LANGIND F DOCNUM 2009-0326961C6

LANGIND F
DOCNUM 2009-0326961C6
AUTHOR Gladu, Guylaine
DESCKEY 20
RATEKEY 2
REFDATE 091009
SUBJECT Distribution of Corporate Property
SECTION 84(2); 88(1)
SECTION
SECTION
SECTION
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Please note
the time of
Prenez note
reprÈsenter
that the following document, although believed to be correct at
issue, may not represent the current position of the CRA.
que ce document, bien qu'exact au moment Èmis, peut ne pas
la position actuelle de l'ARC.
PRINCIPAL ISSUES:
Questions with respect to Rulings no. F
2002-0154223 and F 2005-0142111R3, which dealt with post mortem planning
and their application to a given hypothetical situation. The purpose of
this type of planning is to bring back at the shareholder level property of
a corporation the fair market value of which would correspond to the
adjusted cost base to the shareholder of the shares of the capital-stock of
the corporation. In each of the Rulings mentioned above, it is indicated
that the corporation would remain a separate and distinct entity for a
period of at least one year, and that such corporation would continue to
carry on its business during such period in the same manner than before.
Various questions with respect to the potential application of subsection
84(2) ITA to the hypothetical situation provided.
POSITION:
In this type of post mortem planning, the potential
application of subsection 84(2) would result in a deemed dividend paid by a
corporation and deemed received by the individual shareholder. In the two
Rulings mentioned, the fact that the corporation would remain a separate
and distinct entity for a period of at least one year and that such
corporation would continue to carry on its business during such period in
the same manner than before did contribute to conclude that conditions of
application of subsection 84(2) were not all met. In fact, subsection
84(2) requires that funds or property of a corporation 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 its business. In Rulings no. F 2002-0154223 and F
2005-0142111R3, the individual ceased to be shareholder of the corporation
for at least one year prior to the distribution of funds or property on the
winding-up, discontinuance or reorganization of the corporation's business.
Otherwise, the hypothetical scenario briefly described in the question
seems to differ from the ones described in Rulings no. F 2002-0154223 and F
2005-0142111R3. Among other things, ACO seems to have discontinued its
business prior to the death of the taxpayer and its assets consist only of
cash. In consequence and considering that the given situation is
hypothetical and only briefly described, the CRA cannot make any comments
on the application of subsection 84(2) to the given situation. The fact
that the corporation would remain a separate and distinct entity for a
period of at least one year and that such corporation would continue to
carry on its business during such period in the same manner than before
were part of the proposed transactions submitted by the taxpayers involved
in the Rulings and as such, cannot be considered as "requirements" from the
CRA. Finally, CRA's position is to rule on the potential application of
subsection 84(2) on a case by case basis, after a review of all the facts
and circumstances surrounding a specific situation.
REASONS:
Wording of the Act and previous positions.
APFF- Table ronde sur la fiscalitÈ des stratÈgies financiËres et des
instruments
financiers- CONGR»S 2009
Question 1 - Planification " post-mortem " Pipeline
Depuis que le taux d'imposition du gain en capital est infÈrieur au taux
d'imposition d'un dividende, lors du dÈcËs d'un contribuable dÈtenant des
actions d'une compagnie devant Ítre liquidÈe ‡ court terme, il peut Ítre
prÈfÈrable d'utiliser la technique " post-mortem ", dite pipeline, plutÙt
que le paragraphe 164(6) L.I.R. afin que le montant devenant imposable par
suite du dÈcËs du contribuable le soit ‡ titre de gain en capital plutÙt
qu'‡ titre de dividende.
Exemple : PrÈsumons que le contribuable dÈtient la totalitÈ des actions
d'une compagnie canadienne imposable (ci-aprËs appelÈe " ACO "), qui n'est
pas une SEPE, ayant une juste valeur marchande de 100 000 $ et un co˚t de
100 $.
ACO possËde une encaisse de 100 000 $, aucun passif, un capital-actions de
100 $ et des BNR de 99 900 $.
¿ son dÈcËs, le contribuable est prÈsumÈ avoir disposÈ de ses actions pour
100 000 $ et rÈalise un gain en capital de 99 900 $.
