2000 Ruling 2000-0032113 - FREEZE OF CCPC SHARES IN RRSP ACB ROLLOVER

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) Will the amendment of the attributes of the XXXXXXXXXX shares constitute a disposition and acquisition of those shares?

2) Will section 86 or 51 apply?

3) Will the conditions in Regulatin 4900(12) have to be met after the amendment?

4) Will the acquisition of the amended shares under the freeze indicate that the annuitants are dealing non-arm's-length with the Company?

5) Will the cost base rollover in 86(1)(b) apply for purposes of the $25,000 limit in the definition of "connected shareholder" in Regulation 4901(1)?

6) Will the cost base rollover in 86(1)(b) apply for purposes of subsection 206(2)?

Position:

1) Yes

2) Section 86.

3) Yes
4) No
5) Yes
6) Yes

Reasons:

1) Amendment is a fundamental change in the economic interest in the Company.

2) Section 86 applies automatically, and section 51 will not apply where section 86 applies.

3) The amended shares are "acquired", and the test in Regulation 4900(12) is upon acquisition.

4) The test is immediately after the acquisition. We have said that a situation where two 50/50 shareholders use their own RRSPs to acquire shares of their corporation is not, by itself, an indication that the annuitants do not deal at arm's length with the corporation.

5) Definitions in the Act provide a link from "cost" in 86(1)(b) to "cost amount" in the definition of "connected shareholder" in Regulation 4901(1).

6) Definitions in the Act provide a link from "cost" in 86(1)(b) to "cost amount" in subsection 206(2).

XXXXXXXXXX
		2000-003211
Attention:  XXXXXXXXXX 

XXXXXXXXXX, 2000

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request a ruling on behalf of the above corporation. We also acknowledge receipt of documents dated XXXXXXXXXX, and information confirmed in several telephone calls (XXXXXXXXXX).

DEFINITIONS

For purposes of this letter, the relevant definitions are the following:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1. as amended to the date hereof.

(b) "Annuitants" are annuitants of the RRSPs that own the XXXXXXXXXX shares of the Company. The Annuitants are:

Name SIN Address

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The Annuitants are employees of the Company. They file their tax returns with the XXXXXXXXXX Tax Centre, and are served by the XXXXXXXXXX Tax Services Office.

(c) "Company" means XXXXXXXXXX.

(d) "CCRA" means the Canada Customs and Revenue Agency.

(e) "Regulations" means the Income Tax Regulations as amended to the date hereof.

(f) "RRSP" means a trust governed by a "registered retirement savings plan" as defined in subsection 146(1) of the Act, in respect of an Annuitant.

OTHER INFORMATION

To the best of your knowledge and that of the Company, none of the issues involved in this ruling are:

a) in an earlier return of the Company, an Annuitant or a related person,

b) being considered by any tax services office or tax centre in connection with a previously filed tax return of the Company, an Annuitant or a related person,

c) the subject matter of any notice of objection filed pursuant to the Act by the Company, an Annuitant or a related person, or

d) before the courts.

FACTS

Our understanding of the facts and the proposed transaction is as follows:

1. The Company is a "Canadian-controlled private corporation" as that term is defined in subsection 125(7) of the Act. It was incorporated on XXXXXXXXXX. Articles of amendment were filed on XXXXXXXXXX to change the name of the Company to XXXXXXXXXX. Its registered office is situated at XXXXXXXXXX. The business number is XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Tax Centre, and is served by the XXXXXXXXXX Tax Services Office.

2. The Company is engaged in XXXXXXXXXX. It acquired the assets of XXXXXXXXXX, an unrelated corporation, in XXXXXXXXXX.

3. The authorized share capital of the Company is:

An unlimited number of XXXXXXXXXX voting shares
An unlimited number of XXXXXXXXXX voting shares
An unlimited number of XXXXXXXXXX non-voting shares
An unlimited number of XXXXXXXXXX non-voting shares

The issued and outstanding shares of the Company are:

# of shares	Shareholder	Class	PUC	ACB

XXXXXXXXXX

Both the XXXXXXXXXX shares are participating shares.

4. The Annuitants are arm's length to one another and to XXXXXXXXXX, and they deal at arm's length with the Company.

5. The Annuitants acquired the XXXXXXXXXX shares and the RRSPs acquired the XXXXXXXXXX shares upon incorporation. XXXXXXXXXX. acquired his XXXXXXXXXX share in XXXXXXXXXX from a departing shareholder. The XXXXXXXXXX shares were a qualified investment to each of the relevant RRSPs according to subsection 4900(12) of the Income Tax Regulations immediately after they were acquired by the relevant RRSPs.

PROPOSED TRANSACTION

6. The attributes of the XXXXXXXXXX shares of the Company will be amended and will:

• become non-retractable,
• become redeemable by the Company according to an approved schedule, over a period of XXXXXXXXXX years,
• carry restricted voting rights, limited to decisions relating to cessation of business operations and the preferred share retraction timing schedule,
• have a redemption value of $XXXXXXXXXX per share, and
• become non-participating.

PURPOSE OF THE PROPOSED TRANSACTION

7. The Company wishes to attract and retain qualified professionals and is contemplating offering an equity participation plan to key executives. However, the current market value of the Company is making the cost prohibitive to these key employees. The Company will undertake a partial "freeze" of its value by amending the attributes of the XXXXXXXXXX shares.

RULINGS GIVEN

Provided that the statement of facts and the description of the proposed transaction are correct and constitute a complete disclosure of all the relevant facts and terms of the proposed transaction, and that the proposed transaction is completed in the manner described above, we rule as follows:

A. The amendment of the attributes of the XXXXXXXXXX shares will constitute a disposition of the old XXXXXXXXXX shares and an acquisition of amended XXXXXXXXXX shares by the RRSPs.

B. The provisions of section 86 of the Act will apply to the transaction.

C. The conditions in paragraph 4900(12)(a) of the Regulations must be satisfied upon the acquisition of the amended XXXXXXXXXX shares by the RRSPs.

D. The acquisition of the amended XXXXXXXXXX shares by the RRSPs will not, in and of itself, indicate that the Annuitants do not deal at arm's length with the Company immediately after the acquisition.

E. The cost of the amended XXXXXXXXXX shares to the RRSPs as determined by paragraph 86(1)(b) will apply for purposes of determining the "cost amount" in paragraph (b) of the definition of "connected shareholder" in subsection 4901(1) of the Regulations.

F. The cost of the amended XXXXXXXXXX shares to the RRSPs as determined by paragraph 86(1)(b) will apply for purposes of determining the "cost amount" in subsection 206(2) of the Act.

The above income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by CCRA, provided that the proposed transaction is completed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate