Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Whether an election not to be a public corporation can be made when previously listed shares no longer exist.
2. Is interest deductible on funds borrowed to return capital?
Position:
1. Yes
2. Yes
Reasons:
1. Since as a matter of tax policy, a corporation in this situation should not be precluded from electing not to be a public corporation, the condition in Regulation 4800(2)(a) can be read as applying where previously listed shares no longer exist.
2. IT- 80
XXXXXXXXXX
XXXXXXXXXX 2000-000478
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance income tax ruling request, XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.
We understand that, to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved in the ruling request
(i) is in an earlier return of the taxpayer or a related person,
(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) is under objection by the taxpayer or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously issued by the Directorate;
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
In this ruling "ACO" refers to XXXXXXXXXX
"BCO" refers to XXXXXXXXXX
"CCO" refers to XXXXXXXXXX
"DCO" refers to XXXXXXXXXX
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. ACO is a corporation governed by the Business Corporations Act (XXXXXXXXXX). ACO is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1).
2. BCO is a corporation governed by the Business Corporations Act XXXXXXXXXX. BCO is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1). BCO is a subsidiary wholly-owned corporation of ACO.
3. CCO is a corporation governed by the XXXXXXXXXX. CCO is a "taxable Canadian corporation" within the meaning of subsection 89(1). BCO owns all of the shares of CCO except for XXXXXXXXXX preferred shares that are owned by ACO.
4. DCO is a corporation governed by the Canada Business Corporations Act. DCO is a "taxable Canadian corporation" within the meaning of subsection 89(1). DCO is a subsidiary wholly-owned corporation of CCO.
5. ACO's Business Number is XXXXXXXXXX. ACO's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.
6. BCO's Business Number is XXXXXXXXXX. BCO's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.
7. CCO's Business Number is XXXXXXXXXX. CCO's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.
8. DCO's Business Number is XXXXXXXXXX. DCO's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.
9. The current mailing address for ACO, BCO, CCO and DCO is as follows:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
10. Prior to a Plan of Arrangement effective XXXXXXXXXX (the "XXXXXXXXXX Plan of Arrangement"), BCO was known as "XXXXXXXXXX" and ACO was known as "XXXXXXXXXX".
11.
XXXXXXXXXX
12. Between XXXXXXXXXX shares in the capital of BCO (of one or more classes) were publicly traded on exchanges prescribed by Regulation 3200 under the Act.
13. The share capital of BCO was reorganized on numerous occasions after its incorporation, resulting in, among other things, the creation of new classes of shares in the capital of BCO and the conversion of existing classes of shares in the capital of BCO into other classes of shares. In addition, BCO has at various times issued and redeemed listed classes of preferred shares that are no longer outstanding.
14. Immediately prior to a Plan of Arrangement effective on XXXXXXXXXX (the "XXXXXXXXXX Plan of Arrangement"), the classes of issued and outstanding shares in the capital of BCO that were publicly traded on an exchange prescribed by Regulation 3200 consisted of
a) Class XXXXXXXXXX shares,
b) Class XXXXXXXXXX shares, and
c) XXXXXXXXXX preferred shares, XXXXXXXXXX.
15. Pursuant to and in accordance with the terms of the XXXXXXXXXX Plan of Arrangement,
a) the authorized share capital of BCO was increased by creating an unlimited number of preferred shares, XXXXXXXXXX shares and an unlimited number of common shares,
b) the authorized share capital of BCO was also increased by creating XXXXXXXXXX shares (XXXXXXXXXX), XXXXXXXXXX classes ceased to exist following full implementation of the XXXXXXXXXX Plan of Arrangement,
c) newly created common shares, XXXXXXXXXX shares, warrants and rights were issued to ACO in exchange for the shares of XXXXXXXXXX,
d) newly created common shares (and cash) were issued to creditors of BCO in satisfaction of outstanding indebtedness of BCO,
e) the issued and outstanding preferred shares of BCO existing at the time of the XXXXXXXXXX Plan of Arrangement were exchanged for XXXXXXXXXX shares which were, in turn, exchanged for newly created common shares and warrants,
f) the issued and outstanding XXXXXXXXXX shares and XXXXXXXXXX shares of BCO existing at the time of the XXXXXXXXXX Plan of Arrangement were exchanged for XXXXXXXXXX shares which were, in turn, exchanged for newly created warrants and rights, and
g) all authorized but unissued preferred shares, XXXXXXXXXX shares and XXXXXXXXXX shares of BCO existing at the time of the XXXXXXXXXX Plan of Arrangement were cancelled.