La succession du contribuable est rÈputÈe avoir fait l'acquisition des
actions pour un montant de 100 000 $, lequel montant correspond ‡ la fois
au co˚t et ‡ la juste valeur marchande des actions pour la succession.
La succession constitue une nouvelle sociÈtÈ canadienne imposable (ci-aprËs
appelÈe " BCO ") et y souscrit 100 actions ordinaires pour 100 $.
La succession vend les actions d'ACO ‡ BCO pour un prix de 100 000 $
payable par l'Èmission d'un billet ‡ demande, sans intÈrÍt. Aucun impÙt
n'en dÈcoule.
ACO est ensuite liquidÈe dans BCO et tous ses biens sont remis ‡ BCO.
¿ la rÈception des biens d'ACO, dont l'encaisse de 100 000 $, BCO rembourse
le billet de 100 000 $ d˚ ‡ la succession.
BCO est ensuite dissoute.
Finalement, la succession remet au(x) lÈgataire(s) la somme de 100 000 $
extraite de ACO.
Le rÈsultat final est que la plus-value des actions d'ACO sera imposÈe
comme gain en capital entre les mains du contribuable dÈcÈdÈ.
Le paragraphe 164(6) L.I.R. aurait plutÙt donnÈ lieu ‡ un dividende
imposable de 99 900 $ entre les mains de la succession, provoquant une
perte en capital de 99 900 $ dans la succession, laquelle perte en capital
aurait ÈtÈ appliquÈe par le liquidateur contre le gain en capital rÈalisÈ
par le contribuable dÈcÈdÈ.
Les dÈcisions numÈros F 2002 -0154223 et F 2005-0142111R3 laissent sousentendre que la succession ne devrait pas procÈder ‡ la liquidation d'ACO
dans BCO avant qu'il se soit ÈcoulÈ une pÈriode d'au moins une annÈe si
elle veut bÈnÈficier de ces dÈcisions, toutes deux favorables relativement
‡ la non-application de l'article 84.1 L.I.R., du paragraphe 84(2) L.I.R.
et du paragraphe 245(2) L.I.R.
De plus, dans les deux dÈcisions anticipÈes mentionnÈes ci-dessus, il Ètait
fait mention que durant l'annÈe d'attente en question, la sociÈtÈ donnÈe
(ACO) continuerait d'exploiter son entreprise, et ce, de la mÍme maniËre
que cela se faisait auparavant.
Dans l'interprÈtation technique F 2006-0170641E5 du 29 juin 2006, l'ARC
mentionne que cette attente d'un an, de mÍme que le maintien d'ACO comme
entitÈ juridique distincte continuant d'exploiter son entreprise pour cette
pÈriode d'un an, faisaient partie des opÈrations projetÈes soumises par les
contribuables impliquÈs et ne sauraient Ítre qualifiÈs ‡ proprement parler
d'une " exigence " de l'ARC. L'ARC mentionne Ègalement qu'elle reconnaÓt
toutefois que ces ÈlÈments ont contribuÈ ‡ permettre ‡ la prÈsente
Direction de conclure ‡ la non-application du paragraphe 84(2) L.I.R.
Questions ‡ l'ARC
a)
Pourquoi obliger la succession de maintenir la structure d'ACO et
BCO en place pendant toute une annÈe et de retarder ainsi le rËglement de
la succession, puisque le rÈsultat de la dissolution d'ACO dans BCO sera la
reconnaissance d'un dividende imposable versÈ par ACO ‡ BCO d'un montant de
99 900$ ? Ce dividende n'entraÓnera aucune imposition puisqu'il sera versÈ
entre deux sociÈtÈs canadiennes imposables rattachÈes.
b)
En quoi l'application du paragraphe 84(2) L.I.R. changerait-elle
quelque chose ‡ cet Ètat de fait ?
c)
En quoi le report de la dissolution pendant une annÈe changera-t-il
quelque chose ‡ l'application ou la non-application du paragraphe 84(2)
L.I.R. ?
d)
S'il faut absolument maintenir la structure d'ACO et BCO pendant
une annÈe, est-ce une annÈe de calendrier ou une annÈe financiËre qui
pourrait Ítre plus courte ?
