Presentation Material - McCarthy TÃ©trault

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Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP Also in 2011 and thus far in 2012, the CRA has issued a number of favourable rulings dealing with the non-application of subsection 84(2) in the post-mortem context. 30 However, the proposed transactions have been generally similar to those on which the CRA previously ruled favourably and the statement of proposed transactions in each of these rulings has provided that: • the corporation in question would remain a separate and distinct entity for one year or longer; • during this period the corporation would continue to carry on its business; and • only thereafter would the note be repaid (or the pipeline shares be redeemed or PUC on the pipeline shares be returned), on a progressive basis. Given the CRA’s statement at the 2009 APFF Conference that these three factors were not “CRA requirements”, it is noteworthy that, in the reasons given for one of these more recent rulings, the CRA stated that “[t]he proposed pipeline transaction satisfies the administrative requirements established by the CRA in previous rulings issued in respect of similar arrangements” (emphasis added). 31 Provisions and Scheme of the Act Relevant to Pipelines In considering whether a deemed dividend may arise on a pipeline transaction in the example set out above, the relevant provisions to consider, in addition to GAAR, are subsection 84(2), section 84.1 and paragraph 88(1)(d.1). Simplified, subsection 84(2) provides for a deemed dividend in circumstances in which: […] funds or property of a corporation resident in Canada have […] been distributed or appropriated in any manner whatever to or for the benefit of the shareholders of any class […] on the winding-up, discontinuance of reorganization of its business […] Where subsection 84(2) applies, the shareholders are deemed to have received a dividend equal to the amount by which the FMV of the funds or property distributed exceeds the PUC of the shares. Section 84.1 applies in respect of surplus stripping transactions involving the transfer of shares of one corporation to another in circumstances in which the FMV of the non-share consideration and the increase in the PUC of the shares of the purchaser corporation exceed the greater of: • the ACB (as adjusted for purposes of section 84.1 (the ACB as so adjusted, the “Hard ACB”)); and • the PUC of the shares of the transferee corporation transferred to the purchaser corporation. 30 31 CRA Document Nos. 2012-0435131R3, from 2012; 2011-0401811R3, from 2012; 2010-0388591R3, from 2011; and 2011-0403031R3, from 2011 (supplemented by CRA Document No. 2011-0417741R3, from 2011). CRA Document No. 2011-0403031R3, from 2011. 560600/422632 MT DOCS 11864055v1G 8
Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP In the view of the authors, the language and clear policy of section 84.1 permit pipeline transactions, provided that the aggregate of the FMV of the non-share consideration and of the increase in PUC of the shares of the purchaser corporation does not exceed the Hard ACB of the shares of the transferee corporation. For purposes of section 84.1, ACB is generally reduced in respect of both pre-1972 gains and capital gains exemptions claimed on the share (or a share for which the share was substituted) of the taxpayer or a person with whom the taxpayer did not deal at arm’s length. In the pipeline transaction contemplated in the example above, provided that pre-1972 gains and capital gains exemption claims are not in issue, section 84.1 would appear to be intended to permit the form of surplus stripping contemplated (i.e., where the estate has “Hard ACB” by reason of the deemed disposition on death). Subsection 88(1) governs the winding-up of XCo into Newco in the example contemplated. On such a wind-up, paragraph 88(1)(d.1) provides that subsection 84(2) does “not apply to the winding-up of the subsidiary”. In light of the above provisions, the CRA’s position that subsection 84(2) may apply in respect of a basic pipeline appears to be doubtful in the example contemplated for the following reasons: • Subsection 84(2) is expressly made inapplicable to the winding-up of XCo into Newco by reason of paragraph 88(1)(d.1). • On its face, subsection 84(2) applies to distributions or appropriations “to or for the benefit of the shareholders […] on the winding-up” of XCo. On the winding-up of XCo, XCo’s sole shareholder is Newco (and subsection 84(2) should not apply to deem there to be a dividend triggered on the winding-up of Newco into the estate to the extent that $100,000 is paid on the note rather than on the Newco shares). 32 • The provisions of section 84.1, which govern transactions of the type contemplated in a basic pipeline, permit the extraction of “Hard ACB” such as the estate’s ACB in the XCo shares. • Where the Act has deemed there to be a disposition at FMV by reason of a taxpayer’s death, particularly given the provisions of section 84.1, in the authors’ view, at least in the ordinary course, the estate should not be regarded as an “accommodation party” that has been inappropriately used to extract corporate assets. Therefore, GAAR should not normally be engaged. • Further, subsection 84(2) can apply only where assets have been distributed or appropriated “on the winding-up, discontinuance or reorganization of [… XCo’s] business”. Accordingly, where XCo is not carrying on a business (and, if it was formerly carrying on a business, where the distribution does not occur on the winding-up, 32 It is acknowledged that some jurisprudence has taken a broad view of this aspect of subsection 84(2) (see, for example, RMM Canadian Enterprises Inc. et al v. The Queen, 97 DTC 302 (TCC) [“RMM”], but see also Collins & Aikman Products Co. et al v. The Queen, 2009 DTC 1179 (TCC), affirmed 2010 DTC 5164 (FCA)). 560600/422632 MT DOCS 11864055v1G 9
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