16. Immediately prior to the XXXXXXXXXX Plan of Arrangement, the only shares in the capital of BCO that were publicly traded on an exchange prescribed by Regulation 3200 were common shares.
17. Pursuant to the XXXXXXXXXX Plan of Arrangement,
a) ACO acquired all of the issued and outstanding shares in the capital of BCO that it did not own at that time,
b) the authorized share capital of BCO was increased by creating an unlimited number of XXXXXXXXXX shares, an unlimited number of XXXXXXXXXX shares and an unlimited number of XXXXXXXXXX shares,
c) the issued and outstanding common shares of BCO existing at the time of the XXXXXXXXXX Plan of Arrangement were exchanged for newly created XXXXXXXXXX shares,
d) the issued and outstanding XXXXXXXXXX shares of BCO existing at the time of the XXXXXXXXXX Plan of Arrangement were exchanged for newly created XXXXXXXXXX shares, and
e) all authorized but unissued common shares and XXXXXXXXXX shares of BCO existing at the time of XXXXXXXXXX Plan of Arrangement were cancelled.
18. Since the XXXXXXXXXX Plan of Arrangement, the authorized share capital of BCO has consisted of an unlimited number of XXXXXXXXXX shares, an unlimited number of XXXXXXXXXX shares, an unlimited number of XXXXXXXXXX shares, and an unlimited number of preferred shares and ACO has been its sole shareholder.
19. Since the XXXXXXXXXX Plan of Arrangement, no shares of any of the authorized classes of shares in the capital of BCO have been listed on a stock exchange prescribed by Regulation 3200.
20. The issued and outstanding shares in the capital of BCO currently consist of XXXXXXXXXX shares and XXXXXXXXXX shares.
21. The stated capital of the XXXXXXXXXX shares of BCO and the paid-up capital for the purposes of the Act of the XXXXXXXXXX shares of BCO substantially exceed the aggregate of the returns of capital contemplated in paragraphs 29(c), 30(d) and 31(f) below.
22. At no time has there been a class of shares in the capital of BCO of the type described in Regulation 4800(2)(a)(ii).
23. Substantially all of BCO's capital is used to earn income.
24. BCO has made non-interest bearing advances to CCO from time to time (the "BCO Advances") which CCO has used for the purpose of earning income from a business or property. At this time, the amount outstanding on account of the BCO Advances is approximately $XXXXXXXXXX.
25. On XXXXXXXXXX, CCO paid a $XXXXXXXXXX dividend to BCO.
26. On XXXXXXXXXX, BCO used the $XXXXXXXXXX referred to in the immediately preceding paragraph to make a $XXXXXXXXXX interest-bearing loan to DCO due XXXXXXXXXX (the "XXXXXXXXXX DCO Debt") which DCO has used for the purpose of earning income from a business or property.
27. On XXXXXXXXXX, BCO made a $XXXXXXXXXX interest-bearing loan to DCO due XXXXXXXXXX (the "XXXXXXXXXX DCO Debt") which DCO has used for the purpose of earning income from a business or property.
Proposed Transactions
28. BCO will file an election (the "BCO Election"), in prescribed form, not to be a "public corporation" pursuant to subparagraph 89(1)(c)(i).
29. Thereafter:
a) ACO will borrow $XXXXXXXXXX from a Canadian bank on a "daylight" basis (the "XXXXXXXXXX Daylight Loan").
b) ACO will lend the $XXXXXXXXXX borrowed under the XXXXXXXXXX Daylight Loan to BCO by way of a demand promissory note bearing interest at a rate of XXXXXXXXXX % per annum (the "ACO XXXXXXXXXX Loan").
c) BCO will reduce the stated capital and paid-up capital of its XXXXXXXXXX shares by the amount of $XXXXXXXXXX and will distribute the $XXXXXXXXXX received under the ACO XXXXXXXXXX Loan to ACO as a return of capital.
d) ACO will apply the funds received in step 29(c) to repay the XXXXXXXXXX Daylight Loan.
30. On the same day as the transactions in step 29:
a) ACO will borrow $XXXXXXXXXX from a Canadian bank on a "daylight" basis (the "XXXXXXXXXX Daylight Loan").
b) ACO will lend the $XXXXXXXXXX borrowed under the XXXXXXXXXX Daylight Loan to CCO by way of a demand promissory note bearing interest at a rate of XXXXXXXXXX % per annum (the "ACO XXXXXXXXXX Loan").
c) CCO will apply the $XXXXXXXXXX received under the ACO XXXXXXXXXX Loan to pay down $XXXXXXXXXX of BCO Advances.
d) BCO will reduce the stated capital and paid-up capital of its XXXXXXXXXX shares by the amount of $XXXXXXXXXX and will distribute $XXXXXXXXXX to ACO as a return of capital.
e) ACO will apply the funds received in step 30(d) to repay the XXXXXXXXXX Daylight Loan.