RÈponse de l'ARC aux questions 1 a) et b)
La question 1 a) fait Ètat d'un dividende inter-sociÈtÈ qui rÈsulterait de
la liquidation d'une filiale dans sa sociÈtÈ mËre en vertu du paragraphe
88(1) L.I.R. Normalement, aucun dividende inter-sociÈtÈ ne rÈsulte d'une
telle liquidation. En effet, l'alinÈa 88(1)d.1) L.I.R. Èdicte que le
paragraphe 84(2) L.I.R. ne s'applique pas ‡ la liquidation de la filiale.
D'autre part, l'application potentielle du paragraphe 84(2) L.I.R. dans une
planification " post-mortem " de type pipeline rÈsulterait non pas en un
dividende inter-sociÈtÈ, mais plutÙt en un dividende rÈputÈ versÈ par une
sociÈtÈ (ACO dans votre exemple) et rÈputÈ reÁu par un particulier (la
succession dans votre exemple).
RÈponse de l'ARC ‡ la question 1 c)
Dans le cadre des dÈcisions anticipÈes F 2002-0154223 et F 2005-0142111R3,
l'ARC a conclu que le paragraphe 84(2) L.I.R. n'Ètait pas applicable aux
opÈrations projetÈes pour imposer un dividende au particulier qui Ètait
ultimement bÈnÈficiaire de la distribution ou de l'attribution. ¿ cet
Ègard, les opÈrations projetÈes indiquaient entre autres, que la sociÈtÈ
donnÈe demeurait une entitÈ juridique distincte (i.e. que cette sociÈtÈ
n'Ètait pas liquidÈe dans une autre sociÈtÈ ou fusionnÈe avec une autre
sociÈtÈ) pour une pÈriode d'au moins une annÈe ‡ compter du transfert
d'actions du capital-actions de la sociÈtÈ donnÈe par le particulier en
faveur de la sociÈtÈ nouvellement constituÈe. De plus, durant cette mÍme
pÈriode, la sociÈtÈ donnÈe continuait d'exploiter son entreprise et ce, de
la mÍme maniËre que cela se faisait auparavant. Par la suite, il Ètait
prÈvu que le billet payable serait remboursÈ (ou que la diminution du
capital versÈ serait effectuÈe) sur une base progressive.
Sur la base de ce qui prÈcËde, il Ètait raisonnable, dans les circonstances
et dans un contexte de planification " post-mortem ", de considÈrer que les
conditions d'application du paragraphe 84(2) L.I.R. n'Ètaient pas toutes
respectÈes. Ainsi, le paragraphe 84(2) L.I.R. exige que des fonds ou des
biens d'une sociÈtÈ donnÈe soient distribuÈs ou autrement attribuÈs, de
quelque faÁon que ce soit, ‡ ses actionnaires ou au profit de ceux-ci, lors
de la liquidation, de la cessation de l'exploitation ou de la
rÈorganisation de l'entreprise de la sociÈtÈ donnÈe. Dans les dÈcisions
anticipÈes F 2002-0154223 et F 2005-0142111R3, le particulier avait cessÈ
d'Ítre un actionnaire de la sociÈtÈ donnÈe depuis une pÈriode d'au moins
une annÈe, prÈalablement ‡ la rÈception des fonds ou des biens et ‡ la
liquidation, cessation de l'exploitation ou rÈorganisation de l'entreprise
de la sociÈtÈ donnÈe.
Par ailleurs, la situation briËvement dÈcrite dans l'ÈnoncÈ de la prÈsente
question nous apparaÓt diffÈrÈe de celles dÈcrites dans les dÈcisions
anticipÈes F 2002-0154223 et F 2005-0142111R3. Entre autres, ACO ne semble
plus exploiter d'entreprise prÈalablement au dÈcËs du contribuable et la
totalitÈ de ses ÈlÈments d'actif est constituÈe de liquiditÈs. En
consÈquence et compte tenu du fait que l'ÈnoncÈ de la prÈsente question ne
dÈcrit que sommairement une situation donnÈe hypothÈtique, nous ne pouvons
formuler de commentaires sur l'application potentielle du paragraphe 84(2)
L.I.R. dans le cadre de la situation dÈcrite dans l'ÈnoncÈ.
