New paragraph 212.1(6)(b) deems Newco to have paid dividends to non-resident beneficiaries of an estate that is implementing a pipeline so that Newco must pay withholding tax. The change is effective from budget day, 2018, even though nothing in the budget documents or initial draft legislation indicated that the rule changes to section 212.1 were aimed at pipelines. Marshall Haughey, “Pipelines and Non-Resident Beneficiaries” Canadian Tax Highlights 27:3 (March 2019).
Section 212.1 of the Income Tax Act (Canada) is an anti-avoidance rule that applies in circumstances similar to those for section 84.1. With section 212.1, however, only PUC (and not ACB) is relevant as far as the subject shares are concerned.
In 2018, Finance introduced look-through rules so that a trust in effect is ignored for the purposes of section 212.1 (see subsections (5) to (7)). The look-through means that a pipeline with a trust with non-resident beneficiaries can be problematic.
The concerns extend to inter vivos trusts as well.
Demner and Lamothe, “Section 212.1 Lookthrough Rules Create Issues for Trusts with Non-Resident Beneficiaries” Tax for the Owner-Manager 19:2 (April 2019)
The CRA has issued a pipeline ruling where the ACB of the shares being used to extract funds from a corporation is derived from a deemed disposition pursuant to the 21-year rule. Eric Hamelin, “Pipeline Transactions and the 21-Year Rule”, Tax for the Owner-Manager 19:2 (April 2019).
The foregoing article also provides a useful introduction to the risks of a pipeline and its mechanics. It also identifies some limitations of the comfort provided by the CRA in the ruling.
Finance is not proceeding with the July, 2017, proposals to amend 84.1 and introduce new 246.1. Also, Finance has said that it will focus on developing the passive income proposals. Finance has also said, however, that it believes post-mortem gains in a private corporation should be taxed at the dividend rate and not the capital gain rate. Should advisers implement inter vivos pipelines to anticipate rules aimed at the post-mortem variety?
Issues for the pipeline remain with the July proposals. For example, see 120.4(4) and (5). [This article was written before the release of the December version of the TOSI rules.]
Manu Kakkar “The Pipeline Comes Back to Life (But for How Long?)” 18:1 Tax for the Owner-Manager (January 2018)