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Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP In declining to comment on the possible application of subsection 84(2) in this example, the CRA noted that the provision requires that funds or property of a particular corporation must have been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders on the winding-up, discontinuance or reorganization of the business of the particular corporation (i.e., ACo) (in which case a deemed dividend would result to the extent that the redemption proceeds exceeded the PUC of the shares). The CRA noted that while it had ruled favourably in prior advance rulings on the non-application of subsection 84(2) (in addition to ruling favourably on section 84.1 and the general antiavoidance rule in subsection 245(2) (“GAAR”)), 24 the ruling applications in those cases provided that: • the corporation in question (e.g., the equivalent of ACo and XCo in the examples set out above) would remain a separate and distinct entity for at least one year (i.e., that it would not be wound up into or amalgamated with another corporation); • during this period, the corporation would continue to carry on its business in the same manner as before; and • only thereafter would the note be repaid (or would PUC of shares be reduced), on a progressive basis. The CRA indicated that, in these circumstances, it was reasonable to conclude that the conditions for the application of subsection 84(2) had not all been satisfied. While the CRA declined to comment on the application of subsection 84(2) in the example considered, the CRA noted, from the perspective of tax planners perhaps somewhat hopefully, that the three conditions summarized above that had been referred to in the favourable rulings were facts submitted by the taxpayers in question and could not be considered CRA requirements. 25 While the CRA’s position remained uncertain following this Round Table discussion, the discussion placed tax planners on notice that the CRA might take the position that subsection 84(2) could give rise to a deemed dividend in a pretty typical pipeline plan. Subsequently, in a withdrawn ruling request in respect of a proposed post-mortem pipeline plan involving a holdco that was inactive and owned only liquid assets (which assets were possibly only cash), the CRA took the position that the holdco’s surplus would be subject to dividend 24 25 its $100,000 ACB. Provided that this capital loss was triggered in the estate’s first taxation year, subsection 164(6) would generally permit the executor or executrix to elect to have the capital loss treated as a capital loss of the deceased in his or her terminal year rather than a capital loss of the estate. This capital loss could then be used to offset the capital gain arising in the deceased’s terminal year by reason of the deemed disposition on death. CRA Document Nos. 2002-0154223, dated November 13, 2002, and 2005-0142111R3, dated November 2, 2005. The CRA had previously explained these rulings in a similar manner in a technical interpretation (CRA Document No. 2006-0170641E5, dated June 29, 2006). 560600/422632 MT DOCS 11864055v1G 6
Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP treatment in the hands of the estate (although the CRA noted that capital loss carry-back planning could be undertaken to avoid double taxation). 26 The CRA revisited this issue at the 2010 Canadian Tax Foundation (“CTF”) Annual Conference. While the PowerPoint questions and responses distributed by the CRA were not definitive, in the discussions the CRA seemed to suggest that subsection 84(2) would be applied to a postmortem pipeline of a corporation that held all cash. In 2011, the issue was again revisited at the STEP Conference, the British Columbia Tax Conference and the CTF Annual Conference. At the 2011 British Columbia Tax Conference, the CRA stated that “pipeline planning is not dead…but the potential application of anti-avoidance provisions of s. 84.1 and s. 84(2) must be reviewed” (emphasis original). As for “facts and circumstances” that would lead to the application of subsection 84(2), the CRA stated as follows at the 2011 CTF Annual Conference: […] in the context of a series of transactions designed to implement a post-mortem pipeline strategy, some of the additional facts and circumstances that in our view could lead to the application of subsection 84(2) and warrant dividend treatment could include the following: • The funds or property of the original corporation would be distributed to the estate in a short time frame following the death of the testator. • The nature of the underlying assets of the original corporation would be cash and the original corporation would have no activities or business (“cash corporation”). 27 At the 2011 STEP Conference and the 2011 CTF Annual Conference, the CRA recognized the potential for double taxation arising as a consequence of the deemed disposition on death but stated that the double taxation which pipeline planning is intended to address could be “avoided” or “mitigated” with the implementation of “the subsection 164(6) capital loss carryback strategy”. As discussed below, in the authors’ view, to suggest that capital loss planning is the appropriate remedy is not – from a policy perspective – a reasonable approach given the provisions of the Act, nor does it accord with the fairness concerns which underscored Mr. Justice Hershfield’s decision in MacDonald, discussed below, and the Supreme Court of Canada’s decision in Canada Trustco. 28,29 26 27 28 29 CRA Document No. 2010-0389551R3, from 2010. These same “facts and circumstances” were identified at the 2011 STEP Conference and the 2011 British Columbia Tax Conference. Canada Trustco Mortgage Co. v. The Queen, 2005 DTC 5523 (SCC) [“Canada Trustco”]. Subsection 164(6) requires that the loss be sustained in the estate’s first taxation year, and is subject to numerous stop-loss rules. In many circumstances (e.g., where the validity of a will is contested, underlying facts are uncertain or planners are simply not contacted in time), it may not be feasible to trigger the loss within the time allowed. Further, in some circumstances, the deceased will have sufficient loss carryforwards or tax credits to shelter the gain on death such that the subsection 164(6) loss carry-back is of no benefit to the deceased. Since the deceased’s credits cannot be carried forward to offset income in the estate (including income arising on the wind-up or redemption), significant inequities could arise if pipeline planning is not possible or if it is possible only in the limited circumstances in which CRA is prepared to rule favourably. 560600/422632 MT DOCS 11864055v1G 7
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