RÈponse de l'ARC ‡ la question 1 d)
Comme vous l'avez soulevÈ dans l'ÈnoncÈ de la prÈsente question, l'ARC a
mentionnÈ dans l'interprÈtation technique F 2006-0170641E5 que les ÈlÈments
des dÈcisions anticipÈes F 2002-0154223 et F 2005-0142111R3, sommairement
dÈcrits ci-dessus, faisaient partie des opÈrations projetÈes soumises par
les contribuables impliquÈs et ne sauraient Ítre qualifiÈs, ‡ proprement
parler, d'une exigence de notre Direction. Par ailleurs, nous tenons ‡
prÈciser que la position de notre Direction est de se prononcer sur
l'application potentielle du paragraphe 84(2) L.I.R. sur une base de cas
par cas, aprËs avoir effectuÈ un examen complet de tous les faits et
circonstances se rapportant ‡ une situation particuliËre donnÈe.
Guylaine Gladu
(613) 952-8500
Le 9 octobre 2009
2009-032696
APFF - ROUND TABLE ON THE TAXATION OF FINANCIAL STRATEGIES AND INSTRUMENTS
- 2009 CONFERENCE
Question 1 - Post-Mortem Pipeline Planning
Since the tax rate on a capital gain is lower than the tax rate on a
dividend, at the time of death of a taxpayer holding shares of a
corporation having to be wound-up in the short term, it can be preferable
to use the "post-mortem" pipeline technique rather than subsection 164(6)
of the ITA so that the amount that becomes taxable following the death of
the taxpayer is taxable as a capital gain rather than as a dividend.
Example: Let us assume that the taxpayer is holding all of the shares of a
taxable Canadian corporation (hereafter called "ACO"), which is not a SBC,
having a fair market value of $100,000 and a cost of $100.
ACO has cash totalling $100,000, no liabilities, $100 in capital stock and
$99,900 in RE.
At his death, the taxpayer is deemed to have disposed of his shares for
$100,000 and realizes a capital gain of $99,900.
The estate of the taxpayer is deemed to have acquired the shares for an
amount of $100,000, which corresponds to the cost and the fair market value
of the shares for the estate.
The estate incorporates a new taxable Canadian corporation (hereafter
called "BCO") and subscribes to 100 common shares therein for $100.
The estate sells the shares of ACO to BCO for a price of $100,000 payable
by the issuance of a non-interest bearing demand note. No tax arises from
this.
ACO is then wound-up into BCO and all of its property is transferred to
BCO.
Upon receipt of the property of ACO, including the cash totalling $100,000,
BCO repays the note of $100,000 which is payable to the estate.
BCO is then dissolved.
Finally, the estate gives the amount of $100,000, which came from ACO, to
the heir(s).
The final result is that the increase in value of the shares of ACO will be
taxed as a capital gain in the hands of the deceased taxpayer.
On the other hand, subsection 164(6) of the ITA would have resulted in a
taxable dividend of $99,900 in the hands of the estate, creating a capital
loss of $99,000 in the estate, with such capital loss being applied by the
liquidator against the capital gain realized by the deceased taxpayer.
The rulings F 2002-0154223 and F 2005-0142111R3 imply that the estate
should not proceed with the winding-up of ACO into BCO for a period of at
least a year if it wants to profit from these decisions, which are both
favourable to the non-application of section 84.1 of the ITA, subsection
84(2) of the ITA and subsection 245(2) of the ITA.
Moreover, in both advanced rulings mentioned above, it was stated that
during the one year waiting period in question, the particular corporation
(ACO) would continue to carry on its business in the same manner as before.
