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Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP commented on the CRA’s position in light of the provisions and the scheme of the Act. This paper updates that discussion to take into account subsequent CRA statements, as well as the decisions of the Tax Court of Canada in MacDonald 5 and McClarty Family Trust 6 released earlier this year. Subsection 164(6) Capital Loss Planning Subsection 164(6) capital loss carry-back planning is another technique employed by tax practitioners to relieve against the double taxation that can arise under the Act as a result of the deemed disposition on death. In concept, the planning involves the creation of a capital loss in the estate’s first taxation year which is carried back to offset the capital gain on death. The planning typically involves the winding-up of the corporation owned by the estate and/or a redemption of all or some portion of the estate’s shares therein. 7 Subsection 164(6) is an exceptional provision in that it allows, in some circumstances, the capital loss sustained by the estate on the wind-up or redemption to be carried back to the deceased’s terminal return and applied against the capital gain that arose as a consequence of the deemed disposition on death. 8 The provision requires that the loss be sustained in the estate’s first taxation year, and is subject to numerous stop-loss rules. At the 2012 Society of Trust and Estate Practitioners (“STEP”) Round Table, the CRA was asked to comment on the interaction of subsections 40(3.6), 40(3.61) and 164(6) and, in so doing, expressed a view that could render subsection 164(6) capital loss carry-back planning unavailable for many estates. This paper comments generally on the issue raised at the STEP Round Table and the CRA’s response. Eligible Dividend Designations Following Budget 2012 This paper concludes with a brief update on two relieving measures enacted following Budget 2012. * * * 5 6 7 8 MacDonald v. The Queen, 2012 DTC 1145 (TCC), under appeal by the Crown to the Federal Court of Appeal [“MacDonald”]. McClarty Family Trust v. The Queen, 2012 DTC 1123 (TCC) [“McClarty Family Trust”]. For purposes of this paper, a reference to a redemption includes a purchase for cancellation. The term “exceptional” is used since the provision permits the loss of one taxpayer (i.e., the estate) to be applied against the gain of another (i.e., the deceased). 560600/422632 MT DOCS 11864055v1G 2
Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP PIPELINE PLANNING Background – Post-Mortem Tax Planning Various post-mortem tax planning techniques have been developed and refined over the years to relieve against double taxation that can arise under the Act as a result of the deemed disposition on death. Where an individual dies owning shares of a private corporation, 9 the shares 10 are generally deemed to be disposed of by the deceased immediately prior to death at their then FMV (in the absence of a rollover to a spouse or spouse trust). 11 If the FMV of the shares exceeds their adjusted cost base (“ACB”) 12 as is commonly the case, a capital gain will be realized in the deceased’s terminal year. As a consequence of the deemed disposition at FMV, where the shares of the private corporation are acquired by a person (e.g., the deceased’s estate 13 ), that person is deemed to have acquired the shares at a cost equal to the FMV immediately before death. However, the deemed disposition does not vary the ACB of the assets owned by the corporation or permit assets to be distributed from the corporation to its shareholders without additional shareholder level tax. Accordingly, in the absence of tax planning, the same economic gain that was taxed in the hands of the deceased may be taxed again in the hands of the corporation (and its shareholders) when the corporation’s assets are ultimately disposed of (and the net proceeds are distributed to shareholders). The two principal techniques for relieving against this form of economic double taxation are: • Capital loss carry-back planning, using the provisions of subsection 164(6) to create a loss in the deceased’s estate within the estate’s first taxation year, which capital loss the Act permits to be used to offset the capital gain arising on death; and • “Pipeline planning”, in which a new corporation is used to create a so-called “pipeline” of debt or high paid-up capital (“PUC”) shares that allows assets to be distributed to the estate (or its beneficiaries) without additional tax payable by the recipient. 14 These techniques are sometimes used independently but are often combined with a view to optimizing the after-tax result. 9 10 11 12 13 14 These comments assume, as would normally be the case, that such shares were capital property of the deceased taxpayer for purposes of the Act. Subsection 248(1) and section 54 define what constitutes a taxpayer’s “capital property”. As well as other properties owned by the deceased. Subsection 70(5) provides for the deemed disposition of capital property at FMV; subsection 70(6) generally provides for a rollover to a spouse or spouse trust. The rollovers in section 70 for family farming corporations and family fishing corporations transferred to children of a deceased are ignored for purposes of this paper. Subsection 248(1) and section 54. More precisely, the deceased’s executor or executrix in his or her capacity as executor or executrix. Pipeline planning is sometimes combined with “bump” planning. In concept, the corporation is wound-up into a new corporation and the provisions of paragraphs 88(1)(c) and (d) are relied on to increase the ACB of the corporation’s non-depreciable capital property. Alternatively, instead of a tax-deferred winding-up undertaken pursuant to subsection 88(1), an amalgamation (e.g., a short-form vertical amalgamation) under section 87 could be undertaken. 560600/422632 MT DOCS 11864055v1G 3
Page 1: Current Issues Forum: Pipeline Plan
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Presentation Material - McCarthy TÃ©trault

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