Finance Revives Post Mortem Pipeline for Non-Resident Beneficiaries

The Department of Finance announced on December 3, 2019, at the Canadian Tax Foundation's annual conference, that it would seek to correct an apparently unintended consequence of the amendments to section 212.1 enacted on December 13, 2018. These amendments had the effect of frustrating certain pipeline transactions designed to prevent double taxation on the death of the owner of a private company—specifically, those in which a non-resident beneficiary is involved (see "Post Mortem Pipeline Fails for Non-Resident Beneficiaries," Canadian Tax Focus, February 2019).

The announcement referred to a letter issued (to my firm) the day before the announcement, which promised that the Department would recommend to the Minister of Finance that the Act "be amended to exclude, from the application of paragraph 212.1(6)(b), dispositions of shares by a Canadian resident graduated rate estate [GRE] of an individual who was resident in Canada immediately before the individual's death, provided that those shares were acquired by the estate on and as a consequence of the individual's death." The proposed amendment would be effective for dispositions after February 26, 2018, which matches the effective date of the amendments that caused the problem. Although no legislation has been introduced in Parliament, or even released in draft form, Finance has an excellent record of bringing amendments included in such comfort letters before Parliament and having them passed into law—although it can take years to do so.

Note that the exception to the lookthrough rules included in subsections 212.1(5) to (7) applies only for shares that were acquired by the GRE as a consequence of the death. Consider a situation where a GRE uses existing cash of the estate to acquire shares of a new corporation. If the GRE implements a standard pipeline transaction by transferring shares of that corporation to a holding company in exchange for a promissory note, there will be a deemed dividend to the non-resident beneficiary (if there is one) in the amount by which the promissory note exceeds PUC.

Although the announcement is welcome, taxpayers should monitor pipeline transactions to ensure that there are no further unpleasant surprises.

Henry Shew
Cadesky Tax, Toronto
[email protected]

Canadian Tax Focus
Volume 10, Number 1, February 2020
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