In the past few years, many associated with this blog have written about the benefit of post-mortem pipeline transactions to avoid double tax on disposition of certain assets.
Again, and 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 new corporation. Following a period of at least one year, the new corporation and the corporation previously owned by the deceased will amalgamate and the promissory notes will be repaid.
Despite ongoing concerns for changes in legislation to “terminate” the plans, the Canada Revenue Agency (“CRA”) continues to issue favourable rulings implementing post-mortem planning. It had done so once again with a recent ruling (CRA 2019-083513R3 dated August 26, 2020). In the submission for review, the CRA was asked for their ruling on whether the transactions contemplated (somewhat more complex that those described above but similar in structure and timing) would trigger the rules around deemed dividends and reduced paid up capital, and the General Anti-Avoidance Rules (“GAAR”). The CRA ruled favourably (i.e. no triggering of these rules) in all respects.
As a word of caution, care must be applied to these plans. Timing (therefore patience) is important as is continuity of operations and shares being transacted , as my fellow blogger John Oakey noted in a recent blog.
Happy Reading and be safe!