31. On the same day as the transactions in step 29 and 30:
a) ACO will borrow $XXXXXXXXXX from a Canadian bank on a "daylight" basis (the "XXXXXXXXXX Daylight Loan").
b) ACO will lend the $XXXXXXXXXX borrowed under the XXXXXXXXXX Daylight Loan to DCO by way of a demand promissory note bearing interest at a rate of XXXXXXXXXX % per annum (the "ACO XXXXXXXXXX Loan").
c) DCO will apply $XXXXXXXXXX of the $XXXXXXXXXX received under the ACO XXXXXXXXXX Loan to repay the XXXXXXXXXX DCO Debt.
d) BCO will lend the $XXXXXXXXXX received in step 31(c) to ACO on a demand, non-interest-bearing basis.
e) DCO will apply $XXXXXXXXXX of the $XXXXXXXXXX received under the ACO XXXXXXXXXX Loan to repay the XXXXXXXXXX DCO Debt.
f) BCO will reduce the stated capital and paid-up capital of its XXXXXXXXXX shares by the amount of $XXXXXXXXXX and will distribute $XXXXXXXXXX to ACO as a return of capital.
g) ACO will apply the funds received in steps 31(d) and (f) to repay the XXXXXXXXXX Daylight Loan.
Purpose of Proposed Transactions
The purpose of the proposed transactions is
a) to reorganize the existing intra-group capital structure of BCO, CCO and DCO,
b) to create interest income in ACO, and
c) to create interest expense in each of BCO, CCO and DCO in an aggregate equivalent amount.
Rulings requested and given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
We confirm that
A. BCO will meet the condition in paragraph 4800(2)(a) of the Regulations if, at the time it elects not to be a public corporation, it has no class of shares that was at any time listed on a stock exchange in Canada prescribed for purposes of section 89.
B. On the returns of capital by BCO described in paragraphs 29(c), 30(d) and 31(f) above, subsection 84(4.1) will not apply to deem such returns of capital by BCO to be dividends paid by BCO or received by ACO provided that prior to the returns BCO has elected in accordance with the provisions of subparagraph (c)(i) of the definition of public corporation in subsection 89(1).
C. Provided that prior to the distributions described in each of paragraphs 29(c), 30(d) and 31(f) above, BCO has elected in accordance with the provisions of subparagraph (c)(i) of the definition of public corporation in subsection 89(1), if the amounts so distributed do not exceed the amount by which the paid-up capital of the shares of BCO is reduced in each case, no amount will be deemed to have been paid and received as a dividend pursuant to subsection 84(4).
D. Provided BCO has $XXXXXXXXXX of paid-up capital used by BCO for the purpose of earning income from a business or property, the interest on the ACO XXXXXXXXXX Loan or a reasonable amount in respect thereof will be deductible pursuant to paragraph 20(1)(c) in computing the income of BCO for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by BCO in computing its income.
E. To the extent the funds borrowed by CCO under the BCO Advances were used by CCO for the purpose of earning income from a business or property, the interest on the ACO XXXXXXXXXX Loan or a reasonable amount in respect thereof will be deductible pursuant to paragraph 20(1)(c) in computing the income of CCO for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by CCO in computing its income.
F. To the extent the funds borrowed by DCO under the XXXXXXXXXX DCO Debt and the XXXXXXXXXX DCO Debt were used by DCO for the purpose of earning income from a business or property, the interest on the ACO XXXXXXXXXX Loan or a reasonable amount in respect thereof will be deductible pursuant to paragraph 20(1)(c) in computing the income of DCO for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by DCO in computing its income.
G. The interest on the XXXXXXXXXX Daylight Loan, the XXXXXXXXXX Daylight Loan and the XXXXXXXXXX Daylight Loan (collectively, the "Daylight Loans") will be deductible pursuant to paragraph 20(1)(c) in computing the income of ACO for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by ACO in computing its income.
H. Fees payable by ACO in the course of borrowing the Daylight Loans will be deductible in accordance with the provisions of paragraph 20(1)(e) in computing the income of ACO.
I. BCO will not be considered to have conferred a benefit on ACO for purposes of subsection 15(1) by making a non-interest bearing loan as described in paragraph 31(d) above.
J. Subsection 245(2) will not apply to the proposed transactions to redetermine the tax consequences thereof.
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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