holdco" owning appreciated marketable securities. The estate is directed by will to make a donation.

Scenario 1

Holdco sells the securities and pays a dividend to the graduated rate estate, which makes the donation. Would the cash from the dividend be considered substituted property?