Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether an existing corporation (“Existing Corporation”) whose shares are wholly or partly owned by the beneficiaries of the deceased’s estate (“Beneficiaries”) or owned by persons other than the Beneficiaries can be used to implement a pipeline transaction (“Pipeline”).
Position: Subject to the possible application of section 84.1 and subsection 245(2), the deceased’s estate (“Estate”) can implement a Pipeline using an Existing Corporation whose shares are owned, in whole or in part, by the Beneficiaries or by persons other than the Beneficiaries.
Reasons: Although the Estate’s transfer of the Target shares to the Existing Corporation does not appear to engage the application of subsection 84(2), section 84.1 and subsection 245(2) may nevertheless apply, among other provisions, to the Pipeline after a review of all the facts and circumstances surrounding each specific situation.
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8. Post-mortem pipeline planning
In order to implement pipeline planning (“Pipeline Planning”), an individual’s estate (the “Estate”) generally incorporates a new corporation (“Newco”) to which it sells shares of the capital stock of a private corporation (the “Target”), with or without a tax rollover, in exchange for shares of the capital stock of Newco (the “Shares”) or a note issued by Newco (the “Note”).
In accordance with the facts described in the favourable advance rulings issued by the CRA in respect of Pipeline Planning, Newco will remain a separate legal entity for a period of at least one year before being combined with Target, by way of amalgamation or winding up, to form an amalgamated entity (“Amalco”). The assets of Amalco will then gradually be used to redeem the Shares or redeem the Note.
Question to the CRA
Assuming that a taxpayer’s proposed transactions are similar to the facts that allowed the CRA to conclude that subsection 84(2) did not apply, does the CRA have a problem with the Estate selling the shares of the capital stock of Target to an existing corporation in which it does not hold any shares (the “Existing Corporation”) in order to implement a Pipeline Plan?
a) if the individual’s heirs hold all of the shares in the capital stock of the Existing Corporation;
b) if any of the shares of the capital stock of the Existing Corporation are held by heirs of the individual;
(c) if none of the shares of the capital stock of the Existing Corporation are held by heirs of the individual?
CRA Response
While the CRA has considered the application of section 84.1 and subsection 84(2) in the context of various advance ruling requests involving the implementation of Pipeline Planning, it has never established formal requirements applicable to this type of post-mortem planning. Rather, it has recognized that the manner in which proposed transactions are structured may have an impact on the application of subsection 84(2) to proposed transactions. The CRA will therefore consider the potential application of section 84.1, subsection 84(2). or subsection 245(2), among other provisions, to Pipeline Planning on a case-by-case basis after conducting a full review of all the facts and circumstances relating to a particular situation.
With respect to the three scenarios described in the statement of the issue, the transfer of the shares held by the Estate in the capital stock of Target to the Existing Corporation rather than to Newco does not appear to raise any immediate concerns with respect to the application of subsection 84(2). However, it is still necessary to consider the application of section 84.1, subsection 245(2), as well as other relevant provisions, to the proposed transactions described in the request for an advance ruling.
In general, section 84.1 will only apply if the Estate is not dealing at arm's length with Existing Corporation at the time of the transfer of the shares of the capital stock of Target (the "Transfer") and Target and Existing Corporation are connected within the meaning of subsection 186(4) immediately after the Transfer. In addition, the tax consequences under paragraphs 84.1(1)(a) and 84.1(1)(b) will apply only if the shares of the capital stock of Target had an increase in value prior to 1971 or a capital gains deduction was claimed by the individual or a person not dealing at arm's length with the individual in connection with a previous disposition of the shares of the capital stock of Target. In such circumstances, the amount of the increase in the ACB of the Target shares held by the Estate as a result of the application of paragraph 70(5)(a) (the "Increased ACB") will be reduced, as applicable, to the extent of the amounts provided for in subparagraphs 84.1(2)(a), 84.1(2)(a.1)(i) and 84.1(2)(a.1)(ii).
The Estate should generally be able to monetize the modified Increased ACB of Target's capital stock (the "Hard ACB") without being subject to section 84.1 and subsection 245(2).
The application of subsection 245(2) could be considered if the Pipeline Planning is structured to avoid the application of section 84.1 to the transfer of shares of the capital stock of Target to Existing Corporation contrary to the legislative intent of that provision. In addition, the application of subsection 245(2) could be considered if the Pipeline Plan results in an abuse of, or attempts to circumvent, one or more other provisions of the Income Tax Act.
François Mathieu
(613) 670-9044
October 7, 2021
2021-089970
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