Recently, a fellow blogger wrote about the benefit of post-mortem pipeline transactions to avoid double tax on disposition of certain assets.
Briefly, a pipeline transaction is a form of transaction whereby the assets of a corporation are distributed to shareholders utilizing the high adjusted cost base resulting from the capital gains realized on death, rather than as a distribution in the form of a dividend. In this sense, the use of a pipeline is often justified as avoiding “double-tax” in the sense that there has been tax imposed as a capital gain on the death of the shareholder followed by further tax in the form of a dividend realized when the assets are distributed.
The steps in the proposed plan include the issuance of promissory notes equal to the fair market value of the deceased’s shares upon the sale of those shares to another corporation and then a subsequent combination of the companies to complete the pipeline. For tax reasons outlined in my colleague’s blog, it is commonplace to wait a year from the time of the share transfer before the distribution of the assets and that the Canada Revenue Agency (“CRA”) appears to support this approach in recent rulings.
However, CRA rulings also included a requirement for the continual carrying on of the business for a period of one year. In a conference several years ago, the CRA noted that the pipeline strategy would not work if the original corporation had no business assets, holding mostly cash. In fact, it appeared the CRA would not consider portfolio investments as business assets.
This is a problem for a growing number of taxpayers, because they may have had businesses inside their corporation which they sold upon retirement. They would have replaced the business assets inside their corporation with an investment portfolio from the cash proceeds on sale to support their retirement.
Good news. In early 2016, the CRA provided a favorable ruling to a taxpayer’s pipeline strategy which, involved a company the CRA acknowledged was engaged in the business of managing an investment portfolio. Here’s hoping that future rulings confirm this result.