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 corporation and then a subsequent combination of the companies to complete the pipeline.
There was considerable concern that these plans would disappear with legislation arising from the 2018 Federal Budget initiatives. It survived the legislation (so far). In the meantime, when requested to do so, the Canada Revenue Agency (“CRA”) continues to issue favorable rulings on post-mortem pipelines under various circumstances (but has indicated an intention to keep challenging them nevertheless).
Recently the CRA ruled a transaction involving a pipeline strategy which used the adjusted cost base derived from a deemed disposition of an inter vivos trust’s assets at the end of 21 years would not result in a deemed dividend upon conversion of the ACB of the shares in shareholder loans. More Good news.