By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning
A nuance
In a February 2024 technical interpretation the CRA, confirmed post-mortem pipeline planning under the new GAAR would not be considered a misuse or abuse and Rulings continue to be issued. (See: Post-mortem pipelines under the new GAAR are OK – Tompkins Insurance ). At the recent STEP CRA Roundtable on June 4, 2024 STEP asked:
“To assist estates in managing the potential for double-taxation that can occur when a deceased dies while owning shares of a Canadian private corporation, the CRA has a long history of providing guidance and advanced income tax rulings on post-mortem planning strategies known as pipelines and subsection 164(6) loss carry back plans. New subsection 245(4.1) of the general anti-avoidance rule (“GAAR”) provides that if an avoidance transaction is significantly lacking in economic substance it is an important consideration that tends to indicate that the transaction results in misuse or abuse under 245(4).
Can the CRA provide any updates on its guidance on post-mortem pipelines and subsection 164(6) loss carry back plans in light of this amendment to the GAAR?”
The official answer is not yet published but in verbal remarks the CRA confirmed their prior commentary regarding pipeline planning. In relation to subsection 164(6), the CRA stated that it was not aware of any specific concerns regarding GAAR and subsection 164(6). Given the importance of this tool in the post-mortem planning arsenal, this is welcome confirmation.
STEP Submission requests a technical amendment to subsection 164(6)
In a submission dated June 21, 2024, STEP has asked that the timeline for carrying out subsection 164(6) loss carry-back planning be aligned with the period that the estate qualifies as a graduated rate estate (GRE). Currently, subsection 164(6) loss carry-back planning must occur within the first taxation year of the GRE. A GRE can choose any year-end date within 12 months from the date of death to be its taxation year. The taxation year could be a short as 1 day to a maximum of 365 days from the date of death.
The submission made the point that the existing timeline probably dates back to general loss carry-back timelines when the measure was historically introduced and has not kept up with the times. It also points out that estate administration timelines have lengthened substantially due to any number of reasons – increased complexity, obtaining probate, getting legal and accounting advice, lining up valuations, not to mention will interpretation, estate litigation, family law issues, dealing with minor beneficiaries and associated government agencies, dying intestate, cross-border assets to name a few.
This type of technical amendment would be welcome news for those involved in estate administration and post-mortem planning.
Pipeline rulings – Timing disclosed
In reviewing rulings being given in the context of post-mortem pipelines, the timelines for repayment of the pipeline note and continued operation of the business before a winding up are being published (and not redacted). For an example, see #2022-0945301R3 dated February 21, 2024. Here were the stated timelines:
- ACo is to continue to carry on its business for at least one year following transfer of shares to Newco;
- After the one year period ACo and Newco amalgamate;
- After the amalgamation, Amalco pays out the Newco note to the Estate with the amount paid in any single quarter not to exceed 25% of the principal amount of the Newco note when it was first issued;
- An Amalco winding up is not to occur earlier than two years after the transfer of shares to Newco.
The ruling states “During the one-year period following the transfer of the ACo shares to Newco, ACo will liquidate a portion of its marketable securities in order to raise funds for the Estate to pay BP’s income taxes on her terminal return.”
Pipeline planning can help to solve double tax problems arising as a result of death of a private company shareholder but remember, there’s still a tax liability that needs to be paid in the deceased’s terminal return. Life insurance can provide instant liquidity to pay these liabilities.
Post-mortem planning and life insurance
Whether using subsection 164(6) loss carry-back planning, pipeline planning or some combination thereof, life insurance integrates with these planning tools delivering instant liquidity and CDA to private companies.
FOOTNOTE:
This publication is protected by copyright. Tompkins Insurance is not engaged in rendering tax or legal advice. TOMPKINSights contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice.
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florence@tompkinsinsurance.com