In technical interpretation F 2006-0170641E5 of June 29, 2006, the CRA
mentioned that this one year waiting period, as well as the fact that ACO
would remain as a separate and distinct legal entity continuing to carry on
its business for this period of one year, were part of the proposed
transactions submitted by the taxpayers involved and as such, cannot be
considered as a "requirement" from the CRA. The CRA also mentions,
however, that it recognizes that these elements have contributed to allow
the Directorate to conclude to the non-application of subsection 84(2) of
the ITA.
Questions to the CRA
a)
Why is it required that the estate keeps the structure of ACO and
BCO in place for a whole year and thus delay the settlement of the estate,
since the result of the dissolution of ACO into BCO will give rise to a
taxable dividend of $99,900, paid by ACO to BCO?
This dividend will not
be taxable since it is paid by one taxable Canadian corporation to another
which are connected.
b)
How would the application of subsection 84(2) of the ITA change
anything in regard to this established fact?
c)
How would the postponement of the dissolution for one year change
anything in terms of the application or the non-application of subsection
84(2) of the ITA?
d)
If it is absolutely necessary to keep the structure of ACO and BCO
for one year, is it a calendar year or a financial year which could be
shorter?
CRA Response to questions 1 a) and b)
Question 1 a) refers to an inter-corporate dividend that would result from
the winding-up of a subsidiary into its parent corporation pursuant to
subsection 88(1) of the ITA. Normally, no inter-corporate dividend results
from such a winding-up. In fact, paragraph 88(1)(d.1) of the ITA states
that subsection 84(2) of the ITA does not apply to a winding-up of the
subsidiary.
In addition, the potential application of subsection 84(2) of the ITA in a
"post-mortem" pipeline planning would not result into an inter-corporate
dividend but, rather, in a deemed dividend paid by a corporation (ACO, in
your example) and deemed to be received by the individual (the estate, in
your example).
CRA Response to question 1 c)
In advance rulings F 2002-0154223 and F 2005-0142111R3, the CRA concluded
that subsection 84(2) of the ITA was not applicable to the proposed
transactions so as to tax a dividend in the hands of the individual who was
ultimately the beneficiary of the distribution or the appropriation. In
this respect, the proposed transactions indicated, among others, that the
particular corporation would remain a separate and distinct legal entity
(i.e. that this corporation was not wound-up into another corporation or
amalgamated with another corporation) for a period of at least one year
from the date of the transfer of the shares of the capital stock of the
particular corporation by the individual in favour of the newly
incorporated corporation. Moreover, during this same period, the
particular corporation continued to carry on its business in the same
manner as before. Thereafter, it was provided that the note payable would
be repaid (or that the reduction of the paid-up capital would be effected)
on a progressive basis.
Given the aforementioned, it was reasonable, in the circumstances and in
the context of a "post-mortem" planning, to consider that the conditions
for the application subsection 84(2) of the ITA were not all met. In fact,
subsection 84(2) of the ITA 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 windingup, discontinuance or reorganization of its business of the particular
corporation. In advanced rulings F 2002-0154223 and F2005-0142111R3, the
individual had ceased to be a shareholder of the particular corporation for
a period of at least one year, before the receipt of the funds or the
property on the winding-up, discontinuance or reorganization of its
business of the particular corporation.
In addition, the situation briefly described in the present question
appears to us to defer from those described in the advanced rulings F
2002-0154223 and F 2005-0142111R3. Among others, ACO does not appear to be
carrying on a business prior to the death of the taxpayer and all of its
assets consist of liquid assets. Consequently, and given that the present
question only summarily describes an hypothetical particular situation, we
cannot provide any comments on the potential application of subsection
84(2) of the ITA in the situation described above.
CRA Response to question 1 d)
As you mentioned in the present question, the CRA stated in technical
interpretation F 2006-0170641E5 that the elements of the advanced rulings F
2002-0154223 and F 2005-0142111R3, summarily described above, were part of
the proposed transactions submitted by the taxpayer involved and as such,
cannot be considered as a requirement by our Directorate. In addition, we
want to clarify that the position of our Directorate is to rule on the
potential application of subsection 84(2) on a case by case basis, after a
review of all the facts and circumstances surrounding a particular specific
situation.
Guylaine Gladu
(613) 952-8500
October 9, 2009
2009-032696